AMD's Hammer: The Right Tool for the Job?

CEO Ruiz is betting on the chip to grab share from Intel

Hector de Jesus Ruiz refuses to admit he's licked. Sure, the CEO of Advanced Micro Devices Inc. (AMD ) has seen his company come up short in a bitter arms race with rival Intel Corp. (INTC ) After a string of chip-production delays, AMD's share of the PC market has fallen to 15% at the end of 2002 from 22% a year earlier. And AMD's debt rating has sunk further into junk status. But Ruiz is planning a massive counterstrike. "Stay focused," he told a gathering of 200 top employees on Feb. 5 in San Francisco. "The toughest thing for us is to do what we said we were going to do."

Ruiz is pinning his hopes on a new family of chips called Hammer. First up, in April, will be the company's new server chip, known as Opteron. Following a year of delays and technical glitches, the new chip represents the Sunnyvale (Calif.) company's last, best chance to put a dent in Intel's armor. AMD may be losing the race with Intel in the PC world, but Hammer could be the sliver of silicon that gives it an edge for the next generation of computing: high-performance machines that process data 64 bits at a time--twice the current rate.

Intel has its own 64-bit entry, called Itanium, which CEO Craig R. Barrett says will continue to improve. "Every two months, you're going to see another leap forward," he says. Unlike Hammer, however, the Intel chip forces customers to rewrite all of their 32-bit programs for the new system. That's a costly and laborious process. By contrast, Hammer is like getting two for one, says Ruiz, with no trade-offs in performance. Customers can rewrite software for the 64-bit chip anytime they want. Why? Their crop of 32-bit programs not only work but in many cases perform better because AMD improves the way the processor and memory communicate with each other. Powered by the Hammer family, Ruiz is hoping that AMD can double its 5% share in the server market this year. Higher price tags for the Hammer, say analysts, would drive up AMD's server revenue from $10 million to $100 million. And that number could double if Ruiz meets his goal of 20% share by 2005.

Has AMD bet correctly? It offers customers a cheap path to 64 bits. That's a powerful pitch during the longest tech spending downturn in history. What's more, early testers rave about the processor. Privately held computer seller Angstrom Microsystems will use Hammer to build high-performance servers for financial institutions, movie studios, and oil companies. The Boston company says customers were concerned that they would have to rewrite software for Itanium. "People want an evolutionary process, not a revolutionary process," says CEO Lalit Jain.

Wall Street long viewed AMD as little more than an Intel clone and wrote it off for dead after a court ordered the company to stop reverse-engineering Intel chips by 1995. To the great surprise of many, AMD overcame a string of manufacturing debacles and developed its own chip. AMD wowed the world again in 1999 with the Athlon chip for PCs, which briefly won the speed crown from Intel. Still, Intel has come to grips with each challenge, eventually pounding down AMD with manufacturing might and power to slash prices.

Again, AMD has stumbled with Opteron. Troubles with technology called silicon-on-insulator, which helps the chip consume less electricity, led to delays. In November, AMD had to pay IBM (IBM ), which pioneered the technique, almost $46 million to help clear up the silicon problem.

Despite these maddening detours, the prospect of a 64-bit chip compatible with existing programs has plenty of software companies on board. In late January, IBM's software division revealed that it has prepared its 64-bit Linux database software for Opteron chips. An even bigger endorsement comes from Microsoft Corp. (MSFT ), which will begin shipping a 64-bit Windows server operating system for Opteron ahead of the chip's launch. And in a break from the company's traditional hand-in-hand relationship with Intel, Microsoft execs are talking up Opteron. They say the AMD chip helps companies that want to move at their own speed. "With 64 bits, some customers are going to want to ease into it," says Bob O'Brien, group product manager for Windows Server 2003.

Still, with the April release just two months away, AMD is waiting for customers to sign on. Equipment makers such as Dell Computer Corp. (DELL ) and Fujitsu Ltd. (FJTSY ) have yet to commit to building systems based on the chip. Dell President Kevin B. Rollins says customers are asking about Opteron. But the company will wait to see if there's a groundswell of demand. The same goes for IBM's hardware group. "They've become the `show me' company for all concerned," says Banc of America Securities LLC analyst Douglas Lee.

The problem is, AMD's delays have allowed Intel to reformulate its strategy. Although Intel execs deny it, the industry is abuzz with talk that if Opteron begins grabbing share, the behemoth may add 64-bit capability to its bestselling 32-bit Xeon server chips, which now account for some 50% of the server market. Publicly, Intel execs insist they'll stick with Itanium. On Feb. 19, Intel said it would speed up planned improvements to its Xeon chips, including boosting speed and memory. "We have a lot of flexibility to accelerate," says Lisa Graff, Intel's director for enterprise processor marketing.

AMD doesn't have the same luxury. For most of last year, Ruiz has been focused on damming the river of red ink. For 2002, the company reported a net loss of $1.3 billion on revenue of $2.7 billion. Over the past year, AMD's stock has tumbled 81%, to about 5. On Feb. 17, the company laid off 350 people, the second round in a plan to cut as many as 2,000 workers by June. And in January, AMD jettisoned a plant-construction deal with Asian contract manufacturer United Microelectronics Corp. (UMC ) AMD says the pruning will help it get out of the red by June. Ruiz' goal is to break even on expenses of about $800 million a quarter.

To hedge his bets in case Hammer is slow in grabbing buyers, Ruiz also is counting on hot new products in other markets. The chipmaker has been gaining traction as a supplier of flash memory, increasingly used in electronics such as cell phones and handhelds. Intel is the leader in flash, but in just a few years, AMD has grabbed 13% of the $8 billion market. In the next year, Ruiz hopes to double that figure.

The chief insists that AMD's rich product lineup will restore the company's balance. "We just need a little help" from customers, he says. With Intel dogging AMD every step of the way, the Hammer can't come down soon enough.

By Cliff Edwards in San Francisco

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