AMD Remains A Wait-And-See Story - Analyst Blog

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Advanced Micro Devices ( AMD ) reported first quarter earnings of 17 cents a share, well ahead of the Zacks Consensus Estimate of earnings of 9 cents. Despite the solid beat, investor response was lukewarm (shares up just 1.88% in after-hours trade).

Both Intel ( INTC ) and Microsoft ( MSFT ), which have significant exposure to the PC market, reported positive surprises because the HDD shortage had a less-than-expected impact on sales and channel build rates appeared to be on the rise. AMD also gained from the situation.

Revenue

AMD's revenues in the last quarter came in at $1.59 billion, down 6.3% sequentially and 1.7% year over year, better than its guidance of an 8% sequential decline (at the mid-point). Revenues also beat consensus expectations of $1.56 billion by 1.6%.

Revenue by Segment

Computing Solutions was 76% of AMD's sales in the last quarter, down 8.1% sequentially and consistent with the year-ago quarter. The sequential decline was seasonal. The client side of the business was hit on both units and ASPs due to decline in 45nm shipments for desktops.

APUs are growing as a percentage of the mix, with Llano, the first 32 nm APU making some headway. Pricing was also a negative on the server side of the business, although shipments increased (driven by Bulldozer).

AMD's Graphics business generated the remaining 24% of its sales, flat sequentially and down 7.5% from a year ago. Being a seasonally down quarter for AMD, the sequential growth in GPUs may be considered good. This was driven by stronger pricing for desktop GPUs in the channel, although game console revenue was down as may be expected, offsetting this positive.

Margins

AMD reported a pro forma gross margin of 46.1%, up 34 basis points (bps) from the previous quarter and 142 bps from the year-ago quarter. Improving 32nm yields and a better mix were the reasons for the gross margin expansion.

Operating expenses of $598 million were flat sequentially and up 4.7% year over year. The operating margin shrunk 184 bps sequentially, while expanding 262 bps year over year to 8.3%. Higher R&D expenses (as a percentage of sales) drove the sequential increase and were an offsetting factor in the year-over-year comparison as well.

Both the segments-Computing Solutions and Graphics-did well when compared with the year-ago quarter. Computing Solutions generated an operating margin of 10.3%, which was down 230 bps sequentially and up 197 bps year over year. Graphics generated an operating margin of 8.9%, up 183 bps sequentially was 430 bps from a year ago. Mix and pricing were positives for both segments.

Net Profit

On a pro forma basis, AMD generated a net income of $122 million, or a 7.7% net margin, compared to a profit of $137 million, or 8.1% in the previous quarter and $56 million, or 3.5% in the year-ago quarter.

Including restructuring, intangibles amortization charges and a one-time $703 million charge related to Globalfoundries, the fully diluted GAAP net loss was $590 million, or 80 cents per share compared to loss of $177 million, or 24 cents a share in the previous quarter and a income of $510 million, or 67 cents a share in the year-ago quarter.

Balance Sheet

AMD has done a really good job of reshaping the balance sheet. The long term debt was flattish at around $1.53 billion in the last quarter. The net debt at quarter-end was $475 million, compared to $251 million at the end of the December quarter and $481 million at the end of the March 2011 quarter.

Including long-term liabilities, AMD's debt to total capitalization ratio was 66.4% at quarter-end. The cash and short term investments balance at quarter-end was $1.5 billion, down 221 million during the quarter.

Inventories were up 22.9% sequentially (partly a build for new product launches) to $585 million and inventory turns increasing from 7.7X to 5.8X. Days sales outstanding (DSOs) increased from 50 to 55.

During the quarter, AMD generated $107 million of cash from operations, spending $281 million on the acquisition of SeaMicro and $40 million on capex.

Guidance

AMD guided to second quarter sequential revenue increase of 3% (+/- 3%), implying $1.63 billion at the mid-point, better than the Zacks Consensus of $1.60 billion. The gross margin is expected to be flat to slightly up and operating expenses are of around $605 million.

Our Take

AMD reported a moderate first quarter, with both revenue and earnings beating our expectations. A more conducive market, new products (Brazos, Llano and Bulldozer), growing position in graphics and good execution were the reasons for the earnings surprise. AMD expects better yields to drive continued gross margin expansion this year, although we remain a bit cautious given the many new products and potential issues related to the transition to smaller geometries.

The company has recently dissolved its remaining stake in Globalfoundries and is also using Taiwan Semiconductor ( TSM ). While this allows it to focus on R&D, one wonders how fast it would be able to ramp new products, especially since it has been having issues with 32nm.

That said, we can't help but feel good about a company that has been consistently delivering on its promises, whether with respect to building its product portfolio, or with respect to cleaning up its balance sheet. Therefore, considering the fact that customer response remains strong and design wins continue to pour in, AMD may be expected to see some gains in the next quarter.

Of course, while AMD's products are being launched on schedule and it does look as if it will take some share from Intel, we need to bear in mind that Intel also has some new products lined up, which along with its growing capacity and lead at 22nm, should keep it ahead of AMD.

Cost efficiencies can only do so much; real expansion of margins is dependent on superior technology. AMD is on the right track and its new products are already helping. But there seems to still be a ways to go.

Given the above, we maintain our long-term Neutral rating on AMD shares. The Zacks Rank for AMD is also #3, implying a Hold recommendation in the near term (1-3 months).


 
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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 , Stocks

Referenced Stocks: AMD , INTC , MSFT , TSM

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