Image source: AMD.
Advanced Micro Devices (AMD +3.32%) returned to revenue growth during the second quarter, showing signs of progress that have been absent for years. The company is still losing money, but new product launches this year and next have the potential to turn around AMD's fortunes. While much can be gleaned from AMD's financial results, management's commentary during the company's conference call provided some invaluable information for investors. Here are four quotes, taken from a transcript provided by Thomson Reuters, that investors need to see.
A good start for Polaris
AMD launched its first Polaris graphics card, the RX 480, in late June. With an MSRP of either $199 or $239 depending on the amount of memory, the RX 480 is aimed squarely at the high-volume mainstream portion of the market. So far, AMD CEO Lisa Su is happy with the launch:
We are pleased with the Polaris launch, initial channel sales, and OEM design wins. We expect this strong demand to continue and help drive revenue growth in the third quarter with the launch of the RX 470 and RX 460 desktop GPUs, and Polaris-based notebooks from our OEM customers.
The RX 480 and its lower-end companions will help drive AMD's graphics business during the second half of the year. AMD's unit share of the discrete graphics card market has tumbled over the past two years. During the first quarter of 2016, AMD shipped just 22.8% of discrete graphics cards, according to Jon Peddie Research, down from around 40% during the first quarter of 2014.
Rival NVIDIA (NVDA +0.77%), which has lapped up the market share that AMD has lost, launched a mainstream graphics card of its own in July. The GTX 1060 is priced at $249, but according to NVIDIA it offers substantially better performance and efficiency than AMD's RX 480. AMD expects to grow its graphics business during the second half, but it remains to be seen how much market share it will be able to wrestle back from NVIDIA.
Semi-custom growth
The semi-custom business has been a major success for AMD. The company's SoCs (system on a chip) power both the PlayStation 4 and the Xbox One, providing a reliable source of revenue. As game console inventory is built up for the holiday season, Su expects the third quarter to be strongest for the segment:
As in the previous two years, we expect semi-custom shipments to peak for the year in the third quarter, as both Microsoft and Sony prepare for the holidays. Based on strong demand, we believe semi-custom unit shipments and revenue will grow on an annual basis.
In addition to the game console business, AMD will begin to recognize revenue from two additional semi-custom design wins during the second half of the year. AMD expects each deal to generate roughly $500 million of revenue spread across three to four years, enough for the semi-custom segment to grow in 2016. Another semi-custom design win, Microsoft's Project Scorpio console, will begin generating revenue for AMD in 2017.
Zen is on track
AMD's upcoming Zen CPUs are expected to improve the company's competitive position relative to Intel (INTC +8.78%). The first PC variants should start shipping toward the end of this year, with significant volume in 2017. The server market may represent an even larger opportunity for AMD, given that Intel currently enjoys a near-monopoly. Su gave a progress update:
We are pleased with the performance we are seeing with Zen hardware, which is helping to expand our customer engagements and accelerating design win momentum across multiple OEMs and ODMs. We remain on track for volume shipments of our Zen server CPU in the first half of 2017.
Intel's corporate strategy now revolves around the cloud and the data center, with PCs remaining an important but shrinking focus. The company's data center segment has been the company's growth engine as the PC market has sputtered, and AMD will undoubtedly face major challenges getting its server chips into cloud data centers currently dominated by Intel.
The good news for AMD is that Intel's pace of moving to smaller process nodes has slowed, with the company abandoning its "tick-tock" strategy for an elongated three-step approach. AMD's manufacturing disadvantage will be narrowed with the launch of Zen, and that should help the company make some headway in the server chip market.
Buying some time
Despite the progress AMD has made, the company is still posting significant losses. The company reported a free cash flow loss of $322 million during 2015, a pace that threatened to deplete AMD's cash reserves in just a couple of years.
AMD has taken some steps to shore up its balance sheet, and the result is a larger cushion that gives the company more time to turn itself around. CFO Devinder Kumar explained:
Turning to the balance sheet, our cash and cash equivalents totaled $957 million at the end of the quarter, up $241 million from the end of the prior quarter, primarily due to net cash proceeds from the ATMP JV transaction, offset by working capital needs in the quarter.
AMD announced a deal to sell its assembly and test facilities to a newly created joint venture last year, which brought in a total of $371 million in cash. Inventory buildup for the second half offset some of these gains, but the net result has been an influx of cash that gives AMD some much needed breathing room. The company is no longer at risk of running low on cash anytime soon.
It now appears that AMD's financial performance has bottomed out. Revenue is growing again, and losses are beginning to shrink. A return to GAAP profitability may still be distant, but the company's balance sheet is in a better position to handle the second phase of AMD's turnaround.
