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Advanced Micro's Q1 Loss Wider than Expected, Guides Low - Analyst Blog

Advanced Micro Devices AMD incurred loss of 11 cents per share in first-quarter 2015, wider than the Zacks Consensus Estimate loss of 6 cents.

Following the announcement, shares plunged more than 11% in after-hours trading due to the disappointing sales guidance and a weak PC market.

Revenues

Advanced Micro generated revenues of $1.03 billion, down 16.9% sequentially and 26.3% year over year. The decrease was due to weak sales of graphic cards, seasonal decrease in semi-custom system-on-chip (SoC) sales and persistent weakness in the company’s PC business. First-quarter revenues were below the Zacks Consensus Estimate of $1.08 billion.

Advanced Micro has two reportable segments — Computing and Graphics (focused on the traditional PC market), and Enterprise, Embedded and Semi-Custom (focusing on adjacent high-growth opportunities). The details of these segments are discussed here:

The Computing and Graphics segment includes desktop and notebook processors and chipsets, discrete GPUs and professional graphics. This segment comprised 51% of Advanced Micro’s sales, down 20% sequentially and 38% year over year. The decrease was due to lower desktop and notebook processor and lower GPU sales.

The Enterprise, Embedded and Semi-Custom segment includes server and embedded processors, dense servers, semi-custom SoC products, engineering services and royalties. This segment accounted for the remaining 49% sales, down 14% sequentially due to lower sales of semi-custom SoCs. The 7% year-over-year decrease was primarily due to lower server processor sales.

Operating Results

Reported gross margin was 31.7%, up 260 basis points (bps) sequentially but down 320 bps from the year-ago quarter. The sequential increase resulted from lower market inventory adjustment in the fourth quarter. The year-over-year decrease was due to an unfavorable product mix and lower game console royalties.

Operating expenses of $463.0 million increased 5.7% from $438.0 in the year-ago quarter. However, as a percentage of sales, both research and development (R&D) and marketing, general and administrative expenses increased. Reported operating margin was (13.3%) compared with 3.5% in the year-ago period.

The quarter’s GAAP net loss was $180.0 million or loss of 23 cents per share compared with net loss of $364.0 million or 47 cents in the comparable quarter last year. Excluding all special charges but including stock-based compensation expenses, non-GAAP net loss was ($90.0) million or loss of 12 cents versus earnings of $12 million or 1 cent in the year-ago quarter.

Advanced Micro Devices Inc. - Earnings Surprise | FindTheCompany

Balance Sheet

Advanced Micro exited the first quarter with cash, cash equivalents and marketable securities of approximately $906.0 million, down $134 million from the end of the prior quarter. Trade receivables were $771.0 million, down from $818.0 million in the last quarter.

Total debt (short-term and long-term) totaled $2.27 billion versus $2.21 billion in the prior quarter.

During the quarter, cash from operations were ($173.0) million, while capital expenditure was $22.0 million.

Guidance

Management expects second-quarter 2015 revenues to decrease 3% sequentially, (+/- 3%). Non-GAAP gross margin is likely to be 32%. Non-GAAP operating expenses are forecasted to be approximately $355.0 million.

For full-year 2015, management expects non-GAAP operating expenses in the range of $340–$370 million in each quarter; taxes of $3 million per quarter; cash, cash equivalents and marketable securities balances in the range of $600–$1 billion; capital expenditures of approximately $100 million and inventory to remain flat year over year.

Our Take

Advanced Micro reported weak results, with both the top line and the bottom line missing the respective Zacks Consensus Estimate.

During the quarter, Advanced Micro also stated that it would exit the market for custom-built servers for data centers. The company had entered this market three years ago with the purchase of startup SeaMicro for $334 million. The exit from the cloud server business could be a matter of concern as it had been one of the key strategies to diversify its business away from the PC market.

Also, weak sales guidance indicates that Advanced Micro will continue to be impacted by the ongoing weakness in the consumer PC market. To add to the woes, the company’s computing and graphics side of the business continued to perform poorly.

However, the company made good progress in diversifying its business into new markets and ramping up of PC and embedded design wins with key customers. The company is trying to position itself strongly in the gaming market, which has enough potential to grow over the next few quarters.

Moreover, a more conducive market, increased game console wins, adoption of new products, position in graphics and good execution are expected to lower the company’s dependence on the PC market.

Stocks to Consider

Currently, Advanced Micro sports a Zacks Rank #2 (Buy). Other stocks worth considering in the same space include Cirrus Logic Inc. CRUS, Avago Technologies Ltd. AVGO and Ambarella, Inc. AMBA. While Avago Technologies and Cirrus Logic sport a Zacks Rank #1 (Strong Buy), Ambarella carries the same Zacks as Advanced Micro.


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