Advanced Micro Devices (AMD 0.79%) reported its fourth-quarter results on Jan. 19, disappointing investors with weak guidance and continued losses. A slumping PC market is taking a toll on the company, and while sales of semi-custom chips used in the major game consoles have been a saving grace, AMD is in a difficult position.
Despite the poor results, AMD's management is optimistic that the company can begin to turn things around in 2016. Here are five things management said during the company's conference call that investors need to know.
Semi-custom success
AMD's semi-custom segment, which is mostly comprised of the chips that power the major game consoles, has been keeping AMD afloat as its core PC-related businesses have struggled. During 2015, the semi-custom segment generated more revenue than the computing and graphics segment, enjoying a segment operating margin of roughly 10%. CEO Lisa Su pointed to AMD's semi-custom success in 2015:
"We had record annual Semi-Custom unit shipments in 2015 and have shipped more than 50 million Semi-Custom APUs as a critical and trusted partner to Sony and Microsoft. Demand for gaming consoles looks strong through 2016, and we remain on track to generate additional revenue from new Semi-Custom business in the second half of 2016."
AMD has announced a few additional semi-custom design wins other than the major game consoles, and these are expected to begin contributing to revenue during the second half of this year. Even though console sales remain strong, AMD receives less revenue per console as the console generation runs its course, meaning that the company will need these additional design wins in order to prevent its semi-custom segment from posting continued revenue declines. Total semi-custom revenue slumped 8% in 2015, despite record semi-custom chip shipments.
A return to profitability
AMD expects the first half of 2016 to be rough. The company guided for a sequential revenue decline of 14% for the first quarter, far worse than analysts were expecting. But AMD expects things to get better during the second half. Su explains:
"While we expect revenue to be lower in the first half of 2016 compared to the second half based on the seasonality of the PC and gaming console businesses, swift and successfully executing our product and technology roadmap and plan to return AMD to non-GAAP operating profitability in the second half of 2016 and generate positive free cash flow from operations for the year."
A combination of new semi-custom revenue, the launch of the Polaris graphics cards during the middle of the year, and the launch of Zen CPUs later in the year should help make 2016 a better year than 2015 was for AMD. The company expects to return to non-GAAP operating profitability during the second half of the year, although about $40 million of quarterly interest payments will likely leave non-GAAP EPS in the red.
Shoring up the balance sheet
With AMD posting a net loss of $660 million in 2015, following a loss of $404 million in 2014, the strength of the company's balance sheet is something that investors should be concerned about. At the end of the fourth quarter, AMD had $785 million of cash and $2.26 billion of debt, and the company expects to burn through about $100 million of cash during the first quarter, according to its outlook. The company has previously stated that its target minimum cash balance is $600 million.
The good news is that AMD will be getting an influx of cash during 2016, thanks to the company's sale of its assembly and test manufacturing facilities. CFO Devinder Kumar explains:
"We expect to close that transaction in the first half of 2016 pending regulatory and other approvals and expect cash proceeds of approximately 320 million net of taxes and other expenses upon closure."
An additional $320 million will give AMD a bit more flexibility, putting the company well above its minimum cash target, at least for a while.
Hoping for graphics gains
Over the past 18 months, AMD has watched its graphics card market decline by half. During the third quarter of 2015, AMD shipped about 20% of discrete graphics cards, with the rest of the market going to rival NVIDIA (NVDA 2.13%). AMD's lackluster launch of high-end graphics cards during 2015 wasn't enough to turn the tide, and NVIDIA has emerged as the dominant player in the graphics card market.
Su is optimistic that AMD can regain some market share in 2016, thanks to the upcoming Polaris graphics architecture:
"I think as we go forward it's a combination of things, if you look at our investments in graphics, they really include both hardware and software. So the Polaris family is excellent from a hardware standpoint in terms of the performance per watt that we get, but we've a number of software initiatives that we started over the past couple of months and will continue and we see all of those contributing to graphics momentum."
In terms of hardware, Polaris and NVIDIA's upcoming Pascal graphics cards should be fairly similar. One area where AMD has fallen behind in recent years is software, and the company hopes to correct that going forward. NVIDIA's GameWorks, a suite of software tools and libraries optimized for NVIDIA hardware that enable advanced effects in games, has been a thorn in AMD's side, with a variety of high-profile games launching with GameWorks support. AMD recently announced an open source alternative called GPUOpen, but the company will be playing catch-up to NVIDIA.
Zen in the data center
AMD was once a major player in the server CPU market. In 2006, the company's Opteron CPUs accounted for about 22% of x86 server processors. Today, AMD's market share is essentially negligible, with Intel (INTC 2.20%) accounting for about 99% of x86 server chips. Su has high hopes that Zen will allow the company to reinvigorate its server CPU business:
"We have secured several key design wins with global OEMs for our Zen based server CPU and believe we can rapidly re-establish our presence in the data center when we bring our new products to market in 2017."
AMD made a wrong turn with its Bulldozer CPUs back in 2011. Intel's chips were far ahead in terms of single-threaded performance, and one former AMD executive called Bulldozer "an unmitigated failure." Various revisions haven't solved the core problem, and AMD's server business has suffered greatly as a result.
Zen is expected to bring massive improvements in terms of performance. A 40% jump in instructions per cycle is expected, and if AMD can hit that target, the company could have a competitive chip on its hands. Intel's decision to delay the launch of its 10nm manufacturing process means that both Intel and AMD will be shipping 14nm chips at the same time, potentially narrowing the performance and efficiency gap between the two companies. The first Zen server CPUs are expected in 2017, and AMD hopes to quickly gain back some market share from Intel.
