AMD to experts: Experts don't know jack

Lobbing olive branch to Wall Street

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Sometimes, experts don't know what they're talking about. Just ask AMD, which over the past 12 months has had to endure second-guessing from financial analysts and industry pundits about slumping market share, a string of financial losses, and costly distribution and design gaffes.

On Thursday, AMD's top brass traveled to New York to tell Wall Street professionals their dire prognoses were largely wrong. Sure, recently-disclosed design errors in the four-core versions of Opteron are bad. But no one is as disappointed as the AMD executives themselves. And to focus on that one cloud on an otherwise rosy horizon just isn't fair.

"There's times in your life where you feel that the perspective of those around you is quite a bit different than the perspective that you have yourself," company president Dirk Meyer said during AMD's analyst conference. "You sit back and you think about it and you observe that maybe some of the folks around you aren't taking the time to see everything you see or maybe aren't motivated to see everything that you see."

For one thing, AMD expects to return to an operating profit in the third quarter of next year after finishing the second quarter at a near break even, CEO Hector Ruiz said. Other metrics such as gross margins, average selling prices and market-share have improved over the past several quarters and he predicted the trend will continue.

And yet, to hear AMD executives tell it, all anyone wants to talk about is an erratum in Barcelona chips that AMD confirmed last week. It was discovered late in its development and means that AMD, already considered by some to be late to the quad-core party, will take several more months to ship the product in meaningful volumes.

Not that AMD isn't working diligently to correct the goof. But the market, which over the past few months has driven down AMD's share price by as much as 40 per cent, doesn't seem to be factoring in the many positive achievements AMD has accomplished over the past year.

"At the risk of sounding like I'm really ticked off - which I am - I've got to ask ourselves after you saw this caliber of talented executives talk about the progress we've made and the exciting future that we have ahead of us how in the hell could anyone conclude that our company is worth 40 percent less today than it was just a few weeks ago?" said Ruiz, who delivered the day's final address. "No way. It just doesn't make sense."

Meyer put it slightly differently. Borrowing a tack from Scott McNealy, who during Sun Micro's darkest days decried the "conventional wisdom" of market simpletons, suggested analysts were failing to consider the "trajectory" that AMD has achieved since the beginning of the year.

"What does that say about the prevailing wisdom that the experts apply to our industry or to this company," he asked.

What the experts are missing, the execs said, is that AMD expects all three of its product categories to reach an operational profit in 2008, and for revenue to rise in line with or better than the overall market demand. Manufacturing plans continue to progress, with the company still scheduled to begin 45 nanometer production in late 2008.

At times, though, executives sounded like they were whistling past the grave yard. Bob Rivet trumpeted his prediction of gross margins of 46 per cent to 50 per cent as proof a turn-around was imminent. Gross margin for last year was 49 per cent. The possibility that it could drop three percentage points ought to be cause for concern.

And when asked what exactly had gone wrong with Barcelona, Meyer would only say that the erratum, as microprocessor bugs are generally called, manifests itself in only obscure conditions. "This is not a very good forum to conduct a design engineering post mortem," he said, declining to elaborate.

The company also telegraphed mixed messages about its manufacturing plans, which have been called into question given its increased reliance on outside fabs. Hoping to clear up the misconception, Ruiz said: "We have had and continue to have and it is our plan to continue to have in the future a world class manufacturing operation." And yet the company plans once again to cut spending on factories in new equipment, pledging to spend just $1.1bn next year. This year it will spend about $1.7bn and in 2006 it spent $1.86bn.

There was no additional details on a "material" goodwill impairment charge AMD plans to take on it's acquisition of ATI Technologies. The disclosure, which AMD made on Wednesday, is a tacit acknowledgment it overpaid when it shelled out $5.6bn for the graphics chip maker.

Of course, no one knows better than AMD the benefits of staring down the barrel of a loaded gun in helping a struggling company to find focus and resolve to do better.

"We blew it and we're very humbled by it and we're going to learn from it and not do that again," Ruiz said. Meyer said simply AMD knew exactly what was wrong with Barcelona and was "hell-bent" on getting a fix into the marketplace promptly.

The lines sounded straight out of conference calls from the early 2000s. As even non-experts know, the company went on a four-year tear that still makes Intel CEO Paul Otellini shudder to this day. Savvy market watchers learned long ago that AMD is a nine-lived cat that is reckoned dead at the experts' own expense. The struggle continues. ®

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