AMD’s Q3’15 Earnings Preview: New APU and GPU Lineup & Semi-Custom Wins To Drive Growth

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Advanced Micro Devices

After many years, AMD (NYSE:AMD) saw its revenue base fall below the $1 billion mark in Q2 2015. While the company’s Enterprise, Embedded and Semi-Custom business witnessed strong growth, the softer-than-expected consumer PC demand led to a significant decline in AMD’s revenue base in the quarter. AMD believes that Q2 2015 will be a revenue trough for the year, and expects its Q3 2015 revenue (earnings to be released on October 15th) to increase 6% sequentially (+/- 3%).

AMD 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. However, given the greater than expected weakness in the PC market so far this year, AMD’s  goal of returning to profitability in the second half of 2015 has been pushed out. According to research firm IDC, global PC shipments fell 10.8% year-on-year in Q3 2015. Many industry experts believe that the launch of Windows 10 platform will help stabilize and re-accelerate PC demand in the future, which will benefit AMD.

AMD’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.

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Our price estimate of $2.43 for AMD is at an significant premium to the current market price. We will updated our valuation after the Q3 2015 earnings release.

See our complete analysis for AMD

The Expanding APU and GPU Lineup To Revive AMD’s Growth

Towards the end of Q3 2015, AMD launched its most powerful line of AMD Pro A-series mobile and desktop processors (formerly code-named “Carrizo PRO” and “Godavari PRO”) with significant performance and efficiency gains. Soft consumer PC demand impacted sales of AMD’s sixth generation A-Series APU (code-name Carrizo) in Q2 2015, 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 is banking on enterprise sales and laptop refreshes to drive its computing revenue going forward.

Following the launch of its new GPU lineup, AMD managed to gain share in the discrete GPU market from its arch rival Nvidia (NASDAQ:NVDA). While the extent of the share gain is not confirmed yet, it is still encouraging news given the company’s discrete GPU market share hit rock bottom in Q2 2015. According to Barron’s, AMD gained market share in the $200 and $400 price range, which includes the R9 380 and R9 390X cards, while NVIDIA still holds the lead in the premium $500+ segment. AMD’s recently launched Fury lineup is part of the high end range. While the Radeon R9 Fury card is widely available in the market, AMD’s R9 Fury X (official price of $650) has been in short supply and has been selling at a premium to its original price.

The Fury graphics family marks a turning point in PC gaming with the implementation of High-Bandwidth Memory (HBM). HBM is a relatively new technology and may take time to scale up, but is likely to hit regular supply in the near future. Once supply evens out, we expect AMD to see higher volume of sales for both Radeon R9 Fury X and Radeon R9 Nano. Whether AMD can continue gaining share in the discrete GPU market in the next few quarters is yet to be seen. It would be a stark reversal of  the declining trend it has seen in the last many quarters. (Read: Can AMD Sustain Its Share Gain In Discrete GPUs?)

Increasing volume of the new APUs and GPUs launched in the last few months will help improve the performance of AMD’s Computing and Graphics segment in the second half of the year. The company is also taking steps to align its cost structure with its revenue profile, which should benefit its bottom line.

Q3’15 Will Be An Annual Peak For The Semi-Custom Business, But New Deals Will Expand Revenue Base In The Future

AMD claims to be on track to set a record for annual semi-custom shipments this year. It anticipates 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.

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