AMD’s Restructuring Initiatives Translate Into Strong Growth In 1H 2014

by Trefis Team
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Microprocessor and graphic processors manufacturer AMD (NYSE:AMD) announced its Q2 2014 earnings on July 17. Owing to its restructuring efforts, the company returned to profitability in Q3 2013, and Q3 2014 marks its fourth consecutive quarter of positive non-GAAP net income. At $1.44 billion, revenues grew 3% sequentially and 24% annually, driven primarily by strong sales of semi-custom SoC and notebook offerings. Despite higher semi-custom sales, which have lower margin compared to the corporate average, AMD’s gross margin were flat sequentially (35%) as the company witnessed a richer mix of notebook products.

AMD’s restructuring strategy is clearly paying off, and the company claims to be half way through the three-step transformational process. Its revenue increased 26% and non-GAAP EPS improved by $0.26 in the first half of 2014, compared to the same period last year. The company is on track to derive 40% and 50% of its revenues from high growth markets, including semi-custom and ultra-low power processors, professional graphics processors, as well as processors for dense server and embedded solutions in 2014 and 2015, respectively.

AMD has diligently managed its expenses and lowered its cost structure, in turn significantly reducing its operating expenses, which has helped it increase its investment in innovations that will fuel future growth. Additionally, the company has improved its balance sheet by re-profiling debt at lower rates, which it expects will reduce its interest expense with no significant debt coming due until 2019.

Below are the key areas that AMD intends to focus on to drive its future growth.

We are in the process of updating our price estimate of $3.79 for AMD.

See our complete analysis for AMD

Increasing Sales For Commercial PCs

The PC industry is stabilizing on account of the growing demand in the commercial segment, as the consumer segment remains challenging. Having grown at a robust rate for many years, PC sales started declining 2011 onward. As per research firm IDC, PC shipments declined 3.7% and 10.3%, in 2012 and 2013 respectively. The rate of decline dropped down to 4.4% in Q1 2014 and remained flat in Q2 2014, as Windows XP migration (to machines running newer operating systems) and commercial spending helped offset the weak consumer PC demand. [1] [2]

AMD’s computing solutions revenue declined 20% annually but was up 1% sequentially in Q2 2014, due to higher notebook and embedded process sales, offset by lower desktop, processor and chipset sales. In Q2 2014, AMD’s overall microprocessor unit shipments increased sequentially for the first time in four quarters, driven by the introduction of new notebook from Acer, Dell, HP, Lenovo, and others powered by AMD’s Vima and Kaveri APUs.

The company estimates the overall PC market will decline 5% to 7% in 2014, but believes that its increasing focus on the commercial PC segment will help it improve its performance in this segment. AMD has a larger presence in the consumer PC segment, which still remains weak. AMD launched its Pro A-Series APU in Q2 2014 and claims to be on track to more than double the number of AMD-based commercial offerings available by the end of the year. HP has already announced a full range of elite commercial offerings powered by AMD and the company expects additional OEMs to begin rolling out AMD-powered commercial offerings this quarter.

Last month, AMD created a single market focus team design to strengthen its traditional PC business and drive growth in adjacent markets where its leadership IP provides the company with a competitive advantage. Though AMD has significantly lowered its dependence on the PC market, it continues to derive a considerable portion of its revenue from the segment (including GPUs and APUs). Its PC strategy remains focused on developing profitability by diversifying into the commercial segment, stabilizing the overall PC business and leveraging the channel to deliver profitability.

Ramp Up the Semi-Custom Business to Meet Strong Game Console Demand

AMD witnessed record semi-custom unit shipments in Q2 2014, as the company continued to see strong demand for AMD-powered game consoles. AMD devised a unified gaming strategy in March 2013 that addresses its plan to drive the gaming market across consoles, cloud platforms, tablets and PCs. The company powers all major next generation consoles including Sony’s PlayStation 4, Nintendo’s Wii U and Microsoft’s (NASDAQ:MSFT) Xbox One. It expects shipments to continue increasing in the current quarter as Microsoft and Sony prepare for the upcoming holiday cycle. The company claims to be on track to secure one to two additional semi-custom design wins in 2014.

Gaming remains AMD’s semi-custom business’ key growth segment, but the company claims to be witnessing several new opportunities in the networking and mobility categories as well.

Continued Growth in the Embedded and Professional Graphics Markets

For many years, AMD has been under-represented in the professional graphics segment, which is dominated by Nvidia (NASDAQ:NVDA). Nevertheless, competitive pricing and improving hardware have helped increase AMD’s professional graphics market share from 12% in 2009 to 20% in 2013. Strong performance in professional graphics was an important factor that drove AMD’s growth in the last few quarters. In Q2 2014, AMD’s professional graphics unit shipments increased significantly as it continued to grow its FirePro business with Apple (NASDAQ:AAPL), Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ). AMD is increasing its investment in the area to build a stronger relationship with key customers and expects to drive even more share gains in this margin accretive market.

AMD’s embedded processor revenue increased by double-digits  from the previous quarter as new design wins started to enter the market. The company launched several new products in Q2 2014 and announced wins with HP’s thin clients and Boeing’s next generation advanced cockpit display systems, among others.

AMD has a broad range of embedded processors for different segments in its portfolio, offering a number of price, performance and power options to meet the needs of embedded designers. The company intends to take on the different segments in the embedded market by offering its customers a range of solutions to chose from —  from low-power to high-performance — with a broad ecosystem of software and hardware partners supporting multiple operating systems, including Windows and Linux. There is a growing need for more advanced embedded solutions in healthcare, finance, education and retail services. We expect new product launches this year to accelerate AMD’s growth in the embedded market.

Q3 2014 Guidance

- Revenue to increase 2% sequentially, +/- 3%.

- Gross margin of 35%.

- Non-GAAP operating expense and interest expense of approximately $435 million and $42 million, respectively.

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Notes:
  1. Windows XP Migration and Commercial Spending Helped Offset Weak Consumer PC Demand in The First Quarter of 2014, IDC Press Release, April 9, 2014 []
  2. Gartner: Global PC shipments post flat growth in Q2, Business Line, July 11, 2014 []
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