By Theodore J. Kim, CFA, FRM, Esq.
AMD (NASDAQ:AMD) is not a dog stock – and most Wall Street analysts got it wrong. Surprise, surprise.
Last Friday after the close of trading, Advanced Micro Devices surprised the “smart money” on the Street when it announced its second quarter 2016 results. After a dismal seven quarter stretch of net losses, the earnings surprise amounted to a healthy $69 million in net profit for Q2 2016 as well as a 9% year-over-year and 23% quarter-over-quarter increase in revenues up to $1.03 billion. After posting these pleasantly surprising results, many money managers are opining that perhaps the company may have finally turned the corner.
Fighting to survive in a fiercely competitive market, AMD is a bit of a grandfather in the crowded field of the second tier chip makers. That is: well established, very innovative and smart – but swimming in a pond dominated by a huge shark: Intel. In years past, AMD had to struggle against the threat of the chip industry turning into an Intel-dominated monopoly as well as moribund growth in many major consumer markets. Just think of how the global software industry looked in the early 1990s, before Microsoft more or less eliminated the vast bulk of similar “second tier innovative” players.
The company was grossly undervalued by the market as a bit of a “has been” in the highly volatile semiconductor sector and had, many analysts estimated, been potentially headed towards penny stock territory. With excessive concerns about softening domestic consumer demand in China, which had been driving valuations in the semiconductor sector in years past, the stock was trading at rock bottom multiples and running at negative operating cash flow.
AMD has shown the market it can rebound and turn around operations (albeit it with help from a one-off sale of their equity interests in their joint venture with Nantong Fujitsu Microelectronics) and start dramatically improving the net operating cash flow picture.
Now, the big question will be how far and how fast the stock will rebound in the coming weeks coming off the healthy 12% bounce after last week’s surprise earnings release.
On the up note, the firm has no debt payments due unto 2019, is sitting on $1 billion in cash, and is extremely well positioned to leverage any uptick in global emerging market consumer demand. Additionally, the new product pipeline for the remainder of FY’16 looks solid. In short, there may be considerable steam in AMD’s engine to continue to support the share price into a more respectable valuation.
AMD designs and builds computer processors and related technologies for markets across the globe. This encompasses intelligent devices, including personal computers, game consoles and cloud servers. AMD generates revenue through two business segments: 1) Computing and Graphics Solutions, and 2) Enterprise, Embedded and Semi-Custom. The Computing and Graphics segment includes desktop, notebook processors, chipsets, discrete GPUs (Graphics Processing Unit), and professional graphics. The Enterprise, Embedded and Semi-Custom segment includes server and embedded processors, dense servers, semi-custom SoC (system on chip) products, engineering services and royalties.
The strong SoC segment has led the way to AMD’s rebound. Considering the generally strong demand from the wireless and mobile technology industry globally, the SoC product line will likely continue to drive top line revenue growth at least for the next few quarters. In summarizing results in the quarterly analyst conference call, AMD’s president and CEO, Dr. Lisa Su, explained “In the second quarter, we accomplished a significant milestone as we returned to non-GAAP operating profitability based on solid execution and strong demand for our semi-custom and graphics products”
Momentum in several product areas, Su added, is set to continue. “Based on the strength of our semi-custom products and demand for our latest Radeon RX GPUs and 7th Generation A-Series APUs, we are well positioned to drive growth and market share gains in the second half of the year.”
Ongoing semi-custom SoC ramps, the introduction of Polaris GPUs, and the launch of the 7th generation APUs will all add up to help AMD keep the positive momentum alive going forward. The company expects steady single-digit revenue growth for the FY 2016 and is confident of finally delivering operating profitability in the second half of the year. For Q3 2016, the company estimates that: 1) revenue will increase by 18% sequentially; 2) non-GAAP gross margin should be 31%; and, 3) operating expenses will be approximately $350 million, due to an increase in R&D investments.
In the analysts’ quarterly call, Su detailed outlined several more key highlights:
- First half 2016 GPU sales increased by a double digit percentage from a year ago.
- Stronger than seasonal GPU sales and higher client notebook processor sales were offset by a decline in desktop processor sales.
- Mobile APU sales increased for the third straight quarter.
- Professional graphics revenue also grew for the third straight quarter. AMD believes it gained share driven by increased adoption of Firepro graphics by OEMs, as well as several cloud data center GPU compute wins.
On top of the Firepro graphics business, AMD is also driving ahead across high power graphic applications and just announced it is developing a new Radeon Pro solution for large dataset applications. The new Radeon Solid State Graphics solution is ideal for the next wave of demanding use-case scenarios including real-time post-production of 8K video, high-resolution rendering, VR content creation, oil and gas exploration, computational engineering, medical imaging and life sciences.
So will AMD’s turnaround have legs for the rest of the summer? With improving fundamentals, a shortage of good “value plays” in the tech sector, and a promising pipeline, even better days may be ahead for the share price.
Summary of Q2 2016 Results
- Revenue of $1,027 million, up 23% sequentially and up 9% year-over-year primarily due to higher sales of semi-custom SoCs.
- Gross margin of 31%, down 1% sequentially due primarily to a higher mix of semi-custom SoC sales.
- Operating expenses of $353 million, compared to $344 million for the prior quarter. Non-GAAP operating expenses of $342 million, compared to non-GAAP operating expenses of $332 million in Q1 2016, primarily due to increased marketing investments.
- Operating loss of $8 million, compared to an operating loss of $68 million in Q1 2016. Non-GAAP operating income of $3 million, compared to non-GAAP operating loss of $55 million in Q1 2016, primarily due to higher sales.
- Net income of $69 million, earnings per share of $0.08, and non-GAAP net loss of $40 million, non-GAAP loss per share of $0.05. This is compared to a net loss of $109 million, loss per share of $0.14 and non-GAAP net loss of $96 million, non-GAAP loss per share of $0.12 in Q1 2016. The GAAP sequential and year-over-year improvements were primarily due to a gain of $150 million related to the formation of the assembly, test, mark and pack (ATMP) joint venture (JV) with Nantong Fujitsu Microelectronics Co., Ltd. (NFME). The non-GAAP sequential and year-over-year improvements were primarily due to higher sales and an IP licensing gain.
- Cash and cash equivalents were $957 million at the end of the quarter, up $241 million from the end of the prior quarter, primarily due to net cash proceeds received from the ATMP JV transaction with NFME which closed in Q2 2016.
- Total debt at the end of the quarter was $2.24 billion, flat from the prior quarter
AMD, Inc. – GAAP Financial Results
| Q2-16 | Q1-16 | Q2-15 | |
| Revenue | $1,027M | $832M | $942M |
| Operating income (loss) | $(8)M | $(68)M | $(137)M |
| Net income (loss) / earnings (loss) per share | $69M/$0.08 | $(109)M/$(0.14) | $(181)M/$(0.23) |
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