<font color=red>Dan K. Scovel - very positive
02:21pm EDT 12-Oct-00 Needham & Co. (Dan K. Scovel 212-705-0322) AMD
GOOD 3Q, POSSIBLE 4Q CHIP SET CONSTRAINTS; REITERATE STRONG BUY (PT1)
Equity Research Morning Note Dan K. Scovel (212) 705-0322
October 12, 2000 dscovel@needhamco.com
William J. Sherman (212) 705-0289
wsherman@needhamco.com
Advanced Micro Devices (AMD/NYSE)
Good 3Q, Possible 4Q Chip Set Constraints: Reiterate Strong Buy
Price (10/11/00): $23.50 Shares Outstanding (MM): 311
52 Week Range: $48.50 - $8.19 Market Cap. (MM): $7,308
Recommendation/Target: Strong Buy/$58 Avg. Daily Volume (000): 9,422
12/00E 12/01E 12/02E
Was Is Was Is
Revenue (MM) $4,953.1 $4,805.3 $6,160.5 $6,119.0 $7,462.8
Growth 68% 27% 22%
Op. Margin 21.0% 20.7% 24.7% 24.4% 24.7%
EPS: 1Q $0.58A $0.58A $0.61 $0.63 $0.86
EPS: 2Q 0.60A 0.60A 0.64 0.65 0.81
EPS: 3Q 0.62 0.64A** 0.74 0.74 0.86
EPS: 4Q 0.76 0.70 0.88 0.87 0.91
EPS: Year $2.57 $2.52* $2.89 $2.89 $3.43
Growth NMF 15% 19%
P/E Ratio 9.3x 8.1x 6.9x
*2000 earnings taxed at 31% would be $2.07
**Excludes one-time charges & gains. Diluted EPS was $1.18.
Summary
* AMD announced adjusted 3Q earnings of $0.64 per share, two cents ahead of
consensus. Diluted earnings including one-time charges and gains totaled
$1.18 per share.
* AMD beat consensus, met Athlon and Duron microprocessor unit shipment goals,
exceeded flash memory production targets, and gained microprocessor unit
market share last quarter.
* Management views the PC market as very healthy after a typically back-end
loaded summer accelerates into the peak 4Q holiday season.
* Revenue was slightly below our expectations, primarily due to unexpected
microprocessor average selling price weakness as low-end Durons were
discounted to motherboard makers to offset incremental platform costs
associated with the transition to socket from slot mounts and the lack of core
logic chip sets with integrated graphics.
* The company claimed it was unaffected by marginal sluggishness in certain PC
market segments, specifically the corporate space in Europe and the
very-low-end consumer space stateside. However, we believe such sluggishness
may have impacted the market adoption rate of AMD's new low-end Duron
microprocessor offering.
* We are lowering our 2000 EPS and revenue estimate to $2.52 on $4.8 billion
from $2.57 on $4.95 billion, maintaining our 2001 estimate at $2.89 on $6.1
billion, and introducing a 2002 estimate of $3.43 on $7.5 billion. Short-term
core logic chip set availability from infrastructure partners is expected to
constrain 4Q Duron shipments.
* We consider AMD significantly undervalued at current price levels
approximating 8-times 2001 earnings, and reiterate our Strong Buy
recommendation on the shares. Our target price remains $58.
Investment Opinion
We believe AMD's recovery remains intact, despite short-term Duron
microprocessor platform transition issues. We continue to believe the company
is well positioned for earnings, revenue and market share growth with its highly
competitive Athlon microprocessor family offering. It is also benefiting from
extremely strong flash memory market conditions that appear likely to sustain
for several quarters.
3Q Review
AMD announced adjusted 3Q earnings of $0.64 per share, two cents ahead of
consensus. Diluted EPS of $1.18 included a one-time, pre-tax gain of $336.9
million from the sale of its voice communication products division and a
one-time, after-tax charge of $23.0 million related to the retirement of senior
secured notes. Total revenue grew 3.1% sequentially to $1.21 billion, below our
estimate of $1.26 billion up 7.7%, and gross margin declined 70 basis points
to 47.0%, as expected. Revenues were adversely impacted by $45 million due to
the sale of the voice communication product line. Microprocessors accounted for
52% of revenue, flash memory 35%, and the balance a mix of embedded processors,
communication ASSPs, chip sets and foundry work for former businesses.
Microprocessor unit shipments exceeded expectations of 3.6 million Athlon and
Duron devices, international sales fell to 57% from 61% in the prior quarter and
headcount grew by 220 to 14,000. Bookings exceeded billings, cash increased
$154 million to $1.23 billion, and capital expenditures of $249 million are
expected to approximate $850 million for the year, up from $620 million in 1999.
Microprocessors
3Q Gains: Total microprocessor unit sales increased 10% sequentially and 50% on
the year. We estimate K6 microprocessor shipments met our expectations of 3.2
million units at $50 each, and Athlon and Duron offerings exceeded our unit
expectation by 100,000 for 3.7 million, but average selling prices (ASPs) of
approximately $125 fell short of our estimate of $145. Overall microprocessor
ASPs declined to $90.59 from $95 the prior quarter, and fell short of our $100
estimate. The company claims hundreds of thousands of high-end, 1.1GHz Athlon
devices shipped during the period. Management estimates its market share ranged
from 16.3% to 17.5%, depending what overall industry microprocessor shipments
were from 41.7 million to 39 million (It considers its higher share at the lower
total number more probable). We expect AMD to ship a total 8 million to 9
million microprocessors 4Q resulting in market share approaching 20%, assuming
43 million to 45 million total industry shipments, and implying sequential gains
of approximately 300 basis points. AMD's estimate of 43 to 45 million units 4Q
was revised from earlier estimates of 45 to 46 million. We expect market share
gains to continue throughout 2001.
Coming Attractions: A 1.2GHz Athlon is expected to top its current 1.1GHz
offering this month, with an even faster part due out before year-end. New
low-end Durons are expected at 800MHz this month, 900MHz by year-end, and 1GHz
1Q01. The company sees a one quarter delay into 1H01 before any of the big four
PC OEMs serving the corporate market-IBM, Compaq, Dell and HP-are likely to
embrace AMD in any significance. Upcoming Palomino and Morgan derivative
offerings are targeted at this market. The company demonstrated a chip set
supporting dual-microprocessors for workstation applications this week and
considers 2Q01 a reasonable timeframe to begin to see such revenues. We
continue to believe AMD will remain performance competitive with Intel for the
foreseeable future.
Manufacturing Strength: All high-end Athlon microprocessor shipments by the end
of 1Q01 will be manufactured in copper-interconnect process technology from Fab
30 in Dresden, Germany. Over time and in theory, low-end Duron devices should
be just as fast as Athlon-except for the copper interconnect technology. The
current plan is to keep Fab 25 in Austin, Texas as an aluminum-interconnect
facility dedicated to Duron production, with Dresden Fab 30 dedicated to Athlons
and copper. However, management is considering transferring copper to Austin
Fab 25, given the success it has experienced in Dresden. We would consider this
an incremental performance competitive positive for AMD, should such a strategy
be pursued. The Dresden Fab 30 production ramp is expected at 2,500 wafer
starts per week by the end of the year, growing in a relatively linear fashion
to a maximum of 5,500 by the end of next year.
Duron Challenges: Management claimed it lowered the selling price of some
Durons last quarter to offset a motherboard cost disadvantage associated with
the transition to socket from slot mounting and the lack of available core logic
chip sets with integrated graphics functionality for extremely cost-sensitive,
low-end systems. The Duron platform cost differential is estimated to range
from $30 to $45. We believe the microprocessor ASP (and total revenue)
shortfall to our expectations 3Q was primarily due to these price reductions.
Management expects chip set partner VIA Technologies in Taiwan to ramp
production of an integrated chip set offering by December, and Ali (also in
Taiwan) to provide a device 1Q01. This delay is expected to constrain Duron
microprocessor unit sales 4Q and accounts for our downward revision of 4Q
earnings expectations.
Conspiracy Theory: Management blames the lack of an integrated core logic chip
set with graphics from its infrastructure partners for its failure to support
very low-end market demand with Duron microprocessors last quarter, and we agree
with its strategy to avoid Duron price cuts 4Q that would be required to
entertain such applications. However, a more skeptical view would be that PC
market sub-segment sluggishness impeded acceptance of the new, low-end Duron
offering last quarter, and the company dropped prices to motherboard
manufacturers to offset incremental platform costs in a conscious effort to meet
short-term unit shipment goals. We believe such a scenario is at least
partially true, and estimate the company may have lost potential EPS upside on
the order of $0.10.
PC Markets Healthy . . .
PC business appears pretty strong to AMD. Management expects total PC unit
sales to top 150 million this year and unit growth to continue in the high-teens
percent annually for the foreseeable future. AMD has seen a normally back-end
loaded summer accelerating into a typically robust holiday season so far this
year. It also sees white box makers putting pressure on the top tier PC OEMs
within the space. We generally concur with such sentiment, with the caveat that
sub-segment sluggishness has tempered more optimistic growth expectations for
the year.
. . . But Some Segments Sluggish
However, AMD also confirmed sluggishness in sales to corporate customers in
Europe and consumer sales in the US at the very low-end--$399 and $499 priced
boxes. However, these segments are not currently being served by AMD, and
management claimed it was largely immune to such incremental weakness. CEO
Sanders generally considers both PC and cell phone markets to be very
healthy-albeit more healthy for suppliers with more desirable offerings, than
for those with less desirable ones.
Extremely Strong Flash . . .
Flash memory revenues grew 17% on the quarter and more than doubled on the year.
Flash memory units increased 11% to 72 million, with total bit shipments up
19% on the quarter and 80% on the year. The average density per device was 9.5
megabits, compared with 7.2 megabits last year. Applications are more
diversified than we expected, and include: cell phones, set top boxes,
automotive applications, Internet infrastructure products and mobile Internet
appliances. No application accounted for more than 20% of sales, except cell
phones at 35%.
02:20pm EDT 12-Oct-00 Needham & Co. (Dan K. Scovel 212-705-0322) AMD
GOOD 3Q, POSSIBLE 4Q CHIP SET CONSTRAINTS; REITERATE STRONG BUY (PT2)
. . . Expected to Continue
Flash memory demand remains extremely strong and management expects to remain
supply constrained at least through 2001. The company claims excellent
visibility, given over 80% of its business is long-term in nature with contracts
that include penalties, pre-payments, and price collars. It has very limited
exposure to spot market dynamics. Overall demand for bits is expected to expand
by 100% annually for the foreseeable future. For example, regardless of ones
opinion of cell phone unit growth-or the slowing of such-- the number of total
flash memory bits per phone is expected to triple within the next couple of
years. FASL, AMD's joint-venture flash memory wafer fabrication operation with
Fujitsu is expected to increase annual bit production by 100% for the next
couple of years.
4Q Constraints . . .
Management expects to sell out of Athlons once again this quarter and foresees
total annual shipments of approximately 28 million, which is consistent with our
previous expectations but up from previous guidance of 25 million. AMD plans
to manufacture enough Athlons and Durons to support 7.2 million unit sales 4Q,
but currently believes such shipments will be constrained by Duron chip set
availability. This is the reason behind the 4Q shortfall to our previous
expectations.
We have modeled 4Q shipments of 1.3 million K6s at $50 and 6.8 million Athlons
and Durons at a blended ASP of $98.50, down from $125 3Q and our previous
expectation of 7.2 million at $107 each. Our total annual unit shipment
assumption remains at 27.7 million, albeit with a slightly richer mix of K6s.
We are also tempering our sequential flash memory growth assumption to 7.5% from
10%, consistent with management guidance.
. . . With Upside Potential
Our downward revision is relatively incremental. We believe it reflects the
loss of potential upside and uncertainty surrounding market adoption of Durons
and chip set availability from infrastructure partners. However, we also have a
sense of deja vu: last year at this time 4Q Athlon shipments were expected to
be constrained by chip set availability, which subsequently improved by the
company's analyst meeting in early November. We would not be surprised to see
our current downward revision return to our previous expectations under a repeat
performance within the next few weeks.
Longer-term Expansion
We are maintaining our microprocessor unit shipment and ASP assumption for 2001
at 32.1 million and $100, respectively, and our flash memory revenue growth at
47%. We assume other businesses will remain flat at $150 million per quarter,
rather than slightly increasing over time. For 2002, we assume microprocessor
unit growth of
20% with flat $100 ASPs, flash memory growth of 30%, and other businesses flat.
We believe AMD can sustain 20% top- and bottom-line growth for the foreseeable
future due to PC unit market growth, microprocessor market share gains,
microprocessor ASP enhancement potential, and continuing strong market
conditions for flash memory. Dresden Fab 30 is now fully functional and will
ramp to 5,500 wafer starts per week from 2,500 shortly. We believe most of the
costs of this facility have been incurred, and incremental gross margin-over and
above our estimated 47%-- is not unlikely within the next few quarters.
Extremely Attractive Valuation
AMD is currently trading at 8-times 2001 estimated earnings-a valuation level we
consider low by virtually any metric. We believe upside potential
significantly exceeds downside risk at current price levels, and reiterate our
Strong Buy recommendation. Our target price of $58 reflects a 20-times multiple
to next years expected earnings and offers potential upside of 147% over
current price levels. Management indicated a significant level of comfort
associated with yesterday's consensus EPS estimates for 2001 of $2.50, and we
believe our estimate of $2.89 is likely to be more accurate. The company plans
to hold its annual analyst conference in California on November 9.
Advanced Micro Devices is a major semiconductor supplier of microprocessors and
flash memories. |
