Q2’15 Is A Revenue Trough For AMD As Things Are Expected To Turnaround Going Forward

-19.88%
Downside
180
Market
145
Trefis
AMD: Advanced Micro Devices logo
AMD
Advanced Micro Devices

AMD (NYSE:AMD) reported its Q2 2015 earnings on July 16th. As the company had already lowered its revenue and gross margin forecasts earlier this month, the dismal performance in the quarter was no surprise. Softer-than-expected consumer PC demand led to a 35% year-on-year and 9% quarter-on-quarter declines in AMD’s Q2 2015 revenue, which after many years fell below $1 billion. While Enterprise, Embedded and Semi-Custom revenue saw strong growth in the quarter, a higher proportion of revenue from the segment led to a steep decline in gross margins (from 34.6% in Q2 2014 to 24.6% in Q2 2015). At negative $0.23, AMD’s diluted earnings per share (EPS) was flat quarter-on-quarter.

On the positive side, AMD made some good progress in Q2 2015 as it introduced several key new products, secured multiple embedded design wins across target markets and continued to see strength in its semi-custom business. Due to the recent change in the PC market outlook, the company’s goal of returning to profitability in the second half of the year has been pushed out. AMD is currently assessing actions to be taken to reduce its current cost structure with a view to lower operating expenses to better align with its near-term revenue profile.

AMD believes that Q2 2015 will be a revenue trough for the year.  Management looks forward to seeing improvements in the back half of the year as the company ramps semi-custom wins and its newest APU and GPU products.  It will also benefit from improving OEM demand likely to accompany  the transition to Windows 10. The company’s long-term focus is to expand margins and improve its cash flow generation by gaining profitable share across the gaming, emerging devices and data center markets over the next three to five years.

Relevant Articles
  1. Digital Infrastructure Stocks Are Up 7% This Year, Will Generative AI Tailwinds Continue To Drive Them Higher?
  2. Up 130% In The Last 12 Months, Will AI Power AMD’s Rally Post Q4 Results?
  3. AMD Takes The Fight To Nvidia With Latest AI Chip Launch. Is The Stock A Buy At $116?
  4. Is AMD Stock A Buy At $120 As It Doubles Down On AI-Focused GPUs?
  5. Is AMD The Dark Horse Of The AI Silicon Race?
  6. What To Expect From AMD’s Q2 Results?

Our price estimate of $2.66 for AMD is at a significant discount to the current market price. We are in the process of updating our model for the Q2 2015 earnings.

See our complete analysis for AMD

New APUs and GPUs To Revive PC Demand In The Second Half Of 2015

At $379 million, AMD’s Computing and Graphics segment revenue decreased 54% annually and 29% sequentially, primarily due to lower sales of client notebook processors on account of a weak consumer PC market. However, channel PC processor and graphics sales were in line with company expectation. Soft consumer demand also impacted sales of AMD’s sixth generation A-Series APU, code name Carrizo, as some OEMs chose to align Carrizo launches with the Windows 10 launch. The company believes that its mobile unit shipments will rebound and ramp in the second half of the year as more than 35 Carrizo platforms come to market globally.

AMD saw good initial demand for its  new 300 Series GPUs and latest flagship Radeon R9 Fury X (launched last quarter). Though the new products contributed to a sequential improvement in GPU channel revenue and ASPs, the company’s GPU revenue decreased sequentially in line with seasonality. Powered by the Fiji GPU, Fury X is the industry’s first graphics chip to feature die-stacked high-bandwidth memory (HBM), which can deliver unprecedented performance in an extremely quiet and compact graphics card. The company is pleased with the initial ramp-up of its Fiji GPUs and plans to expand its industry-leading HBM GPU offerings in the coming quarters with the introduction of the Fury, Nano and a high-end duel Fiji GPU card.

AMD expects the launch of Windows 10 and its new APU and GPU products to improve the performance of its Computing and Graphics segment in the second half of the year. Since the PC market is expected to remain volatile, the company is taking steps to align its cost structure with its revenue profile. AMD is focusing on its strongest market opportunities and aims to continue investing in the high-performance computing and graphics technologies that can enable it to create great products and re-establish itself as a leader across its target markets.

New Deals To Expand Revenue Base For The semi-Custom Business

Enterprise, Embedded and Semi-Custom revenue increased 13% sequentially driven by strong semi-custom sales. The company claims to be on track to set a record for annual semi-custom shipments this year. It anticipates the current quarter (Q3 2015) to be the annual peak for semi-custom shipments and revenue based on Sony and Microsoft building inventory in advance of the holiday period.

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 the second half of 2016. In its Q2 2015 earnings call, the company announced starting development for a new semi-custom design (it did not disclose the name of the customer) that it believes will further expand its base for the semi-custom business.

Q3 2015 Outlook

– Revenue to increase 6% sequentially, +/- 3%.

– Non-GAAP gross margin of approximately 29%.

– Non-GAAP operating expenses of approximately $340 million. Interest expense, taxes and other to be approximately $45 million.

– Inventory is expected to be approximately $850 million, in support of the second half product ramps and semi-custom sales to support the holiday season.

– Cash of approximately $700 million.

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research