Advanced Micro Devices (AMD) reported breakeven results in the fourth quarter of 2014, in line with the Zacks Consensus Estimate.
Following the announcement, shares plunged 6.3% due to the weak sales guidance. Though the overall PC market is stabilizing, the consumer market continues to remain under pressure. As the majority of Advanced Micro's chips are integrated into consumer desktops, it could likely suffer and apparently lose market share to Intel.
Revenues
Advanced Micro generated revenues of $1.24 billion, down 13.3% sequentially and 22% year over year. The decrease was due to weak sales of graphic cards and the ongoing weakness in the company’s PC business. Fourth-quarter revenues were in line with the Zacks Consensus Estimate.
Effective Jul 1, 2014, Advanced Micro reorganized its business into two reportable segments — Computing and Graphics (focused on the traditional PC market) and Enterprise, Embedded and Semi-Custom (focusing on adjacent high-growth opportunities). The details of these segments have been discussed below:
The Computing and Graphics segment includes desktop and notebook processors and chipsets, discrete GPUs and professional graphics. This segment comprised 53% of Advanced Micro’s sales, down 15.2% sequentially and 25.5% from the year-ago quarter. The decrease was due to lower desktop processor, lower GPU sales and a drop in chipset sales.
The Enterprise, Embedded and Semi-Custom segment includes server and embedded processors, dense servers, semi-custom SoC products, engineering services and royalties. This segment accounted for the remaining 47% of the sales, down 11% sequentially and 17.5% year over year due to lower sales of semi-custom SoCs. Advanced Micro had supplied a significant amount of SoCproducts to Microsoft and Sony in the third quarter to support the holiday demand.
Operating Results
Reported gross margin was 29.1%, down 550 basis points (bps) sequentially and 570 bps from the year-ago quarter due to an unfavorable product mix.
Operating expenses of $382.0 million decreased 10.7% sequentially and 17.3% year over year. However, as a percentage of sales, both research and development (R&D) and marketing, general and administrative expenses increased. Reported operating margin was (26.6%) compared with 8.5% in the year-ago period.
The quarter’s GAAP net loss was $364.0 million or a loss of 47 cents per share compared with net income of $89.0 million or earnings of 12 cents per share in the comparable quarter last year. Excluding all special charges but including stock-based compensation expenses, non-GAAP net earnings were $2.0 million or a breakeven versus $45 million or earnings of 6 cents in the year-ago quarter.
Balance Sheet
Advanced Micro exited the fourth quarter with cash, cash equivalents and marketable securities of approximately $10.40 billion versus $9.38 billion in the prior quarter. Trade receivables were $818.0 million, up from $973.0 million in the last quarter.
Total debt (short and long term) totaled $2.21 billion, flat sequentially.
During the quarter, cash from operations was $116.0 million and capital expenditure was $22.0 million. Free cash flow was $94.0 million.
Guidance
Management expects first-quarter 2015 revenues to decrease 15% sequentially, (+/- 3%). Non-GAAP gross margin is likely to be 34%. Operating expenses are forecast at approximately $350.0 million, excluding $20 million for stock-based compensation, and interest expense is estimated at nearly $46 million.
For full-year 2015, management expects non-GAAP operating expenses in the range of $340–$370 million in each quarter; taxes of $3 million per quarter; cash, cash equivalents and marketable securities balances of roughly $1 billion; and capital expenditures of approximately $100 million. Inventory is likely to remain flat year over year.
Our Take
Advanced Micro reported decent results with both the top and the bottom line matching the respective Zacks Consensus Estimate. A more conducive market, increased game console wins, adoption of new products, position in graphics and good execution are expected to lower the company’s dependence on the PC market.
In the quarter, Advanced Micro made good progress in diversifying its business into new markets, ramping up of PC and embedded design wins with key customers and improving its overall balance sheet. The company is trying to position itself strongly in the gaming market, which has enough potential to grow over the next few quarters.
However, the ongoing weakness in the company’s PC business due to higher-than-optimal desktop and AIB inventory levels in the channel remained the headwinds. Also, a soft sales guidance indicates that Advanced Micro will continue to be impacted by the ongoing weakness in the consumer PC market. To add to the woes, the company’s computing and graphics side of the business continued to perform poorly.
Stocks to Consider
Currently, Advanced Micro has a Zacks Rank #4 (Sell). Some better-ranked stocks include Ambarella, Inc. (AMBA) and Avago Technologies Limited (AVGO) sporting a Zacks Rank #1 (Strong Buy), and AXT Inc. (AXTI) carrying a Zacks Rank #2 (Buy).
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