Following Advanced Micro Devices' (AMD 0.79%) earnings report in July, shares dropped substantially, at least partially driven by a weaker-than-expected revenue and profit outlook for the coming quarter and, by extension, the year. However, for long-term investors, the story often goes well beyond a particular quarter's financial results. In order to understand the company better, here are five important points that AMD's management made on its most recent conference call.
About those game console chip trends
In a question aimed at AMD's management, Jeffries' Mark Lipacis noted that game console shipments have traditionally been more weighted toward the second half of the year rather than the first. He then asked for an explanation behind management's expectations of game console revenue that was "more even throughout the year."
AMD's Lisa Su indicated that more game consoles would be sold during the second half of the year than were sold during the first half, but that, "There is a bit of a timing phenomenon between when we ship and then what [AMD's] customers manufacture and sell-through." Su also pointed out that, "It's really hard to call seasonality" at this point in the console cycle, but suggested that the seasonality may, later on in the cycle, look more like the lopsided dynamic that Lipacis described in his original question.
Another semi-custom win or two coming this year
One of AMD's key strategic imperatives has been to pursue the semi-custom chip business. The idea here is that AMD combines its processor and/or graphics designs onto the same chip as a more specialized block, either developed by AMD or by the customer. The game console chips, which leverage AMD's "Jaguar" processor cores and its graphics processors, are examples of such semi-custom work.
On the earnings call, Lisa Su commented on the progress there, stating, "We are on track to announce one or two confidential design wins in 2014."
Where will those wins come from?
Su pointed out on the call that AMD's semi-custom business is garnering further interest in the gaming market, but added that the company has seen "a lot of activity in mobility, as well as new opportunities in networking that are quite interesting, as well." Investors should keep an eye out for developments here as the semi-custom business is likely to grow in importance to AMD over time.
Process technology is not the only thing on AMD's mind
On AMD's earnings call, Credit Suisse analyst John Pitzer asked the management team about its thoughts around moving to next generation chip manufacturing technologies, or "process nodes." Su offered the following answer:
I think when you look at what's important to us, I mean clearly process technology is an important element, but we have invested quite a bit in architecture, design techniques, new IP, [and] software. So, I wouldn't say that process technology is the first and primary determinants for us. It is important that we are on competitive technology, so we have said before and I will say again that 20 nanometer is an important note for us. We will be shipping products in 20 nanometer next year and as we move forward obviously FinFET is also important.
This answer actually gives investors some interesting perspective. It suggests that AMD may be moving to the foundry 14/16-nanometer manufacturing technologies for its 2016 processor and graphics product lines. Now, when during 2016, particularly given the difficulties that AMD's potential manufacturing partners appear to be having in manufacturing these technologies, is the open question.
However, what may be a headwind here is that AMD's major competitor in the PC space, Intel, should begin shipping its first 14-nanometer PC products later this year, with more PC products along with mobile products following in 2015. Furthermore, it will likely move to 10-nanometer technology in 2016 -- Intel claimed at its 2013 Investor Meeting that 10-nanometer products would be "ready in 2015." Outside of PC processors in, say, graphics or embedded, AMD's competitive positioning should be better with respect to manufacturing technology.
AMD moving more volume to GLOBALFOUNDRIES
AMD has a wafer supply agreement with GLOBALFOUNDRIES, a chipmaker that began life as a spinoff of AMD's own manufacturing facilities back in 2009. This agreement stipulates that AMD needs to buy a certain dollar value of chip wafers each year; otherwise, AMD has to face take-or-pay charges.
Traditionally, AMD has built its graphics processors at Taiwan Semiconductor, which meant that a substantial portion of its business has not been able to be put toward satisfying that agreement. On the most recent call, however, AMD CFO Devinder Kumar stated, "As of right now, GLOBALFOUNDRIES is shipping both the GPU products and the semi-custom game console products."
