Advanced Micro Devices
(AMD) announced stronger third quarter earnings that nevertheless missed the Zacks Consensus Estimate by 10 cents. This excludes 28 cents per share for one-time licensing revenue, 10 cents for a gain on the repurchase of debt and 2 cents for stock based compensation.


Revenue of $1.39 billion was up 17.9% sequentially and down 21.4% year over year, better than management’s expectations of a slight sequential increase. However, excluding the $191 million in one-time process technology license revenue, it was up 1.8% sequentially and down 32.2% year over year, in-line with management expectations. The revenue per employee increased 1.0% sequentially.

Revenue was driven by consumer PC demand, particularly in notebooks and in China. The company saw continued recovery in Europe and North America. Management also stated that the commercial IT market was positioned to improve in 2010.

Computing Solutions generated $1.07 billion, up 17.5% from the second quarter. Both ASPs and double-digit unit growth contributed to the increase. Unit growth was driven by a 28% increase in shipment of notebook processors, as well as increases in desktops and servers. Chipset revenue also increased.

Graphics revenue was $306 million, an increase of 21.9% sequentially. The consumer market (mobile discrete graphic processors) drove the strength in this segment.

Foundry segment sales increased 1.2% to $256 million. Foundry segment sales are eliminated in inter-segment calculations; therefore, they do not increase the net revenue figure. Other products generated around $21 million in the last quarter.

Platforms momentum is building, 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. Hewlett Packard Company (HPQ), International Business Machines (IBM), Dell (DELL), Cray (CRAY) and Sun Microsystems (JAVA) are already using AMD’s new 6 core Opteron processors, which cater to the need for high-density energy-efficient devices. Discrete graphics also did extremely well in the last quarter.

The company also showcased several products including drivers for Microsoft’s (MSFT) DX11 technology included in Windows 7 to be released later this year. While significant revenue from the DX11 products is not expected until 2010, the new Opteron processors should ramp in the second half.

Operating Performance

The pro forma gross margin was 32.8%, up 449 basis points (bps) from the previous quarter’s 28.3%. The continued transition to 45nm process, better yields, higher utilization rates and higher ASPs helped the gross margin in the last quarter.

Operating expenses of $625 million were down 4.6% sequentially. The operating loss margin improved 794 bps to 19.1%. This was largely on account of lower COGS and helped by lower SG&A and R&D as a percentage of sales. Management stated that cost controls helped lower operating expenses in the last quarter.

The computing solutions, graphics and foundry margins were 7.1%, 2.6% and -39.5%, respectively. We believe this is encouraging, since it is the first quarter that the product company was able to generate positive operating margins. The computing solutions and graphics segment margins witnessed sequential increases of 1,502 bps and 740 bps, respectively.


Note: Operating results do not include the handset and DTV businesses in 2008 and the second, third and fourth quarters of the prior year, as these are classified as discontinued operations

On a pro forma basis, AMD had a net loss of $354 million, or a 29.4% net loss margin, compared to a loss of $406 million (-34.3%) in the previous quarter and profit of $100 million (5.6%) in the prior-year quarter. Including special items, the income attributable to the Foundry Company and providing for payments on class B preference shares, the fully diluted GAAP loss per share (LPS) was 18 cents, compared to 49 cents in the prior quarter and 21 cents in the year-ago quarter.

Balance Sheet

Inventories increased 4.5% sequentially to $515 million, with annualized inventory turns decreasing from 6.9x to 6.3x. Days sales outstanding (DSOs) increased from 28 to 43 days. The company ended with a cash and short term investments balance of $2.5 billion, flat compared to the June quarter. AMD has around $5.3 billion in long term debt and $888 million in long term liabilities, yielding a net debt balance of $3.65 billion.


Revenue is expected to increase modestly next quarter. Operating expenses are expected to be approximately $500 million (within the range provided in the operating breakeven model). AMD reiterated the capex guidance for the year. Spending for the product company is expected to be $100 million, and spending for the foundry company is expected to be $690 million.
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