Advanced Micro Devices
(
AMD
) reported third quarter loss of 20 cents a share, missing the
Zacks Consensus Estimate by 4 cents.Shares slid 5.4% during the
day and another 3.3% in extended trading hours.
Revenue
AMD's revenues in the last quarter came in at $1.27 billion,
down 10.2% sequentially and 24.9% year over year, more or less in
line with its revised guidance of a 10% sequential decline (at
the mid-point). Revenues were also in line with consensus
expectations of $1.28 billion.
Revenue by Segment
Computing Solutions
was 73% of AMD's sales in the last quarter, down 11.4%
sequentially and 27.9% from the year-ago quarter. The third
quarter was a continuation of softening trends noticed in the
second, both as a result of macro conditions that impacted
consumer spending and on account of inventory rebalancing at OEMs
ahead of Microsoft's Windows 8 launch. The consumer client side
of the business appears to be the worst hit and AMD is taking a
beating since it is more dependent on this area. The only
positive was the Trinity APU, which management stated increased
17% sequentially and made up a third of the company's
notebook-related sales.
AMD's
Graphics
business generated the remaining 27% of its sales, down 6.8%
sequentially and 15.1% from the year-ago quarter. The graphics
business is currently under some pressure due to the PC market
slowdown. AMD stated that the discrete business for desktops and
consoles grew in the last quarter.
Margins
AMD reported a pro forma gross margin of 30.9%, down 1,462
basis points (bps) from the previous quarter and 1,384 bps from
the year-ago quarter. Lower volumes impacted the margin in the
last quarter. AMD also wrote down $100 million of Llano inventory
that it was unable to sell due to weak market conditions. This
impacted the mix of business, pulling down overall prices and
thus affecting the margin. Utilization of backend facilities also
declined, another negative for the quarter.
Operating expenses of $516 million were down 7.4% sequentially
and 15.4% year over year. However, the operating margin shrunk
1,586 bps sequentially and 1,841 bps year over year to -9.8%
mainly on account of high cost of sales (as discussed above) and
helped by higher R&D expenses (as a percentage of sales).
The two segments-Computing Solutions and Graphics-generated
operating margins of -12.3% and 5.3%, respectively. Computing
Solutions declined 2,014 bps sequentially and 2,388 bps year over
year. Graphics declined 318 bps sequentially while increasing 229
bps from last year.
Net Profit
On a pro forma basis, AMD generated a net loss of $150
million, or a -11.8% net margin, compared to a profit of $46
million, or 3.3% in the previous quarter and $95 million, or 5.6%
in the year-ago quarter.
Including a legal settlement and intangibles amortization
charges, the fully diluted GAAP net loss was $157 million, or 21
cents per share compared to profit of $37 million, or 5 cents a
share in the previous quarter and income of $87 million, or 12
cents a share in the year-ago quarter.
Balance Sheet
The long term debt was $2.04 billion, up around $500 million
during the quarter, which was used to retire its 5-3/4%
convertibles. The net debt at quarter-end was $1.19 billion
compared to $442 million at the end of the June quarter.
Including long-term liabilities, AMD's debt to total
capitalization ratio was 67.7% at quarter-end. The cash and short
term investments balance at quarter-end was $1.3 billion, down
$279 million during the quarter.
Inventories were down 10.7% sequentially to $744 million (AMD
wrote down $100 million), with inventory turns rising from 3.7X
to 4.7X. Days sales outstanding (DSOs) went from 48 to 59.
During the quarter, AMD used $240 million of cash in
operations, spending $32 million on capex.
Guidance
AMD provided limited guidance, which seems to highlight
management caution. The company guided to a fourth quarter
sequential revenue decline of 9% (+/- 4%), or $1.16 billion at
the mid-point, lower than the Consensus of $1.33 billion.
Operating expenses are expected to be flat sequentially.
Our Take
AMD had a very poor third quarter, with a significant net loss
that was the combined effect of weak demand, an inventory
write-down and productivity issues. A more conducive market,
adoption of new products, position in graphics and good execution
are the only things that can pull the company out of the current
situation.
For this purpose, AMD has announced a massive restructuring to
align the cost structure with current demand trends. Management
currently expects the initiative to reduce the cost base by 25%
and generate total annualized cost savings of around $190
million. The new structure will enable the company to break even
in the third quarter of 2013 at a quarterly revenue level of $1.3
billion. Management expects to regain some market share in
2013.
Management optimism notwithstanding, we encourage investors to
avoid AMD shares for now, as represented in the Zacks Rank of #5,
implying a Strong Sell recommendation in the near term (1-3
months).
This is because of the significant challenges that we expect
the company to see in a market that is being increasingly
cannibalized by tablets from well-established players, such as
Apple
(
AAPL
), Samsung,
Microsoft
(
MSFT
),
Hewlett Packard
(
HPQ
) and
Dell
(
DELL
) among others.
Intel's
(
INTC
) Ultrabook concept is going to further fragment the market,
making things that much more difficult for AMD. Intel has so far
been more focused at the high end, which helped AMD pick up share
at the low end. However, considering Intel's deep pockets and
innovative prowess, the company looks set to take share from
AMD.
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