AMD's obsession with top server and PC makers has proved costly. The chip maker claims to have focused on so-called Tier 1 OEMs at the expense of its longtime channel partners and now blames declining channel sales for its expected first quarter revenue miss.
Earlier today, AMD warned that Q1 revenue will likely come in well short of a previous $1.6bn to $1.7bn forecast. This disclosure appeared at a tough time for AMD as CEO Hector Ruiz was scheduled to face off against financial analysts at a Morgan Stanley technology conference in San Francisco. To his credit, Ruiz made the appointment this morning and squirmed as Wall Street demanded answers.
"We let down our channel partners," Ruiz told the audience.
In the bad old days, AMD gave channel partners its undivided attention, since the company relied on such ties to compete against Intel. Over the past couple of years, however, AMD's strong product line allowed it to gain the attention of IBM, HP, Dell, Sun Microsystems and other top customers. AMD fought to supply these behemoths with all the chips they could order and lost some of its channel focus, according to Ruiz.
AMD's shift to having OEMs count for the majority of its sales happened "faster than we had planned."
Intel seems to have noticed AMD's channel weakness and swooped in to claim customers.
"We did lose share in the channel to our competitor," Ruiz said, when commenting on AMD's most recent quarter.
Ruiz's excuse for what appears to be a poor upcoming first quarter didn't go over that well with the Wall Street crowd.
AMD claims to be selling every chip possible to voracious server and PC OEMs, so much so that it didn't have enough gear for channel partners. So, if all the available chips are being sold, why does it matter if they went to OEMs or the channel from a revenue standpoint?
Ruiz never answered this question directly.
He did, however, admit that the "pricing environment is very competitive."
And facing lower average product prices seems a more realistic explanation than slumping channel shipments for AMD's sales miss.
That's especially true when you consider that AMD's shift to an OEM-driven business has been underway for more than two years. AMD has been working to offset the effects of this change since October of 2005 with a program specifically meant to keep channel interest in AMD gear high. In the past, AMD has characterized the Commercial Systems Channel program as a raging success.
Looking forward, AMD will need to up its x86 processor market share from the mid-20s if the company is to post a profit, Ruiz said.
"We have to get above the thirty per cent share number," he said.
AMD characterizes this goal as its "breaking the monopoly" agenda, although Ruiz was much quieter than usual about his company's anti-trust proceedings against Intel.
AMD, which has about $1.5bn in the bank, also needs to keep its cash on hand above $1bn in order to ensure a comfort zone, according to the CEO.
The chip maker could fatten market share numbers and its bank account with a strong run in 2007. It will ship a four-core version of Opteron by "the end of the Summer."
"We see unit demand being healthy in 2007," Ruiz said. ®