Advanced Micro Devices (AMD) reported first quarter earnings of 8 cents a share (excluding the impact of GlobalFoundries), beating the Zacks Consensus estimate of a loss of 9 cents. Revenue of $1.57 billion beat by 2.5%.

Beginning in the first quarter of 2010, AMD started reporting the foundry business under the equity method.

Revenue

Revenue was down 4.4% sequentially and up 33.7% year over year, as expected by management. The sequential decline was the result of normal seasonality.

However, similar to Intel Corp (INTC), AMD experienced stronger demand from enterprise customers, which was the reason for the year-over-year growth. Management stated that demand continued to outpace supply, athough the company would build some channel inventory in the current quarter.

Revenue by Segment

Computing Solutions generated $1.16 billion, down 4.9% sequentially and up 23.1% from the year-ago quarter. AMD saw double-digit year-over-year revenue increases across the desktop, notebook and server platforms. Servers were particularly strong, with the six-core and newly launched eight and twelve-core processors accounting for more than two-thirds of total server revenue. Average selling prices (ASPs) were firmer sequentially, but not enough to offset the decline in volume.

Graphics revenue was $409 million, a decrease of 2.9% sequentially and increase of 87.6% from the year-ago quarter. Graphics processor ASPs increased sequentially, but volumes declined. The 5000 series chips remained strong in the last quarter.

Margins

The pro forma gross margin was 42.7%, up 144 basis points (bps) from the previous quarter’s 41.3%. Improving mix and higher ASPs drove the increase. The transition to 45nm was completed in the Dec 2009 quarter, so there was no margin benefit in the last quarter.

Management did not provide specific information regarding the timing of the 32 nm transition, although it is expected to take off in the second half of the year. This should fuel further margin expansion until the entire product line moves to 32nm.

Operating expenses of $542 million were up 6.3% sequentially. The operating margin dropped 201 bps to 8.3%. Both R&D and SG&A increased as a percentage of sales. Management expects to maintain the expense run rate for the remainder of the year.

Both the two core segments — Computing Solutions and Graphics — saw operating margin declines in the last quarter. Computing Solutions generated an operating margin of 12.6%, down 61 bps sequentially, while Graphics generated an operating margin 11.5%, down 31 bps sequentially. This was the third straight quarter that the two segments generated profits.

The pro forma net profit of $63 million, or 4.0% net profit margin was a significant improvement over the $10 million in profits (0.6% margin) reported in the previous quarter and net loss of $135 million, or 11.5% 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 income was $257 million ($0.34 per share), which compares to $1.18 billion ($1.49 per share) in the Dec 2009 quarter and loss of $416 million (-$0.66 per share) in the Mar quarter of 2009.

Balance Sheet

Inventories increased 1.8% sequentially to $577 million, with annualized inventory turns down slightly from 6.4x to 6.3x. Days sales outstanding (DSOs) decreased from 41 to 39 days. The company ended with a cash and short term investments balance of $1.9 billion, down $744 from the Dec quarter.

AMD used the $1.2 billion settlement amount received from Intel to pay off a significant portion of its debt. Consequently, the company ended the quarter with $2.6 billion in long term debt, or a net debt position of $826 million, compared to net debt of $2.5 billion at the end of the fourth quarter.

Guidance

AMD expects a sequential revenue decline in the second quarter. The company expects to see $15 million of inventory-related savings in the quarter, which will have a positive impact on the gross margin. Operating expenses are expected to come in at around $560 million.

Management stated that the company would spend $160 million on capex in 2010.
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