AMD Banks On Its Restructuring Plan To Drive Future Growth

by Trefis Team
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With $1.16 billion in Q4 2012 revenue, AMD (NYSE:AMD) ended fiscal 2012 with a fourth consecutive decline in its quarterly earnings. Macro headwinds and weak demand for PCs created a difficult selling environment for chip manufacturers, such as AMD, last year. In addition, internal factors such as a change in leadership, a temporary manufacturing glitch and a slow response to rapidly changing consumer needs further reduced investor confidence in AMD, whose stock has declined by more than 60% since March 2012.

AMD’s Q4 2012 revenue registered a 31% y-o-y decline whereas its full year earnings marked an 18% decline over 2011. As intense competition in a slow market put pressure on gross margins, the company suffered a net loss of $1.18 billion in 2012.

Last quarter, AMD announced a restructuring plan in an effort to strengthen its competitiveness and better manage its expenses and cash. Additionally, it has increased its focus on diversifying itself beyond the PC market and target other adjacent markets, where it feels its IP provides differentiation and a better growth opportunity.

Introducing new product offerings, leveraging growth in adjacent market, lowering operating expenses and reducing its inventory will be AMD’s key focus areas in 2013 as it aims to return to profitability by the second half of 2013. Though the turnaround will take time and we might not see visible benefits this quarter, we feel that AMD could witness positive growth this year onward.

Here are a few factors that we believe could turnaround AMD’s business in the future.

See our complete analysis for AMD

AMD’s Restructuring Plan To Reduce Its Expense Base

The restructuring plan announced in Q3 2012 was to strengthen AMD’s competitiveness and reduce its expense base by 25% in light of the broader macroeconomic issues. The plan also included reducing AMD’s global workforce by 14% in Q4 2012 and Q1 2013, which is estimated to result in operational savings of $190 million in 2013.

AMD effectively managed its costs and reduced its inventory in Q4 2012. Owing to tight spending controls, operating expenses were slightly lower at $506 million. With lower expenses, AMD aims to deliver breakeven results with $1.3 billion in revenue and reduce operating expenses to $450 million per quarter by Q3 2013.

New Product Offerings To Accelerate AMD’s Business

AMD claims to have a robust pipeline of upcoming platforms which it feels will steer demand for its products in 2013 and beyond. The company introduced new APUs, code-named Temash and Kabini, which will be the industry’s first quad-core x86 SoCs. While the Kabini platform is meant for ultrathin notebooks, the Temash platform targets the fast growing performance tablets and hybrid markets.

Additionally, AMD introduced a new APU, code-named Richland, that delivers over 20%-40% better visual performance compared to its predecessor. The follow-on to Richland is also expected to start shipping in the second half of 2013. AMD announced a new series of discrete graphics processors for performance gaming earlier this year. The new product portfolio aims to target high-growth markets such as ultrathins, convertibles and tablets.

AMD also added Vizio as a new customer last quarter and expects Vizio to start shipping AMD-based products, which includes two touch-based ultrathin notebooks and a Windows 8 tablet, later this year.

A strong new APU line-up and an increased effort to enter the fast growing tablet and smartphone market should augur well for AMD’s business in the long run.

Leveraging High-Growth Opportunities In Adjacent Markets

AMD aims to diversify itself beyond the PC market and target other adjacent markets, including dense servers, 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.

Within the server space, AMD intends to combine its extensive 64 bit design experience X86 processor IP and ARM processor cores with the SeaMicro offering to leverage the increasing transition to dense servers.

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% by 2014, from the current level of a mere 5%. It scored significant design wins last quarter and claims to be in line to achieve the target growth.

Outlook for Q1 2013

Revenue to decline 9% sequentially (+/- 3%)

– Gross margins to remain flat

– Operating expenses of $495 million

– Taxes of $4 million

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deliver breakeven results with $1.3 billion in revenue by Q3 2013 and deliver consistent profitability thereon.
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