Shares of Advanced Micro Devices (AMD 2.33%) have been beaten down in recent years, and for good reason. The company has struggled to compete in both the CPU and GPU markets, leading to slumping revenue and four consecutive years of losses. AMD's first-quarter earnings report wasn't pretty, but optimistic guidance and news of a joint venture in China sent shares soaring.
Beyond the numbers, AMD's management team provided additional details for investors during the company's earnings conference call. Here are five quotes from AMD's management, taken from the conference call transcript provided by Thomson Reuters, that investors need to see.
Polaris is near
AMD has lost considerable share in the discrete graphics card market to rival NVIDIA (NVDA 1.56%) over the past couple of years. During the fourth quarter of 2015, AMD shipped just 21.1% of discrete graphics cards, with NVIDIA accounting for the rest, according to Jon Peddie Research. Two years ago, AMD's market share was roughly 40%, with NVIDIA enjoying only a modest lead.
AMD is betting on Polaris, its new graphics architecture, to restore its competitive position in the industry. According to CEO Lisa Su, these new graphics cards are on schedule.
We remain on track to introduce our new 14 nanometer FinFET-based Polaris GPUs midyear. Polaris delivers double the performance per watt of our current mainstream offerings, which we believe provides us with significant opportunities to gain share.
Both AMD's Polaris and NVIDIA's upcoming Pascal GPUs will be built on 14/16 nm FinFET processes, following years of both companies being stuck at 28nm. The improvements in performance and efficiency should be substantial, and as long as Polaris can go toe to toe with Pascal in both areas, AMD should be able to claw back at least some market share.
New semi-custom wins set to deliver
AMD's semi-custom business, which up until now has been comprised solely of the SoCs that power the major game consoles, will get a jolt during the second half of this year. AMD has previously announced three additional semi-custom design wins, expected to generate a total of roughly $1.5 billion over the course of a few years. According to Su, the first revenues from these efforts will begin rolling in later this year.
Based on our current visibility, we expect semi-custom unit shipments and revenue to grow on an annual basis based on strong demand for game consoles and the ramp of our previously announced new business in the second half of the year.
Game console sales have been strong this generation, but AMD receives less per unit as time goes on, meaning that AMD's revenue from the game consoles can peak before units do. However, the company expects to grow its semi-custom business this year due to new revenue from additional design wins. Details are scarce regarding the nature of these semi-custom chips, but diversifying beyond the game consoles is an important step for AMD.
Zen in the data center
AMD expects its upcoming Zen CPUs to restore its competitiveness in the CPU market, where Intel (INTC +1.14%) is dominant. The first Zen PC CPUs are expected toward the end of this year, but the server version won't be widely available until next year. Su provided an update on Zen's progress:
I am also pleased to share that we are making excellent progress on our strategy to reestablish our presence in the data center market as we successfully passed several key milestones related to our next-generation Zen-based server processor. The Zen silicon running in our bring-up labs is meeting our expectations, and priority customer sampling is on track to begin this quarter in advance of data center system availability in 2017.
Intel has essentially run away with the server chip market, but AMD will make an attempt to regain share next year. Zen promises a 40% boost in instructions per clock compared to AMD's previous CPUs, and with the chips being built on a 14nm process, Intel's manufacturing edge will be smaller than it's been in quite some time. AMD is also employing a separate strategy, forming a joint venture with a Chinese firm and licensing its technology, in an effort to win market share in China. Given how low AMD's server chip market share is at the moment – it basically rounds down to zero-even modest gains would be a boon for the company.
The JV won't boost revenue by much
Strategically, AMD's server chip joint venture makes a lot of sense. The company will receive $293 million in licensing fees, in addition to royalty payments from future product sales. But this won't do much to boost revenue this year, according to Su.
So look, on the JV licensing payments, we will expect about half of the licensing revenue to come over the next two years, so over 2016 and 2017. Our current forecast for 2016 was that $50-ish million that Devinder mentioned, and it is contingent on several milestones that we believe are on track.
Only about $50 million of revenue will be recognized this year, with another $100 million coming in 2017 and the remaining half in later years. These payments are based on the JV achieving certain milestones, so they aren't guaranteed. The good news is that much of this should flow through to the bottom line after taxes.
Optimistic guidance
2015 was an awful year for AMD, but according to CFO Devinder Kumar, AMD expects 2016 to be better.
For the full-year 2016, we continue to expect revenue to grow year over year, to be non-GAAP operating profitable in the second half of 2016, and to generate positive free cash flow from operations for 2016.
AMD will return to revenue growth this year, according to its guidance, driven by new semi-custom design wins and the launch of Polaris. AMD also expects to post a non-GAAP operating profit during the second half, although net income will still very likely be negative due to interest payments. The licensing payments will certainly help the cause, and if AMD hits its guidance, it would be proof that the turnaround is finally making some progress after years of turmoil.
