AMD admits preferring OEMs to system builders for months

Edmonton’s Hard Data Ltd. has had trouble getting AMD Opteron processors since last fall for the high-end servers it builds for customers from Brazil to British Columbia.

In fact company president Maurice Hilarius said he is only just receiving some top of the line CPUs ordered last August.

He isn’t the only AMD system builder having trouble. All of them are.

Yesterday, AMD chairman and chief executive officer Hector Ruiz apologized to the channel for shortages, explaining the company has been favouring OEM manufacturers like Hewlett-Packard, IBM and Sun Microsystems for months because demand from them unexpectedly soared.

“We were under incredible pressure to support the OEMs we had committed to,” Ruiz told a technology conference sponsored by the Morgan Stanley brokerage in California.

But as a result “we let down our channel partners,” he said. “We took our eye off the channel.”

That, combined with a price war with Intel, made him acknowledge that AMD won’t be able to meet its prediction of earning between US$1.6 billion and $1.7 billion this quarter, and that supply won’t match demand until the end of the second quarter — meaning June.

He dodged suggestions from a Morgan Stanley moderator that AMD will post losses in the first and second quarters. The company reported a net loss of US$574 million in the fourth quarter of last year.

Ruiz tried to blunt the hard news by saying that unlike some experts who feel the chipmaking business is mature, it’s really still in infancy.

AMD has gone in only four years from being largely a channel supplier to selling most of its chips to OEMs. The transition was “faster than we planned,” he said, and the company temporarily didn’t have enough manufacturing capacity.

And when demand from OEMs dropped in the fourth quarter, AMD couldn’t suddenly change to the processors system builders were asking for.

He also deflected potential complaints that the OEM deal signed with Dell late last year could have deflected some of the supply, saying his company is only now starting to serve Dell.

“We didn’t do as good a job as we should have,” he said in accepting some of the blame.

He has some sympathy from Dean McCarron, principal at Mercury Research, a Scottsdale, Arizona, microprocessor analyst.

Deals with OEMs are eagerly sought after because they are a stable source of revenue, he said, but they are contractual, unlike orders from system builders.

AMD “got what they wished for,” he said in OEM deals, but demand “came on much more stronger than anyone expected.”

Not having seen this kind of demand for its CPUs, it couldn’t forecast what it would take to keep up. For AMD “it’s kind of a learning experience” that Intel went through years ago.

Still, he added, “they could have planned a little better.”

Hilarius is also forgiving, to a point, even though 90 per cent of Hard Core’s servers and workstations use AMD chips and he believes he’s lost some business – although he couldn’t say how much – from the chip shortages.

“It’s one thing to have demand exceed capacity,” he said. “It’s another to change from having a channel with a number of players, then adding another potentially just as large” – meaning Dell.

Bothering him just as much as the shortages is that AMD has fallen in price-performance behind Intel, which released quad-core CPUs before its competitor and won’t release its own versions until the end of the summer.

“We’ve got that lovely AMD gold partner sticker,” he said. “I don’t feel very gold right now.”

But AMD made sure chips he ordered — when they could be gotten — were sent directly to Hard Data from Singapore, bypassing Canadian distributors.

After all, he added, parts shortages, disruptions, model changes and the fluctuating Canadian dollar aren’t rare.

So he’s not mad at AMD. “It’s business,” he said.

Meanwhile Ruiz told the conference that the revenue shortfall is merely a “blip in this quarter. We don’t see it as a long-term blip.”

The PC industry will change dramatically, he said, with a broader range of x86-based products expanding into homes and verticals such as education and health care. With its purchase of Canadian graphic chipmaker ATI, it is well placed to take advantage of these and other opportunities, he said.

 “We’ll continue to grow our OEM business dramatically,” in the second quarter, he said. As for the rest of the year, “we’re very bullish.”

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Howard Solomon
Howard Solomon
Currently a freelance writer. Former editor of and Computing Canada. An IT journalist since 1997, Howard has written for several of ITWC's sister publications, including Before arriving at ITWC he served as a staff reporter at the Calgary Herald and the Brampton (Ont.) Daily Times.

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