Summary
- AMD reported results in line with my expectations as of 2014 Q1, but disappointed the market, leading to a sell off.
- Although AMD's future in consoles appears secure, its future in PC computing remains in doubt.
- AMD's future ability to compete with Intel depends mainly on Global Foundries and Samsung making good on their collaboration on 14 nm FinFET.
As of calendar Q1, I characterized AMD as being left "with a holding action in PCs while using console sales to keep its head above water financially," and this is exactly what AMD (NYSE:AMD) produced for its Q2 earnings report. Despite improvements on Q1 results in key areas, investor disappointment in AMD's net loss of $0.05/share led to panic selling after hours, to the tune of a 17% drop (as of the Friday pre-market). AMD has been and will continue to be a bumpy ride through this year.
Holding in PCs, Gaining in Consoles
Overall, AMD's results showed considerable improvement over last year. Net revenue was up 24% y/y to $1.441 billion, and operating income was in the black at $63 million compared to the year ago loss of $29 million. The net income loss was primarily due to AMD's decision to refinance debt that was coming due in 2015, a non-operational cost of $49 million, and this pushed the net loss to $36 million. AMD is saddled with high long-term debt of $2.1 billion and servicing this debt also eats into profit. Interest payments this quarter totaled $46 million.
Net revenue and operating income also grew relative to last quarter at 3% and 28%, respectively. This was due to continuing strength in console chip sales and PC chip sales that stayed flat compared to Q1. Although Computing Solutions segment revenue was down significantly by 20% y/y to $669 million, operating income was up 350% to $9 million, indicating that restructuring has been successful in allowing AMD to sustain lower PC revenue without huge losses.
The Graphics and Visual Solutions segment was the continuing bright spot for the company, since this is where console chip sales are booked. Segment revenue grew by 141% to $772 million y/y and by 5% compared to Q1. This was despite a drop off of enthusiast graphics card sales as crypto-currency mining shifted to ASICs.
Perhaps some investors were expecting better results in the Computing Solutions segment, but given the fierce competition from Intel (NASDAQ:INTC) and its contra-revenue price cutting on Bay Trail, the best that AMD could hope for was to arrest the decline in its PC business, which it has done. AMD made its final payment of $200 million to Global Foundries as part of its 2012 wafer purchase obligation last quarter and I had predicted that as a result, Computing Solutions would be profitable going forward, which it was this quarter.