The TSC Streetside Chat: Benjamin Anixter of Advanced Micro Devices
By Chris Frankie
Staff Reporter
Originally posted at 11:14 AM ET 8/11/01 on RealMoney.com
Many forecasters said the chip sector would turn around in the second half of the year. Now, well into the third quarter, there are few indications that a reversal is imminent. And Intel (INTC:Nasdaq - news - commentary) and Advanced Micro Devices (AMD:NYSE - news - commentary) are mired in a pricing slugfest that could bruise both companies' margins.
Lehman Brothers' analyst Dan Niles wrote in a recent research note that Intel is "planning to detonate a price bomb on Advanced Micro Devices by cutting prices about 50% on high-end [Pentium 4] processors." He added that "for those who thought the price war was already aggressive, you haven't seen anything yet."
TheStreet.com spoke this week with Benjamin Anixter, vice president of external affairs at AMD, about a number of issues affecting the company and the semiconductor industry. Anixter has been with AMD, where he is responsible for industry affairs, government affairs and investor relations, since 1971. He has seen everything the chip sector has to offer, and he shared with us his thoughts on the current state of affairs. (This interview has been edited for length and clarity.)
TheStreet.com: Do you think Intel can outlast AMD in terms of price-cutting? How long can you sustain lower margins in a price war?
Benjamin Anixter: I don't know that this is a price war with us. The big problem they have is that the Pentium 4 is a very undesirable product. And in this particular generation, they have to get the prices low enough to be in the price points that people buy in. They have 75% of the business, and while they are trying to inhibit us from gaining market share, what they're really replacing on the desktop is the [Pentium III]. They're bringing the P4 prices into the area where the P3 was selling, so they're replacing the P3.
Their margins are getting hit, because the P4 is a much more expensive product to make than the P3. In the meantime, they're still trying to arrest our ability to gain or hold market share. But the Athlon [AMD's signature microprocessor] is a more desirable product, so they're stuck. Yes, it's very aggressive pricing; some people can call it a price war. But the problem is that it comes about not because of a price war but because they're trying to take an inferior product and force it into the marketplace, and that's the only way they can do it.
TheStreet.com: You just said the Athlon, your product, is a better one. Can you elaborate on that a little bit?
Benjamin Anixter: Clock speed doesn't necessarily mean what the performance is of the processor. The best example is Apple has the machines that are just as powerful as Microsoft Windows machines, but their clock speeds are only in the 500 to 600 megahertz range. The architecture of the Athlon 4 is much more powerful in generating performance that a person can see. If you use industry standard benchmarks generated by third parties -- not us, not Intel -- it turns out that a 1.3 gigahertz Athlon outperforms a 1.7 gigahertz P4. But the reality is we can only supply 25% of the market, so they're going to get 75% of the business, but they can't get 75% of the business unless they price it right. It's not helping us, because the average prices are putting pressure on our margins, but it's hurting Intel a lot.
And from the point of view of outlasting them, we have a very strong balance sheet. Last quarter we were profitable. We're about cash-flow neutral, so it's unlikely that anybody's going to put anybody else out of business.
TheStreet.com: You said last quarter you were profitable. Will you break even in the third quarter and turn a profit in the fourth quarter?
Benjamin Anixter: We actually forecast an operating loss in Q3. We had a goal of break-even but it would be very, very difficult to do. We said our sales would be down 10% to 15% this quarter, and we would have a rebound in Q4 and be solidly profitable in Q4.
TheStreet.com: At this point, are you seeing prices still coming down or stabilizing? If so, when do you see things starting to turn around?
Benjamin Anixter: Prices don't go up in processors. They continuously go down for a given clock speed. The blended average price goes down more slowly. Intel had four price cuts last quarter, they were very aggressive. And the major supplier in volume sets the price. We have a flat PC-processor market this year, so it's making it difficult in a soft market. We're going to get some growth next year. It will take a little bit of pressure off. But I do not foresee an end to lower prices.
TheStreet.com: The company previously said it would cut capital spending to $900 million from $1 billion. Do you see it being cut any more?
Benjamin Anixter: We have trimmed capex from $1 billion to $900 million. About half of the capex went to the build-out, or is going to the build-out of our Dresden, Germany, facility, which is where all of our Athlons are produced and where we're getting the equipment to go to .13 micron and start SLI production. Those expenditures have not been cut. The expenditures that have been cut are mostly in the back end, where the volume for flash memory is down, so we don't need as many testers, we don't need as much assembly. There's no program that's of importance to the company that's been cut.
TheStreet.com: Will R&D be one of the places that you might have to cut?
Benjamin Anixter: We will not cut expenditures on programs that are critical to our strategic operation. What you do is you reduce costs and you reduce other things.
TheStreet.com: How has the slowing of PC unit sales affected the company this year and might it for the remaining quarters?
Benjamin Anixter: For the first year in a long, long time, the PC processors required by the industry are flat compared to last year. They have been growing at the compound rate of between about 15% and 20%, and this year they've gone flat. And the reason for that is, we believe, the PC market is getting some fallout from the debacle in the communications market and the dot-com bubble bursting. And also, it's probably not shocked you to find that there's a recession in the United States, or at least in the economy in the United States and in Europe.
Now, for the first time ever, there's going to be fewer PCs sold in the United States this year than last. I will tell you, however, that overseas -- in Asia, India, South America and China and even Japan -- sales are up in units. And I think that when we get a little better economy here, Europe will quickly follow. So I think that next year, we will start to get the PC industry back on a growth path, and although it's a more mature industry, we would expect to see in the 10% to 15% unit growth next year. In the meantime this year, our unit sales are actually rising. We've gained market share, so we're going to have significantly higher unit sales this year than in last in PC processors.
TheStreet.com: You said you were gaining market share. Is that for the year, or are you still gaining market share quarter over quarter compared to Intel?
Benjamin Anixter: Last year we exited the year at about 17.5%. We had, depending on who you talk to, anywhere from 20.5% to 21% in Q1, and in Q2, we were something over 22%. And I think because of our more desirable product line, we've been able to gain market share.
TheStreet.com: Do you still think in Q3 you're gaining market share? Or were you talking in general terms for the year?
Benjamin Anixter: I was talking in general. The first two quarters, that's history. For the rest of the year, I think we'll at least hold market share and probably gain some. Because there are new markets that we're going into -- markets where we had no penetration or essentially no sales last year, such as the portable market, which is a very important product category in PC processors -- we're just starting to see the effect of those. So it's either going to help us gain more market share or mitigate any loss in market share in the desktop market.
TheStreet.com: What about flash memory? Chief Operating Officer Hector de Ruiz said you could see as much as a 30% drop-off in the third quarter.
Benjamin Anixter: What I think we said was that the company would be down in sales 10% to 15% this quarter over last quarter. We've also said publicly several times that we think the flash market, not our business, but the flash market in total, would be down 25% or 30% this year over last. We said Q3 flash memory sales for us would be down over Q2, but that we would get a significant bounce in Q4. So our sales would be down significantly less than 25% to 30%.
TheStreet.com: How do you foresee the company going about getting new customers in the next couple of quarters?
Benjamin Anixter: In the flash area, we have 25 supply agreements with the largest manufacturers in the world. And when the bottom fell out of the demand, and we were essentially tapped out of capacity, we could just barely fill our agreements to these 25 major customers. In the PC area, we're bringing out new products to get into new markets that we haven't been able to participate in. One that I mentioned earlier was the mobile market, where we have a better offering than Intel now, and that offering is being picked up wholesale by our existing customers and offered to the marketplace. We expect to do very well with that. We entered the low-end server and workstation market last quarter. And we're having some success in some markets overseas.
We've been through six of these downturns in the last 25 years. I could say there's maybe more intensity this time, but when you're in this kind of a market, you have to draw on your strengths and work that much harder.
TheStreet.com: When do you see the next big AMD chip coming out, the next big product?
Benjamin Anixter: The Athlon product is going to go through two generations between now and this time next year. The first generation, which we commence production on next quarter, is now only a couple of months away. That will give us a lower-power device, which will be good for notebooks, and also a fast product, which gives better performance. We'll also start production on the Hammer family, our eighth-generation machine. We'll have samples out by the end of this year, early samples.
TheStreet.com: You said your product is better, but regardless of that, Intel's name to an average person has a certain brand recognition. Does that at all worry you, and what is your company doing to fight that?
Benjamin Anixter: It worries us all the time. It's been worrying us as long as I've been at the company, and I've been here for 30 years. But I would point out there's a difference between brand recognition and brand preference. There's no question in my mind that Intel is one of the most well-known brands and is recognizable in the world. But if you do the next survey, about the preference, they don't do nearly as well. And we have been successful with our marketing programs worldwide and in all the geographies working with our customers to show our customers why they're better off. When people go to buy computers, they evaluate performance and value. We went out there, and that's why we're gaining market share. Remember, if we have a 25% market share in units, we're going to lose 75% of the business. So our goal being 30% of the market share, we'll still lose 70% of the business. And we'll win 30% of the business. It's never easy to compete against Intel, but we're doing it successfully.
TheStreet.com: In the last six months, AMD's stock has lost almost one-third of its price. In the last three months, it's dropped around 40%.
Benjamin Anixter: Well, we're still up for the year, and Intel is not. If you invested money in Intel a year ago, three years ago, five years ago, we would've been a better investment. The fact that they have a higher price-to-earnings ratio just means that people are not necessarily investing wisely. This is a cyclical business we're in, and we're in the worst down cycle in the history of our industry. You have to manage through these cycles, and right now we're doing very well in a very bad industry environment. Sales were down in the second quarter by 31%, according to the Semiconductor Industry Association. And in our PC processor and in our flash memory business, if you add them together, we were only down 11%. And these markets always do turn around. You go into these recessions for the same reason every time. This one is no different, it's just a little deeper. And when the market improves, we're well-positioned to come out of the market with new products, new technologies. And when business improves, our fortune will improve markedly.
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