Can AMD's Semi-Custom Chips Save Its 2014?

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AMD (NASDAQ: AMD  ) isn't expecting a turnaround in demand for its CPUs anytime soon. Research firm IDC expects PC sales to continue declining in 2014, and Intel (NASDAQ: INTC  ) continues to widen the technical gap between the two chipmakers.That's why CEO Rory Read has instead focused on lowering overhead costs along with high-growth products that can become consistent profit makers.

The company's wins with Microsoft (NASDAQ: MSFT  ) and Sony (NYSE: SNE  ) to make semi-custom SoCs for their game consoles will be a big part of AMDs profits in 2014, but is the division enough to make up for the diminishing sales of its computing solutions division?

Declining CPU and APU business
Last quarter, AMD reported its computing solutions revenue fell 15% year over year and accounted for just 54% of total revenue. Year to date, the division has seen a 25% decline in sales. IDC estimates that PC sales fell 10% in 2013, and will fall nearly 4% in 2014.

Meanwhile, Intel continues to dominate the server business controlling 95% of the market. AMD is poised to get back some of that market share with the acquisition of SeaMicro and there's potential to make deals similar to last quarter's agreement with Verizon. Still, Intel ought to continue dominating the CPU space.

Intel still offers better performance per watt and per dollar with its technological lead over AMD, and that gap should continue widening as Intel spends more on R&D. Intel is also eyeing the low-end PC market, so AMD may face declining revenue as Intel encroaches on its strongest market.

Semi-custom could be the answer
CEO Rory Read indicated that he is looking to generate nearly 50% of revenue from high-growth markets including semi-custom SoCs. That business got a big boost last quarter as the company ramped up production for Sony's PS4 and Microsoft's Xbox One. Continued strong demand for the consoles will be a boon to AMD's semi-custom business.

Although the semi-custom business was to blame for AMD's sequential drop in gross margin, it brought in better than expected operating margin in the mid-teens.As a result, the graphics and visual solutions division posted $79 million of operating profit on $671 million of revenue, and the semi-custom business is estimated to have generated the vast majority of that profit. Comparatively, its computing solutions division generated just $22 million in operating profit on $790 million in revenue.

One reason operating margins are higher for semi-custom SoCs is because Microsoft and Sony, and whoever else is tapping AMD, help to pay for R&D. As a result, AMD's gross margin and operating margin on semi-custom SoCs are relatively close, which means they'll be a consistent profit maker.

Semi-custom growth in 2014 and beyond
With PS4 and Xbox One sales off to a good start, and console sales usually peaking around year three or four, AMD should see strong growth in its semi-custom business in 2014. Additionally, AMD expects to see operating efficiencies lead to higher margins on its semi-custom SoC products, which means that it should be able to maintain strong profitability even as the average selling price declines in the future.

Chief Sales Officer John Byrne indicated that the company is building off the momentum it gained in the game console market and has developed "a pipeline of semi-custom opportunities." The company plans to announce two new design wins in 2014 to begin in 2015, which will generate $250 million to $500 million in additional revenue.

All-in-all the outlook is strong for AMDs semi-custom SoC business.

Is it enough?
AMD doesn't expect things to get better for the PC market in 2014, and that means the computing solutions division will likely lose revenue. If the division can stay close to break-even through cost-cutting -- it's lost $15 million year to date -- I believe the semi-custom division ought to keep AMD profitable as the company transitions to high-growth products.

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Read/Post Comments (4) | Recommend This Article (0)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 30, 2013, at 2:11 PM, SnarfJabroni wrote:


  • Report this Comment On December 30, 2013, at 2:12 PM, masterwallstreet wrote:

    In my opinion only, I like your article. AMD is not targeting themselves on PC sales. They are growing on game consoles, servers and tablets. I believe that they are in a better position than Intel. I believe a reversal. Intel goes down, AMD goes up. There is no more excitement in Intel anymore. Intel is very overvalued and overpriced. AMD is very undervalued and underpriced. AS soon as the market realizes this, we will see a reversal. Intel brand is starting to fade away.

  • Report this Comment On December 30, 2013, at 3:24 PM, rustianowski wrote:

    I have been a long time Nvidia purchaser for my custom built PC's. I will no longer use their Gpu's, their prices, marketing, and overall value are not on par with AMD. The future of pc gaming is with AMD as Nvidia really isn't looking for the next big thing. Their cards are only getting better by adding more of the same. AMD on the other hand is discovering new designs, architecture, and changing the tempo of things. in the gaming community I know alot of other gamers that feel the same way. Look for a big year for AMD in 2014, especially when they send out their next enthuiast/gaming cpu. AMD knows gamers, it knows that we don't just play games; that we are streaming, using voip, and media all at the same time which works significantly better on AMD.

  • Report this Comment On December 31, 2013, at 1:09 PM, kjurden wrote:

    AMD: Enabling Today, Inspiring Tomorrow

    I like the sound of that!

    Long AMD

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