AMD’s Q4’15 Earnings Review: What’s In Store For 2016

The year 2015 has been a challenging one for graphics processor manufacturer AMD (NYSE:AMD), as is evident from the company’s recently released Q4 2015 and fiscal 2015 earnings. The company’s 2015 revenue base is down 28% to $4.0 billion, while its net loss expanded to $660 million, compared to $403 million in 2014. In addition to weak macroeconomic conditions and declining PC sales, AMD 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).

Notwithstanding a tough PC market and financial losses, AMD continued its multi-year effort to transition its business model by diversifying its revenue base and establishing a foundation for improved financial performance. The company actually managed to make some progress in stabilizing its Computing and Graphics businesses (despite the continuous decline in PCs), and achieved 2% revenue growth in the second half of 2015 compared to the first half of the year.

AMD believes that its long term technology investments and sharpened focus have created a strong foundation for future growth. The company targets revenue growth for fiscal 2016 (guidance mentioned below), driven primarily by:  1) regaining share in the client compute and discreet graphics market, driven by gaming, VR, commercial, and a competitive product roadmap;  2) growth in the datacenter and infrastructure markets, driven by AMD’s FirePro GPU’s and next-generation service CPU’s; 3) further expanding the TAM for products and technologies through ramping the previously communicated Semi-Custom wins, converting additional Semi-Custom pipeline opportunities, and gaining share in the targeted embedded market.

AMD plans to return the company to non-GAAP operating profitability in the second half of 2016 and generate positive free cash flow from operations for the year. It expects to see stronger revenue growth in the back half of the year, based on the seasonality of the PC and gaming console businesses.

Quick Snapshot of the Q4 2015 & Fiscal 2015 Earnings

At, $958 million, AMD’s Q4 2015 revenue declined 10% sequentially and 23% annually. The sequential decline was on account of the seasonally lower  semi-custom SoC shipments, which was offset by double digit percentage revenue growth in the Computing and Graphics business. The annual decline was due primarily to lower client processor and chipset sales and lower game console royalties. Gross margin for the quarter was 30%, a 7 percentage point improvement from the prior quarter. Net income and diluted EPS came in at $102 million and negative $0.13.

Against the backdrop of a 28% revenue decline in 2015, AMD reduced its cost profile (with a 14% decrease in operating expenses), managed its inventory down and maintained its cash position well within the target range of $600 million to $1 billion.

We are in the process of updating our price estimate of $2.23 for AMD.

See our complete analysis for AMD

AMD To Gain Share In Computing & Graphics Despite The Declining PC Sales

In Q4 2015, AMD’s Computing and Graphics segment revenue increased 11% quarter on quarter, as the company managed to improved the performance of its PC business on account of the higher notebook processor sales. Q4 2015 was AMD’s second consecutive quarter of double digit percentage revenue growth for this segment as it saw higher sales in both client compute and graphics processors.

AMD witnessed a strong double digit sequential growth in mobile APU sales, driven largely by increased Carrizo shipments and good sell through of AMD-based PCs on Black Friday. In the channel, the company delivered its third consecutive quarter of sequential revenue growth and further reduced downstream product inventories based on improved demand for FX CPUs and A-Series APUs. It made progress diversifying its client computing revenue by further expanding into the commercial PC market. In the second half 2015 commercial APU unit shipments increased more than 15% compared the first half of the year. AMD believe it can continue to grow its commercial shipments in 2106, based on the high volume wins both across larger enterprises and the public sector.

GPU revenue increased sequentially for the second straight quarter in Q4 2015, driven by improved channel sales of Radeon 300 series across the enthusiast, performance and mainstream segments and growth in professional graphic sales. The PC gaming market strength helped fuel a richer GPU mix and improved demand for AMD’s high end Radeon R9 series in the quarter. The company expects this momentum to continue throughout 2016 as Oculus and HTC begin shipping consumer ready VR headset.

AMD firmly believes that it can manage to gain share in computing and graphics in 2016.  In client computing, its opportunities to regain share in 2016 will be driven by its design win momentum, continued progress expanding into the commercial market and re-entering the high performance desktop market late in the year with the new Zen based Summit Ridge CPU. The recently introduces Polarid GPU Architecture will begin shipping in the middle of 2016, and could help AMD regain its GPU market share.

New Semi-Custom Wins To Generate Revenue In The Latter Part of 2016; New Products To Help AMD Regain Its Server Market Share in 2017

AMD’s Q4 2015 Enterprise, Embedded and Semi-Custom revenue declined 23% sequentially as the Semi-Custom sales decreased from their third quarter seasonal peak. Nevertheless, the company reported record annual Semi-Custom unit shipments, shipping more than 50 million Semi-Custom APU’s in 2015. AMD expects the demand for gaming consoles to remain strong through 2016, and remains on track to generate additional revenue from new Semi-Custom business in the second half of 2016.

In 2015, AMD began production shipments of its first 64-bit datacenter class ARM SoC, and it expects additional system introductions from partners through 2016. However, ARM SoC will be only a  modest revenue contributor in 2016. Much of the growth in servers going forward will be driven by AMD’s FirePro GPU’s and next-generation service CPU’s. The Zen based CPUs development is on track to achieve greater than 40% ITC uplift from previous generation CPUs, and is on schedule to sample later this year. AMD claims to have secured several key design wins with global OEMs for its  Zen based service CPU. The new products can help the company gain back market share in servers in 2017.

Q1 2016 Outlook

– Revenue to decline 14% sequentially, +/- 3%, driven by game console seasonality and a cautious macro environment in China.

– Gross margin of 32%.

– Non-GAAP operating expenses of approx. $320 million.

– Interest expense, taxes and other expenses of approx. $ 42 million.

Fiscal 2016 Outlook

– Revenue to grow year-on-year.

– Non-GAAP operating expenses in the range of $320 – $340 million per quarter.

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

– Capex of $70 million.

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