AMD (NYSE:AMD), which manufactures and markets microprocessors, declared its Q1 2013 earnings on April 18. Reporting $1.1 billion in sales, we believe the company made a good start to its fiscal 2013. The company marked its 5th consecutive quarter of sequential decline as sales slid 6% q-o-q though strong operational execution in a difficult macro environment helped it lower its net loss to $146 million in Q1 2013, compared to $473 in Q4 2012 and $590 in Q1 2012.
In light of significantly lower PC shipments in Q1 2013, AMD witnessed a 9% q-o-q decline in its computing solution group, though its server and graphics revenues were marginally higher compared to the prior quarter. While the graphics division gained from higher channel sales, game console royalty and workstation graphics sales, the server microprocessor revenues rose on account of higher ASP’s from high density microprocessors.
In addition to macro headwinds, internal factors such as a change in leadership, a temporary manufacturing glitch and a slow response to rapidly changing consumer needs led to a 17% decline in AMD’s revenues and it incurred a net loss of $1.18 billion last year.
Aiming to return to profitability by the second half of 2013, AMD intends to focus on three key aspects in 2013 - introduction of new product offerings, leveraging growth in adjacent markets and lowering its operating expenses. It claims to be right on track with its restructuring plan announced last year. We believe that the introduction of new products can help AMD regain its lost share in the traditional PC market. Additionally, introduction of new platforms can increase its foothold in alternate growth markets. We think the above measures can help AMD re-accelerate growth momentum in its business this year onward.
Restructuring Initiative To Improve Efficiency
In an effort to strengthen its competitiveness in the market, AMD announced a restructuring plan in Q3 2012, which aims to reduce its expense base by 25% by Q3 2013, compared to Q1 2012, in light of the macro headwinds. As part of the restructuring plan, AMD will cut its global workforce by 15%, which is estimated to result in operational savings of $190 million in 2013. With lower expenses, the company aims to deliver break-even results and reduce operating expenses to $450 million per quarter by Q3 2013.
In its Q1 2013 earnings call, AMD declared that it has almost completed the restructuring activity and is on track with its target to return to profitability and positive cash flow in the second half of the year. Its operating expenses declined from $592 million in Q1 2012 to $491 million in Q1 2013, and the company estimates the figure to further reduce to $480 million this quarter.
Strong Product Roadmap Could Accelerate Product Wins In The Future
Weak consumer buying environment and seasonal factors led to lower desktop, notebook and chipset unit shipments in Q1 2013. Global PC shipments witnessed the sharpest quarterly decline (13.9% y-o-y) in Q1 2013 in almost two decades which impacted the sale of AMD processors. Though IDC estimates a revival in demand in the second half of the year, it forecasts the global PC shipments to decline for the second consecutive year in 2013.
Nevertheless, AMD has a robust pipeline of upcoming products and platforms which we believe could fuel demand for its products in 2013 and beyond.
- Kabini Platform: AMD has started volume production of the Kabini platform, AMD’s first quad-core APU set to replace its Brazos 2.0 platform. It claims to have scored strong portfolio of high volume entry level design wins on account of the better performance and improved battery life of the processors.
- Richland: Earlier this year, AMD also introduced a new APU, code named Richland, which target the desktop and performance ultrathin segments. Richland platform delivers over 20%-40% better visual performance compared to its predecessor, the Trinity chip. AMD launched the A series Richland APU for the mainstream client market and claims to have scored premium design wins for the same.
- Kaveri: 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.
With the expanded product offering, AMD aims to increase its share in the PC market by winning designs across each customer, by region, price point and form factor.
Leverage Growth Opportunities In Alternate Markets
As part of its restructuring initiative, AMD focuses on diversifying 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 for it to grow its share. The company remains on track to derive more than 20% of its revenues from these faster growing markets this year, and intends to increase the proportion to around 40% to 50% of its portfolio in the next two to three years.
AMD is focusing on increasing its share in additional embedded markets including communication, industrial and gaming among others. AMD will introduce its first quad-core x86 SoC, which delivers more than two times the compute and four times the graphics performance of its competitors offerings, for the embedded market this quarter. The embedded x86 market is slated to reach $7 billion by 2016. 
Significantly increasing its presence in the gaming industry is one of its key strategies. The game console market is forecast to ship over 40 million games consoles this year and AMD intends to leverage the success of its APUs and graphics to tap the increasing potential in the market. 
Additionally, the launch of AMD’s Temash platform, which targets the fast growing performance tablets, hybrid and convertibles markets, can open an additional revenue stream for the company. It has ramped up production of the processor and expects to see a number of form factors based on the Temash platform to be introduced by OEMs in the latter part of 2013.
Q2 2013 Outlook
- Revenue expected to rise by 2% sequentially, +/- 3%
- Gross Margins to remain flat
- Operating expense to decline (check) to $480 million
- Inventory to increase to 650-700 million ahead of new product introductions
We are in the process of updating our price estimate of $3.15 for AMD.Notes:
- Advanced Micro Devices’ CEO Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, April 18, 2013 [↩] [↩]