AMD Took Q4 Hammering as Gross Margins Collapsed, Sales Fell

AMD's fourth quarter results for 2012 are in, and they're as bad as everyone has been expecting. The only good news is that since everyone has been expecting it, the company's stock shouldn't take too hard a hammering. Total revenue for the year was $5.42B, down 17.5% year-on-year.

Gross margins fell from 45% to 23% thanks to a much higher cost of sales. AMD ended 2012 with a $1.1B net loss, compared to a $486M income in 2011. Computing Solutions (CPU sales) revenue fell to $4B for the year, down from $5B in 2011. Graphics revenue was down 10% year-on-year, to $1.41B in sales, as opposed to $1.565B for 2011.

There are a few glimmers of positive news. Computing solutions revenue was down sharply, but desktop ASPs held steady as Trinity and Piledriver CPUs hit the market. Unfortunately that only offset declines in mobile ASPs and wasn't enough to produce a net positive impact.

Server revenue increased significantly. Graphics revenue for the quarter still fell overall, but AMD notes that it hit record workstation volume shipments in Q4. That's an essential market if the company wants to improve its operating income on GPUs. It also recognized new revenue from the Wii U's launch -- again, not enough to offset the decline, but there were positive factors in play.

The company's margins took such a beating in Q4 because of how it accounted for a $273M payment to GlobalFoundries. It doesn't mean AMD's sales margins actually materially fell due to product yield problems or failure to ship in volume, but it significantly inflated the cost of sales.

Fasten Your Seatbelts

Here's a few facts:  In 2012, AMD dropped $212M in cash to buy SeaMicro. It had to take a $100M writedown on excess inventory, and it paid GlobalFoundries several hundred million dollars as part of its agreement to use an alternative source for 28nm chips. I'd have to comb through the financial documents to see exactly how much the GF payments adversely impacted Sunnyvale's bottom line, but those three factors account for at least $590M in expenses. AMD lost $1.1B in 2012.

I'm not saying AMD blew those decisions. I don't have access to enough information to make that claim. What I can say is that Read has effectively bet the company on these three outcomes. According to Read, AMD expects revenues to decline by a further 9% in Q1, in line with previous seasonal variation. Right now, Sunnyvale has $1B in cash, cash-equivalents, and marketable securities. It has previously stated that it needs at least $700M to keep the company solvent and would prefer $1B. In previous conversations, when pressed for details on how AMD will manage to return to positive cashflow in the latter half of this year, company executives have refused to comment.

A few weeks back, we told you about AMD's CES events where the company made some impressive claims about Kabini, Temash, and Richland. Those chips still look pretty good -- but none of them are scheduled for a Q1 launch, and it can take 2-3 months for a new product's revenue to ramp up.

The next six months are literally make-or-break for AMD. The company is rumored to have a few tricks up its sleeve, including a plan to sell and lease back its own headquarters that could net it $150-$200M dollars. In the short term, that's fine. Longer term, such tricks can't stave off insolvency. To do that, AMD needs products that can command higher margins and larger market share.