AMD’s Q1’15 Earnings To Be Impacted By PC Weakness & Seasonal Decline In Its Semi-Custom Business

AMD (NYSE:AMD) will report its Q1 2015 earnings on April 16th. The company witnessed a 13% sequential and 22% year-on-year decline in its Q4 2014 revenues, 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 (Add-In-Board) inventory levels in the channel) and its over-concentration in consumer PCs. Despite a weak Q4 2014, AMD’s 2014 revenue grew (by 4% annually) for the first time since 2011, and the company delivered its first full year of non-GAAP profitability in three years.

AMD expects lower PC sales and a seasonal decline in its semi-custom business to further lower revenues in Q1 2015. The company anticipates a 15% sequential decline (+/- 3 percentage points) in its revenue for the quarter. For fiscal 2015, AMD is concentrating on three key aspects: 1) reversing the decline in the PC business; 2) increasing R&D investments in enterprise, embedded and semi-custom devices;  and, 3) 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.

Our price estimate of $4.12 for AMD is at a considerable premium to the current market price. We will update our valuation for the company after the Q1 2015 earnings release.

See our complete analysis for AMD

AMD Is Taking Appropriate Steps To Reignite Growth In The Computing & Graphics Business; Weakeaning PC Demand Could Slow Progress

In Q4 2014, AMD’s Computing and Graphics revenue of $662 million declined by 15% sequentially, primarily due to lower desktop processor and GPU sales. The company claims to have taken appropriate actions since then to re-position 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 last quarter. The company believes that its increasing focus on the commercial PC segment will help it improve its performance.

Research firm IDC recently lowered its PC outlook for 2015. The firm expects global PC shipments to decline by 4.9% this year as compared to its initial estimate of 3.3%. ((IDC Lowers PC Outlook for 2015, While the Long-Term Outlook Improves Slightly, IDC Press Release, March 12, 2015)) For Q1 2015, IDC estimates PC shipments to have declined by 6.7% year on year, a much sharper drop compared to Q4 2014 (2.4%) and Q3 2014 (1.7%).  As the firm stated: “The Q1 market faced multiple headwinds – including inventory build-up of Windows Bing based notebooks, commercial slow down following the Windows XP refresh and constrained demand in many regions due to currency fluctuations and unfavorable economic indicators.” ^[1]

We believe 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.

Despite Short-Term Weakness, The Semi-Custom & Embedded Business Will Continue To Be A Key Growth Driver

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 a significant amount of product to Microsoft and Sony in Q3 2014 as a ramp to support the holiday demand spike for gaming systems. 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. AMD expects to see seasonal decline in this business in Q1 2015 as well.

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. Last year, 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 CPUs and GPUs are differentiated. 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 its strengths in efficient computing and image processing, factors that it believes differentiates it from other players and will fuel its growth in the embedded market.

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1. PC Shipments Beat Expectations Despite Weak Currencies and Product Transitions, IDC Press Release, April 9, 2015 [↩]