AMD (NYSE:AMD), which has 85% of its core business in the traditional PC market, reported its Q3 2012 earnings on Thursday. In line with the company’s preliminary earnings release, AMD suffered a 10% sequential decline in revenues and posted a net loss of $157 million. The macro headwinds have led to a challenging selling environment, which is impacting the overall semiconductor industry. Though most of its competitors such as Intel (NASDAQ:INTC), Nvidia (NASDAQ:NVDA) and Texas Instruments are being hurt by the slowdown, AMD has been the worst hit so far.
Hitting a peak of $8.40 in March this year, the stock has declined significantly since then and is currently hovering around the $3-$4 range. Apart from adverse macro conditions, AMD has also been effected by internal factors such as a change in leadership, a manufacturing glitch last year and the company’s slow response to rapidly changing consumer needs.
As a consequence of lean inventory maintained by its OEM partners, AMD registered a 11% q-o-q decline in its computing solution segment and a 7% q-o-q decline in the graphics segment revenue. The gross margins declined to 31%, a 15% sequential decline, as a result of the $100 million inventory write-off consisting of AMD’s Llano APU’s. Weak demand led to lower ASPs this quarter, which combined with the low factory utilization rates led to the significant drop in profit margins.
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AMD’s dismal performance was very much anticipated, and we estimate the situation to persist for the next few quarters. In this article, we focus on some of the upcoming developments that could steer the company from these tough times and help it return to profitability in the coming years.
AMD’s Effort To Restructuring the Business
AMD claims that it underestimated the speed of change in the computing industry and realizes the urgency of a much needed restructuring of its current business. The restructuring plan announced this quarter is an effort to strengthen AMD’s competitiveness and reduce its expense base by 25%, in light of the broader macroeconomic issues. In an effort to control its mounting costs, the company plans to reduce its current headcount by 15%.
AMD aims to diversify itself beyond the PC market and target other adjacent markets, including dense serving, new embedded markets and new lower-power form factors, where its IP provides differentiation and a better opportunity for it to grow its share. The company intends to drive 40% to 50% of its portfolio to these faster growing markets in the future.
With the change in its operating model, AMD aims to deliver breakeven results with $1.3 billion in revenue by Q3 2013 and deliver consistent profitability thereon. In light of the slow PC growth, we feel a shifting focus to other markets is a welcome move for the company and should augur well for its outlook.
Higher Revenue Contribution From Embedded Processors
AMD is focusing on increasing its share in additional embedded markets including communication, industrial and gaming among others. It intends to leverage the success of its APUs and graphics to tap the growing potential in such markets. AMD aims to increase the revenue contribution from its embedded business to almost 20%, from the current level of a mere 5%. While being extremely discrete about the progress so far, the company did declare that it has scored significant design wins to meet the above target.
We estimate the embedded processors division to contribute just over 4% to AMD’s valuation. However, the same could change now that the company intends to drastically increase its dependence on this segment.
Success of Trinity APUs & Upcoming Kabini APUs
While the lower unit shipments and decline in ASPs led to lower than expected sales of desktop processors, the Trinity notebook shipments marked a significant increase. With a 70% sequential increase in unit shipments, Trinity notebooks accounted for one third of the total notebook shipments in Q3 2012. Though the Trinity APUs are targeted at the mainstream price points, AMD claims that it is witnessing continued consumer adoption of Trinity APUs at higher system price points as well and has had significant design wins this quarter.
AMD has over 125 AMD based systems up for launch with Windows 8, including tablets and ultra-thin notebooks. Earlier this month, the company announced its new Z-series processors, code-named Hondo, for Windows 8 tablets and hybrid designs to compete with ARM-based tablets and Intel’s Z2760 Atom processors. Tablets based on the new AMD platform are expected to start shipping later this year. While we believe that it will hardly impact the stock performance at this point, we feel it is a welcome move and could benefit the company in the future.
Additionally, AMD is working on its next-generation 28-nanometer Kabini APU, which is the successor to the popular Brazos platform and the company’s first true SoC design. The same is expected to launch in the first half of 2013.
We are in the process of updating our price estimate of $5.71 for AMD and will upload the same soon.