AMD Pricing Spineometer: 2 of 5 Vertebrae

AMD, a fabless semiconductor company, had a positive Q3 ‘23. Revenue rose 4.2% to $5.8 billion and earnings before interest and taxes rose from a loss to a gain of $224 million over the same period last year.

A review of AMD’s October 31^st earnings call and financial report provided insight regarding the importance of pricing on performance.

AMD operates in highly dynamic and volatile markets as alluded to in a statement from Jean Hu, CFO of AMD: “We’re guiding one quarter at a time.” Embedded chips were the hot thing, now they are not.  Gaming was a hot thing but is facing cyclical challenges.  Mobile computing remains a hot topic, but the cutting edge keeps evolving.  PCs may be thought of as a maturing market, but the competition to drive them is wild.  Cloud computing, data centers, servers, and AI are all high growth.  “Hyperscalers” are the big thing now, but how does one price to a hyperscaler?

To address the dynamic market, AMD has launched and, presumably, will be launching multiple new product lines.  In the earnings call, one product after the other was touted as meeting the needs of one market segment after the other.

The PC segment, the silicon industry is maturing.  Here, AMD faces the challenge of changing buying habits as computers and servers last longer.  AMD would like to deliver revenue growth but how does one do this when the products sold have a longer lifetime, leading to lower volume growths?  Prices must increase to meet these business goals.

How should a company manage price in such a highly dynamic environment? Business cycles, product launches, macroeconomic evolutions, and customer negotiations all make price management for AMD challenging.

Management at AMD are aware of these challenges. They spoke of issues of “TCO (total cost of ownership) advantages” implying an understanding of the economic value to customers drove both volume and pricing decisions.

Jean Hu, CFO of AMD, expressed awareness of the importance of price management stating “Our objective is to drive top line revenue growth much faster than OpEx (operating expense) growth.”

In talking about servers, Lisa Su, CEO of AMD, stated: “unit growth may be more modest, but ASP growth, given the core count and the compute capability will contribute to overall growth.”  To drive home her understanding of the important relationship between value delivered and price captured, she stated: “Price is only one aspect of the conversation. Much of the conversation is on how much performance can you give me at what efficiency.”

And, Jean Hu expressed the importance of price and mix in value capture in stating: “going forward, it’s really mix, primarily mix is driving our gross margin.”

AMD management clearly understand the importance of price, have they built the necessary capability to deliver?

1. Industry benchmarks would imply 50 to 230 individuals would be engaged in pricing and price management at AMD as their primary profession. Given the volatility and dynamism of AMD’s market, we would expect the numbers to be at the upper end of the industry benchmarks.
2. Given the number and importance of product launches, many pricing professionals should be dedicated to pricing new offerings via economic value to customer and qualitative research methods.
3. Given that AMD works with multiple customers in the same segment, there would be a modicum of transactional price management professionals engaged using AI and statistical methods to drive negotiation expectations.
4. Given the global nature of AMD, it would be expected to find pricing mangers geographically dispersed.
5. And, given that AMD works as a fabless semiconductor manufacturer in multiple markets, each subject to its own geopolitical and macroeconomic dynamic, we would expect the pricing department to include individuals accustomed to international affairs.

Research into the investment by AMD in pricing yielded underwhelming results.  The number of professionals dedicated to pricing is far below industry benchmarks.  While their titles ranged from “pricing strategy / plan manager” to director, no vice president of pricing was identified. The responsibilities of pricing professionals at AMD are also in question.  Pricing professionals were geographically dispersed, including in the States, EU, and APAC region.

Many product and account managers listed pricing as their responsibility.  How are pricing experts contributing to the success of product and sales managers?

Given the importance and capability of pricing at AMD as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of November 2023.

AMD Pricing Spineometer: 2 out of 5 Vertebrae. Executive is aware of the importance of price management but has an underwhelming investment in this capability.

AMD (Advanced Micro Devices, Inc.) rose from 96 the day prior to their earnings call to 114 one week later. FY ’22 revenue of $23.6 billion with a 5.4% operating margin and P/E ratio near 988.

For FY ‘22, a 1% improvement in price would yield a 19% improvement in operating profits holding all else constant at AMD.