Advanced Micro Devices, Inc. AMD reported non-GAAP earnings of 8 cents per share in fourth-quarter 2017 against a loss of 1 cent per share in the year-ago quarter. The figure also surpassed the Zacks Consensus Estimate of 5 cents per share.
Revenues increased 33.8% year over year to $1.480 billion and exceeded the Zacks Consensus Estimate of $1.407 billion. However, sequentially revenues were down 9.9%.
The year-over-year increase was primarily driven by robust performance of the company’s product portfolio comprising Ryzen CPU, EPYC and Radeon Vega GPUs.
Segments
Advanced Micro has two reportable segments — Computing and Graphics (focused on the traditional PC market) and Enterprise, Embedded and Semi-Custom (focusing on adjacent high-growth opportunities).
Computing and Graphics
Computing and Graphics segment revenues witnessed year-over-year increase of 60% to $958 million. Growth can be attributed to accelerated sales of Radeon graphics and Ryzen desktop processors.
Operating income for this segment was $85 million against a loss of $21 million in fourth-quarter 2016, primarily driven by higher revenues.
Client computing revenues recorded strong double-digit growth from the year-ago quarter driven by solid demand for the expanded Ryzen processor family in the desktop market during the holiday season.
During the quarter, the company launched Ryzen mobile processors with Radeon Vega graphics. Notably, the company’s Ryzen PRO-based offerings have already been adopted by prominent commercial PC providers including Dell, Lenovo, Acer and HP. The availability of Ryzen Threadripper processors has enabled AMD to re-enter the high-end desktop market.
The company delivered robust growth in graphics during the quarter driven by strength across its graphics product portfolio. The company’s release of Vega-based GPUs and increasing demand for its Polaris products in both gaming and blockchain industries led to improved revenues. Launched during the quarter, Radeon RX Vega family of GPUs aimed at gaming enthusiasts has performed better than previous Radeon GPUs.
Adding to the positives, Apple recently launched the new iMac Pro, powered by AMD’s Radeon Pro Vega product.
Enterprise, Embedded and Semi-Custom
Segment revenues amounted to $522 million, up 3% year over year but down 37% sequentially. Lack of a $31 million licensing gain in fourth quarter last year and higher costs (research & development expenses) brought down operating income for the segment from $47 million to $19 million for the quarter.
The sequential decrease in revenues was primarily due to seasonally lower semi-custom SoC revenue. However, higher server revenues drove year-over-year growth.
The ramping up of EPYC datacenter processors sale to cloud and OEM customers has bolstered server revenues. Management remains optimistic about this product with companies like Tencent and JD.com planning to deploy the company’s EPYC processors. Baidu and Microsoft also announced plans of deploying EPYC based products in their hyperscale environment, which is another positive for AMD.
The company achieved record Graphics Processor Units (GPUs) revenues on the back of improved average selling price (ASP) and higher unit shipments compared with the year-ago quarter.
Additionally, AMD started the shipment of AMD EPYC processor-powered HPE ProLiant DL385 Gen10 server to the high-end content creation market during the quarter.
Notably, the company entered into a partnership with Baidu during the quarter to deploy AMD EPYC single-socket platformsin Baidu datacenters.
The company is working with Qualcomm to integrate its Snapdragon LTE modem solution in Ryzen mobile processors. The partnership will help AMD address the needs of high performance consumers as well as enterprise notebook platforms.
Margins
Gross margin increased 300 basis points (bps) to 35% year over year backed by a proper product mix in the Computing and Graphics segment and IP-related revenues. Management noted that ramping up of high performance products will continue to have a positive impact on margins.
Non-GAAP operating margin during the quarter came in at 6.9% compared with 2.4% reported in the year-ago quarter. The year-over-year expansion was primarily owing to higher operating income from the Computing and Graphics segment driven by higher revenue.
Adjusted EBITDA amounted to $142 million compared with $60 million in the year-ago quarter.
Balance Sheet & Cash Flow
AMD ended the fourth quarter with cash and cash equivalents of $1.185 billion compared with $879 million in the previous quarter. Total debt (including current portion) amounted to $1.395 billion. Free cash flow was $339 million.
Advanced Micro Devices, Inc. Price, Consensus and EPS Surprise
Guidance
For first-quarter of 2018, management expects revenues to be roughly $1.55 billion (+/-) $50 million. This represents an increase of approximately 32% year over year primarily due to higher demand of new Ryzen, GPU and EPYC products. The Zacks Consensus Estimates for revenues is pegged at $1.40 per share.
Non-GAAP gross margin is expected to be 36%, while non-GAAP operating expenses are anticipated to be around $435 million.
For fiscal 2018, the company projects double-digit growth in revenues. Non-GAAP gross margin is expected to be more than 36%, while non-GAAP operating expenses is anticipated to be around 28% of revenues.
.Zacks Rank and Key Picks
AMD currently carries a Zacks Rank #2 (Buy).
Some other top-ranked stocks in the broader technology sector include Applied Materials, Inc. AMAT, NVIDIA Corporation NVDA and Vishay Intertechnology, Inc. VSH, all carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The long-term earnings growth rate for Applied Materials, NVIDIA and Vishay are projected at 12.7%, 10.3 and 20.6%, respectively.
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