AMD Prey to PC Market Pressures

Advanced Micro Devices (AMD) reported third quarter earnings of 12 cents a share (excluding the impact of GlobalFoundries), beating the Zacks Consensus estimate of 6 cents, despite falling revenues. Shares moved up 4.5% in after-hours trading, but have been moving down since the market opened this morning, since guidance was not encouraging.

Similar to Intel Corp. (INTC), AMD also saw softness in the consumer market, although the enterprise side fared better. Management stated that processors for client PCs (both desktop and notebook) increased during the quarter. On the server side, AMD continued to add customers, such as International Business Machines (IBM).

Beginning in the first quarter of 2010, AMD started reporting the foundry business under the equity method.


Revenue of $1.62 billion was down 2.1% sequentially and up 34.3% year over year, contrary to management’s expectations of a seasonally strong quarter (5-10% sequential increase). If the $191 million of one-time process technology license revenue in the year-ago quarter was added back, revenue for the quarter would have been up 15.9%. While both operating segments grew from the year-ago period, the sequential decline was on account of weakness in the graphics business.

AMD will launch its second generation DX11 graphics products next week, which will further help grow the GPU business in the back half of 2010. The first products for Microsoft Corp’s (MSFT) DX11 technology (included in Windows 7) were launched earlier this year and management stated that more than half the GPU shipments in the last quarter were DX11 capable. They have been popular because of their energy efficiency, superior functionality and greater memory bandwidth.

Revenue by Segment

Computing Solutions amounted to 34% of sales, up 1.2% sequentially and up 14.7% from the year-ago quarter. Both mobile and desktop processor units increased in the last quarter, with the slight increase in mobile processor ASPs more than offset by the decline in desktop processor ASPs.

Graphics made up 11% of sales, a decline of 11.4% sequentially and increase of 27.5% from the year-ago quarter. The weakness in Graphics came from both volume and ASP pressures. Mobile GPU volumes were down, although desktop increased. As may be expected, the enterprise segment did better, as workstation units increased double-digits. However, AMD also saw a mix shift to value models, which impacted ASPs when compared sequentially.

AMD is expected to launch the Ontario chip in the fourth quarter this year, which will further drive revenues and margins in 2010.


The pro forma gross margin was 45.7%, up 103 basis points (bps) from the previous quarter and 1,298 bps from the year-ago period. The increase was mainly due to the improving product mix.

Management did not provide specific information regarding the timing of the 32 nm transition, although we expect it to take off in the first half of next year. This should fuel further margin expansion next year when the entire product line moves to 32nm.

Operating expenses of $595 million were down 0.8% sequentially. The operating margin increased 55 bps sequentially to 8.9%. The higher gross margin combined with slightly higher R&D expense (as a percentage of sales) and was partially offset by slightly lower SG&A. Operating expenses were well below management’s expectation largely due to lower variable expenses related to the lower revenue level.

The two core segments — Computing Solutions and Graphics — had mixed results. Computing Solutions generated an operating margin of 13.4%, up 282 bps sequentially, while Graphics generated an operating margin 0.3%, down 724 bps sequentially.

Net Profit

On a pro forma basis, AMD generated a net profit of $84 million, or a 5.2% net profit margin, compared to a profit of $90 million, or 5.4% in the previous quarter and loss of $371 million 30.8% in the prior-year quarter.

Including intangibles amortization charges and Globalfoundries-related adjustments, the fully diluted GAAP loss was $118 million, or 17 cents per share compared to loss of $43 million, or 6 cents a share in the previous quarter and loss of $128 million, or 18 cents a share in the year-ago quarter.

Balance Sheet

Inventories increased 7.1% sequentially to $622 million, with annualized inventory turns down from around 6.3X to around 5.7X. Days sales outstanding (DSOs) increased from 40 to 43. The company ended with a cash and short term investments balance of $1.7 billion, down 170 million from the June quarter. AMD has around $2.2 billion in long term debt and $131 million in long term liabilities, yielding a net debt balance of $590 million at quarter-end, down from $677 million at the beginning of the quarter.

During the quarter, AMD used $124 million of cash in operations, spent $31 million on capex and repaid $818 million of debt. Management expects debt repayments to continue through the rest of the year.


Management provided very limited guidance for the fourth quarter, most likely due to the uncertainty in the consumer PC market. Accordingly, fourth quarter revenues are expected to be consistent with the third quarter. Management did not provide any EPS guidance for the fourth quarter; however, the current Zacks Consensus expectation is pegged at 8 cents, or a sequential decline of 1 cent.

Given the continued sluggishness in consumer PC demand and AMD’s dependence on it, we believe investors should avoid the shares. We therefore have a Zacks #4 Rank on AMD shares, signifying a short-term Sell recommendation.

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