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Advanced Micro Devices (AMD - Analyst Report) reported a loss of 14 cents per share for the fourth quarter of 2012, better than the Zacks Consensus Estimate 20 cents loss per share, owing to solid expense management.

Revenue

AMD generated revenues of $1.16 billion in the quarter, down 31.7% year over year. The quarter’s revenue was roughly in line with its guidance of a 9% sequential decline (at the mid-point). A challenging macro-environment and growing consumer preference for smartphones and tablets impacted the company’s fourth quarter results.

Revenue by Segment

Computing Solutions comprised 72% of AMD’s sales in the last quarter, down 11.0% sequentially and 37.0% from the year-ago quarter. The fourth quarter marked a continuation of softening trends noticed in the third, both as a result of macro conditions that impacted consumer spending.

AMD’s Graphics business generated the remaining 28% of its sales, down 5.0% sequentially and 15.0% from the year-ago quarter due to lower unit volume shipments. The graphics business is currently under some pressure due to the PC market slowdown.

Operating Results

Reported gross margin for the quarter was 15.4%, down significantly from the year-ago quarter’s 45.7%. Lower volumes and unfavorable mix impacted margins in the last quarter. Utilization of backend facilities also declined, another negative for the quarter.

Operating expenses of $506.0 million decreased 15.8% year over year from $601.0 in the year-ago quarter. However, the reported operating margin was -36.5%, which shrunk from the year-ago quarter of 4.2% on account of high cost of sales due to higher research and development (R&D) expenses (as a percentage of sales) as well as higher restructuring charges.

The quarter’s GAAP net income was ($473.0) million or loss per share of 63 cents, down from ($177.0) million or 24 cents earned in the comparable quarter last year. Excluding restructuring charges and intangible amortization charges, but including stock-based compensation expenses non-GAAP net loss was $102.0 million or loss per share of 14 cents compared with $138 million or 19 cents a share in the year-ago quarter.

Balance Sheet

AMD exited the fourth quarter with cash, cash equivalents and marketable securities of approximately $1.0 billion, down from $1.3 billion in the prior quarter. Trade receivables were $630.0 million, down from $683.0 million in the prior quarter.

During the quarter, AMD used $286.0 million of cash for operations, spending $22.0 million on capex.

Guidance

Management expects first quarter 2013 revenue to decline 9.0% (+/- 3.0%) sequentially. Gross margin is expected to be flat sequentially. Operating expenses are expected to be approximately $495.0 million.

For 2013, operating expenses are expected to be approximately $450.0 million, capital expenditures of approximately $150.0 million.

Our Take

Though AMD’s bottom line beat the Zacks Consensus Estimate, it posted a significant net loss due to weak demand and a slow PC market. A more conducive market, adoption of new products, position in graphics and good execution can pull the company out of the current situation.

For this purpose, AMD has announced a massive restructuring to align the cost structure with current demand trends. Management currently expects the initiative to reduce the cost base by 25%. Also, the company plans to diversify its business into new embedded markets, including communication, industrial and gaming among others. It expects to increase revenue contribution from its embedded business and increase market share.

The company operates in a highly competitive market, which is being increasingly cannibalized by tablets from well-established players, such as Apple (AAPL - Analyst Report), Samsung, Microsoft (MSFT - Analyst Report), Hewlett-Packard (HPQ - Analyst Report) and Dell among others. Intel’s (INTC - Analyst Report) Ultrabook concept is going to further fragment the market, giving strong competition to AMD.  Currently, AMD has a Zacks Rank #3 (Hold).

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