How AMD aims to get back in the black

• Three consecutive years of losses, plunging market share in some segments
• Data centre segment key to recovery; new chip in 2016, revenue ramp by 2017

 
THE past few years have been painful for US chipmaker Advanced Micro Devices Inc (AMD), which registered losses for three consecutive financial years.
 
For the first nine months this year, it recorded a net loss of US$558 million, versus a US$39-million net loss in the same period a year ago.
 
In 2014, the company recorded a net loss of US$398 million versus a US$74-million net loss in 2013 and a massive US$1.18-billion net loss in 2012.
 
The last time it posted a full year of profitability was in 2011, when it recorded a net income of US$495 million.
 
This decline has partly been driven by factors such as pressure on its PC business and its weakening presence in the data centre business, among others.
 
Sitting in the centre of this fiscal maelstrom is its chief financial officer, the Malaysian-born Devinder Kumar (pic above).
 
“The last two to three years have been very difficult; we lost a lot of money. Our products then were not competitive enough, but we have made significant progress recently,” he tells Digital News Asia (DNA) in an exclusive interview in Kuala Lumpur.
 
While AMD is expected to register losses again this financial year, the signs increasingly point to a recovery sooner rather than later.
 
For example, in its third quarter (Q3), the company’s struggling computing and graphics business posted its first quarter-on-quarter increase in revenue since the fourth quarter of 2013. Prior to Q3 2015, it suffered six consecutive quarters of decline.
 
In fact, Devinder expects the unit’s revenue in fourth quarter to continue to grow quarter-on-quarter.
 
“We understand that two quarters [of growth] do not make a trend because we have lost a lot of market share, [but] there is good traction we are seeing in that particular space,” he says.
 
This “good traction” he is seeing is backed by a few factors.
 
“The transition to Windows 10 impacted the PC space in 2014 and in early 2015. That is now behind us.
 
“We have taken some actions to correct some of the imbalances – in our channel inventories, among others.
 
“We also have introduced a new chip, the Carizzo chip, which has been well received,” he argues.
 
Data centre boost with new chip
 

 
Another sign of possible recovery is that its effort to recapture lost market share in the data centre space is showing good progress and is on track.
 
Sometime next year, AMD will introduce its new APUs (accelerated processing units) with a Zen core for the data centre business, which its parks under its Enterprise, Embedded and Semi Customs or EESC division.
 
The move is critical, as over the years, AMD has lost significant market share in this space.
 
“At one point, we had 25% to 30% share in the data centre space. Today, it’s about 1% or less,” says Devinder.
 
“We have been working on the APU for the last few years. It takes about three to four years to design a complicated core from the ground up.
 
“That is something we have been working on since 2012. The APUs will be introduced on a sampling basis to our customers in 2016, and the revenue ramp will occur in 2017,” he adds.
 
With its market share in the data centre space pared down to a near-non-existence, every single percentage point it recaptures would have a significant positive impact on the company’s financials.
 
AMD expects the data centre market to be worth US$19 billion by 2019. Assuming that it is able to capture a mere 20% share by in 2019 [note it had a 25-30% share in this space several years ago], this would translate to US$3.8 billion in revenue – that’s 66% of AMD’s total revenue in 2014.
 
But this is a lot of assumption and hope – after all, the reason its market share shrank to 1% was mainly due to weak products.
 
The question then remains: Does AMD still have the trust of its customers?
 
“The trust is still there, because we know the server business very well. We know the ecosystem. We still have engineers who deeply understand the server business,” argues Devinder.
 
“All we need is a competitive part to be introduced, so that the business will come,” he adds.
 
In fact, he argues that enterprise customers are very much looking forward to AMD’s new APUs.
 
“As you know, there are only two [microprocessor] players in the world, us and Intel [Corp]. If we have a competitive part, our customers have a lot of incentive to give their business to us.
 
“When we meet our OEM (original equipment manufacturer) players, they say they have to take 99% of their needs from one supplier, so the price competition really is not there; the leverage is really not there either.
 
“When you have only one player, it can pretty much determine what the prices should be,” says Devinder.
 
Consolidate, then focus, focus, focus
 
Recently, AMD announced its plan to sell its majority stakes in two facilities – one in Suzhou, China, and the other in Penang, Malaysia – to Nantong Fujitsu Microelectronics (NFME).
 
The deal, which is expected to be completed in the first half of next year, involves NFME purchasing an 85% share in the Suzhou and Penang facilities for US$371 million. After deducting taxes and other related expenses, AMD stands to receive US$320 million in cash.
 
Once the deal is completed, AMD will no longer have controlling stakes in any manufacturing facilities globally.
 
For Devinder, the move to sell its Suzhou and Penang facilities will help AMD be more focused, moving forward.
 
“It simplifies our business by fully shifting to a fabless business model that aligns with other companies that leverage OSAT (outsourced semiconductor assembly and test) manufacturing partners,” he says.
 
The move may also potentially help the company further reduce its operating expenditure. Under the deal, AMD is not obligated to purchase new products offered by NFME – in other words, AMD has the flexibility to choose its manufacturing partner based on which offers the best price and deals.
 
Devinder says that AMD will also continue to closely watch its operating expenses (opex), which are in a declining trend in any case.
 
In 2013, its quarterly opex ranged from US$421 million to US$469 million. This year, it was at the US$336-million to US$357-million level.
 
Besides getting its data centre business back on track, AMD will also be focusing on its gaming console business, where it has achieved significant success over the past few years.
 
Today, all Sony PlayStation 4 (PS4) and Microsoft Xbox 1 consoles are powered by AMD chips. 
 
“We are supplying on a 100% exclusive basis, so if you go out in the market and buy a PS4 or Xbox 1, the APU, which is essentially the most expensive component in the game console, comes from AMD.
 
“That business continues to be healthy, and we are making money,” says Devinder.
 

 
No IoT plans
 
While the company is focused on growing on its EESC and Computing and Graphics segments, there is one area that the company will not be going into, and that is the Internet of Things (IoT).
 
Devinder stresses that this is not because AMD does not believe in the IoT market potential, but simply because the segment does not fit well into its business plan.
 
“For the size of company we are, we have to select areas where we can pursue the most profitable poles.
 
“The data centre business is a large profit pole, the gaming console business is a large profit pole ... I don’t think these businesses are easier, but they are less fragmented.
 
“In the data centre x86 server space, there are three significant players – Dell Inc, Hewlett-Packard Co and Lenovo Inc – and we have built good relationships with them.
 
“The IoT is a huge business opportunity, but it is very fragmented. Some of the IoT devices are low-price, high-volume and low-margin, and the customers are so diversified.
 
“With the resources that we have, we want to come in with specific customers and with specific relationships,” says Devinder.
 
Previous Instalment: Jobs assured despite Penang plant sale: AMD CFO
 
 
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