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Advanced Micro Devices (AMD - Analyst Report) reported earnings of 6 cents per share in the fourth quarter of 2013, in line with the Zacks Consensus Estimate.

However, a disappointing forward guidance led to an 11.9% drop in share price in after-hours trading.

Revenues

AMD generated revenues of $1.59 billion in the quarter, up 8.8% sequentially and 37.6% year over year. The sequential increase was better than management’s expectations of 5.0% (+/- 3.0%). The increase was driven by strong performance in the Graphics and Visual Solutions segment, higher revenues from semi-custom System-on-Chips (SoCs) and ramp up of the new R7 and R9 series of GPU products.

Revenues by Segment:

Computing Solutions comprised 45% of AMD’s sales in the last quarter, down 8.6% sequentially and 12.9% from the year-ago quarter. The decline was due to decreased notebook and chipset unit shipments.

AMD’s Graphics and Visual Solutions business generated the remaining 55% of the sales, up 28.9% sequentially and soaring 165.3% from the year-ago quarter. The strong growth was largely driven by increased shipments of game consoles, semi-custom SoCs and R7 and R9 series of GPU products.

Operating Results

Reported gross margin for the quarter was 34.8%, down 90 basis points (bps) sequentially but up significantly from the year-ago quarter. The fourth-quarter gross margin included a $7 million benefit from sales of certain previously reserved products.

Operating expenses of $418.0 million decreased 30.3% from $600.0 in the year-ago quarter. Also, as a percentage of sales, both research and development (R&D) as well as marketing, general and administrative expenses declined. As a result, AMD reported operating margin of 8.5%, significantly above the year-ago quarter’s margin of (36.5%).

The quarter’s GAAP net income of $89.0 million or earnings of 12 cents per share compared favorably with a net loss of $473.0 million or loss of 63 cents per share reported in the comparable quarter last year. Excluding legal charges and intangible amortization charges but including stock-based compensation expenses, non-GAAP net earnings were $45.0 million or 6 cents per share compared with a net loss of $114 million or loss of 16 cents a share in the year-ago quarter.

Balance Sheet

AMD exited the fourth quarter with cash, cash equivalents and marketable securities of approximately $1.10 billion versus $1.06 billion in the prior quarter. Trade receivables were $832.0 million, down from $873.0 million in the prior quarter.

Total debt (short- and long-term) in the quarter was $2.06 billion, up from $2.05 billion in the previous quarter.

During the quarter, AMD generated $21.0 million from cash for operations, spending $21.0 million on capital expenditures. No free cash flow was generated in the last quarter.

Guidance

Management expects first-quarter 2014 revenues to decrease 16.0% (+/- 3.0%) sequentially. Non-GAAP gross margin is expected to be 35.0%. Operating expenses are expected to be approximately $420.0 million.

For full-year 2014, management expects revenues to increase year over year, non-GAAP operating expenses in the range of approximately $420.0 million–$450.0 million per quarter, taxes of approximately $3.0 million per quarter and capital expenditure of approximately $120.0 million.

Our Take

AMD’s top-line numbers for the quarter surpassed its guidance, supported by new products and increased demand for the company’s new semi-custom SoCs. A more conducive market, increased game console wins, adoption of new products, position in graphics and good execution are expected to pull the company out of the weak PC market.

We believe AMD is on the right track. It is trying to position itself strongly in the gaming market, which has enough potential to grow over the next few quarters.

Also, during the quarter, the company made good progress in embedded markets, including communication, industrial and gaming, among others. It expects to further increase revenue contribution from the embedded business and increase market share. AMD’s new APUs, which power a number of thin and light-touch notebooks, are expected to drive strong double-digit sequential increase in mobile processor unit shipments.

Currently, AMD has a Zacks Rank #3 (Hold). Other stocks that have been performing well and are worth a look include Pericom Semiconductor Corp. (PSEM - Snapshot Report), Cirrus Logic (CRUS - Snapshot Report) and Rambus Inc (RMBS - Snapshot Report). All these stocks carry a Zacks Rank #2 (Buy).

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