SoundView reiterated buy rating
09:18am EDT 6-Jul-01 Wit SoundView (Scott Randall 203-462-7246) AMD
Advanced Micro Devices (AMD) Preannouncement July 6, 2001
Advanced Micro Devices (AMD) Price: $28.64 Buy July 6, 2001
Fiscal Year Dec. 31 F00A F01E F02E C00A C01E C02E 2Q01E 1Q01A 2Q00A
EPS ($) 2.34 0.70 1.11 2.34 0.70 1.11 0.04 0.37 0.60
Old EPS ($) 2.34 1.31 1.56 2.34 1.31 1.56 0.28 0.37 0.30
Revenue ($M) 4644 4356 4907 4644 4356 4907 986 1189 0.60
Old Revenue ($M) 4644 4666 5169 4644 4666 5169 1098 1189 1170
P/S 0.00 0.00 0.00 0.00 0.00 0.00
P/E 0.00 0.00 0.00 0.00 0.00 0.00
PE/Growth Rate 0.00 0.00 0.00 0.00 0.00 0.00
Summary
* Advanced Micro Devices' preannouncement indicated that on record processor
shipments, revenue would decline by 17% q/q with EPS of $0.03 to $0.05.
* Although AMD has not provided details, the company indicates that both weak
processor pricing and weak flash sales contributed to the miss.
* Although full details will not be provided until the company releases full
results on July 12, we are estimating the company shipped about 7.35 million
processors (higher than our earlier assumptions of 6.85 million) although we
believe ASPs came in at about $82 vs. our estimates of $92. For flash, we are
now estimating shipments of about $300 million vs. our earlier estimates of $365
million.
* In our note on Tuesday, we referred to a "perfect storm" of pricing pressure;
AMD's preannouncement confirms this thesis with the company being affected both
sooner and more significantly than we had been modeling.
* AMD is clearly taking even more drastic pricing actions than we had thought in
reaction to Intel's more aggressive pricing.
* With both AMD and INTC shipping competitive products and having excess
capacity, PC OEMs fighting a fierce price war, and weak PC demand, we expect
the current environment to continue.
* We continue to avoid PC component plays.
From our July 6, 2001 note:
* We believe AMD's June quarter has been challenging for both processors and
Flash.
* For the June quarer, we have lowered both our processor unit and GM
assumptions.
* Perhaps more importantly, we believe that INTC's more aggressive pricing could
slow AMD's market share gains - our out quarter reductions reflect this
dynamic.
* Although AMD continues to offer highly competitive and cost-effective
products, INTC is fighting back with aggressive pricing.
* The combination of pricing pressure at PC OEMs, weak PC unit demand, and
excess capacity at both AMD and INTC is, we believe, creating a perfect storm of
pricing pressure.
* While AMD is not expensive off our estimates, we believe that INTC's pricing
actions will result in slowing market share gains that could serve to cap the
stock.
As PC OEMs have become more willing to engage in price wars, pricing pressure is
finding its way to the component suppliers. With both AMD and Intel having
excess production capacity, we believe the PC OEMs are increasingly in a
position of having significant bargaining power. The combination of pricing
pressure at PC OEMs, weak PC unit demand, and excess capacity at both AMD and
INTC is, we believe, creating a "perfect storm" of pricing pressure that will
continue to affect both INTC's and AMD's results. For AMD, we believe that this
pressure is translating into slower share gains even as the company continues
to execute well and ramp higher frequency processor shipments. We have lowered
our processor unit assumptions for the June quarter from 6.950 million to 6.850
million. For F01 overall, we have lowered our processor unit assumptions from
30.175 million to 29.975 million. We have also lowered our GM assumptions for
both the June quarter and full year from 40.5% and 41.4% to 39.5% and 40.5%,
respectively.
In the past, strong differentiation between Intel and AMD allowed the component
vendors to be somewhat insulated from system pricing pressure. Specifically,
Intel typically enjoyed a high-end product segmentation that allowed the company
to continue to price at premium levels. Simply put, with Intel being
historically in a favorable position of not being faced with a competitive
offering from AMD, it enjoyed significant pricing and margin stability.
With both AMD's Athlon family and Intel's P3 and P4 family offering good system
performance and compelling value propositions, PC OEMs are increasingly able to
play one vendor off of the other. In addition, with AMD having crossed the 20%
market share point, we believe that Intel has become that much more aggressive
in defending its market share. While in the past this would suggest that Intel
would work hard to move customers up to its next, latest offerings, currently
Intel's strongest weapon is that of price.
As noted from our research trip to Taiwan, we believe that Intel's more
aggressive pricing strategy is possibly slowing some of AMD's market share
gains. While we do not believe that AMD's market share is seeing a reversal as
of yet, we do believe that further gains from current levels will be
incrementally more difficult.
Compaq Computer's decision last week to scrap its Alpha processor and focus more
on Itanium suggests to us a stronger alignment between Compaq and Intel.
Certainly in the past, Compaq has been among one of the more aggressive vendors
willing to look outside of Intel for strong value propositions in the
microprocessor arena. As such, Compaq has always been a company most willing to
use AMD processors when they offered a favorable value proposition. In 2000,
CPQ accounted for 11% of AMD's revenues. Although AMD's efforts in the server
area are in their embryonic stages (with AMD having just introduced its two
processor capable chipset weeks ago), Compaq's decision would seem to limit
AMD's potential of penetration there.
In addition, and perhaps more importantly, we believe that Compaq's alignment
with Intel for servers may presage a closer alignment on both desktops and
portables as well. In fact, conversations at PC expo last week with individuals
from Compaq suggested as much. Although we believe that AMD will continue to
participate with CPQ in a variety of platforms, we believe that Intel's
aggressive pricing on the P4 as well as INTC's impending move to higher clock
rates enabled by the transition to 0.13 micron technology could result in AMD's
participation being more concentrated on the lower end of CPQ's product
offerings.
Although AMD certainly participates in a variety of both consumer and soho
applications, the company continues to enjoy greater success with the consumer
than with the corporate world. Although it is difficult to predict how the
remainder of 2001 will evolve for consumer PC demand, our checks in Taiwan
continue to suggest a weak start to the back-to-school build season. Looking
beyond into the Christmas selling season and the launch of Microsoft's XP
operating system, both AMD and Intel will be sparring for position as the vendor
selling systems best positioned to work with XP. We believe this battle is
much more likely to be fought from a PR perspective rather than on technological
merits. Under these terms of engagement, it has always been difficult for AMD
to compete against Intel's greater resources.
From a product roadmap perspective, AMD's Athlon family will continue to add
members targeted at addressing both mobile and desktop applications. With AMD
having made the decision early on to adopt a memory roadmap that includes SDRAM
and DDR, we believe that the company's product roadmap has in some ways been
more compelling than Intel's. Recall that Intel's early decision to base many
of its future products on RDRAM has effectively resulted in a system value
proposition that has fallen short of expectations both in terms of performance
and market penetration. While Intel certainly is regrouping with its own DDR
chipset for the P4 expected in early 2002, we believe this will continue to be
one area where AMD holds a competitive advantage vs. Intel.
Flash demand and pricing continues to be weak. Although Flash finds usage in a
variety of computing, communications and consumer applications, AMD's
high-density Flash tends to be focused more on communications applications
including cell phones. While handsets will continue to be one of the largest
unit opportunities, increasingly unit growth in 2001 looks to be limited.
Although we continue to be bullish on the prospects for the eventual migration
to both 2.5G and 3G cell phones as being strong drivers for increasing Flash
densities, these transitions will occur over the next few years. For the June
quarter we have reduced our Flash estimates from $376 million to $366 million
and for F01 from $1,584 million to $1,535 million.
|
