Advanced Micro Devices (AMD) reported first quarter earnings of 9 cents per share, beating the Zacks Consensus Estimate by a penny.
AMD’s revenues in the last quarter came in at $1.57 billion, down 2.4% and 4.8% from the previous and year-ago quarters, respectively.
This was better than normal seasonality, although it may be considered to be somewhat worse than AMD’s expectations of flat to slightly down revenues for the quarter and just short of the consensus estimate of $1.58 billion. AMD’s revenues in the quarter benefited from the ramp up of both the Brazos and Llano chips, something that is expected to accelerate in the second half of the year, with AMD possibly picking up some share at Intel Corp’s (INTC) expense in both notebooks and netbooks.
Revenue by Segment
Computing Solutions was 77% of AMD’s sales in the last quarter, flat sequentially as well as in comparison with the year-ago quarter. AMD began benefiting from the higher ASPs of its new chips, although units were seasonally down. AMD did see growing engagement from eleven of the twelve leading players in the mobile segment, including Hewlett Packard Company (HPQ), Dell Inc (DELL), Acer and Sony Corp (SNE), but it remains largely relegated to the lower-end segment of the computing market overall.
AMD’s graphics business generated the remaining 23% of its sales, down 11.1% sequentially and 16.6% from a year ago. The graphics business has weakened considerably and it appears that Intel integrated graphics and NVIDIA Corp (NVDA) discrete graphics are stealing the show.
On the mobile computing side, AMD saw lower discrete volumes, while the decline in desktops was attributed to seasonality. It could also be that AMD’s focus on developing its fusion chips is resulting in reduced R&D focus on this segment. Management mentioned some success with game consoles, so the actual position will be clearer come the holiday season.
AMD reported pro forma gross margin of 45.7%, up 111 basis points (bps) from the previous quarter and up 110 bps from the year-ago period. The strength in gross margins was related to a lower mix of legacy products and the ramp up of higher-margin APUs.
Operating expenses of $606 million were down 3.5% sequentially and up 1.0% from last year. The operating margin expanded 154 bps sequentially, while contracting 111 bps year over year to 7.2%. The sequential improvement was due to lower SG&A and cost of sales, with R&D increasing only slightly as a percentage of sales. However, both R&D and SG&A were up as a percentage of sales from the June 2010 quarter, although cost of sales declined.
The two core segments—Computing Solutions and Graphics—had mixed results. Computing Solutions generated an operating margin of 11.8%, up 343 bps sequentially, while Graphics generated an operating margin of -1.9%, down 651 bps sequentially. The Computing margin benefited from a higher mix of new products, while graphics suffered the impact of lower volumes and higher R&D spending.
Net Profit
On a pro forma basis, AMD generated a net profit of $70 million, or a 4.4% net profit margin, compared to a profit of $56 million, or 3.5%, in the previous quarter and $90 million, or 5.4%, in the prior-year quarter.
Including intangibles amortization charges, the fully diluted GAAP net income was $61 million or 8 cents per share compared to income of $510 million, or 67 cents in the previous quarter and a loss of $43 million or 6 cents in the year-ago quarter.
Balance Sheet
AMD has done a really good job reshaping the balance sheet over the past year.
Working capital metrics remained strong in the last quarter, with inventories dropping 1.9% sequentially to $642 million and inventory turns dropping slightly from 5.5X to 5.3X. Days sales outstanding (DSOs) declined from 45 to 44.
The company ended with a cash and short term investments balance of $1.86 billion, up 116 million from the December quarter. AMD has around $2.2 billion in long term debt, $4 million in short-term debt and $76 million in long term liabilities, yielding a net debt balance of $414 million at quarter-end. This is significantly lower than in the beginning of the quarter, as well as in the year-ago quarter.
During the quarter, AMD generated $174 million of cash in operations and spent $67 million on capex. Management expects debt repayments to continue.
Guidance
AMD guided to a third quarter sequential revenue increase of 10% (+/- 2%). Guidance looks surprisingly strong, particularly since Intel projected a lower growth rate. We note that the Zacks Consensus Estimate for the third quarter is 16 cents, nearly double the earnings reported in the second quarter.
To Conclude
AMD started off the year reasonably well. We believe there are several things that should interest investors at this point. The first of these is execution. We feel really good about a company that has been consistently delivering on its promises over the past few quarters, whether with respect to building its product portfolio, or with respect to cleaning up its balance sheet. The separation of Global foundries freed AMD from manufacturing pressures, enabling it to focus on R&D instead. We think the company is poised to generate significant improvement in profits, both as a result of its improving product lineup and cost control.
However, while the individual analysis does look positive, the comparative analysis doesn’t look as great. While AMD’s products are being launched on schedule and it does look as if it will take some share from Intel, we need to bear in mind that Intel also has some new products lined up, which along with its growing capacity and lead at 22nm should keep it ahead of AMD. Additionally, AMD usually provides vague guidance. This is the first time it provided a specific performance target, so we probably need to tread a bit cautious here.
Cost efficiencies can only do so much; real expansion of margins is dependent on superior technology. AMD is on the right track and it appears to be doing things right. But the absence of a CEO at this crucial juncture could be a setback for the company.
AMD shares currently carry a Zacks #3 Rank, implying a Hold recommendation in the short term (1-3 months).
