AMD’s (NYSE:AMD) Q2 2013 earnings result show that the company’s restructuring efforts have started paying off. Though still significantly lower compared to last year, the $1.16 billion in revenues were 7% higher on a sequential basis, as AMD saw improving demand for its products in the quarter. Renewed demand in its traditional PC segment, and new growth opportunities improved AMD’s financial and operational results. With better operational efficiency AMD managed to lower its operating net loss from $473 million and $146 million in Q4 2012 and Q1 2013, respectively, to $74 million in Q2 2013.
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 has impacted AMD’s top line and bottom line growth. Last year, the company devised a restructuring strategy to turnaround its business in three parts. The first stage – restructuring its operations – is now complete. In the second stage, AMD intends to focus on executing its new product plan to accelerate growth. Lastly, it intends to derive 40%-50% of its revenue from high growth business, including semi-custom, ultra-low power client, professional graphics, dense server and embedded solutions, in the next two to three years.
Estimating revenues to increase in excess of 20% q-o-q AMD hopes to return to profitability in the current quarter. It remains on track to reach its operating expense target of approximately $450 million per quarter this year. AMD believes that its updated product portfolio better positions it to gain share in the traditional PC market as well as generate higher revenues from new growth markets.
Improving Strength In The Traditional Business Segments
AMD marked a 12% sequential growth in revenues from its computing solution segment, which accounts for more than 70% of the company’s total revenues. The new Kabini and Temash platforms helped AMD post higher notebook and desktop unit shipments, whereas the latest Opteron 6300 series of products helped drive higher sales in the server segment in Q2 2013. With a greater than 85% contribution to its total revenues, PCs remain an integral part of AMD’s core business. AMD derives close to 5% of its revenue from its server business.
PC Market - IDC estimates the worldwide PC shipment to have declined by 13.9% and 11.7% y-o-y in Q1 2013 and Q2 2013, respectively. It 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. 
AMD claims that the PC industry is witnessing increasing demand for systems within the $300-$600 price range, which has traditionally been its strong point. The entry and mainstream price point systems now account for a larger portion of the overall PC market, a trend that is working to AMD’s advantage. 
The new APU lineup enabled AMD to win high volume notebook designs across key customers by region, price point and form factors, which in turn helped drive strong double-digit q-o-q growth in its processor shipments. With the addition of new products last quarter, the company now claims to have the broadest product portfolio in its history. It believes that with improving PC demand, it will see stronger demand for its products in the latter part of the year. Acer, Asus, Dell, HP, Lenovo and Samsung have begun to roll-out AMD processor based products and many more systems are expected to launch later this year.
While we believe that the new products can re-accelerate AMD’s growth this year, we think it will face increasing competition from Intel’s upcoming Bay Trail which promises to offer new convertible and touch enabled PC designs at mainstream price points later this year.
Servers - AMD scored a number of large data center wins in Q2 2013, which contributed to sequential gains in server unit shipments and revenues. Additionally, it claims to be gaining momentum in the emerging dense server market. With new improved servers, its industry-leading graphics processing capabilities and its strategy to embrace both the X86 and ARM architectures, we think AMD can strengthen its foothold in the server processor market. It will introduce its next generation X86 APUs and CPUs as well as its first ARM-based server product in 2014.
Increasing Reliance On The Semicustom & Embedded Portfolio
The semi-custom and embedded divisions are two key growth markets for AMD, and it claims to be on track to derive more than 20% of its revenues from these two divisions by Q4 2013.
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 believes that the semi-custom model has the potential of being a long term revenue generator for the company.
It believes that it is effectively positioned to drive the next revolution in gaming and now powers all major next generation consoles including Sony’s PlayStation 4, Nintendo’s Wii U and Microsoft’s Xbox One. Despite stiff competition from other forms of gaming, game consoles account for 42% of the $65 billion global video game market.  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. 
AMD is also focusing on increasing its share in additional embedded markets including communication, industrial and gaming among others. AMD recently 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. The embedded x86 market is slated to reach $7 billion by 2016. 
Q3 2013 Outlook
- Revenue to increase 22% sequentially, +/- 3%.
- Gross Margins to be approximately 36%.
- Inventory to increase to $800 million, largely consisting of semi-custom products.
- Cash to remain flat at approximately $1.1 billion.
We are in the process of updating our price estimate of $2.91 for AMD.Notes:
- May PC Shipments Reflect Slow Second Quarter, According to IDC, IDC Press Release, June 28, 2013 [↩]
- Advanced Micro Devices, Inc. (AMD) CEO Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, July 18, 2013 [↩]
- Microsoft: Global video-game market hits $65 billion, and consoles still lead the way, Geek Wire, May 17, 2013 [↩]
- PC Gaming Hardware Market to Hit $23.6 Billion in 2012, Jon Peddie Research, May 3, 2012 [↩]
- Advanced Micro Devices’ CEO Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, April 18, 2013 [↩]