Advanced Micro Devices (NYSE: AMD ) has had a pretty rough couple of years. In addition to the harsh competitive pressure from Intel (NASDAQ: INTC ) in the PC and server spaces -- AMD's bread and butter -- the company has also been a victim of a declining PC market, and in particular, a declining lower-end PC market, where most of AMD's PC products have traditionally played. While the recent earnings report proved that AMD could be brought back to positive cash flow thanks to its semi-custom business, the road ahead is still rocky.
Processor sales still very discouraging
AMD's computing solutions segment -- that is, processors for laptops, desktops, and servers -- saw a 6% sequential decline and a whopping 15% year-over-year decline. Considering that the broader industry's PC sales were up a smidge, and given that Intel's PC client group saw revenue increase sequentially, it's clear that AMD continued to bleed market share to its much larger rival, as warned in my Oct. 10 piece, "Bad News for AMD." This trend will only get worse as Intel aggressively targets its low-cost, low-power Bay Trail-M processors for low-cost clamshells -- a space that Intel had largely let AMD have to itself in prior years.
AMD managed to bolster the strength of its desktop APU and CPU sales, largely thanks to aggressive pricing and a market that isn't as sensitive to power efficiency. But its notebooks share dropped substantially, particularly as Intel's Haswell and soon Bay Trail-M processors take share across the entire spectrum. Further, given that Intel's recently launched Xeon E5v2 processors offer substantial performance-per-watt advantages over AMD's Opteron lineup, it is very likely that AMD continued to hemorrhage what little market share it had left in the traditional server markets.
Graphics sales and semi-custom
Despite the significant weakness in its PC sales, AMD's semi-custom business -- thanks largely to the game-console wins -- managed to propel the company to profitability as well as significant year-over-year revenue growth. While this business has fairly low gross margins, it does have a rather nice mid-teens operating margin that management believes can be grown over time. While this remains to be seen, the more important thing is that if AMD can rack up enough of these types of semi-custom deals, it could run a sustainable -- if lower-margin -- business profitably.
The GPU division was down year over year, and ASPs came under pressure, implying that AMD probably lost some market share in the quarter to rival NVIDIA (NASDAQ: NVDA ) . That being said, AMD recently refreshed its desktop product lineup, which could help to drive share gains back in the desktop PC space. This won't do much for the share problem in gaming notebooks, however, as NVIDIA won the vast majority of the designs this cycle.
Could micro-servers be a game changer?
While AMD has largely lost the war in the portions of the server space that require high performance and high performance per watt, the company is now trying to shift into the burgeoning micro-server space. That is, the company is working on fairly low-power system-on-chip products based on ARM's Cortex A57 processor core and built on TSMC's 28nm process, scheduled to sample by the first quarter of 2014 and ship to customers by the end of 2014. That being said, it's tough to imagine that this part -- codenamed Hierofalcon -- will be competitive with the current Intel C2000 Avoton processors out today (22 nanometer, based on Silvermont, TDP up to 20W) from either a performance or performance-per-watt standpoint. The problem compounds, as this part won't compete against Intel's 2013 Avoton but the 14-nanometer Denverton from below and the Broadwell SoC from above.
Foolish bottom line
AMD is back to profitability, albeit barely. While the fourth quarter will also be in the black, it's unclear how well AMD's business will weather the traditional seasonality effects going into the first quarter of 2014. CEO Rory Read, when asked about profitability into Q1, refused to give guidance, but then deflected somewhat, urging the analysts to look at a full year 2013 against full year 2014 comparison, rather than whether a particular quarter is profitable or not. This is probably the right way to think about it, but investors probably won't be too happy if 2014 starts off with a net loss.
All in all, AMD continues to be a business that faces significant challenges, both secular and competitive. While there's a glimmer of hope that it can emerge a transformed, profitably growing company thanks to its non-PC efforts, investors should take great care to know exactly what they're buying into.
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