A month has gone by since the last earnings report for Advanced Micro Devices (AMD - Free Report) . Shares have added about 4.8% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Advanced Micro due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
AMD Q1 Earnings Beat, Revenues Down on Lower Graphics Sales
AMD reported first-quarter 2019 non-GAAP earnings of 6 cents per share, which beat the Zacks Consensus Estimate by a penny. However, the figure declined 45.5% year over year and 25% sequentially.
Revenues decreased 22.8% year over year and 10.4% quarter over quarter to $1.27 billion but beat the Zacks Consensus Estimate of $1.26 billion.
The year-over-year decline was due to weak Computing and Graphics segment revenues. Sequential decline resulted from lower client processor sales.
Computing and Graphics segment (65.3% of total revenues) revenues depreciated 25.5% year over year and 15.7% sequentially to $831 million.
The year-over-year decline can be attributed to lower graphics channel sales. Lower client processor sales hurt revenues sequentially.
AMD stated that Ryzen and EPYC processors and data center GPU revenues more than doubled on a year-over-year basis.
Client processor average selling price (ASP) increased year over year, driven by higher Ryzen processor sales. Client ASP was down slightly on a sequential basis due to a decrease in mobile processor ASP.
GPU ASP increased year over year, primarily driven by higher datacenter GPU sales. Moreover, improved product mix drove GPU ASP sequentially.
In CES 2019, AMD launched the much-awaited, next-generation, 7-nanometer (nm) Radeon Vega GPU, AMD Radeon VII. The card has been designed to deliver more than 29% of computing performance, offering extreme gaming details with 2X superior brightness and color volume.
During the quarter, Alphabet division Google announced that it has selected AMD Radeon datacenter GPUs and AMD software developer tools for its Stadia game-streaming platform.
Moreover, Apple’s updated 21.5-inch iMac and 27-inch iMac computers are powered by Radeon Pro Vega graphics cards.
AMD Ryzen and Ryzen PRO Mobile processors have gained significant traction, as HP and Lenovo are using it in their commercial PCs. In fact, Lenovo announced the IdeaPad S540 and IdeaPad S340, powered by second-generation Ryzen mobile processors.
The number of Ryzen notebook models set to be launched in 2019 is 50% higher than the ones launched in 2018. These systems are mostly from the likes of Acer, Asus, Dell, HP, Lenovo and other OEMs and are expected to be launched in the second half of the year.
AMD expanded Ryzen embedded family of processors by launching the new AMD Ryzen Embedded R1000 SoC.
Enterprise, Embedded and Semi-Custom segment (34.7% of total revenues) revenues of $441 million were down 17.1% year over year but up 1.8% sequentially.
The year-over-year decline can primarily be attributed to lower semi-custom product revenues, partially offset by higher server sales. Higher semi-custom revenues drove sequential growth.
Amazon’s cloud arm, Amazon Web Services (AWS), announced broader availability of the AMD EPYC processor-based service. AWS launched three new EPYC processor-powered EC2 instance families, including the first T3-series instances, during the quarter.
Moreover, Sony’s upcoming gaming console will be powered by a custom AMD chip based on the “Zen 2” CPU and “Navi” GPU architectures.
Non-GAAP gross margin expanded 470 basis points (bps) on a year-over-year basis to 41%, driven by strong Ryze and EPYC processors and datacenter GPU sales. Sequentially, gross margin remained flat.
Operating expenses on a non-GAAP basis increased 11.7% year over year and 5.1% from the previous quarter to $498 million.
Research & development (R&D) expenses increased 8.7% year over year and 0.5% sequentially to $373 million.
Marketing, general and administrative expenses escalated 26.9% year over year and 23.2% sequentially to $170 million.
Adjusted EBITDA decreased 33.7% year over year and 14.5% sequentially to $130 million.
Non-GAAP operating income came in at $84 million, down 44.7% year over year and 22.9% sequentially.
The year-over-year decline was primarily due to lower revenues and operating margin in the Computing and Graphics segment.
Segment wise, Computing and Graphics operating income plunged 88.4% year over year and 86.1% sequentially to $16 million.
Enterprise, Embedded and Semi-Custom operating income was $68 million compared with a profit of $14 million reported in the year-ago quarter and a loss of $6 million in the previous quarter.
The improvements were primarily driven by a $60-million licensing gain associated with the company’s joint venture with THATIC.
Balance Sheet & Cash Flow
AMD ended the first quarter with cash and cash equivalents (including marketable securities) of $1.19 billion compared with $1.16 billion in the previous quarter.
Total debt (including current portion) was $1.09 billion, down from $1.25 billion reported at the end of the previous quarter.
Free cash outflow was $275 million compared with free cash flow of $79 million in the previous quarter.
For second-quarter 2019, AMD expects revenues to be roughly $1.52 billion (+/-$50 million), up almost 19% sequentially but down 13% year over year.
Management expects weakness in graphics channel, negligible blockchain-related GPU revenues and lower semi-custom revenues to hurt year-over-year revenue growth.
Non-GAAP gross margin is anticipated to be 41%, driven by higher sales from Ryzen, EPYC and datacenter GPU processor sales. Operating expenses are expected to be roughly $510 million.
The company is well-positioned to grow GPU revenues in the second quarter and through the second half of the year.
For 2019, AMD expects revenues to increase high-single digit on a year-over-year basis. The company expects to introduce its first 7-nanometer Navi gaming GPUs in the third quarter. Moreover, AMD is on track to begin Rome production shipments in the second quarter to support a third-quarter launch.
Non-GAAP gross margin is anticipated to be more than 41%. Operating expenses as percentage of revenues are expected to be almost 29%.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month.
Currently, Advanced Micro has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Advanced Micro has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.