Nanotech - The Circuits Blog

Advanced Micro Devices' CEO Dirk Meyer is confident about his company's ability to compete--especially with Intel--and believes a new focus on processors for smaller laptops (and possibly a Netbook chip) will be key.

AMD CEO Dirk Meyer

(Credit: AMD)

During a phone interview Thursday, Meyer also addressed the finalization of its deal to spin off its manufacturing operations. As planned, AMD will become a chip-design company and spin its manufacturing operations off to a new entity tentatively called The Foundry Company. AMD will own 34.2 percent of the new manufacturing company, while the Advanced Technology Investment Co. will own the rest. ATIC is an investment company wholly owned by the government of Abu Dhabi, which is part of the United Arab Emirates.

"We've completed all the prerequisites to closing the deal and we close the transaction no later than Monday (March 2)," he said.

One of the linchpins of the spin-off is the opening of a new manufacturing facility in Saratoga County, New York. "We still plan to break ground on that facility next summer. When we open up the doors it will be one of the most advanced semiconductor manufacturing facilities in the country," Meyer said.

Meyer explained what the spin-off means to AMD investors. "What AMD stockholders will own is AMD the product company. It will happen that AMD the product company will own an equity interest in The Foundry. However, The Foundry's operations will be funded off The Foundry Company balance sheet. And AMD won't have any obligations going forward to pony up anymore investments to fund The Foundry company operations," Meyer said.

The upshot is that the spin-off will save AMD money, allowing it to be more profitable. "In the past we've been burdened with the need to invest in silicon R&D and wafer fabs (plants). And this transaction gets us out from underneath both of those things. In the past, we've had to invest between one and two billion dollars a year in manufacturing capacity for wafer fabs. We don't have to do that anymore."

"This will bring a bunch of cash into the company and lighten our debt load," he said.

Intel, not surprisingly, sees things differently. It believes having full ownership of manufacturing operations makes it more competitive by allowing it to move quickly to next-generation manufacturing processes: a strategy that Intel has executed almost flawlessly in the past couple of years: moving from 65-nanometer to 45-nanometer and, later this year, to 32-nanometer. (Generally, the smaller the geometries, the faster and more power-efficient the chips are.)

And Intel CEO Paul Otellini mentioned yesterday at a Goldman Sach's technology conference that AMD may face issues when it "decouples" its design operations from the manufacturing side of the business.

Meyer disagrees. "The supposition is just wrong. That presumes we won't have a relationship with our foundry partners." (Foundry, in this case, is a generic term for manufacturing facility.) "Actually, we have that relationship with TSMC today, who builds our graphics parts." (TSMC is Taiwan Semiconductor Manufacturing Company.) "So, the supposition that we won't have the appropriate influence on technology isn't correct. What about Qualcomm, Nvidia, TI (Texas Instruments)...who don't own their own manufacturing assets? The idea of being a successful semiconductor product company and not owning the manufacturing assets isn't new."

So, how will AMD compete with Intel in the race to move to the next-generation manufacturing process? "We've never introduced products on the next node (manufacturing process) first in the industry. One, it's really expensive to do. And it has been a good business decision, frankly. And, given our scale, we don't receive the first copies of manufacturing tools. So, we have, by choice, introduced products six to twelve months after the first company in the business and that typically is Intel. We're not materially disadvantaged by doing so. Our product architectures have always left us very competitive. At the 65-nanometer generation, our products were competitive in the data center with Intel's 45 (nanometer)."

Meyer said AMD will begin its "ramp" to 32-nanometer in the middle of next year.

And what about AMD's ability to respond if the economy gets worse? "We embarked on some restructuring activities in the back half of last year. And when the economy turned south we had to go back and restructure further. We did so with a very sober view of the future. So our plans were not created on the assumption we were going to see a miraculous turnaround in the second half," he said. "Priority one is manage cash and make sure we maintain liquidity. Priority two is maintaining investment in the R&D pipeline. That will make sure we're an interesting company when things do turn around."

An emerging area of critical competitiveness for AMD is mobile processors. Before addressing specifics, Meyer said that consumers should look beyond benchmarks. (AMD mobile processors do not fare well against competing Intel chips in benchmarks). "Let's open the aperture a little bit. Let's think about what people actually do with PCs. And let's think about the experience in various usage scenarios and talk about how well the device responds in delivering that experience. If I'm going to transcode video or play a 3D game. Let's talk about what we actually want to do instead of some benchmark." Here, Meyer is saying that AMD's processors combined with its ATI graphics chips can process certain tasks more quickly than Intel processors alone.

And Netbooks? Does AMD, dare we say, now have a Netbook strategy (after renouncing the Netbook last year)? "I think a year from now people are not going to talk about a Netbook versus a notebook because the lines are going to be so blurred it's not going to make any difference anymore." He said AMD has reevaluated the small laptop space and intends to compete in small devices starting at the 10-inch diagonal screen size. "I hate to say Netbooks because a year from now people won't say Netbooks." And how low will AMD go? "You'll see our chips show up in devices down to the $399 price point."

This very-low-cost chip will be different than AMD's Yukon, aka the Athlon Neo Processor MV-4 (1.6GHz), which will be used in Hewlett-Packard's upcoming dv2 Pavilion ultraportable notebook. Meyer said AMD is working on a chip code-named "Ontario" that's "more purpose built for lower power, lower cost applications."

"So we've got a continuum of solutions going Yukon, Congo, Nile, Ontario...that will enable smaller, less expensive form factors. We're focusing on that ten-inch and above..10, 11.6 (diagonal screen size)--in there."

Though Meyer didn't get very specific, the single-core Yukon and the dual-core Congo (the latter coming later this year) appear to be targeted at larger screen sizes (like the 13-inch HP dv2 Pavilion) while Ontario is smaller form factors.

Advanced Micro Devices' chief executive predicts that Netbooks will eventually disappear. This thinking, though obviously favorable to AMD's strategy, isn't completely at odds with Intel's.

The lightweight HP Pavilion dv2, which uses the AMD Neo processor, is marketed as a notebook

(Credit: Hewlett-Packard)

"The distinction between what is a Netbook and what is a notebook is going to go away," AMD CEO Dirk Meyer said Thursday in the company's earnings conference call.

"There will be a continuum of price points and form factors," he said.

"Given the way Netbooks are configured today, consumers who want a notebook at those kind of (low) price points have to compromise and as a result don't enjoy a full PC experience, particularly around the graphics and media capability of the machine," Meyer said. "And likewise people who wanted a thin and light machine had to pay a lot of money, typically well over a thousand dollars."

Upcoming inexpensive ultra-thin notebooks will meet the need for a small, thin, lightweight laptop that is more powerful than a Netbook, Meyer said.

This sentiment is actually backed up to some extent by Intel's recent behavior. Intel CEO Paul Otellini, in that company's earnings conference call last week, spoke oddly of Netbooks in the past tense. He said the buzz around Netbooks at the Consumer Electronics Show "validates our view that (the market) had a high potential for growth and it was an exciting segment, in particular in this kind of economic environment." (Emphasis added.) Otellini did add, however, that he expected Intel "would do very well in the Netbook market in the course of the next couple of years."

Whether his use of tense is just a way to refer to the Netbook market to date or a Freudian slip tied to Intel's intention to bring out new mainstream Core architecture chips for inexpensive thin notebooks later in the year, is not clear. This chip platform could potentially suck a lot of the enthusiasm out of the Netbook market.

And Intel has small plans for its Atom processor in 2009. Aside from a tiny increase in processor speed and a slight improvement in graphics, nothing big is slated for the platform. Is the demise of the Netbook market as we know it today something both AMD and Intel agree on? We'll see.

Advanced Micro Devices reported a much smaller loss for the third quarter and better-than-expected revenue.

The Sunnyvale, Calif.-based chipmaker reported third-quarter 2008 revenue of $1.776 billion, including process technology license revenue of $191 million.

Revenue increased 32 percent compared to the second quarter of 2008 and 14 percent compared to the third quarter of 2007.

A positive surprise is the net loss, which was significantly smaller than expected. The company reported a net loss of $67 million, or 11 cents per share. Analysts polled by Thomson Reuters had expected a third-quarter loss of 40 cents per share on $1.48 billion in revenue. The company also reached operating profitability in the quarter.

Analysts were impressed by the numbers. "Even in a normal environment this would be a pretty remarkable achievement. In today's environment, it's extraordinary," said Ashok Kumar, an analyst at investment bank Collins Stewart.

"Improved execution across all of our businesses," Robert J. Rivet, AMD's chief financial officer, said in a statement, "was punctuated by a refresh of our graphics product line-up, driving 55 percent sequential revenue growth and market share gains. In addition, customer adoption of our quad-core microprocessors was strong, with unit shipments increasing 46 percent sequentially."

In the second quarter of 2008, AMD had revenue from continuing operations of $1.349 billion and a net loss of $1.189 billion. In the third quarter of 2007, AMD had revenue from continuing operations of $1.558 billion and a net loss of $396 million.

Third-quarter 2008 gross margin was 51 percent, or 45 percent excluding process technology license revenue. This compares favorably to both the second-quarter 2008 non-GAAP gross margin of 37 percent, and the third-quarter 2007 gross margin of 41 percent.

"We achieved a significant milestone with the recent announcement of our Asset Smart strategy, which will transform both AMD and the industry," Dirk Meyer, AMD's president and CEO, said in a statement.

Earlier this month, AMD announced that it was splitting into two companies: one for designing chips (AMD), the other for manufacturing them (The Foundry Company). The capital-intensive business of manufacturing chips had been weighing on AMD as it reeled under a $5 billion debt load, partially due to its purchase of ATI Technologies in 2006.

The investment is expected to allow AMD to remain directly involved in chip manufacturing--crucial for competing with Intel.

AMD said it has secured $5.7 billion of "confirmed, pledged investment," with some of the money earmarked for a future manufacturing facility in Malta, N.Y. It will own part of the new manufacturing entity, and Advanced Technology Investment Co. (ATIC) will own the rest.

In addition, ATIC will commit a minimum of $3.6 billion and up to $6 billion in additional funds over the next five years for the upgrade and expansion of fabrication facilities in Dresden, Germany, and construction the Malta, N.Y., facility.

One of the largest investors, Mubadala Development, now owns 19.3 percent of AMD.

Update on July 24, 5:50 p.m. PDT with additional information and corrections.

UPDATE: According to Kirk Ladendorf, the author of The Austin American-Statesman article, the Statesman will issue an update, likely sometime during the week of July 28. In short, it appears that AMD's contention that Dirk Meyer was misquoted is true.

Advanced Micro Devices will split into separate companies as it spins off its manufacturing operations, according to a report.

The Austin American-Statesman had one of the most unambiguous statements to date when it interviewed AMD's new CEO, Dirk Meyer, last week: "Meyer says the company is just months away from a major restructuring that will spin the manufacturing operations off into a separate company, with new ownership," the report said.

AMD spokesperson Drew Prairie says Meyer was misquoted, but did not give details on the company's future plans. He did say that "it's fundamentally important to AMD to transform how we manufacture our wafers."

One thing is clear: AMD has been laboring for months over the details of the restructuring. "We have made enormous progress. Certainly have an incredibly high level of expectation we will be able to do that before the end of the year," said AMD chairman Hector Ruiz--who stepped down as CEO last week--during the second quarter earnings conference call on July 17.

What may happen before the end of the year is a partial reorganization of the company rather than a clean spin-off of all manufacturing assets. But the basic import of the Statesman comment isn't necessarily inaccurate. AMD Chief Financial Officer Bob Rivet said during AMD's second-quarter earnings conference call that Asset Smart "will be a major reformation of the company." Asset Smart is AMD's terminology for the restructuring of its manufacturing operations.

"Part of the reason for the timing of the CEO transition...(is) we're just about at the goal line on Asset Smart," Prairie said. "It's at a point where it requires 100 percent of Hector's time and focus to see it through."

One of the biggest pieces of news that emerged from AMD's earnings announcement last week was that Meyer would become CEO and Ruiz would remain as chairman to oversee AMD's transition to Asset Smart. This arrangement has led to speculation that AMD would spin off the manufacturing part of the business. The question seems to be: How much of this would AMD retain?

AMD already has an Asset Smart relationship with IBM, Prairie said. "We have a very good relationship with IBM on the process technology side. That's one of the examples we have held out where we have gone Asset Smart in the past. Not having to have a 300 millimeter test facility on our books because we use their facilities."

However, Ashok Kumar, senior vice president at CRT Capital Group, said that one of the likeliest partners for AMD when it restructures manufacturing operations is Singapore-based Chartered Semiconductor Manufacturing. Taiwan Semiconductor Manufacturing Company (TSMC), which currently makes AMD's graphics processors, has also been cited as possibly playing a role in AMD's restructuring.

Advanced Micro Devices has its eye on the ultra-low-cost notebook market. Dirk Meyer--the company's new CEO--and other executives discussed this and ways to make the company profitable during the company's earnings conference call Thursday.

HP 2133 Mini-Note is a low-cost ultramobile notebook--a market AMD is eying.

(Credit: Hewlett-Packard)

Meyer--promoted to CEO on Thursday--made it clear that AMD is serious about the so-called Netbook market, where Intel's Atom processor has been the most successful so far. (Though Intel CEO Paul Otellini made a perplexing comment Tuesday about the Atom processor.)

Netbooks have two hallmarks: they are typically under $400 and are extremely small and light. The Asus Eee PC is the most popular Netbook currently.

In response to a question from an analyst, Meyer implied that while AMD is not interested in the mobile Internet device market (think: iPhone), it is serious about low-cost notebooks.

"We're a much smaller company with not nearly the scale that our competitor has," Meyer said. "We don't intend to try to do absolutely everything they do in the marketplace. (But) slightly smaller form factor notebooks and inexpensive notebooks. That is a market segment that we're interested in."

AMD is already taking concrete steps to get into this market.

"It's actually a segment that we're starting to offer products to our customers in support of now," Meyer said. "We actually haven't talked in public about that, but I expect we'll be talking about that roadmap when we get together in November at our analyst conference."

Meyer and other executives also addressed upcoming 45-nanometer processors, new graphics chips, and the so-called "asset-lite" strategy as ways to bring the company back to profitability.

Chief Financial Officer Bob Rivet said upcoming 45-nanometer processors and the eventual outsourcing of more production to companies like Taiwan Semiconductor Manufacturing Company (TSMC) will be the keys to long-term sustained profitability.

"Our strategy to continue to execute on 45 nanometer improves our cost structure," Rivet said. He added that improving profitability also "does incorporate asset-smart (and) execution by Hector (Ruiz) to bring it to conclusion." Analysts refer to the outsourcing strategy as asset-lite, AMD refers to it also as "asset-smart." Outgoing CEO Hector Ruiz will stay on to execute the asset-lite strategy.

Rivet later added that asset-lite "will be a major reformation of the company."

On upcoming 45-nanometer production, Meyer said: "We're well on track with the 45-nanometer plan. We actually started production late last quarter and on track to begin volume shipment early in Q4." AMD currently uses a 65-nanometer manufacturing process for most of its silicon. Intel, on the other hand, has been shipping 45-nanometer processors since last year and its newest Centrino 2 processors are made on a 45-nanometer process.

New graphics chips will also help, according to Rivet. "The new 4800 series will be the best products in the marketplace. (This) will definitely contribute to gross margin," he said. AMD is struggling to get the all-important financial benchmark of gross margin to above 40 percent. It is now at 37 percent. By comparison, Intel's gross margin was just below 56 percent in the second quarter.

About profitability in general, Rivet said: "Since we're so far away from profitability. The first order of magnitude is operating profit at the operating income level not at the net income level. First get to that level then we'll work to get the net," he said. Rivet said AMD will show an operating profit in the second half.