AMD Results: Better Than Expected Is Still Pretty Bad

On Thursday afternoon, troubled chip maker Advanced Micro Devices (NYSE: AMD  ) reported a non-GAAP loss of $0.13 per share on revenue of $1.09 billion. The revenue and earnings results were both slightly better than Wall Street expected, and AMD also guided Q2 revenue somewhat above expectations. AMD is attempting to transform its business away from its current reliance on PC sales, which seem to be in permanent decline. CEO Rory Read wants the company to focus on sales of embedded and semi-custom processors, graphics processors, and other growth initiatives, in order to diversify away from the company's bread-and-butter of selling x86 processors in competition with Intel (NASDAQ: INTC  ) .

That said, AMD's Q1 results were still pretty discouraging. Revenue was down more than 30% from the prior-year quarter, and the company swung from non-GAAP EPS of $0.12 in last year's Q1 to this year's loss. AMD expects to continue losing money and bleeding cash in the current quarter, before (hopefully) returning to profitability in the second half of the year. However, its guidance for a return to profitability depends to a large extent on the popularity of new products like Sony's PlayStation 4 and Microsoft's (NASDAQ: MSFT  ) expected Xbox 360 successor, as well as better customer acceptance of Windows 8. To put it another way, AMD's revival depends on things almost completely outside of the company's control. This does not sound like a good investment case to me.

Stabilizing the business
I will give Rory Read credit for taking decisive action to stabilize AMD's financial position and reduce its operating expenses. Considering the 31% slide in revenue last quarter, strong gross margin and reduced expenses kept the net loss relatively small. Furthermore, AMD was able to close a sale-leaseback transaction for its Austin campus in March, which generated $164 million of cash and kept the company's cash balance steady.

AMD is also entering a significant product launch cycle, and management believes it can retake share from Intel, particularly for entry-level PCs. The management team is also bullish about its ability to regain share in GPUs from NVIDIA (NASDAQ: NVDA  ) following new product launches later this year. However, the big long-term goal seems to be gaining embedded and semi-custom design wins, and AMD has made progress here by winning the slots for Nintendo's new Wii U, the PlayStation 4, and (reportedly) the new Xbox.

Problems linger
However, AMD's pursuit of game console design wins may prove futile. Early sales results for the Wii U have been poor, and there is no guarantee that the new PlayStation or Xbox entries will fare better. NVIDIA is making big bets on cloud gaming and mobile gaming with its GRID gaming platform and Project Shield handheld gaming device, both announced at CES earlier this year. Cloud gaming in particular could render the home game console obsolete, by centralizing the computing power on servers, while delivering the output to TVs, tablets, or even smartphones. Plenty of game console enthusiasts will upgrade, but there is a good chance that console sales peaked in the last generation.

Moreover, AMD still faces its traditional problem in the x86 market: Intel has far more resources at its disposal to build better products more profitably. Intel spent more than $2.5 billion on research and development last quarter, whereas AMD cut back to just $312 million. Even NVIDIA seems to be on pace to overtake AMD in R&D spending this year. I am skeptical that AMD can be so efficient with its R&D spending that it will be able to keep up with its deep-pocketed rivals. In the technology world, falling behind can quickly become fatal.

Foolish conclusion
From a high-level perspective, AMD's "better-than-expected" results were still pretty bad. AMD needs a lot of good things to happen to become sustainably profitable. Windows 8 needs to become successful, game console sales need to rebound, and the company needs to keep up with Intel and NVIDIA despite a slim R&D budget. It's not impossible, but I'm still not willing to bet any money on an AMD turnaround.

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  • Report this Comment On April 23, 2013, at 1:40 AM, bashersuit wrote:

    " AMD's "better-than-expected" results were still pretty bad"

    Wasn't the company supposed to go bankrupt a couple of years ago?

    "better -than-expected" was not even a even sentence that would have been associated with this company

  • Report this Comment On April 23, 2013, at 2:47 AM, CarsonMB wrote:

    It's not really fair to use Wii-U sales as a prediction tool for the next generation Playstation and Xbox. Sluggish console sales are mainly due to the extended life of current consoles. I believe the Sony and Microsoft contracts will help put AMD on the road to profitability and keep the company around for the long term.

  • Report this Comment On April 23, 2013, at 6:49 AM, rav55 wrote:

    "AMD's pursuit of game console design wins may prove futile."

    The pursuit of game console wins has been successfull. AMD will be providing silicon for WiiU, PS4 and XBOX. Nothing futile about that pursuit. The deal has been done.

    "Early sales results for the Wii U have been poor, "

    Nintendo has launched no new content to run and that means no excitement.

    "and there is no guarantee that the new PlayStation or Xbox entries will fare better."

    XBOX 360 sales through March exceeded 1.3 million units x 4 would project at least 5.2 million units for the year. Given the XBOX metric I would expect XBOX 720 to at least equal that number.

    And PS3 sales figures are expecting to be better than XBOX 350. Those are again more reliable metrics than WiiU.

  • Report this Comment On April 23, 2013, at 7:00 AM, rav55 wrote:

    .....WiiU sales wil impact AMD bottm line but not by much as it was only discrete gpu silicon that was provided to Nintendo.

    Microsoft sold 261,000 Xbox 360 units during March 2013 in the United States. That works out to 3.12 million per year again US sales. That does not account for the accelaration in sales during the holidays nor does it account for World Wide sales.

    PS3 and XBOX 360 are roughly neck in neck with in excess of 77 milion units each world wide duing the life cycle of the product.

    It would not be unreasonable to expect that similar sales numbers will rack up at the outset for XBOX 720 and PS4.

    That would suggest that AMD will be selling 22 million Jaguar apu's at $60.00 each for a total sales of about $1.3 billion per year.

    I would predict that PS4 and XBOX 720 will generate more than 11 million combined units world wide.

    Most analysts agree that $60.00 per copy of Jaguar is expected.

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