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AMD Beats on Q3 Earnings, Shares Down on Weak Q4 Guidance

Advanced Micro DevicesAMD reported third-quarter 2018 non-GAAP earnings of 13 cents per share that was in line with the Zacks Consensus Estimate but jumped 44.4% year over year.

Revenues increased 4.4% year over year to $1.65 billion that lagged the Zacks Consensus Estimate of $1.71 billion. IP-related revenues were $86 million, including revenues related to THATIC joint venture.

The year-over-year growth was driven by strong computing and graphics segment revenues. However, revenues declined 6% sequentially due to lower graphics revenues.

Following the announcement of third-quarter results, shares plunged 22.4% after hours due to weak fourth-quarter guidance. Graphics revenues are expected to suffer from lack of blockchain related sales. Semi-custom sales are also projected to decline sequentially in the quarter.

Notably, AMD's stock has returned 121.7% year to date, against the industry 's decline of 3.9%.

Top-Line Details

Advanced Micro Devices, Inc. Price, Consensus and EPS Surprise

Advanced Micro Devices, Inc. Price, Consensus and EPS Surprise | Advanced Micro Devices, Inc. Quote

Ryzen processor sales contribution to total client revenues increased more than 70%.

However, management stated that blockchain-related GPU sales were negligible in the reported quarter. In the year-ago quarter, blockchain-related GPU sales were approximately high single digit percentage of total AMD revenues.

Sequentially, segment revenues declined 13.6% year over year primarily due to lower graphics revenues.

Client processor average selling price (ASP) increased on a year-over-year and quarter-over-quarter basis owing to higher desktop and mobile processor ASP. This was primarily driven by strong demand for higher end Ryzen 7, Ryzen 5 and Ryzen Threadripper processors. However, GPU ASP decreased year over year and sequentially on lower GPU channel sales.

During the quarter, AMD launched a number of new solutions, including its 2nd Generation Ryzen Threadripper processors. The company also announced its first "Zen" core-based Athlon and Athlon PRO desktop processors.

The company also introduced Radeon Pro WX 8200 graphics card, which is priced below $1,000 and "Vega" architecture-based Radeon Pro V340 graphics card.

AMD is currently sampling 7 nanometer (nm) Radeon "Vega" GPU, which it is on track to launch later this year.

Enterprise, Embedded and Semi-Custom segment (43.3% of total revenues) revenues declined 4.5% from the year-ago quarter to $715 million. The year-over-year decline was primarily attributed to lower semi-custom product and IP-related revenues, partially offset by higher server sales.

Sequentially, segment revenues increased due to higher semi-custom, IP-related and server revenues.

Adoption of EPYC datacenter processor is significantly strong among original equipment manufacturers (OEMs), including Cisco, Dell and Hewlett Packard Enterprise. Notably, Microsoft MSFT and Oracle ORCL announced new solutions for their respective cloud services powered by the EPYC processor. Dropbox and Xilinx were two other notable users of the EPYC processor.

AMD expects other Tier 1 cloud service providers to announce new products that are supported by EPYC processor in the current quarter.

During the quarter, AMD added dozens of new end customers across oil & gas, healthcare, aerospace, banking and other industries, driven by superior performance of EPYC processors in both data analytics and general purpose virtualized workloads.

AMD expects to have mid-single digit server unit market share at the end of 2018, driven by strong adoption from cloud customers. The company is also sampling 7nm EPYC processor, codenamed "Rome," and is on track to launch in 2019. AMD expects to achieve double-digit server unit share with Rome, driven by strong competitive position and robust adoption.

Operating Details

Non-GAAP gross margin increased 400 basis points (bps) on a year-over-year basis to 40%, driven by strong sales of new products, including Ryzen and EPYC processors. Sequentially, gross margin expanded 300 bps owing to higher IP-related revenues and strong sales of high-margin new products.

Operating expenses on a non-GAAP basis increased 12.3% year over year to $476 million. As percentage of revenues, operating expenses surged 200 bps to 28.8%.

Adjusted EBITDA increased 23.4% from the year-ago quarter to $227 million.

Non-GAAP operating income rallied 26% year over year to $186 million. Operating margin expanded 200 bps to 11.3%.

Segment wise, Computing and Graphics operating income soared almost 37% to $100 million. The year-over-year operating income improvement was primarily driven by favorable product mix and higher IP-related revenues, partially offset by lower graphics revenue.

However, segment operating income declined 14.5% sequentially due to lower graphics revenue.

Enterprise, Embedded and Semi-Custom operating income increased 16.2% from the year-ago quarter to $86 million, driven by favorable product mix.

Moreover, segment operating income rallied 24.6% sequentially due to higher IP-related and server revenues.

Balance Sheet & Cash Flow

AMD ended the third quarter with cash and cash equivalents (including marketable securities) of $1.06 billion compared with $983 million in the previous quarter.

Total debt (including current portion) was $1.30 billion, down from $1.39 billion reported at the end of the previous quarter.

Free cash flow was $62 million, much better than a free cash outflow of $88 million in the previous quarter.

Guidance

For fourth-quarter 2018, AMD expects revenues to be roughly $1.45 billion (+/-$50 million), up 8% on a year-over-year basis. However, the projected figure is much less than the current Zacks Consensus Estimate of $1.71 billion.

Management expects client compute business, which faces seasonality in the fourth quarter, to perform better, owing to strong adoption of new products. The company expects the server business to grow on solid adoption of EPYC products by cloud service providers.

Moreover, graphics business is expected to grow sequentially, owing to product portfolio strength that includes new datacenter GPU products. However, semi-custom is projected to decline sequentially in the quarter.

Non-GAAP gross margin is anticipated to be 41%, driven by higher sales from Ryzen, EPYC and datacenter GPU processor sales.

Operating expenses are expected to be roughly $465 million and as percentage of revenues to be almost 32%.

For 2018, AMD expects revenues to increase mid-20% on a year-over-year basis. Non-GAAP gross margin is anticipated to be more than 37%.

Operating expenses as percentage of revenues are expected to be almost 28%.

AMD expects to generate positive free cash flow for both the fourth quarter and 2018.

Zacks Rank & Key Pick

AMD currently carries a Zacks Rank #3 (Hold).

Impinj PI is a better-ranked stock in the same sector. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Long-term earnings growth rate for Impinj is currently projected at 17.5%.

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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 Nasdaq, Inc.


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

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