AMD’s Earning Preview: Factors That Instill Hope Amid A Dismal Year

by Trefis Team
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Though most of its competitors such as Intel (NASDAQ:INTC) and Texas Instruments are being hurt by the slowdown, AMD (NYSE:AMD) has been the worst hit so far, posting negative cash flows for two consecutive quarters amid declining revenues. In addition to macro headwinds, internal factors such as a change in leadership, a manufacturing glitch last year and its slow response to rapidly changing consumer needs has led to a more than 60% decline in AMD’s stock price since March 2012. (Read Our Article: Why AMD’s Stock Collapsed And How It Can Recover)

Last quarter, AMD suffered a 10% sequential decline in revenues for the second consecutive quarter and posted a net loss of $157 million. The dismal performance was very much anticipated and we expect the declining trend to continue in Q4 2012 as well. AMD is expected to announce its Q4 2012 earnings on Tuesday, January 22.

In an effort to strengthen its competitiveness and reduce its expense base, AMD announced a restructuring plan last quarter. In addition to its restructuring effort, increase in Trinity notebook shipments and introduction of Opteron chips in the server market towards the end of the quarter could have a positive impact on AMD’s earnings outcome in Q4 2012.

See our complete analysis for AMD

AMD’s Restructuring Plan To Reduce Its Expense Base

The restructuring plan announced in Q3 2012 was an effort to strengthen AMD’s competitiveness and reduce its expense base by 25%, in light of the broader macroeconomic issues.

Apart from controlling mountings costs, the restructuring plan aims to diversify AMD beyond the PC market and target other adjacent markets, including dense serving, new embedded markets and lower-power form factors, where its IP provides differentiation and a better opportunity for it to grow its share. The company intends to drive 40% to 50% of its portfolio to these faster growing markets in the future.

With the change in its operating model, AMD aims to deliver breakeven results with $1.3 billion in revenue by Q3 2013 and deliver consistent profitability thereon. In light of the slow PC growth, we feel a shifting focus to other markets is a welcome move for the company and should augur well for its outlook.

Higher Revenue Contribution From Embedded Processors

AMD is focusing on increasing its share in additional embedded markets including communication, industrial and gaming among others. It intends to leverage the success of its APUs and graphics to tap the growing potential in such markets. AMD targets increasing the revenue contribution from its embedded business to almost 20%, from the current level of a mere 5%. While being extremely discrete about the progress so far, the company did declare in its last earnings call that it has scored significant design wins to meet the target.

Continued Success Of Trinity APU’s

As a consequence of lean inventory maintained by its OEM partners, AMD registered a 11% q-o-q decline in its computing solution segment in Q3 2012. Though the lower unit shipments and decline in ASPs translated into lower than expected sales of desktop processors, AMD’s Trinity notebook shipments marked a 70% sequential increase in unit shipments.

Trinity notebooks accounted for one third of the total notebook shipments in Q3 2012. Though the Trinity APUs are targeted at the mainstream price points, AMD claims that it is witnessing continued consumer adoption at higher system price points as well and scored significant design wins last quarter. Thus, we expect to witness an increase in Trinity shipments in Q4 2012 as well.

New Opteron Chips Can Revive AMD’s Server Market

In December 2012, AMD launched nine new mid-range and entry-level Opteron processors which are ideal for use by cloud providers, web hosts and small as well as medium-sized businesses. Cloud servers represent a high-volume market and any major win could significantly fuel AMD’s server business. Delivering 24% better performance per watt compared to its predecessor, the new processors offer a better combination of performance, power and price to its customers. While we do not expect the new processors to have a significant impact on the Q4 results, we believe the same will help fuel AMD’s server buisness in the future.

In addition, collaborating with ARM Holdings, AMD intends to launch ARM-based servers in 2014. The new generation server products will make AMD the only processor provider to bridge the x86 and 64-bit ARM ecosystems. (Read: Can The New Opteron Chips Revive AMD’s Server Business)

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