Why Advanced Micro Devices, Inc. Is Getting Clobbered After Earnings

AMD met earnings estimates in a quarter where Microsoft and Sony launched next generation consoles.

Jan 22, 2014 at 9:30AM

Advanced Micro Devices (NASDAQ:AMD) reported fourth quarter revenues and EPS of $1.59 billion and $0.06, in-line with consensus of $1.54 billion and $0.06. Gross margin decreased 1 percentage point from 3Q even though there was a $7 million one-time benefit from the sale of inventory previously reserved.

The graphics business was the high point of the quarter with revenue increasing 165% year over year, thanks in large part to sales of semi-custom chips. This generated an operating profit of $121 million, good and enough to offset the lagging computing solutions business but not enough to generate earnings upside as the company struggles to solidify its turnaround.

The computing solutions division's revenue decreased 13% year over year despite an increase in the average selling price for microprocessors, indicating a dismal market for chipsets and notebooks. This conflicts with Intel's (NASDAQ:INTC) commentary about seeing the bottom of the PC market and led to a segment operating loss of $7 million, down from a $22 million profit in the third quarter.

This is not a bad quarter from a numbers perspective but as an investor, one has to wonder what's next. If the company can only generate $0.06 of earnings in a quarter when both Microsoft and Sony launched next generation platforms, what levers can the management pull when favorable market winds are no longer behind the company?  Unless something drastic changes, this may be as good as it gets.

Two key issues arose in the question and answer session on the earnings call: 1) management guiding cash balances lower and 2) the CEO running away from a question about an additional leg down for the gross margins.  The first issue is bad.  A lower cash balance is never a good thing, especially in a capital intensive industry.  Suggesting that it would be lower in the first quarter would not have been good but stating that it is in the company's best interest to "target cash levels in the $1 billion range" which implies $200 million down from current levels is downright bad.  Sadly, the second issue is even worse.  By leaving the door open to more margin erosion, professional investors will take a wait and see attitude.

Despite printing decent quarterly results, a look behind the numbers makes AMD a wait and see company.  Until there are indications that revenue can grow after the console cycle and margins will stabilize, its likely that this stock will remain in the penalty box.

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