AMD Navigates Tough Second Quarter, Emerges In The Black

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.