Advanced Micro Devices (AMD) reported second quarter earnings of 12 cents a share (excluding the impact of GlobalFoundries), beating the Zacks Consensus Estimate of 6 cents. The company reported earnings and revenue growth both on a year over year and sequential basis.
Similar to Intel Corp. (INTC), AMD is experiencing a resurgence in information technology enterprise spending, which seems to be the main factor behind the company’s exceptionally good quarter.
Beginning in the first quarter of 2010, AMD started reporting the foundry business under the equity method.
Revenue
Revenue of $1.65 billion was up 5.0% sequentially and up 39.6% year over year. This was above management’s expectation of a sequential decline.
AMD experienced stronger demand from enterprise customers, which was the primary reason for the year-over-year growth. Management stated that demand continued to outpace supply, athough the company expects supply constraints to alleviate in the second half of 2010.
Results for the reported quarter were boosted by strong demand for GPUs led by an 18% sequential increase in Notebook Discrete units. Management noted that this was the second straight quarter of record GPU shipments. AMD is expected to release its second generation DX11 graphics products by the end of 2010, which will further help grow the GPU business in the back half of 2010. Moreover, AMD benefited from increased demand for mobile and desktop platforms in the quarter.
AMD is expected to launch the Ontario chip in the fourth quarter this year, which will further drive revenues and margins for the full year 2010.
Revenue by Segment
Computing Solutions generated $1.21 billion, up 4.5% sequentially and up 30.9% from the year-ago quarter. AMD saw double-digit year-over-year revenue and unit increases across the notebook and graphic chips. Servers were particularly strong as server ASPs improved for the fourth consecutive quarter. However, management noted that microprocessor ASPs were flat sequentially but increased year over year.
Graphics revenue was $440 million, an increase of 7.6% sequentially and increase of 87.2% from the year-ago quarter. The sequential increase was primarily driven by increased mobile discrete GPU shipments. However, Graphics processor ASPs decreased sequentially as a result of higher mix of notebook discrete unit shipments.
Margins
The pro forma gross margin was 44.6%, up 190 basis points (bps) from the previous quarter and 900 bps from the year-ago period. The incrase was mainly due to the improving product mix, good fab utilization rates and the impact of global foundries.
Management did not provide specific information regarding the timing of the 32 nm transition, although we expect it to take off in the first half of next year. This should fuel further margin expansion next year when the entire product line moves to 32nm.
Operating expenses of $600 million were up 10.7% sequentially. The operating margin dropped 70 bps sequentially to 7.6%. R&D as a percentage of sales increased sequentially although SG&A as percentage of sales remained consistent with last quarter. Operating expenses were above management’s expectation largely due to increased variable expenses and higher R&D costs. AMD anticipates R&D spending to be flat in the second half.
Both the two core segments — Computing Solutions and Graphics — saw operating margin declines in the quarter. Computing Solutions generated an operating margin of 10.6%, down 200 bps sequentially, while Graphics generated an operating margin 7.5%, down 400 bps sequentially. However, this was the fourth straight quarter that the two segments generated profits.
The pro forma net profit of $83 million, or 5.0% net profit margin, is an improvement over the $63 million in profits, or 4.0% reported in the previous quarter and net loss of $244 million, or 20.6% loss margin reported in the year-ago quarter.
The pro forma calculations above exclude foundry segment adjustments in all the mentioned periods.
The fully diluted GAAP net loss was $43 million (6 cents per share) in the reported quarter, which compares to a net profit of $257 million (35 cents per share) in the previous quarter and loss of $330 million (49 cents per share) in the year-ago quarter.
Balance Sheet
The company ended the quarter with a cash and short-term investments balance of $1.90 billion, down $36 million from the March quarter. The company ended the quarter with $2.24 billion in long-term debt (including the current portion), or a net debt position of $525 million, compared to net debt of $829 million at the end of the first quarter.
During the quarter, AMD repurchased $206 million principal amount of its 6% Convertible Senior Notes due 2015, for a total value of $200 million. The company expects to continue repayment of debt in the second half.
Guidance
AMD expects third quarter revenue to be up sequentially due to seasonality. Revenue is expected to grow 5% to 10% sequentially as the company is witnessing strong demand for its notebook chipset. Operating expenses are expected to come in at around $630 million, an increase of $30 million due to the increased marketing of products.
Management did not provide any EPS guidance; however, the current Zacks Consensus expectation is pegged at 13 cents for the third quarter.
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