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AMD Navigates Tough Second Quarter, Emerges In The Black

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News Posted: Thu, Jul 19 2012 5:51 PM
When AMD told investors that its second quarter results would be significantly lower than anticipated, the company's stock price went into a skid. Historically, AMD's quarterly warnings have been followed by ugly earnings calls, filled with enough red ink to drown a small army of accountants. It is, therefore, a pleasant surprise to see that while the company took a nasty hit to overall revenue, with sales down 11% sequentially and 10% year-on-year, it managed to keep its head above water with a net income of $37 million.

One of the keys to that achievement was the company's gross margin, which held steady at ~45%. While that's a poor second to Intel's percentage, which hovers in the mid-60s, 45% is solid territory for AMD. Unfortunately, it looks like the Sunnyvale held the line thanks to decreased spending rather than steady prices. Average selling prices for microprocessors fell last quarter, as did the total number of units shipped. Server revenue fell, mostly due to lower unit shipments, APU shipments as a percentage of AMD sales (relative to standalone CPUs) held steady, and chipset revenue was down as well. The one bright spot was GPUs, where ASPs rose slightly.


AMD's 1GHz Radeon cards are aimed at NV's strong Kepler family

On the GPU side, AMD reported sales of $367M (down 15M from last quarter) and operating income of $31M. As thin as that tea is, it's actually a considerable improvement over last year. In 2011, AMD reported sales of $367M and an operating loss of $2M for the second quarter. Revenue in graphics for the first half of the year was $745M with an operating income of $65M. Again, that compares quite favorably to 2011, when AMD sold more cards ($780M in net revenue) but made just $12M. AMD could actually run a headline off those figures -- the company's operating income from GPU sales has increased nearly sixfold, up to 8.6% from 1.5%.

The one major negative from AMD's report is the surge in inventory levels. Inventory rose 42% in the second quarter and stands now at nearly double what it did at the beginning of the year. That's worrisome for a company in AMD's position because inventory that isn't sold must be written off against the company's bottom line after a period of time. AMD sought to allay fears on this score by claiming that the buildup mostly consisted of its newest parts that it expects to sell once demand picks up due to seasonal trends in Q3.

The problem with that line of reasoning is that AMD also states that it expects Q3 revenue to be down 1-3% compared to Q2. Intel, in contrast, expects revenue of $14.3B (plus/minus $500B) as compared to 13.5B in Q2.  The wide plus/minus figure is a sign that Santa Clara is also uneasy about the current world economy, but even the company's worst-case scenario projects an increase of 2%.

One of the reasons AMD gave for the unexpected inventory buildup is that it misaligned Llano chipset shipments with the volume of Llano processors currently in-channel. This, in turn, led the company to push back the introduction of Trinity desktops to give Llano inventory time to clear.

The Honeymoon is Over

It's been nearly a year since Rory Read took over the big chair at AMD. Thus far, he's made a number of sweeping changes to the company's long-term plans while keeping quarterly results in the black (Q1's purchase of SeaMicro was an exception). That's to his credit. Hopefully by the time we run the numbers in October, AMD will have more details to share on the next-generation products that it badly needs to compete with next-generation parts from ARM and Intel.

With Hot Chips coming at the end of next month, we'll hopefully hear more about AMD's next-generation plans and parts. God knows we're tired of writing stories about Sunnyvale's ability to eke out a living quarter-after-quarter, while Intel sets revenue records and breaks new ground in the low-power market.

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The analyst bloomberg quoted a few weeks ago was correct: “When you miss by this magnitude you end up with a ton of inventory in the pipeline.”

http://www.bloomberg.com/news/2012-07-09/amd-says-second-quarter-sales-to-fall-11-reducing-forecast.html

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mhenriday replied on Fri, Jul 20 2012 7:29 AM

Now the background to AMD's recent decision to cut prices for high-end GPUs, as reported earlier on HH (http://hothardware.com/News/AMD-Slashes-Prices-on-Radeon-7000-Series-Graphics-Cards/), becomes clearer....

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CDeeter replied on Fri, Jul 20 2012 8:03 AM

Possibly, but GPU's were the silver lining for them - "AMD could actually run a headline off those figures -- the company's operating income from GPU sales has increased nearly sixfold, up to 8.6% from 1.5%" . They were doing ok on that front.

What they need to move more of is their Llano APUs to clear out that inventory, and CPUs in general. Bulldozer did them no favors in that regard, and the sooner they get Trinity and Piledriver out in the channel the better. If it were me, Bulldozer and Llano would be the ones getting price cuts to make room for the newer parts.

Cutting prices on their GPUs, may help, but we won't see the results of that until next quarter.

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mhenriday replied on Fri, Jul 20 2012 8:53 AM

AMD did just that - i e, cutting prices on FXs and APUs - as well, back in April (http://www.cpu-world.com/news_2012/2012042701_AMD_cuts_prices_on_A-Series_APUs_and_FX_CPUs.html), but they still seem to have problems moving the products due to disappointing CPU performance. My suggestion is that they're being proactive on the Radeons, but as you say, we'll have to wait until the Q3 statistics roll in before knowing how well the strategy worked. Hoping for the best for AMD - after all, what kind of CPUs would Intel now be offering users if AMD hadn't rocked them out of their compalcency ? - but I find it hard to be optimistic....

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Joel H replied on Fri, Jul 20 2012 12:36 PM

AMD actually held back on the deeper price cuts it would've had to enact to really clear inventory. It was a calculated move, and a decent one. Most of the analyst questions in the Q&A followed up the inventory angle; it'll definitely be problematic if levels aren't down by the end of the year.

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yuchen68 replied on Mon, Jul 23 2012 4:18 AM

Cutting prices on their GPUs, may help, but we won't see the results of that until next quarter.

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