Business, Enterprise, Hardware

AMD Q2 Earnings Call Analysis: Company Admits Huge Llano Sales Slip

Earlier we reported about the financials of AMD’s second quarter 2012 earnings call. During the call, AMD’s Rory Read made it clear that the results were very disappointing and that they were committed to correcting the problems that lead to it. In this analysis we will touch upon some of those issues as well as other interesting details that were highlighted by the company executives.

Largely unsurprising, Brazos continues to sell very well. Rory Read claims to have achieved further market share gains in the segment of notebooks $499 and below. That seems like an odd claim, considering Intel said during their call that they made share gains in the low end segment as well. Given AMD’s particular weakness in desktop CPUs this quarter, it is a reasonable assumption to say that Intel won share there, while AMD gained some in notebook sales.

Interestingly, even though there was pressure to drop pricing due to low sales and Intel pushing lower SKUs into the market, AMD chose not to slash their prices to maintain sales volume, but rather protected their margin. This becomes evident when considering that the company achieved a 46% operating margin, albeit they had 11% declined revenue and around 40% lower income. Historically AMD pursued market share gains and did not care as much about the margin, so this is a refreshing change.

Llano Channel Slip

In the call it was made clear that bad planning and execution of Llano sales in the channel were one of the main causes of the 11% revenue decline the company reported. The executives explained that the reason for this was that OEMs initially got preferential treatment on Llano, which resulted in a bad supply situation in the channel. Once they got the necessary supply for the channel, there were not enough motherboards allocated and the pricing environment also adversely affected sales.

Consequently, the channel aligned their strategy around other products, whereas on the OEM side of things Llano was a very strong seller. The main culprit in all of this was bad communication of the advantages the Llano product had, which Rory Read has promised to fix going forward. AMD reportedly has a higher than usual inventory of Llano chips, which they plan to sell over the remainder of 2012 and even into 2013. This is a direct confirmation that Llano will not be phased out anytime soon.

AMD also has a similar situation with Trinity. Trinity launched in June, but currently is only available in notebooks and desktops from OEMs. The channel launch was planned for fall 2012, but at this point we have no more information to share about when exactly it will happen. In the last few weeks rumors repeatedly came up claiming it has even been postponed by a few months.

During the call it was said that Trinity?s volume doubled in Q2 compared to Q1. Considering that in Q1 shipments started rather late, we have reason to believe that double the volume is still just a small number of chips. We do not know whether there is a supply side problem with Trinity or the company simply wants to sell off Llano inventory before they aggressively push Trinity, which is much more attractive to customers, as we explained in our launch preview. Rory Read stated they were not supply constrained with Trinity, which would make Llano inventories the more likely cause.

Combined with the fact that AMD opted to protect their margin and the statements made in the call regarding the inventory situation, the longevity of Llano well into 2013 as well as the delayed channel-launch of Trinity, we have reason to believe that AMD has considerable inventory of Llano which needs to be sold off at stable prices. If they would slash prices, a lot of this value would need to be written off, thus having an adverse effect on AMDs financials.

Foundry Partners

AMD executives again made it clear that for a company their size there is no capacity to expand the number of foundry partners beyond two, GLOBALFOUNDRIES and TSMC. AMD is very happy with the progress GLOBALFOUNDRIES has made after last year?s shenanigans. For AMD it was rather costly to get out of their old agreement with GLOBALFOUNDRIES and ditch SOI in the process.
Unlike the previous quarters, AMD did not make a statement that they were able to sell any chip they could get. In other words, they were not supply constrained, although the executives did not explicitly state it. Given that Q2 is a seasonally weak quarter for AMD, this is not surprising.

Bulldozer Server Competitiveness

Some analysts expressed concerns about AMD’s server business and the competitiveness of Bulldozer in that segment (or frankly, any segment). Rory Read explained that he considers Bulldozer ?solid technology? and sees growth opportunities ?in the portions of the market where our products deliver clear performance advantages.? He continued ?Based on the competitive landscape, we believe Bulldozer can drive modest share growth in the near term.?

Given the current performance situation, the truth of the matter is that AMD can only compete with Intel by pricing to compensate for the performance disparity in a lot of workloads. Since the pricing environment is rather stable, this does not mean they need to slash prices. Read also stressed they need to raise awareness among IT buyers to make sure they properly value AMD?s products.

With the strategic acquisition of SeaMicro, they see further potential for expansion in the dense server market. During AFDS 2012 they surprised the press with a prototype of an Opteron-board with the SeaMicro fabric that is due to ship in November this year. It remains to be seen how competitive the prospective low-voltage Bulldozer-based Opteron targeted for this segment will turn out to be. At least AMD is confident about the upcoming product, touting it as the ?king of the hill? at AFDS over a month ago.

Economic Situation

Similar to other companies in the PC ecosystem, AMD experienced slow business in Q2. They saw weak sales of desktop CPUs especially in Europe and China. Their notebook sales were also impacted by this situation. Unlike Intel, AMD did not lower their outlook for the year. They said they are confident they can meet the targets previously forecasted.