AMD's Q2'15 Earnings Preview: 2015 To Be Turbulent, But Things Can Turnaround In 2016

PC and graphics processor manufacturer, AMD ( AMD ) is set to announce its Q2 2015 earnings on July 16th. The company's stock lost almost 20% of its value after it lowered its Q2 2015 guidance earlier this week. In addition to being the worst hit by the sluggish PC demand this year, AMD has suffered market share losses to Intel ( INTC ) and Nvidia ( NVDA ) in the last few quarters. The company has undertaken a number of restructuring initiatives in the last two years, but its efforts have so far failed to provide a continuous growth momentum to its top line. In 2014, AMD saw a marginal growth in its revenue as it successfully ramped up a diverse set of new products in non-PC growth markets.

There is no doubt that 2015 is a going to be a difficult year for AMD. However, we believe that things could turn around next year onward. AMD is focusing its investments on the strongest opportunities to enable its customers to create great products that push the boundaries of what is possible and allow the company to achieve profitable growth in the years to come. We believe growth for the company will be driven by delivering next-generation technologies across the key areas of gaming, immersive platforms and data centers.

AMD's revised Q2'15 guidance - Blaming the weaker than expected consumer PC demand, AMD now estimates a 8% sequential decline in its Q2 2015 revenue, as against it prior guidance of a 3% drop (+/- 3%). The company expects its Computing and Graphics reporting segment to be the hardest hit, while it claims that the Enterprise, Embedded and Semi-Custom ( EESC ) segment met its expectations in Q2 2015. It also lowered its non-GAAP gross margin guidance from 32% to 28%, mainly because EESC will have a higher proportion of sales than initially expected.

Our price estimate of $2.66 for AMD is approximately 25% above the current market price. We will revise our valuation after the Q2 2015 earnings release.

See our complete analysis for AMD

Gaming Is An Integral Part of AMD's Turnaround Startegy

Citing its expertise in visualization, power efficiency, and high-performance CPUs and GPUs, AMD firmly believes that gaming will be an important cornerstone of its recovery plan. Its success in the gaming industry, particularly supplying semi-custom chips for game consoles, was one of the key reasons which helped the company return to positive top line growth in 2014. The company powers all major next generation consoles including Sony's PlayStation 4, Nintendo's Wii U and Microsoft's Xbox One.

The game console business has a cycle of three to four years. Microsoft and Sony launched new products in late 2013 and thus AMD expects another few years of strong game-console revenue growth from them. In its Q3 2014 earnings call, AMD announced securing two new wins in the segment, which are expected to deliver combined total lifetime revenue of approximately $1 billion over approximately three years. Design work for these opportunities has started and AMD anticipates first silicon revenue from these deals in 2016.

When it comes to discrete graphics cards, Nvidia ( NVDA ) still has an upper hand over AMD, as far as the current market share is concerned. The market shares of the two companies have fluctuated a lot between quarters, but Nvidia still manages to retain its lead over AMD in the discrete GPU market with a 76% market share. As of February 2015, only 28.6% of Steam gamers have an AMD video card, compared to 51.8% for Nvidia, and the former's share has declined from over 32% two years ago.

AMD's larger gaming efforts include not only consoles, but everything from casinos to PCs, and will leverage GPUs, CPUs, software and semi-custom chips. Plans for AMD's Graphics Core Next architecture include high-performance capabilities with twice the power efficiency of current GPUs and a FinFET 3D transistor architecture. So far this year, AMD has launched a number of new products (CPUs, APUs and GPUs) with added features and improved efficiency.

At the Electronic Entertainment Expo (E3), held in Los Angeles last month, AMD unveiled its line of next-generation Radeon graphics chips - Radeon R9 Fury series, Radeon R9 300 series and Radeon R7 300 series - which mark a technology turning point in PC gaming.

PC gaming represents almost 40% of the worldwide gaming market, which is higher than consoles, phones, tablets or any other individual gaming segment. The new products can help expand the company's footprint in PC gaming.

With Its Diversified, Intel-Based and ARM-Based Offering, AMD Is Uniquely Positioned In Servers

AMD's server market share declined from 15% in 2007 to 1.7% in 2014, as per our estimate. The success of Intel's Xeon processors, combined with AMD's execution issues, are the key factors responsible for AMD's continuous slide in the server market. Nevertheless, with new improved servers, its industry-leading graphics processing capabilities and its strategy to embrace both the x86 and ARM architectures, AMD remains committed to strengthen its foothold in the server processor market.

In October 2012, AMD announced its collaboration with ARM Holdings to design server processors using the ARM technology in addition to its x86 processors for multiple markets, which makes AMD the only processor provider to bridge the x86 and 64-bit ARM ecosystems. AMD believes that ARM CPUs have the potential to account for 20% of the server market by 2016 or 2017. AMD's first ARM processors were set to ship this year, but appear to be behind schedule.

We expect AMD to regain some of the its lost server market share over our review period.

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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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