The Business of Tech: AMD & Intel Q3’08

Now that we have the quarterly numbers in for both Intel (who reported Tuesday) and AMD (who reported Thursday) we’re going to take a quick stroll through the numbers to see what’s up.

AMD

The AMD/Foundry Co. spilt has not been finalized yet, so the foundries are and will continue to stay on AMD’s books through the end of the year. Furthermore any of immediate investments and sales from the transaction are in the 4th quarter, since the plan was announced over a week after AMD’s 3rd quarter ended. So this 3rd quarter marks the last quarter where AMD is entirely whole, while the company’s books will begin to be shaken up in the 4th when Mubadala’s latest investment is counted. Finally, the Foundry Co. spin-off appears to be set in stone to complete in early 2009, AMD has ceased mentioning “late 2008” when discussing it.

Getting down to the numbers, as predicted for some time by AMD this quarter has been another loss. But it’s a loss that was anything but expected. For the quarter AMD lost a paltry $67 million on revenues of $1.78 billion, completely blowing away their own predictions and what analysts were expecting, losing nearly $100 million less than expected. Compared to their loss last quarter of $1.19 billion and their Q3 loss last year of $400 million, AMD may have as well broken even for the quarter. In fact if you switch to the numbers from their non-Generally Accepted Accounting Principles accounting, then they did indeed make a profit of $80mil for the quarter. The quarter also marks the end of AMD’s operating losses, they posted an operating income of $131 million this quarter.

AMD’s better than expected results can be attributed to 3 major sources. The first is their server CPU operations, for which Q3 was the first quarter where the TLB-fixed Barcelona shipped in volume for the entire quarter; in effect it was the first normal quarter for the CPU business in quite some time. The second source is a one-time license fee the company received for its 130nm SOI technology, which added $191 million to the bottom line. Finally, AMD’s graphics division turned a profit for the first time since they were purchased, posting a profit of $47 million on $385 million in revenue.

Looking at the segmented information, AMD’s CPU division hasn’t changed much in the last quarter. Intel continues to dictate CPU pricing, keeping AMD’s ASP for CPUs flat compared to both last quarter and last year. Due in part to the aforementioned TLB fix, the total number of CPUs sold was higher than last quarter, but compared to last year it’s still down – AMD’s CPU business is doing better than expected, but it’s still not doing well. Meanwhile everything is up with GPU sales; prices and units shipped are up compared to last quarter and last year. The Radeon 4000-series has been the smash hit AMD has been looking for from its graphics division, with Q3 marking the first full quarter for the high-end products of that generation. It needs to be kept in mind just how lop-sided AMD’s GPU and CPU business are in terms of revenue, so doing well here isn’t enough, but all-told the business is at a comfortable position. We’ll have more to discuss next month, once NVIDIA posts its Q3 numbers.

Finally, there are the Q4 projections. AMD is being a bit more vague than usual, perhaps because even they aren’t entirely sure how things will turn out (and as we’ll see, Intel is the same way). They’re expecting Q4 revenue to hold flat with Q3’s (minus the license fee revenue), which puts them around $1.58 billion. It seems unlikely that they’ll turn a profit in Q4 as a result, but it is not something AMD is explicitly outlining. AMD has now posted losses for the past 8 quarters, so there’s a lot of interest in finally snapping that streak with a strong Q4 performance. If not Q4, then Q1’09 with the completion of the foundry spin-off will certainly push the company in the black at long last.

Intel

It seems that as long as AMD doesn’t do too well, Intel can do quite well. Intel posted another big quarter, with $2 billion in profits on $10.2 billion in revenue, for a 12% rise in profit and 1% rise in revenue respectively. Interestingly however, the company missed analyst estimates on revenue, where they were expected to bring in $10.25 billion. Intel has been especially proud of their gross margin for the quarter, which was an unexpectedly high 59% (for the sake of comparison, AMD Is 51%). All things considered, the market seems happy as long as Intel’s gross margins stay this high, even if they miss estimates elsewhere.

Looking at the revenue breakdown, processor shipments are up but the ASP was down. Intel attributes this to the Atom, which is now fully shipping and dragging down the ASP of the rest of the CPU business since the Atom is significantly cheaper than Intel’s traditional CPUs. We don’t have a complete breakdown of the Atom versus everything else, but we do know that Intel sold around $200 million in Atom processors and chipsets in the 3rd quarter, and if you remove the Atom from Intel’s CPU sales the ASP of everything else held steady. It’s a bit of a riddle to see Intel’s ASP hold steady when they get to dictate the terms of the market, but it is high-end product launches that tend to drive up the ASP, of which Q3 had little. Furthermore cheap laptops are still driving down the ASP, to which the Atom isn’t helping. Nehalem in Q4 should help drive the ASP back up, but it won’t solve the long-term problem posed by cheap laptops and the Atom.

Finally, we have the future. Intel’s Q4 predictions are unusually reserved, as a result of the recent credit crunch and associated problems. The resolution of these problems is going to have a significant impact on the CPU business for both Intel and AMD, which makes predicting revenues nearly impossible (unless you’re Miss Cleo). Intel’s official predictions are for between $10.1 and $10.9 billion in revenue for Q4, a very weak number for what’s usually a very strong quarter. Intel has a strong product portfolio, but getting customers to buy is a whole other matter. Perhaps as an omen of things to come, sales were down in North America by 8.7%, the only region in which they fell.