AMD’s Reports A Lukewarm Q3’15 Earnings, But Things Could Turnaround In 2016

AMD’s (NYSE:AMD) Q3 2015 earnings (released on October 15th) were a ‘mixed bag’. While revenue beat Wall Street estimates, the company’s non-GAAP diluted earnings per share (EPS) of negative $0.17 came in below analyst expectations. Though AMD’s Q3 2015 revenue (at $1.06 billion) was down 26% year-on-year, as it has lost significant market share to Intel and Nvidia (NASDAQ:NVDA) over the past year.  Still, the company did see a sequential improvement in all its business segments and revenues were up 13% sequentially. However, the ongoing restructuring initiative to align its cost structure and an inventory write down impacted AMD’s bottom line. The company reported a met loss of $197 million for the quarter.

AMD claims to have successfully executed many of its technical priorities in Q3 2015, which include:  1) delivering strong double digit sequential revenue growth in each of its business segments; 2) expanding its portfolio with the introduction of several new APUs and GPUs that improve the company’s competitive positioning in key markets; 3) forming the Radeon Technologies Group to bring a vertical focus to its graphics business; and, 4) establishing leadership initiatives in immersive computing markets like virtual and augmented reality.

While AMD’s Q3 2015 earnings are not particularly encouraging, it does look like that things could turnaround going forward. Its cost cutting initiatives will hopefully return the company to profitability in fiscal 2016. In addition to stabilizing its drowning PC business, 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.

In an effort to improve its long-term financial performance, AMD has signed a definitive agreement with Chinese tech firm Nantong Fujitsu Microelectronics to form a joint venture which will combine AMD’s high-volume assembly and test facilities and experienced workforce with Nantong’s established OSAT expertise. (Read Press Release)

Our price estimate of $2.43 for AMD is at a more than 20% premium to the current market price. We are in the process of updating our model for the Q3 2015 earnings.

See our complete analysis for AMD

New Platforms & Windows 10 Launch Can Help Revive AMD’s Computing & Graphics Business

After two years, AMD delivered its first sequential increase in ‘Computing and Graphic’ revenue, driven by improved desktop processor and GPU sales. Channel sales also improved sequentially for the second straight quarter as AMD’s effort to reduce channel inventories started paying off.

Despite the launch of the Windows 10 OS last quarter, AMD claims that the overall PC demand, particularly in the consumer markets, continues to be somewhat muted as there remains a high volume of Windows 8 based systems still on shelves. As a result OEMs have been slow to ramp their Windows 10 platforms.

However, AMD did see a number of its partners introduce new Carrizo based (AMD’s recently launched APU lineup) Windows 10 platforms in Q3 2015, and we expect additional platforms to come to market in the current quarter. Increasing its presence in the commercial segment (where it is under-represented) is one of AMD’s key strategies to stabilize its PC business. The company continues to gain success with HP in the commercial market as it sees accelerating demand for AMD based systems, including increased adoption with key Fortune 500 accounts. For the first time, AMD was the exclusive launch processor partner for HP’s newest EliteBook commercial client systems, which is based on AMD Carrizo PRO APUs. ^[1]

AMD does not anticipate Windows 10 will drive a dramatic near-term PC refresh cycle. The fact that Windows 10 offers a free upgrade option, which means that one need not necessarily buy a new PC specifically to run Windows 10, is impacting new PC sales. However, PC shipments will most likely pick up once the free Windows 10 licenses end. Windows 10 has already been installed on more than 110 million PCs to date, and the consumer and commercial refresh cycle environment over the coming year is expected to further expand the installed base. AMD is banking on enterprise sales and laptop refreshes to drive its computing revenue going forward.

AMD’s GPU revenue increased again sequentially in Q3 2015, as the company grew both OEM and channel sales based on the strength of its latest desktop and notebook offerings. AMD claims that its strategy to profitably regain share by capturing key hardware and software technology transitions, like HBM and DirectX 12, is gaining traction. It delivered strong double-digit sequential revenue growth in the high-end enthusiast and performance portions of the GPU market based on the success of its recently launched Fury line of energy efficient products. According to Barron’s, and enhanced product portfolio enabled AMD to gain share in the discrete GPU market from its arch rival Nvidia, last quarter.

In 2016, AMD plans to launch its next generation GPUs designed to improve performance per watt by a factor of two compared to its current offerings.

New Design Wins To Drive Semi-Custom Growth In 2016

AMD’s ‘Enterprise, Embedded and Semi-Custom’ revenue increased 13% sequentially in Q3 2015, driven by seasonally higher sales of its Semi-Custom SoCs to support the holiday game console demand. While the company is confident that 2015 will be a record year for semi-custom unit shipments, revenue for the segment might not increase substantially due to declining ASPs.

Nevertheless, AMD is on track to begin revenue shipments of its new semi-custom design wins, which will spur revenue growth in the latter half of 2016.  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. 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.

Q4 2015 Outlook

– Revenue to decline 10% sequentially, +/- 3%, due to seasonal decline in semi-custom sales. Computing and Graphics segment revenue to increase sequentially.

– Non-GAAP gross margin of approximately 30%.

– Non-GAAP operating expenses of approximately $350 million.

– Interest expense, taxes and other to be approximately $45 million.

– Cash to be approximately flat at $750 million.

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1. AMD’s Q3 2015 Earnings Call Transcript, Seeking Alpha, October 16, 2015 [↩]