Earnings Review: AMD Focuses On Reigniting Its PC Business & Continued Growth In New Markets

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Advanced Micro Devices

AMD (NYSE:AMD) reported its Q4 2014 and full year 2014 earnings on January 20. At $1.24 billion, its Q4 2014 revenue declined 13% sequentially and 22% year on year, which was in line with company guidance. The steep top line decline was primarily driven by lower desktop processor GPU and semi-custom SOC sales. AMD’s progress in diversifying into new markets and ramping PC and embedded design wins with key customers was offset by the ongoing weakness in its PC business (due to higher than optimal desktop and AIB inventory levels in the channel) and its over-concentration in consumer PCs. The company reported a net loss of $364 million in the quarter.

Despite a weak fourth quarter, AMD’s full year 2014 revenue grew (4% annually) for the first time since 2011. The higher revenue base combined with an 11% reduction in operating expenses helped AMD deliver its first full year of non-GAAP profitability since 2011. The company delivered positive free cash flow and ended the year with more than $1 billion in cash. AMD continued to build a good foundation for future long-term profitable growth by investing in innovations to drive future success. 2014 was the first full year of semi-custom game console shipments, and this  was an important factor in AMD deriving approximately 40% of revenues from high growth markets. The company claims to have witnessed good momentum with significant revenue and design win growth in 2014 across all of its new businesses. Embedded and professional graphics revenue both increased by more than 20% in 2014.

AMD expects lower PC sales and seasonal decline in semi-custom business to further lower revenues in Q2 2015. (outlook mentioned below). For fiscal 2015, the company is concentrating on three key aspects: reversing the decline in the PC business, increasing R&D investments in enterprise, embedded and semi-custom devices, and diversifying its revenue base by growing in new markets. Just how the strategy plays out for the company as the year progresses will be of great interest.

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Our price estimate of $4.12 for AMD is at a considerable premium to the current market price. We are in the process of updating our model for the 2014 earnings release.

See our complete analysis for AMD

AMD Is Taking Appropriate Steps To Reignite Growth In The Computing & Graphics Business

In Q4 2014, AMD’s Computing and Graphics revenue ($662 million) declined by 15% sequentially, primarily due to lower desktop processor and GPU sales. Lower sales were offset by lower operating expenses in the segment, which resulted in an operating loss of $56 million, compared to $17 million in Q3 2014. The company claims to have taken appropriate actions in the quarter to reposition its product stack and reduce downstream desktop and AIB channel inventory. Though these actions will result in short-term pressure in the business, AMD believes they are integral to building a stronger and more profitable business going forward.

On the positive side, AMD drove a richer mix of higher-end products, expanded its presence in the commercial market, and increased adoption of its discrete graphic solutions  in Q4 2014. The company believes that its increasing focus on the commercial PC segment will help it improve its performance in this segment. Additionally, mobile APU unit shipment ASPs  and revenue all increased sequentially on account of higher-end A8 and A10 APU shipments. AMD also achieved strong double-digit percentage revenue growth for notebook GPUs in the quarter, as strategic wins like Apple’s iMac with retina 5K display began to ramp-up.

The PC market is expected to stabilize, with low single-digit percentage decline in 2015. Despite a few positives mentioned above, AMD has a long way ahead to improve the overall revenue and financial performance of this segment. The company feels confident that it is taking the right actions to return the business to a healthy trajectory starting in the second quarter. It has right-sized its investments in the Computing and Graphics business and is taking appropriate actions to reduce its downstream channel inventory. It aims to bring the segment back to positive growth starting in the second quarter.

AMD is focusing on introducing a strong product portfolio in 2015, and plans to launch Carrizo in Q2 2015. AMD claims that Carrizo delivers the largest ever generational leap in performance per watt for its mainstream APUs, and the design win momentum for Carrizo continues to grow.

Semi-Custom & Embedded Business Will Continue To Be Key Growth Drivers

For Q4 2014, revenue for AMD’s Enterprise, Embedded and Semi-custom segment declined 11% sequentially primarily due to a decrease in sales of semi-custom SOCs. The company supplied significant amount of product to Microsoft and Sony in Q3 2014 as a ramp to support the holiday demand spike. Nearly 30 million Sony and Microsoft consoles have been shipped since their launch, which helped AMD ship more than double the number of semi-custom chips in 2014, compared to 2013. For full year 2014, the segment grew 50% annually in 2014, to $2.4 billion.

The game console business has a cycle of three to four years. Microsoft and Sony launched new products in late 2013 and thus AMD expects another few years of strong game-console revenue growth from them. In its Q3 2014 earnings call, AMD announced securing two new wins in the segment, which are expected to deliver combined total lifetime revenue of approximately $1 billion over approximately three years. Design work for these opportunities has started and AMD anticipates first silicon revenue from these deals in 2016.

AMD’s embedded processor revenues increased for the third straight quarter in Q4 2014, as it continued to successfully execute its strategy to gain share in targeted vertical markets where its high-performance CPU and GPU IP are differentiated. In target markets such as network storage, avionics and medical devices. And several customers (including Airbus, QNAP and Analogic) launched new AMD embedded powered solutions.

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. The embedded market is a very competitive market and AMD’s strategy is to play to its strengths. The company is focusing on efficient computing and very strong visualization, factors that it believes differentiates it from other players and will fuel its growth in the embedded market.

Q1 2015 Outlook

– Revenue to decline 15% sequentially., +/- 3 percentage points.

– Gross margin of approximately 34%.

– Non-GAAP operating expenses of $350 million.

– Interest expense, taxes and other to be approximately $48 million. Inventories to be essentially flat sequentially.

2015 Outlook

– Profitable on a non-GAAP basis.

– Non-GAAP operating expenses to be between $340 million to $370 million per quarter.

– Taxes of approximately $3 million per quarter.

– Capital expenditures of approximately $100 million.

– Inventory to be flat year-on-year.

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