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).
ADV MICRO DEV (
AMD
): Free Stock Analysis Report
INTEL CORP (
INTC
): Free Stock Analysis Report
MICROSOFT CORP (
MSFT
): Free Stock Analysis Report
TAIWAN SEMI-ADR (
TSM
): Free Stock Analysis Report
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