AMD To Post Another Difficult Quarter With Dismal PC Sales

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Advanced Micro Devices

Quick Take

  • Macro factors and internal disruptions at AMD led to a 17% decline in revenues and a net loss of $1.18 billion in 2012.
  • AMD will announce its Q1 2013 earnings on April 18, and due to the drastic decline in Q1 2013 PC shipments, we do not expect Q1 results to instill much hope; global PC shipments declined by 13.9% (y-o-y) in Q1 2013.
  • However, we believe that the company’s restructuring initiative could help it turn around its business in the future; AMD announced a restructuring plan in Q3 2012 in an effort to strengthen its competitiveness and better manage its expenses and cash.
  • The introduction of new product offerings, leveraging growth in adjacent markets, lowering operating expenses and reducing inventory will be AMD’s key focus areas this year.
  • A strong APU line-up, new products to leverage growth opportunities in embedded markets and reviving its server business can help AMD perform better in 2013.

With $5.4 billion in sales, AMD (NYSE:AMD) ended fiscal 2012 with a 17% decline in annual revenues and marked its fourth consecutive decline in quarterly earnings. Additionally, as intense competition in a slow market put pressure on gross margins, the company suffered a net loss of $1.18 billion in 2012.

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Macro headwinds and weak demand for PCs created a difficult selling environment for chip manufacturers, such as AMD, last year. In addition, internal factors such as a change in leadership, a temporary manufacturing glitch and a slow response to rapidly changing consumer needs further reduced investor confidence in AMD, which led to a decline in the stock by more than 60% last year.

In Q3 2012, AMD announced a restructuring plan in an effort to strengthen its competitiveness and better manage its expenses and cash. The introduction of new product offerings, leveraging growth in adjacent markets, lowering operating expenses and reducing inventory will be AMD’s key focus areas in 2013 as it aims to return to profitability by the second half of 2013.

AMD is set to announce its Q1 2013 results on Thursday, April 18. Keeping in mind the drastic decline in PC sales last quarter, we do not expect Q1 results to instill much hope. Nevertheless, we believe that the company’s restructuring initiative could help it turn around its business in the future.

See our complete analysis for AMD

PC Sales Remained Sluggish In Q1 2013; Declining Shipments In 2013

The slowing enterprise market, consumer softness in mature markets (the U.S. and Western Europe), slowing demand from emerging markets, a weak reception for Windows 8 OS and cannibalization by tablets and smartphones are the main factors leading to the slump in the PC market. PC sales declined marginally in 2012, and research firm IDC estimates the downward trend to continue this year as well.

Global PC shipments witnessed the sharpest quarterly decline (13.9% y-o-y) in Q1 2013 in almost two decades. Though IDC estimates a revival in demand in the second half of the year, we maintain a conservative estimate for PC shipments in the future. Nevertheless, with improving macro conditions, increasing demand from emerging economies and the introduction of new convertible and hybrid designs, we forecast the rate of decline in global PC demand to drop in the future.

We are yet to update our AMD model with the latest PC sales figures. This could be one of the variables where we differ from the current market price.

(In Millions)

2009

2010

2011

2012

2013

2014

2015

2016

Total PC Sales

304.9

347.1

363.9

350.4

344.4

341.5

339.9

339.5

Desktop Sales

136.2

145.9

154.8

148.4

145.4

142.5

139.0

135.5

Notebook & Netbook Sales

168.7

201.2

209.1

202.0

199.0

199.0

201.0

204.0

Source: IDC Press Release & Trefis Estimate

A Strong APU Line-up Could Accelerate Product Wins

AMD has a robust pipeline of upcoming platforms which could fuel demand for its products in 2013 and beyond. At the 2013 Consumer Electronics Show in January, it introduced the Kabini platform meant for ultrathin notebooks in the low power segment. Kabini will be AMD’s first quad-core APU and will replace its Brazos 2.0 platform.

Earlier this year AMD also introduced a new APU, code named Richland, which targets the desktop and performance ultrathin segments. AMD claims that the Richland platform delivers over 20%-40% better visual performance compared to its predecessor, Trinity.

We feel that the introduction of higher efficiency processors could lead to additional design wins for AMD, helping the company maintain its market share in the coming years. The follow-up to Richland – Kaveri – is also expected to start shipping in the second half of 2013 and promises to offer significant performance per watt improvement and a stronger battery life, offering higher efficiency.

Leveraging High-Growth Opportunities In Adjacent Markets

AMD aims to diversify itself beyond the PC market and target other adjacent markets including dense servers, new embedded markets and new lower-power form factors where its IP provides differentiation and a better opportunity to grow market share. The company intends to drive 40% to 50% of its portfolio to these faster growing markets in the future. Earlier this year, AMD introduced its Temash platform that targets the fast growing performance tablets and hybrid markets. We believe that the new tablet platform can open an additional revenue stream for the company.

Additionally, 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 potential in such markets. AMD aims to increase the revenue contribution from its embedded business to almost 20% by 2014, from the current level of a mere 5%. It scored significant design wins last year and claims to be in line to achieve its growth target. (Read: AMD Targets Game Consoles To Soften Blow From PC Weakness)


New Opteron Chips Can Help AMD’s Server Business

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. We believe the same could help reverse AMD’s server buisness in the future.

In addition, AMD intends to launch ARM-based servers in 2014 through its collaboration with ARM Holdings. The new generation server products will make AMD the only processor provider to bridge the x86 and 64-bit ARM ecosystems.

We will update our price estimate of $3.15 for AMD after the Q1 2013 earnings release.

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