AMD Earnings Beat the Street! Intel Earnings Beat the Street?

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AMD Earnings Beat the Street! Intel Earnings Beat the Street?
R. Krause - May 4, 2000

Event Summary

April 18, 2000 - Spurred by heavy demand for chips in the first quarter, chip makers AMD and Intel announced sales and earnings estimates far in excess of what "Wall Street" had predicted. For Intel, earnings were 88 cents per share, vs. the expected 69 cents per share. But the real surprise was AMD: analysts expected earnings to be 58 cents per share, the actual results were $1.15 per share, almost double the estimates.

Closer inspection reveals that 17 cents of Intel's earnings came from a tax settlement with the IRS, which means the earnings was more like 71 cents per share. Still ahead of estimates, but not a barn-burner of a quarter. Then factor in the "extra" $140M Intel earned from investments (i.e., expected $500M vs. actual $640M) and a picture of operational weakness starts to appear. Although Intel is clearly trying to stake out a major portion of the networking market, the problems for its microprocessor business - its bread and butter - must be troubling to management.

Market Impact

About a year ago, maybe two, everyone thought the CPU wars were over, with Intel the victor. Cyrix was just about dead, and AMD looked like all it could do was deliver lower-priced Intel-like processors. Although AMD's revenues are still only a fraction of Intel's ($1.1B vs. $8B for the quarter), their growth rate is currently greater than Intel's. Intel and AMD have also been going through rounds of aggressive price cuts, with the end-users reaping the benefits.

Even with the price cuts on the Athlon CPU et al., AMD is destroying (in the good sense) Wall Street's estimates, which would seem to indicate that their volumes are increasing and their production costs are decreasing. We expect continued performance (AMD also handily beat street estimates last quarter) will start to get Intel a little nervous, if they aren't already. In addition, rumors have surfaced regarding Dell Computer considering adding AMD chips (most likely Spitfire, a Celeron competitor, refer to TEC News Analysis "Will Intel Take a Loss on Each CPU, but Make It Up in Volume?"). If that isn't enough to give Intel CEO Craig Barrett the heebie-jeebies, then maybe nothing will.

As we have mentioned in the past, one place where Intel is still the only game in town is PC servers - they aren't called "Intel-based" for nothing. When/if AMD gets the "HotRail" chipset working (which will allow AMD's CPUs to work in a multi-processor environment), Intel will have another 12-24 months of relative peace in that market. (Making a quality multiprocessor system is naturally more complex than a "uni", and we expect it to take AMD that long to figure out and fix all the issues / complexities / problems.)

Intel still owns the corporate desktop, but AMD is making inroads there as well.

Finally: we believe at least some of the great sales and earnings performance was due to pent-up demand from the pre-Y2K jitters. Thus, we do not expect sales to be as robust during the second quarter.

User Recommendations

As we have said in the past, corporate users generally don't concern themselves with the brand of CPU powering their machine, except that there has been (and continues to be) a strong preference for Intel. Although "Intel Inside" still carries a certain cachet, we wonder how much longer it can maintain the aura. If Intel continues to commit blunders, the "halo effect" may wear out.

Users should review the performance specs of comparable Intel and AMD machines to determine if there is any difference vis--vis the programs they expect to run. AMD's performance numbers are generally comparable to Intel's, and generally at a lower price. However, Intel can probably reduce prices to a greater degree than AMD, as we believe their manufacturing costs are lower than AMD's.

IT professionals concerned about more than price should also review the various "roadmaps" from each company. Although Merced/Itanium is the next big thing in the chip world, the alleged backward-incompatibility with x86 code may cause people to reconsider it as their 64-bit upgrade path. With AMD planning to deliver their backward-compatible "Sledgehammer" processor soon after Itanium, IT managers may think twice about following Intel in lockstep.

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