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Advanced Micro Devices (AMD - Analyst Report) reported earnings of 2 cents per share in the first quarter of 2014, exceeding the Zacks Consensus Estimate by a couple of cents.

Revenues

AMD generated revenues of $1.40 billion in the quarter, down 8.8% sequentially but up 28.4% year over year. However, first-quarter revenues were better than the Zacks Consensus Estimate of $1.34 billion and management’s expectations of 16.0% (+/- 3.0%) revenue decline driven by healthy demand for Radeon GPUs and semi-custom gaming APUs.

Revenues by Segment:

Computing Solutions comprised 48% of AMD’s sales in the last quarter, down 8.2% sequentially and 11.7% from the year-ago quarter. The decline was due to decreased desktop and client unit shipments, partially offset by increased notebook revenues.

AMD’s Graphics and Visual Solutions business generated the remaining 52% of the sales, down 15.1% sequentially and soared 117.8% from the year-ago quarter. The year-over-year increase was largely driven by semi-custom SoCs. Management stated that GPU revenues increased sequentially as well as year over year due to strong demand for R7 and R9 series of GPUs.

Operating Results

Reported gross margin for the quarter was 34.9%, up 10 basis points (bps) sequentially but down 600 bps from the year-ago quarter. The first-quarter gross margin included a $4 million benefit from sales of certain previously reserved products.

Operating expenses of $438.0 million decreased 19.3% from $543.0 in the year-ago quarter. Also, as a percentage of sales, both research and development (R&D) and marketing, general and administrative expenses declined. As a result, reported operating margin of 3.5% compared favorably with the year-ago quarter’s margin of (9.0%).

The quarter’s GAAP net loss was $20.0 million or loss of 3 cents per share compared with a net loss of $146.0 million or 19 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 $12.0 million or 2 cents per share versus a net loss of $94 million or loss of 13 cents in the year-ago quarter.

Balance Sheet

AMD exited the first quarter with cash, cash equivalents and marketable securities of approximately $9.02 billion versus $1.10 billion in the prior quarter. Trade receivables were $840.0 million, up from $832.0 million in the prior quarter.

Total debt (short- and long-term) in the quarter was $2.14 billion, up from $2.06 billion in the previous quarter. Additionally, the company paid $200 million cash to GlobalFoundries related to the reduction of the "take or pay" wafer obligation commitments for 2012.

During the quarter, AMD used $204.0 million from cash for operations, spending $21.0 million on capital expenditures. Free cash flow was negative $225.0 million in the last quarter.

Guidance

Management expects second-quarter 2014 revenues to increase 3.0% (+/- 3.0%) sequentially. Non-GAAP gross margin is expected to be 35.0%. Operating expenses are expected to be approximately $435.0 million.

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

Our Take

AMD’s top line for the quarter surpassed its guidance, supported by new products and increased demand for 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. Last quarter, the company witnessed strong demand for AMD-powered Microsoft and Sony gaming consoles. 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 sports a Zacks Rank #1 (Strong Buy). Other stocks that have been performing well and are worth a look include Freescale Semiconductor (FSL - Snapshot Report), Rambus Inc. (RMBS - Snapshot Report) and Intel Corp. (INTC - Analyst Report). While Freescale Semiconductor and Rambus have the same Zacks Rank as AMD, Intel has a Zacks Rank #2 (Buy).

Read the Full Research Report on INTC
Read the Full Research Report on RMBS
Read the Full Research Report on AMD
Read the Full Research Report on FSL


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