Earnings Preview: AMD

Advanced Micro Devices, Inc. (AMD - Analyst Report) is scheduled to announce its first-quarter 2012 results on April 19, 2012. We witness only 1 upward movement in the analysts’ estimates in the build-up to the release.

Prior-Quarter Synopsis

AMD’s fourth-quarter non-GAAP earnings were 19 cents a share, ahead of the Zacks Consensus Estimate of 16 cents due to better gross margins and lower-than-expected expenses.

Revenue came in at $1.69 billion, flat sequentially and up 2.5% from the year-ago quarter. In the last quarter, the company benefited from strength in its new products viz, Brazos, Bulldozer and Llano but could not meet its guidance of a 3% sequential increase due to HDD shortages which hit the PC market.

Gross margin was up 98 basis points (bps) sequentially and 65 bps year over year to 45.7%, driven by higher ASPs and a favorable mix. Operating margins also expanded in the quarter on lower operating expenses and solid cost management.

First Quarter Guidance

AMD guided to first quarter sequential revenue decrease of 8% (+/- 3%), below the Street expectations of around $1.6 billion. The gross margin is expected to be around 45% and operating expenses around $590 million.

(Detailed earnings results can be viewed in the blog titled: Few Bright Spots in AMD’s Q4

Agreement of Analysts

Out of the 24 analysts providing estimates for the first quarter, none revised the estimates in the last 30 days. Over the same period, only 1 analyst made an upward revision for fiscal 2012.

With the Gartner report indicating an improving PC environment and hard drive shortages recovering a bit faster than anticipated by many, the majority of analysts believe that AMD will come out with in-line March quarter results. They believe that AMD continues to improve 32nm yields at GlobalFoundries, and this improving yield should lead to expansion in AMD’s gross margins.

On the other hand, a handful of analysts expect first quarter revenue to be above the Street consensus estimate of $1.56 billion. They expect the upside to come from further share gains in entry-level notebooks (Brazos) and continued growth in servers. The analysts believe that once the macro environment improves, AMD will likely benefit from share gains in servers and cloud computing, and increasing content in notebooks and desktops. The analysts also expect value-priced Trinity based ultrathins to be a solid driver in the second half of 2012.

However, the majority of analysts believe that the company will be limited by stiff competition from Intel Corp. (INTC - Analyst Report). They remain concerned about share losses to Intel, as Intel rolls out a number of new products including 22nm IvyBridgefor PC clients and Romley for servers.

Magnitude of Estimate Revisions

In the past 30 days, there was no change in the Zacks Consensus Estimate for the first quarter, although the estimate for fiscal 2012 increased a penny to 66 cents.

Over the 90-day period, the Zacks Consensus Estimate fell by a penny to 9 cents for the first quarter but increased 7 cents to 66 cents for fiscal 2012.

Our Recommendation

AMD is the second largest producer of microprocessors, GPUs and chipsets in the world. The company’s new products, strength in graphics, and advancements in 32nm manufacturing are quite encouraging. An improving HDD supply chain, its strong product portfolio and cost management should position AMD for an in-line first quarter.

While AMD suffered from GlobalFoundry 32nm yield issues last year, the company’s recent adoption of a new wafer pricing agreement indicates that these issues could be behind it.

Additionally, AMD’s promise to deliver competitive products with Llano and Bulldozer should also increase its market share.

However, Intel also has some new products lined up, which along with its growing capacity and lead at 22nm, should keep it ahead of AMD. Hence, AMD shares carry a Zacks Rank of #3, implying a Hold recommendation in the short term (1-3 months).