AMD’s Q4’15 Earnings Preview: Things Could Turnaround In 2016

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Advanced Micro Devices

The year 2015 has been a rocky one for graphics processor manufacturer AMD (NYSE:AMD). In addition to weak macroeconomic conditions and declining PC sales, the company was hit by significant market share loss to Intel (NASDAQ:INTC) in APUs (i.e., Accelerated Processing Units) and Nvidia (NASDAQ:NVDA) in GPUs (Graphics Processing Units). AMD’s revenue for the first three quarters of fiscal 2015 is down 29% year on year, while its net loss has expanded from $39 million in the first 9 months of fiscal 2014 to over $550 million during the same period in 2015. AMD will report its Q4 2015 earnings on January 19th, and the company expects revenue to decline 10% sequentially, +/- 3%, due to a seasonal decline in semi-custom sales.

Despite the grim results last quarter, AMD did see a sequential improvement in all its business segments. In the last few months, the company expanded its portfolio with the introduction of several new APUs and GPUs that improve its competitive positioning in key markets.  It has also established  leadership initiatives in immersive computing markets like virtual and augmented reality. All of these initiatives are expected to re-accelerate AMD’s top line growth in 2016. Additionally, the company’s cost cutting initiatives in 2015 will hopefully return the company to profitability this year.

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.

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We will update our price estimate of $2.23 for AMD after the Q4 2015 earnings release.

See our complete analysis for AMD

New Platform To Revive AMD’s Computing & Graphics Business

Key to the re-acceleration of AMD’s growth is the expansion of its product portfolio with the introduction of several new APUs and GPUs that improve the company’s competitive positioning. Management believes it has successfully executed many of its technical priorities.  In the last few months, AMD has launched new APU and GPU products in the market, and the company claims that its strategy to profitably regain share by capturing key hardware and software technology transitions, like HBM and DirectX 12, is gaining traction. In Q3 2015, AMD delivered its first sequential increase in ‘Computing and Graphic’ revenue in two years, driven by improved desktop processor and GPU sales.

Despite the muted demand for the Windows 10 platform, AMD did see a number of its partners introduce new Windows 10 platforms in Q3 2015 that use AMD’s recently launched Carrizo APU lineup. 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. The commercial refresh cycle is expected to stabilize the declining PC sales in the back half of 2016.

In November 2015,  AMD launched a completely revamped graphics software suite, Radeon Software Crimson Edition, which significantly improves user experience for PC gamers. The release is the first from AMD’s newly formed Radeon Technologies Group, which recently announced a renewed focus on software, placing it on par with hardware initiatives.

A greater focus on the software side is perhaps what the company needs to renew investor confidence in its long-term growth potential. PC gaming is a growing market that is estimated to increase from around $26 billion in 2014 to $35 million in 2018. Consumers are increasingly spending not just on software, but also on PC hardware, as they buy expensive equipment to play, view, and record games. [1]

AMD managed to gain some market share in discrete GPUs in Q3 2015, and we believe that the new Radeon AIB lineup and the Radeon Software Crimson Edition can help the company gain additional market share in discrete GPU’s going forward.

New Design Wins To Drive Semi-Custom Growth In 2016

While AMD is confident that 2015 was a record year for semi-custom unit shipments, revenue for the segment might not increase substantially due to declining ASPs. The company 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 for a yet to be named customer that it believes will further expand its base for the semi-custom business.

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Notes:
  1. PC Gaming to be worth $35 billion in 2018, Venture Beat, March 2, 2015 []