Analysis

Bright Side Debate: What's The Future of AMD?

AMD Restructuring AMD Restructuring

This Fall has been an eventual one for AMD (NYSE: AMD). In a surprise announcement, the company announced that Lisa Su, its former General Manager, would assume the position of CEO with Rory Read stepping down from the position.

While Su had long been the public face of the company, appearing at events such as the Consumer Electronics Show and Computex, it came as a surprise that Read was replaced so quickly. Read was always seen as something as an interim executive, but by all accounts the restructuring plan that he started appears to be working — albeit slowly — making the exact timing of the move unexpected.

Su has an uphill battle ahead of her. AMD is a company in transition. It’s not the company it was in 2011, nor is it the company it was at its highest or lowest points under former-CEO Hector Ruiz.

The question is, can Su ‘save’ AMD? Does she have what it takes to turn the company around? Bright Side of News* co-founder and Chief Technical Editor Anshel Sag, and Editor-in-Chief Sam Reynolds recently discussed this issue.

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Anshel:  So, AMD is once again in a state of change. They just announced last quarter’s earnings and they were still surprisingly profitable. Yes, Lisa Su is the new CEO, and yes there’s some restructuring going on within the company, but ultimately we want to talk about AMD’s long term prospects. With Intel pressuring them on the CPU side, and Nvidia (NASDAQ: NVDA) pressuring them on the GPU side, their fourth quarter is very likely going to be murderous in the short term.  Traditionally, AMD’s been able to buoy their losses in the CPU side by making money on GPUs, but I’m not sure that’s going to happen in the fourth quarter, thanks to Nvidia’s Maxwell selling ridiculously well.

Now that we’ve gotten the short term out of the way, there are some serious issues to address about AMD — their CPU competitiveness, their GPU competitiveness, and whether or not they can survive the current climate. Sure, they did just win Apple’s new 5K iMac as a design win, but those aren’t going to ship anywhere near the volumes to keep AMD afloat. They don’t have anything for this quarter to compete with Nvidia’s Maxwell and they probably won’t until the first half of next year. Hopefully, it comes in the first quarter but there’s a strong possibility that it could come in the second quarter as well.

We all know that AMD is working on ARM servers and custom CPUs (K12), and they’re even working on building their own custom x86 cores. But the reality is, most of that will really only come in fruition in 2016, and we’re still in 2014 and there’s a whole year to go until AMD can even remotely claim to have something to compete with Intel and everyone else.

Oh, and by the way, what ever happened to SeaMicro? AMD has been very quiet about them since the acquisition.

My outlook for AMD is that they are going to have a very rough fourth quarter of 2014, and probably first quarter of 2015. They will probably release Fiji and that’ll help them a bit… and they will start to ship their ambidextrous ARM and x86 chips in the same boards and sockets and maybe they’ll get some wins there. But realistically, AMD needs to find a way to survive 2015 if they want to be able to reach the next phase of the company’s development in 2016.

 

Sam: My colleague Anshel and I agree on something: the future of AMD is precarious.

While Anshel believes that the company is on a road to recovery — should it survive 2016 — I think that it will have very serious problems making it that far at all and the market knows it too. Consider the interest rate on AMD’s bonds: 8.125%  (this interest rate has been lowered) For a corporation of AMD’s size, that’s a real cause of concern. AMD is not some junior mining company with paper rights to a mine field in the Global South. It’s a real company that makes real things with a series of high-profile hardware wins.

Part of the reason why the market has pushed the interest rate on AMD’s bonds up so high is it’s a risky investment. AMD tends to produce a lot of promise, and a fair amount of vaporware as well. Consider Beema and Mullins, which both lack high-profile hardware wins. Consider the lack of publicly acknowledged wins in the embedded space (supposed to be one of AMD’s big saviors) Consider the big investments AMD has made into HSA. HSA is far from vaporware, but its potential is far from realized. To top it off, AMD’s HSA themed developer conference, held last year in November in San Jose failed to materialize this year for reasons unknown.

In 2016, AMD is going ambidextrous, mixing x86 and ARM on the same silicon. While this is a technically interesting endevour, AMD lacks the market share to have the authority to push this out as a new standard. If AMD was the company it once was — bigger and more cash rich — it could tolerate the losses trying to promote this and sell it as an advantage over pure ARM or pure x86 silicon. But it simply cannot.

There are no doubts that AMD does Radeon well. But this is not enough to propel the company forward. Unless game developers start creating compelling reasons for people to upgrade their cards, the vast majority of users will sit on what they currently have. For many, a Radeon 7990 is simply good enough and with cryptocurrencies loosing their luster that market for AMD has since evaporated.

So what’s CEO Su to do? Given Wall Street’s enthusiasm for breakups and spinoffs this might be its best bet. The visual solutions arm of the company might do just fine on its own. The IP from the rest of the company could be sold off or licensed. Maybe VIA (TPE: 2388) wants another shot at the game.

 

Anshel: While I can agree with Sam that HSA has not been the savior of AMD that it was supposed to be, there’s definitely some value in Mantle, where AMD is able to squeeze out extra mileage out of hardware that is technically now over a year old. Obviously, the amount of games that utilize Mantle are fairly few, but in the ones that it gets implemented in, it appears to make the difference.

Mantle could certainly help AMD in the long term, but realistically speaking most game developers are going to want to gravitate toward DirectX 12 once it rolls out next year with Windows 10. But even so, we’re probably still a year away until any games that can utilize DX12 are going to ship. It will be interesting to see what happens with Nvidia and AMD’s performance in DX12, as Nvidia appears to have worked very closely with Microsoft (NASDAQ: MSFT) showing off lots of their newest DX12 demos on Nvidia hardware.

Even with a lacking CPU division and some of their mobile chips failing to really gain any major traction, there’s no denying that their Embedded and Semicustom business is still doing really well. In fact, it did better last quarter than it did in the same period a year ago and better than the previous quarter. This last quarter, AMD reported $108 million in net income from $649 million from the division, which is both more in terms of revenue and profit. And there are still going to be a lot of people that don’t have consoles, and were waiting to see which console ‘won the unwinnable war’. I suspect this holiday season will very likely be good to that division again this quarter. That’s in spite of the fact that I suspect Computing and Graphics will lose even more than the $17 million they lost last quarter.

The other thing you missed about AMD’s financial situation that might be troubling is that they’ve already sold a lot of their assets and started leasing them from whomever they sold them to. They’re fabless, so they no longer have fabs to take loans out against and they already sold their Austin HQ and Singapore offices.

Lots of people have talked about the selling off of the graphics division, which isn’t ridiculous to consider if the company becomes insolvent. However, it would sell for FAR less than what AMD paid for it in 2006 for $5.4 billion. It would certainly be a huge win for someone like Apple, who could effectively utilize the graphics IP across their entire product line. But I consider that an option of last resort for AMD if their stock gets precariously low…

Lisa Su has a difficult job, there’s no doubt about it. But she knows products and she knows where AMD fits and what they can be good at. It’s merely a question of whether or not they can execute on her plans, which she’s already set forth the last 18 months. Lisa Su inherited the company from a ‘caretaker’ CEO in Rory Read, and his job was to keep the company going and from going under. He’s done that, but that does not set up the company for long term success, unfortunately. I will admit though, he took more risks than I expected him to for being a former IBMer.

I have thought many times that AMD was certainly doomed, but there’s no denying that they’re still profitable, any way that you cut it. There are no special payments or accounting trickery. Sure, they’re bleeding cash in their computing and graphics division, but as long as they can keep selling those products and making money on embedded and semicustom I think they can last until 2016 when we can really see what the future of the company looks like with their new x86 and ARM IP.

 

Sound off: What do you think the future of AMD is? Let us know in the comment section below.