Advanced Micro Misses Q2 Earnings on Weak Consumer PC Market - Analyst Blog

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Advanced Micro Devices ( AMD ) reported earnings of 2 cents per share in the second quarter of 2014, missing the Zacks Consensus Estimate by a penny.

Following the earnings announcement, shares plunged 19.04% in after-hours trading due to weak sales guidance. Though the overall PC market is improving, consumer market continues to remain under pressure. As a major share of Advanced Micro's chips is integrated into consumer desktops, it could likely suffer and apparently lose market share to Intel ( INTC ).

Revenues

Advanced Micro generated revenues of $1.44 billion, up 3.1% sequentially and 24.1% year over year. The increase was driven by strong sales of semi-custom System-on-chips (SoCs) and notebook offerings. Second-quarter revenues were in line with the Zacks Consensus Estimate.

Revenues by Segment:

Computing Solutions comprised 46% of Advanced Micro's sales in the last quarter, up 0.9% sequentially but down 20.5% from the year-ago quarter. The sequential increase was due to higher notebook and embedded processor sales, while the year-over-year decline was due to decreased microprocessor unit shipments.

Advanced Micro's Graphicsand Visual Solutions business generated the remaining 54% of the sales, up 5.2% sequentially and 141.3% from the year-ago quarter, largely driven by increased semi-custom SoC shipments. Management stated that GPU revenues decreased sequentially as well as year over year due to decline in AIB channel sales.

Operating Results

Reported gross margin for the quarter was 34.6%, down 30 basis points (bps) sequentially and 490 bps from the year-ago quarter due to unfavorable product mix.

Operating expenses of $435.0 million decreased 10.9% from $488.0 in the year-ago quarter. Also, as a percentage of sales, both research and development (R&D) and marketing, general and administrative expenses declined. As a result, reported operating margin of 4.4% compared favorably with the year-ago quarter's margin of (2.5%).

The quarter's GAAP net loss was $36.0 million or loss of 5 cents per share compared with a net loss of $74.0 million or 10 cents reported in the comparable quarter last year. Excluding loss on debt redemption and intangible amortization charges but including stock-based compensation expenses, non-GAAP net earnings were $17.0 million or 2 cents per share versus a net loss of $65 million or loss of 9 cents in the year-ago quarter.

Balance Sheet

Advanced Micro exited the second quarter with cash, cash equivalents and marketable securities of approximately $9.48 billion versus $9.02 billion in the prior quarter. Trade receivables were $872.0 million, up from $840.0 million in the prior quarter.

Total debt (short- and long-term) in the quarter was $2.21 billion, up from $2.14 billion in the previous quarter.

During the quarter, Advanced Micro used $28.0 million from cash for operations, spending $23.0 million on capital expenditures. Free cash flow was negative $51.0 million in the last quarter.

Guidance

Management expects third-quarter 2014 revenues in the range of $1.43-$1.51 billion, an increase of 2.0% (+/- 3.0%) sequentially. The sales guidance is below analyst expectations of $1.57 billion, according to Bloomberg. Non-GAAP gross margin is expected to be 35.0%. Operating expenses are expected to be approximately $435.0 million and interest expense to be approximately $42 million.

For full-year 2014, management continues to expect revenues to increase year over year; non-GAAP operating expenses in the range of approximately $420.0-$450.0 million per quarter, taxes worth approximately $3.0 million per quarter and capital expenditures nearly $120.0 million.

Our Take

Advanced Micro reported strong top-line figures, supported by new products and increased demand for its semi-custom SoCs . A more conducive market, increased game console wins, adoption of new products, position in graphics and good execution are expected to lower the company's dependence on the weak PC market.

The weak sales guidance indicates that Advanced Micro is not gaining as expected from a rebound in corporate spending.

However, we believe Advanced Micro is on the right track. The company is trying to position itself strongly in the gaming market, which has enough potential to grow over the next few quarters.

Also, during the quarter, the company made good progress in embedded markets, including communication, industrial and gaming, among others. It expects to further increase revenue contribution from the embedded business and increase market share. Advanced Micro's new APUs, which power a number of thin and light-touch notebooks are expected to drive strong double-digit sequential increase in mobile processor unit shipments.

Currently, Advanced Micro has a Zacks Rank #3 (Hold). Other stocks that have been performing well and are worth a look include FormFactor Inc. ( FORM ) and OmniVision Technologies, Inc. ( OVTI ), sporting a Zacks Rank #1 (Strong Buy).


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: INTC , FORM , AMD , OVTI

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