AMD investors: Jerry's letter to shareholders
Below is Jerry's letter to shareholders. Compared with his letter last year in which he promised the return to profitability, the themes for this year are distinctively two: an emphasis on manufacturing - the P3 strategy and sustained profitability. It must be pointed out that he did use the word "position" ourselves for sustained profitability. "position" along gives him a lot of weasel room. Nevertheless, it is a long, informative document worth reading.
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TO MY FELLOW SHAREHOLDERS
1998 was the year of the AMD-K6(R)-2 processor with 3DNow!(TM) technology.
Our introduction of the AMD-K6-2 processor with 3DNow! technology in May of
1998 was a watershed event. For the first time in our history, we had a new,
differentiated processor, fully compatible with the Microsoft(R) Windows(R)
computing standard, that offered clear, compelling performance advantages for
consumers.
The response of the marketplace has validated our strategy:
. Today nine of the world's top ten personal computer manufacturers offer
systems powered by AMD-K6 family processors, including the world's #1 and #2
manufacturers of portable systems.
. Unit shipments of AMD-K6 family processors more than trebled year-to-
year, and revenues
from AMD-K6 family processors nearly trebled to $1.25 billion.
. AMD shipped more than 13 million AMD-K6 family processors in 1998 -
including more than 8.5 million AMD-K6-2 processors with 3DNow! technology.
. AMD-K6 family processors captured a 16 percent share of the worldwide
market for Windows compatible processors in the fourth quarter of 1998 - more
than double our market share for the same quarter of 1997!
The success of the AMD-K6-2 processor enabled AMD to achieve record
quarterly revenues of $788,820,000, as well as record annual revenues of
$2,542,141,000. In 1998, AMD revenues grew by 8 percent in a year when worldwide
shipments of integrated circuits declined by nearly 10 percent.
Despite the progress we made in microprocessors, enabling a return to
profitability in the second half, AMD incurred a substantial net loss of
$103,960,000, or $0.72 per share, in 1998.
Our non-microprocessor product groups - our Communications Group, our
Memory Group, and Vantis, our programmable logic subsidiary - were severely
impacted by continuing weak demand and resultant price pressures due to the
lingering recession in the worldwide semiconductor industry. Revenues from these
groups in the aggregate continued to decline throughout the year, in some
measure offsetting the strong revenue growth of our Computation Products Group.
I do not expect significant growth in revenues from these product lines during
the first half of 1999. Therefore, for the near term, any and all revenue growth
must come from our Computation Products Group, i.e., processors for Windows
computing.
At AMD, we define "winning" as gaining market share, and "success" as
profitable growth. By these definitions, even though we are winning, we have not
been consistently successful. The necessity of investing heavily and
continuously in research and development while bringing up additional production
facilities in order to execute our long-term strategy continues to make it
difficult to achieve consistent profitable growth. I am not satisfied with our
performance, and I will not be satisfied until we can consistently grow
profitably.
Our principal challenge in 1999 will be to continue to grow our
microprocessor market share and position ourselves for sustained profitability.
All applicable resources at AMD must and will be focused accordingly as we
restructure our activities to address the realities of the marketplace.
The 1,000 Days In 1996 I issued a challenge to our worldwide sales force. At
that time, I told them that we had 1,000 days in which to establish an
alternative platform for Microsoft Windows computing. The 1,000-day window of
opportunity began with the introduction of our first independently engineered
alternative to Intel processors. Our overarching goal was and is to capture a 30
percent unit share of the worldwide market for processors for Windows computing
by the end of 2001, creating an opportunity for us to achieve financial returns
superior to the semiconductor industry. Our immediate challenges, however, were
to shed our "clone image" and secure a beachhead with innovative products of our
own concept and design.
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By the end of 1998 - and the expiration of our initial 1,000-day campaign -
the beachhead was ours. The AMD-K6-2 processor with 3DNow! technology and a low-
cost infrastructure supported by independent chipset and motherboard suppliers
throughout the world have established AMD and our AMD-K6 processor family as the
only real alternative to the Intel monopoly. With a 16 percent market share, we
are just over halfway toward our long-term goal. Let's review the progress we
have made and the challenges we must meet to achieve that goal.
Our "P3 Strategy" Execution of our "P3 Strategy" continues to be the key to
success: first, we must be the nucleating point for platforms based on processor
products that offer compelling features within the Microsoft Windows standard;
second, we must have leading-edge process technology that will enable us to
deliver high-performance processors at competitive cost; and finally, we must
have production capacity to manufacture processors using that technology in
volume to support our customers as they come to depend upon AMD for a growing
percentage of their requirements.
During the past three years we have made extraordinary progress in creating
these wealth-producing assets.
PROCESS TECHNOLOGY. Today all of our microprocessor production is on
leading-edge 0.25-micron (250-nanometer) technology. We have successfully
developed 180-nanometer, six-layer, aluminum interconnect technology to remain
at the leading edge and have produced advanced processors using this technology
both in our development facility in Sunnyvale, California, and in Fab 25 in
Austin, Texas. We are on schedule to introduce 180-nanometer technology into
high-volume production in the third quarter of 1999.
The next step in the continuing evolution of process technology will employ
the use of copper interconnect technology to achieve even higher-performance
devices and lower-cost production. During 1998, we entered into a seven-year
agreement with Motorola to collaborate on the development of process technology,
including copper interconnect technology. This alliance with another of the
world's premier semiconductor manufacturers has increased our confidence that we
will meet our schedule for introduction of copper interconnect technology into
production at Fab 30 in Dresden, Germany. We have commenced process integration
wafer starts that will utilize copper interconnect technology resulting from
this alliance, and we plan to qualify the process for production by the end of
this year in order to generate revenues from Fab 30 in the first quarter of
2000.
Production Capacity. We have completed the outfitting of Fab 25. This
facility is now equipped to produce 5,000 wafers per week - 250,000 wafers per
year - employing technologies with geometries of 250 nanometers and finer. Fab
25 is currently operating at approximately 80 percent of capacity.
We have completed construction of Fab 30, and are in the process of
installing equipment and qualifying the facility to commence commercial
production by the end of this year. When fully equipped, Fab 30 will also be
capable of producing 250,000 wafers per year employing technologies of 180
nanometers and finer with copper interconnects.
Platforms/Products. The AMD-K6-2 processor with 3DNow! technology enabled
AMD to gain a substantial share of the mainstream PC market, reaching a 37
percent share of the market in December for desktop systems in the North
American retail channel, which is frequently a bellwether for trends in the PC
industry. In January of this year, we were #1 in the channel with a 43.9 percent
market share versus Intel's 40.3 percent! I believe a growing installed base of
PC systems with 3DNow! technology establishes a strong platform for software
developers, which should enhance opportunities for even broader acceptance of
AMD processors going forward. All AMD processors for the PC market incorporate
3DNow! technology, which is supported by Microsoft Windows Direct X.
The AMD-K6-III processor with 3DNow! technology, our latest offering for
the mainstream PC market, features a unique performance-enhancing tri-level
cache memory design with more on-system
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cache memory than any other processor currently available for Windows computing.
With outstanding capability and features, the AMD-K6-III processor will enable
PC manufacturers to build more affordable high-performance systems. I expect
that an increasing proportion of production for the market segments served by
AMD will be devoted to the AMD-K6-III processor family throughout the remainder
of 1999.
The Convergence of Computation and Communications As the convergence of
computation and communications continues to accelerate, driven in large measure
by the burgeoning growth of the Internet, AMD will devote increasing focus on
enhancement of the personal computer as a visual computing platform and
information tool. Today, our Computation Products Group (which now includes our
Embedded Processor Division) produces two-thirds of our total revenues. With new
opportunities created by the Internet and electronic commerce, our
Communications Group is developing new products, such as our PCnet (TM) Home
controller, that will enable home PC users to link multiple PCs together over
standard telephone wiring - all sharing access to a single Internet connection.
We will also supply ADSL (Asynchronous Digital Subscriber Line) chipsets capable
of delivering high-speed access to the Internet over existing copper telephone
lines.
The AMD-K7 Processor and the Next 1,000 Days Our mission of establishing
the beachhead and putting in place significant wealth-producing assets has been
accomplished in the aforementioned 1,000-day campaign. Our mission for the next
1,000 days is to extract the value for our shareholders from the substantial
investments we have made and continue to make in our P3 strategy. The
forthcoming AMD-K7(TM) processor family will be central to our success. The AMD-
K7 processor will be the first seventh-generation Microsoft Windows compatible
processor in the marketplace.
Prototype AMD-K7 processors were demonstrated at Comdex last fall, and we
are currently sampling versions with clock speeds in excess of 500 megahertz.
Simply put, we believe that the AMD-K7 processor will be the highest-performance
processor for Windows computing on the market in 1999. We plan to aggressively
increase clock speeds over the 18-month period following introduction with a
goal of achieving a clock speed of 1 gigahertz by the end of next year!
The AMD-K7 processor family and the infrastructure to support it offer the
greatest technical, logistical and marketing challenges in AMD's 30-year
history. This is the culmination of our corporate purpose of "empowering people
everywhere to lead more productive lives" and our corporate mission "to grow
faster and achieve superior returns to the semiconductor industry" through
innovative solutions.
Microprocessors for Microsoft Windows computing represent the largest
segment of the worldwide semiconductor industry. The barriers to entry are high.
The scale of investment to compete is enormous. The rewards of success should be
commensurate.
Carpe diem!
/s/ W. J. Sanders III
W. J. Sanders III
Chairman and Chief Executive Officer
February 26, 1999
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