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Advanced Micro (AMD) Achieves Breakeven in Q3 Earnings

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Advanced Micro Devices (AMD - Free Report) broke even in the third-quarter of 2016 as against the Zacks Consensus Estimate of a loss of 2 cents. The company had reported a loss of 19 cents in the year-ago quarter.

Revenues increased 27.3% sequentially and 38.6% year over year to $1.31 billion. The increase was driven by higher sales of semi-custom System on Chips (SoC) and better-than-expected seasonal graphics sales. Moreover, revenues were well above the Zacks Consensus Estimate of $1.21 billion.

However, following the results, sharesplunged5.8% in after-hour trading.

Advanced Micro benefited from strong demand for its semi-custom and graphics products. However, the company provided weak fourth-quarter guidance due to seasonal weakness.

Revenues

Advanced Micro has two reportable segments — Computing and Graphics (focused on the traditional PC market), and Enterprise, Embedded and Semi-Custom (focusing on adjacent high-growth opportunities). The details of these segments are discussed below:

Computing and Graphics includes desktop and notebook processors and chipsets, discrete GPUs and professional graphics. This segment accounted for 36.1% of revenues and was up 8.5% sequentially and 11.3% year over year to $472 million.

The revenue growth was driven by increased sales of Graphics Processing Units (GPUs), partially offset by a decline in sales of client desktop processors and chipsets.

Client mobile processor sales increased sequentially and year over year. Client average selling price (ASP) decreased sequentially due to lower mobile and desktop processor ASP and was flat year over year.

However, GPU ASP increased sequentially and year over year driven by higher channel and professional graphics ASPs.

Enterprise, Embedded and Semi-Custom includes server and embedded processors, dense servers, semi-custom SoC products, engineering services and royalties. This segment brought in the remaining 63.9% of revenues, up 31.1% sequentially and 41% year over year to $835 million, driven by higher sales of semi-custom SoCs.

Operating Results

Non-GAAP gross margin (excluding Wafer Supply Agreement (WSA) charges) was 30.5%, which contracted roughly 50 basis points (bps) sequentially but was up 800 bps on a year-over-year basis.

Adjusted operating expenses of $376 million increased 3.2% sequentially and 5.1% year over year.

Non-GAAP operating income was $47 million as against a loss of $110 million in the year-ago quarter and $15 million in the previous quarter.

Shifting of Headquarters

During the quarter, Advanced Micro announced its plan to move out of its Sunnyvale headquarters to a 220,000 square foot, six-storied building in Santa Clara featuring modern amenities and features.The company intends to shift to the new facility during the second half of 2017. (Read More: Advanced Micro to Shift Headquarters to Santa Clara).

GLOBALFOUNDRIES (GF) WSA Agreement

During the quarter, Advanced Micro recorded a charge of $340 million related to the 6th amendment of the WSA-GF agreement. This charge comprises a $100 million cash payment to GF and approximately a $240 million worth warrant to a Mubadala-owned company to purchase up to 75 million shares of AMD common stock at a price of $5.98 per share by Feb 2020. (Read More: Advanced Micro and Global Foundries Amend Supply Deal)

Balance Sheet

Advanced Micro exited the third quarter with cash and cash equivalent balance of $1.26 billion, up $301 million from the previous quarter.

During the quarter, the company raised approximately $1.4 billion in cash, before issuance costs, as a result of issuing $690 million of common stock and $700 million of Convertible Notes due 2026.

Inventory was $772 million, up from $678 million in the previous quarter. Total debt (short term and long term) was $1.63 billion, down $0.6 billion sequentially.

Guidance

Management expects fourth-quarter 2016 revenues to decrease 18% sequentially (+/- 3%), primarily due to seasonal weakness in semi-custom and graphics products.

Non-GAAP gross margin is likely to be 32%. Non-GAAP operating expense is projected at approximately $350 million due to an increase in R&D investments. IP monetization licensing gain is expected to be approximately $25 million.

For full-year 2016, Advanced Micro expects revenues to be up almost 6% from full-year 2015.

Our Take

The decent third-quarter results reflected Advanced Micro’s improving position in key markets with the introduction of several Accelerated Processing Units and GPUs. Moreover, partnerships with the likes of Alibaba Group BABA for the supply of Radeon Pro GPUs for its cloud services will boost its competitive prowess. Notably, the company trails NVIDIA Corporation NVDA as the second-largest manufacturer of graphics chips for high-end computing.

Additionally, upcoming new products like Zen will drive top-line growth in the long run.

However, weak fourth quarter guidance is disappointing.

ADV MICRO DEV Price and EPS Surprise

ADV MICRO DEV Price and EPS Surprise | ADV MICRO DEV Quote

Zacks Rank

Advanced Micro has Zacks Rank #2 (Buy).

A better-ranked stock in the broader technology space is Ambarella Inc. AMBA, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Notably, the consensus estimate for Ambarella’s current year moved up to $1.54 (from $1.29 earlier) over the last 60 days.

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