Michael Dell Comments On Move To AMD (DELL, AMD, INTC)

Includes: AMD, INTC
by: Mick Weinstein

Dell is up 4% in after hours trading following its 1Q06 earnings report, but the bigger story really is AMD -- Dell announced that it will be ending its longstanding exclusive relationship with Intel (NASDAQ:INTC) and begin buying chips for some of its servers from Advanced Micro Devices (NYSE:AMD).

AMD shot up over 12% after hours on the news, and Intel (INTC) dropped 5% -- a fall one Seeking Alpha contributor sees as an irresistable buying opportunity.

The Dell conference call included more details on the switch in the Q & A session -- key excerpts:

Ben Reitzes - UBS

You... have a new processor partner at AMD. So could you just talk about — I mean you obviously have said a few times here you don’t expect a sale, but I would just like to know when do margins bottom out and start to tick up if your plan works according to what you’re looking at?

Maybe if you can answer it, throw in how we think of this $3 billion in savings and maybe how we think of AMD as potentially helping or hurting your margins?

Jim Schneider, CFO Dell

Well, I don’t think we have a timeline on that. I think we are going to stick with the pricing moves as long as we deem it is necessary to strategically light the business up and create a change in the overall market dynamic. That may take awhile. We don’t think this is a short-term quick turnaround. So we’re prepared to make cost reductions this year, next year, as long as it takes to continue to be efficient and be able to drive and sustain a great value position for customers...

Laura Conigliaro - Goldman Sachs

Just a follow-up on the AMD thing. How much will switching to (AMD's) Opteron by the end of the year help? Given that a lot of people, a lot of consultants and others, have really said that they expect Intel to actually close the technology gap by then?

Kevin Rollins

Well Laura, you raised a good point. I think the issue is that we are seeing a whole new wave of products coming in the second half of the year and significantly improved ingredients, which will allow us to stay very competitive. We’re going to bring the best technology to the market.

There have been some holes in the multiprocessor side that we’re going to be filling. But Intel also has an extremely competitive Woodcrest part and Clover Town part. So as far as the impact, I mean that will somewhat depend on what the demand is in the market. But our product line, we feel, is going to be stronger than it has ever been in the server range.

Laura Conigliaro - Goldman Sachs

What is the catalyst that really caused you to come to this decision since your server growth has been slowing for some time? It really seems that the gap between the two companies’ processors was perhaps wider before than it is now?

Kevin Rollins

Well Laura, if you look at our server business, while it has been slowing, it has still been gaining share pretty steadily all throughout last year. The bulk of the unit volume is still not in the four processor categories. It is in the mainstream categories. So there is still going to be, we think, good growth there.

I think what Mike was highlighting is our commitment to technology and making sure that at every product level, every product category, we have the best technology for our customers. At the higher end of the multi-processor space, we think we could do better, and we think now that the Opteron product can fill a hole there...

Bill Shope - JP Morgan

On AMD, can you help us understand why you chose to move to AMD in servers but not in the PC side of the equation?

Michael Dell

I think it is back to kind of the current best technology discussion again we just had. There was a clear acceptance. You watched it in the market. You guys ask us every time we turn around, what product will we use. The question of technology at the high-end was a situation where AMD was very successful. The technology was good there, and so we’re using it...

Keith Bachman - Banc of America

In terms of your comment today around technology being a key part of your consideration for processors, if in fact AMD continues to have leadership in more than just the four-way, does that then suggest that if the product roadmaps do not come to fruition and AMD has superior products that you will in fact grant processor wins to whoever has leadership in those areas?

Michael Dell

We will deliver the best technology to our customers.