What's Next for Advanced Micro Devices?

AMD's fourth quarter 2013 was propped up by semi-custom chips, and it'll need them even more in 2014.

Jan 23, 2014 at 10:00AM

Advanced Micro Devices (NASDAQ:AMD) has a lot of work cut out for it heading into 2014. Despite fourth quarter 2013 revenue being up 38% year-over-year, the company's main revenue stream, PC processors, took a hit in the fourth quarter and will likely face more obstacles this year.

No big surprises
AMD's fourth quarter earnings weren't all that surprising given that PC sales are on the decline. For the entire 2013 year AMD's revenue was down 2% year-over-year, and the company posted a net loss of $83 million, or $0.11 loss per share.

PC shipments had their biggest decline on record, falling 10% in 2013 . This lead companies in the PC industry like Intel, Dell, and Hewlett-Packard to announce layoffs. Fortunately for AMD, the drop in PC sales was offset by the company's uptick in semicustom chips for Sony's PlayStation 4 and Microsoft's Xbox One release. Combined sales for those two devices in the fourth quarter were more than 7 million.

AMD's graphics and visual solutions segment, which includes graphics processing units (GPUs), game console licensing and semi-custom chips, experienced a 29% revenue increase sequentially. AMD's fourth quarter revenue likely would have been much lower without launches of both the Xbox and PlayStation.

But slumping PC sales will continue to hit AMD in 2014, and the company will need to rely even more on its semi-custom business. That may be difficult in the first quarter of 2014 as the big launches of both Sony's and Microsoft's consoles have already happened. Though it'll continue making chips for both companies the financial gains will likely be less in the first quarter. That's part of the reason why AMD is projecting a 13% to 19% decline in revenue in the first quarter.

On top this, PC sales are traditionally slow in the first quarter of the year, which will hurt AMD' PC processor business. That's not great news considering IDC expects PC shipments to fall 3.8% for the entire 2014 year.

AMD's difficult opportunity
With the slumping PC market, AMD's growth needs to come from expanding its semicustom segment. Gaming console sales will help, especially with Gartner predicting the industry to grow revenue from $44.3 billion in 2013 to $55 billion by 2015, but AMD needs more diversity.

Last year, AMD's CEO and president, Rory Read, said the company is "committed to generating approximately 50 percent [sic] of revenue from high-growth markets over the next two years." This will require new partnerships with companies looking to tap AMD's semicustom chips, which may be easier said than done. While AMD is moving in the right direction, it's going to take time to build up additional customers and even longer to start producing chips for them. For that reason, the first quarter of 2014 won't be so great for AMD, and the rest of the year may be a struggle as well. Investors need AMD to announce some major semi-custom design wins this year if they want to see the company mature out of the slowing PC business. 

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