AMD’s Earnings Can Show Renewed Growth Momentum

by Trefis Team
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Quick Take

  • AMD will announce its Q2 2013 earnings on July 18, 2013 and we believe that it will show renewed growth momentum in the quarter.
  • Though the PC industry still remains in the doldrums, IDC estimates the rate of decline to slow in the coming quarters with the introduction of new ultrabooks, convertibles and touch-enabled designs.
  • We expect new products to increase AMD’s competitiveness in the market. It has a robust pipeline of upcoming products and platforms – Richland and Kaveri.
  • In an effort to reduce its dependence on the traditional PC market, AMD is increasing its focus on embedded markets such as gaming. It now powers all major next generation consoles – Sony’s PlayStation 4, Nintendo’s Wii U and Microsoft’s Xbox One.
  • The PC gaming hardware market was valued at $23.6 billion in 2012 and is estimated to cross $30 billion by 2015.
  • Ramping up the products of Temash can open an additional revenue stream for AMD from the tablet market.

Despite marking its fifth consecutive quarter of sequential decline in Q1 2013, we believe that AMD (NYSE:AMD) made a good start to its fiscal 2013 as strong operational execution helped it lower its net loss to $146 million compared to $473 million in Q4 2012 and $590 million in Q1 2012. Declining PC shipments combined with internal factors such as a change in leadership, a temporary manufacturing glitch and a slow response to rapidly changing consumer needs contributed to a 17% decline in AMD’s 2012 revenues. The company is set to report its Q2 2013 earnings on July 18, and we believe that it will show renewed growth momentum in the quarter.

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. Though the PC market remains in the doldrums, 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 AMD’s foothold in alternate growth markets.

See our complete analysis for AMD

PC Shipments Continue Declining; Strong Product Roadmap Could Accelerate AMD’s Product Wins

The cannibalization by tablets and smartphones combined with a weak reception for Windows 8 OS, the slowing enterprise market, consumer softness in mature markets (U.S. and Western Europe), and the slowing demand from emerging markets 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. IDC predicts the worldwide PC shipment to have declined by 11.7% in Q2 2013, but forecast the PC demand to improve in the second half of 2013, with the rate of decline in PC shipments slowing to 4.7% in Q3 2013 and 1.6% in Q4 2012. [1]

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 ultrabooks, convertibles and touch-enabled designs, we forecast the rate of decline in global PC demand to drop in the future.

(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

AMD has a robust pipeline of upcoming products and platforms which we believe could fuel demand for its products in 2013 and beyond.

Richland: At Computex 2013, xAMD introduced its Elite A-series APU (code-named Richland) which target the desktop and performance ultrathin segments. The Richland platform delivers over 20%-40% better visual performance compared to its predecessor, the Trinity chip, and is ideal for desktop PC builders and mainstream gamers.

Kaveri: AMD also showcased new OEM designs wins for Kabini, its first quad-core APU set to replace its Brazos 2.0 platform. The Kabini platform offers solutions for entry-level and small-form factor touch notebooks. Both HP and Acer have announced small form-factor, touchscreen-based notebooks with many new designs expected to be launched later this year.

With the expanded product offering, AMD aims to increase its share in the PC market by winning designs across customers, regions, price points and form factors.

Gaming Remains A Main Focus Area For AMD

AMD devised a unified gaming strategy in March this year that addresses its plan to drive the gaming market across consoles, cloud platforms, tablets and PCs. It believes that it is effectively positioned to drive the next revolution in gaming, which will help it differentiate itself from its competitors. AMD now powers all major next generation consoles including Sony’s PlayStation 4, Nintendo’s Wii U and Microsoft’s Xbox One.

In an effort to reduce its dependence on the traditional PC market, AMD has launched a semi-custom chip business unit where the chip combines AMD’s central processing and graphic capabilities and can be integrated with the customers’ intellectual property. The new unit focuses on high-volume, high-value applications that span a wide range of markets, including gaming. AMD aims to increase the revenue contribution from its embedded business to almost 20% by 2014, from the current level of a mere 5%.

Despite stiff competition from other forms of gaming, game consoles account for 42% of the $65 billion global video game market. [2] Jon Peddie Research valued the PC gaming hardware market at $23.6 billion in 2012, and forecasts the market to cross $30 billion by 2015. [3]

Temash To Help Leverage Growth In Alternate Markets

In addition to the small form-factor notebook, AMD’s recently introduced Temash platform targets the fast growing tablet and hybrid market segments. Temash is the industry’s first quad-core x86 SoC, and promises significant performance and power improvement over its predecessor. It offers a longer battery life and is specifically targeted at high performance tablets that can run full HD games and productivity applications.

APUs based on the Temash platform also support the Turbo Dock technology. The Turbo Dock technology automatically adjusts AMD’s APU performance when a hybrid PC/convertible is docked, and the device is used for complex tasks such as content creation. On the other hand, the Turbo Dock lowers power consumption when in tablet mode.

While we believe that AMD’s growing focus on the tablet market is a good long-term strategy, we do not think it has a significant impact on turning around the stock price. The company still has no plans to manufacture smartphone chips in the near future. We think AMD has a long way to go before it can effectively compete with Intel and established ARM players in the mobile computing market.

We will update our price estimate of $2.91 for AMD after the Q2 2013 earnings.

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Notes:
  1. May PC Shipments Reflect Slow Second Quarter, According to IDC, IDC Press Release, June 28, 2013 []
  2. Microsoft: Global video-game market hits $65 billion, and consoles still lead the way, Geek Wire, May 17, 2013 []
  3. PC Gaming Hardware Market to Hit $23.6 Billion in 2012, Jon Peddie Research, May 3, 2012 []
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