Thursday, November 11, 2010

AMD Chief Fights for Credibility in Intel Showdown


For Chief Executive Officer Dirk Meyer, Advanced Micro Devices Inc.’s new lineup of chips is more than an effort to win back customers lost to Intel Corp. It’s a bid for credibility.

After four years of production delays, slumping sales and shrinking market share, Meyer says he wants to convince customers and investors that AMD can consistently deliver quality products and challenge its dominant competitor. The first test comes with its new Fusion chips, built with graphics capabilities that AMD says Intel can’t easily match.

Fusion also provides a chance to redeem AMD’s 2006 acquisition of ATI Technologies Inc., a $5.4 billion purchase that threatened to sink the company with debt. By combining its processors with ATI’s graphics chips, AMD aims to get a payback on the deal. Another part of the comeback plan: AMD spun off its factories in 2008, freeing up cash to focus on innovation.

“You gain credibility out of executing successfully over quarters and years,” Meyer, 48, said in an interview at the company’s Sunnyvale, California, headquarters. “We haven’t been doing it for years yet.”

AMD, which was founded a year after Intel, has spent 40 years in the shadow of its rival, the world’s largest chipmaker. AMD has less than 20 percent of the global personal-computer processor market, compared with Intel’s 80 percent, and its revenue last year of $5.4 billion was a seventh of Intel’s.

Fusion Release

AMD began shipments today of its first Fusion product, which puts processors and graphics chips onto one piece of silicon. Computers based on the product will go on sale in early 2011. That will coincide with a new design from Intel, called Sandy Bridge, which also beefs up graphics features.

AMD’s last big hit was a server processor called Opteron that over three years grabbed 20 percentage points of market share from Intel. Opteron, introduced in 2003, also helped AMD squeeze more profit from each chip. In 2005, AMD’s products began to approach Intel’s famously high gross margins, which run as high as 67 percent.

That’s when AMD’s fortunes reversed. Opteron’s successor, Barcelona, was late to the market and needed to be redesigned. That failure was partly because AMD wasn’t ready for the big time, Meyer said.

Meyer is familiar with both companies. He worked at Intel in the 1980s, then spent almost a decade at Digital Equipment Corp., a computer maker acquired by Compaq Computer Corp., which is now part of Hewlett-Packard Co. When Meyer arrived at AMD in 1995, he led the team that designed its flagship processor.

Focus on Execution

Meyer comes from a technical background. He earned a degree in computer engineering from the University of Illinois and got an MBA from Boston University. After rising through the executive ranks at AMD, he replaced Hector Ruiz as CEO in 2008.

So far, AMD has struggled to follow through on its innovations, said Josh Spencer, a portfolio manager at T. Rowe Price Group Inc. in Baltimore.

“Where they’ve always fallen down in the past has been execution,” said Spencer, whose firm owns AMD shares as part of the more than $400 billion it has under management. With Fusion, “they have a chance to compete with Intel.”

AMD now has more than one engineering team capable of delivering multiple chip designs on time, Meyer said. That’s possible because it no longer has the distraction of running multibillion-dollar chip plants, known as fabs. AMD spun those off into a new venture called Globalfoundries Inc., backed by the government of Abu Dhabi.

‘Deep Hole’

The $8.4 billion transaction in 2008 helped reduce AMD’s debt from $5.5 billion in 2007 to about $2.2 billion now. It also let the company cut capital spending to about 10 percent of what it was three years ago, according to Chief Financial Officer Thomas Seifert.

Profitability will continue to improve. Today, Seifert predicted gross margin, the percentage of sales remaining after deducting production costs, will be between 44 percent and 48 percent in 2011. A year ago, he predicted a 40 percent to 45 percent range for 2010. AMD will be able to achieve a margin of above 50 percent in the long term, he said today during a presentation at the company’s headquarters.

“They were coming out of a deep hole,” T. Rowe’s Spencer said. “I’m impressed by what they’ve done.”

‘Critical Mass’

The moves haven’t reignited investor interest in the stock. The shares have declined 18 percent this year, and they’re trading at a fraction of their $42 price in 2006. Intel shares have climbed 3.7 percent this year.

AMD fell 23 cents to $7.91 at 4 p.m. in New York Stock Exchange composite trading. Intel lost 7 cents to $21.16.

“A company that’s up against some huge odds managed to stay in it,” said Alex Gauna, an analyst at JMP Securities LLC in San Francisco. “The question is: Will they get more interesting? I’m not anticipating they’re going to be a disruptive force.”

Rick Bergman, AMD’s senior vice president of products, disagrees.

“The No. 1 thing we have to do is have a differentiated product,” said Bergman, who joined AMD with Markham, Ontario- based ATI in 2006. In the past, “AMD didn’t have the critical mass, got bogged down in running fabs, and now we’re free from that burden.”

The difference between the new chips, according to Bergman, is that AMD will have state-of-the-art graphics, worthy of the most advanced computer games. Intel’s Sandy Bridge chip is years away from being able to handle that, he said.

“It just can’t do certain things,” Bergman said. “Would you want to buy a notebook and know from day one it has three-or four-year-old graphics technology?”

Single Chip

Intel says its Sandy Bridge chip represents a significant advance in graphics. “The overall performance and graphics capabilities of the Sandy Bridge processor are outstanding and represent a major step forward,” said Tom Beermann, a spokesman for Santa Clara, California-based Intel.

Both Fusion and Sandy Bridge combine two of the key components of a computer onto one chip. That reduces battery drain and speeds up processing by letting computers better share memory. Until now, advanced graphics chips have mainly gone into add-on computer boards. Those products are popular with gamers, who use them to get more realistic visuals.

AMD is counting on more than gamers to help Fusion catch on. New versions of programs for surfing the Web, including Microsoft Corp.’s Internet Explorer, could take advantage of the graphics features as well, the company says.

If AMD is right, computer users will get faster browsing, higher-definition video from programs like Adobe Systems Inc.’s Flash, and home movies that can remove the jerks and swings from handheld cameras.

Before AMD’s vision for Fusion can take hold, the company needs to keep delivering chips on time and find ways to be more nimble than Intel, Meyer said.

“As a small company, we’ve got to always look for ways to answer the question, ‘What’s better, what’s different about AMD?’” he said. “I can’t rely on having home runs.”