Advanced Micro Devices (AMD) continued to strengthen in the fourth quarter, with pro forma earnings beating the Zacks Consensus Estimate by 14 cents. Its settlement with Intel Corporation (INTC) added a dollar and 57 cents to GAAP earnings. Revenue exceeded the Zacks consensus by 10.5%.
Revenue
Revenue of $1.65 billion was up 36.6% sequentially and 39.7% year over year, better than management’s expectations of a modest sequential increase. Revenue in the last quarter excludes a one-time process technology licensing revenue of $191 million.
The fourth quarter strength was driven by both consumer and business customers. The holiday season drove higher consumer demand, while the improving economy encouraged stronger enterprise spending. Therefore, sell-through was strong. Growing demand for the Radeon 5000 Series also drove sales.
Revenue by Segment
Computing Solutions generated $1.21 billion, up 13.6% from the third quarter. Both ASPs and double-digit unit growth contributed to the increase. Unit growth was driven by a 19% increase in notebook processor shipments and a 21% increase in server processor shipments. Chipset revenue also increased.
Graphics revenue was $427 million, an increase of 39.5% sequentially. Both mobile discrete graphic processors (consumer segment) and workstation graphic processors (business segment) helped sales in the last quarter.
Foundry segment sales increased 17.9% to $309 million. Foundry segment sales are eliminated in inter-segment calculations; therefore, they do not increase the net revenue figure. Other products generated around $5 million in the last quarter, down 76.2% from the third quarter.
AMD platforms continued to do well, with HP, Acer, Toshiba, Asustek and MSI announcing plans to introduce more than 70 notebooks based on AMD’s latest generation of mainstream and ultra-thin platforms. The AMD 6 core Opteron processor witnessed very strong growth. Hewlett Packard Company (HPQ), International Business Machines (IBM), Dell (DELL), Cray (CRAY) and Sun Microsystems (JAVA) currently have products based on it. Discrete graphics also did extremely well in the last quarter.
AMD has previously showcased several products including drivers for Microsoft’s (MSFT) DX11 technology included in Windows 7. These products are more energy efficient and enable superior functionality and greater memory bandwidth. Several notebooks based on this product family were previewed at CES 2010. We expect the DX11 products to start making a significant contribution within a few more months.
The pro forma gross margin was 44.7%, up 1,193 basis points (bps) from the previous quarter’s 32.8%. The double-digit unit growth in both operating segments, last phase of the transition to the 45nm process and higher ASPs helped the gross margin in the last quarter.
Operating expenses of $654 million were up 4.6% sequentially. The operating margin increased 2,407 bps to 5.0%. This was due to a significant reduction in all expenses as a percentage of sales. The greatest decline was in COGS, followed by R&D and then SG&A.
The two core segments —- Computing Solutions and Graphics — generated margins of 13.0% and 12.4%, respectively. This is an encouraging trend, as the two segments started generating profits in the September quarter and saw operating margin increases of 591 bps and 980 bps, respectively, in the last quarter.
On a pro forma basis, AMD generated a net loss of $26 million, or a 1.6% net loss margin, compared to a loss of $354 million (29.4%) in the previous quarter and loss of $578 million (49.1%) in the prior-year quarter. Our pro forma calculations exclude the amount received from Intel ($1.57 per share), intangibles amortization charges (-0.03 per share) and stock-based compensation charges (-$0.02 per share) in the last quarter.
Including the above-mentioned special items, the income attributable to the Foundry Company and providing for payments on class B preference shares, the fully diluted GAAP EPS was $1.49, compared to a loss of $0.19 in the previous quarter and loss of $2.34 per share in the year-ago quarter.
Balance Sheet
Inventories increased 10.1% sequentially to $567 million, with annualized inventory turns increasing from 6.3x to 6.4x. Days sales outstanding (DSOs) decreased slightly from 43 to 41 days. The company ended with a cash and short-term investments balance of $2.7 billion, up slightly from the September quarter. AMD has around $4.3 billion in long-term debt and $892 million in long-term liabilities, yielding a net debt balance of $2.47 billion.
AMD undertook a number of transactions that reduced the total debt by roughly a billion dollars and pushed out current maturities. However, it also issued senior convertible notes bearing a higher-interest rate.
Guidance
AMD expects a sequential revenue decline in the first quarter. Operating expenses are expected to come in at around $550 million and tax expenses at around $3 million. Beginning in the first quarter of 2010, AMD will report the foundry business under the equity method, which is expected to result in a one-time non-cash charge to be recorded in the quarter.
For 2010, the company expects a gross margin of 40-45%, SG&A of 14-17%, depreciation & amortization of $340-370 million, capex of 120 million and positive free cash flow.
We reiterate our Neutral rating on AMD shares, since we expect the stock to continue trading at current levels.
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