Advanced Micro Devices (AMD) reported third
quarter loss of 20 cents a share, missing the Zacks Consensus
Estimate by 4 cents.Shares slid 5.4% during the day and another
3.3% in extended trading hours.
Revenue
AMD’s revenues in the last quarter came in at $1.27 billion,
down 10.2% sequentially and 24.9% year over year, more or less in
line with its revised guidance of a 10% sequential decline (at the
mid-point). Revenues were also in line with consensus expectations
of $1.28 billion.
Revenue by Segment
Computing Solutions was 73% of AMD’s sales in
the last quarter, down 11.4% sequentially and 27.9% from the
year-ago quarter. The third quarter was a continuation of softening
trends noticed in the second, both as a result of macro conditions
that impacted consumer spending and on account of inventory
rebalancing at OEMs ahead of Microsoft’s Windows 8 launch. The
consumer client side of the business appears to be the worst hit
and AMD is taking a beating since it is more dependent on this
area. The only positive was the Trinity APU, which management
stated increased 17% sequentially and made up a third of the
company’s notebook-related sales.
AMD’s Graphics business generated the remaining
27% of its sales, down 6.8% sequentially and 15.1% from the
year-ago quarter. The graphics business is currently under some
pressure due to the PC market slowdown. AMD stated that the
discrete business for desktops and consoles grew in the last
quarter.
Margins
AMD reported a pro forma gross margin of 30.9%, down 1,462 basis
points (bps) from the previous quarter and 1,384 bps from the
year-ago quarter. Lower volumes impacted the margin in the last
quarter. AMD also wrote down $100 million of Llano inventory that
it was unable to sell due to weak market conditions. This impacted
the mix of business, pulling down overall prices and thus affecting
the margin. Utilization of backend facilities also declined,
another negative for the quarter.
Operating expenses of $516 million were down 7.4% sequentially
and 15.4% year over year. However, the operating margin shrunk
1,586 bps sequentially and 1,841 bps year over year to -9.8% mainly
on account of high cost of sales (as discussed above) and helped by
higher R&D expenses (as a percentage of sales).
The two segments—Computing Solutions and Graphics—generated
operating margins of -12.3% and 5.3%, respectively. Computing
Solutions declined 2,014 bps sequentially and 2,388 bps year over
year. Graphics declined 318 bps sequentially while increasing 229
bps from last year.
Net Profit
On a pro forma basis, AMD generated a net loss of $150 million,
or a -11.8% net margin, compared to a profit of $46 million, or
3.3% in the previous quarter and $95 million, or 5.6% in the
year-ago quarter.
Including a legal settlement and intangibles amortization
charges, the fully diluted GAAP net loss was $157 million, or 21
cents per share compared to profit of $37 million, or 5 cents a
share in the previous quarter and income of $87 million, or 12
cents a share in the year-ago quarter.
Balance Sheet
The long term debt was $2.04 billion, up around $500 million
during the quarter, which was used to retire its 5-3/4%
convertibles. The net debt at quarter-end was $1.19 billion
compared to $442 million at the end of the June quarter. Including
long-term liabilities, AMD’s debt to total capitalization ratio was
67.7% at quarter-end. The cash and short term investments balance
at quarter-end was $1.3 billion, down $279 million during the
quarter.
Inventories were down 10.7% sequentially to $744 million (AMD
wrote down $100 million), with inventory turns rising from 3.7X to
4.7X. Days sales outstanding (DSOs) went from 48 to 59.
During the quarter, AMD used $240 million of cash in operations,
spending $32 million on capex.
Guidance
AMD provided limited guidance, which seems to highlight
management caution. The company guided to a fourth quarter
sequential revenue decline of 9% (+/- 4%), or $1.16 billion at the
mid-point, lower than the Consensus of $1.33 billion. Operating
expenses are expected to be flat sequentially.
Our Take
AMD had a very poor third quarter, with a significant net loss
that was the combined effect of weak demand, an inventory
write-down and productivity issues. A more conducive market,
adoption of new products, position in graphics and good execution
are the only things that can pull the company out of the current
situation.
For this purpose, AMD has announced a massive restructuring to
align the cost structure with current demand trends. Management
currently expects the initiative to reduce the cost base by 25% and
generate total annualized cost savings of around $190 million. The
new structure will enable the company to break even in the third
quarter of 2013 at a quarterly revenue level of $1.3 billion.
Management expects to regain some market share in 2013.
Management optimism notwithstanding, we encourage investors to
avoid AMD shares for now, as represented in the Zacks Rank of #5,
implying a Strong Sell recommendation in the near term (1-3
months).
This is because of the significant challenges that we expect the
company to see in a market that is being increasingly cannibalized
by tablets from well-established players, such as
Apple (AAPL), Samsung, Microsoft
(MSFT), Hewlett Packard (HPQ) and
Dell (DELL) among others. Intel’s
(INTC) Ultrabook concept is going to further fragment the market,
making things that much more difficult for AMD. Intel has so far
been more focused at the high end, which helped AMD pick up share
at the low end. However, considering Intel’s deep pockets and
innovative prowess, the company looks set to take share from
AMD.
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