It has been about a month since the last earnings report for Advanced Micro Devices (AMD - Free Report) . Shares have added about 19% 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 the most recent earnings report in order to get a better handle on the important catalysts.
AMD Q3 Earnings In Line, Revenues Lag Estimates, Up Y/Y
Advanced Micro Devices reported third-quarter 2019 non-GAAP earnings of 18 cents per share, which matched the Zacks Consensus Estimate. Notably, the figure improved 38.5% year over year and soared 125% sequentially.
Revenues of $1.801 billion missed the Zacks Consensus Estimate of $1.828 billion. However, the top line improved almost 9% year over year and 17.6% sequentially.
Strength in Computing and Graphics segment drove the year-over-year improvement amid softness in Enterprise, Embedded and Semi-Custom vertical.
Computing and Graphics segment (70.8% of total revenues) revenues grew 36% year over year and came in at $1.276 billion.
Robust adoption of Ryzen desktop and notebook processors, which led to higher unit shipments and ASPs, resulted in year-over-year growth. Notably, AMD witnessed solid demand for high-end Ryzen processors in the reported quarter.
Management is optimistic regarding growing clout of Ryzen 3000 and Ryzen 2000 desktop processor families across leading retailers and e-tailors. Ryzen PRO 3000 Series processors have been implemented in latest HP and Lenovo devices, which in turn is expected to help AMD in expanding presence in the commercial market.
AMD introduced the second generation of its EPYC processors (code-named Rome and built on its Zen 2 microarchitecture) in the third quarter. The latest processors are already witnessing adoption by notable companies including Google, Twitter, Cray, HPE, Dell Technologies, Lenovo, to name a few.
The company also rolled out Athlon PRO processors integrated with Radeon Vega Graphics.
Client processor average selling price (ASP) improved year over year, on higher Ryzen processor sales. Moreover, Client ASP was up on a sequential basis on account of strong adoption of mobile processors and Ryzen desktop processors.
Revenues from Mobile notebook processors grew double-digit on a year-over-year basis, primarily on account of higher unit shipments and favorable product mix during the reported quarter. Management is elated on first-ever win from Microsoft’s latest Surface laptop. Notably, Surface Laptop 3 15” variant utilizes customized Ryzen Microsoft Surface Edition processor for advanced graphics performance.
In graphics domain, higher channel GPU sales drove year-over-year revenue growth. The increase was also driven by higher shipments of Radeon 5000 series GPUs based on RDNA architecture.
GPU ASP increased year over year, primarily driven by higher channel GPU sales. However, higher mix of mobile processor sales reduced GPU ASP on a sequential basis.
In the reported quarter, AMD commenced shipping Radeon RX 5500 GPU, in a bid to provide mainstream gamers with an enhanced gaming experience. Notably, Lenovo, Acer, HP, and MSI intend to utilize the latest GPU in their respective upcoming PCs.
The company noted that Data Center GPU sales remained almost flat on a year-over-year basis and declined sequentially. The company inked new deal wins in cloud and HPC vertical in the quarter. Markedly, Microsoft intends to implement AMD’s Radeon instinct GPUs and EPYC CPUs in its latest remote desktop offering to support complex graphics-intensive workloads.
Enterprise, Embedded and Semi-Custom segment (29.2% of total revenues) revenues of $525 million were down 26.6% year over year.
The year-over-year decline can primarily be attributed to lower semi-custom product revenues, partially mitigated by higher EPYC processor and server sales.
In server domain, management noted that higher shipments of latest second-gen EPYC processors drove EYPC data center CPU revenue by over 50% on a quarter-over-quarter basis.
Strength in AMD’ latest EPYC processors are enabling the company garner new deal wins from major enterprise, cloud, and HPC companies.
For instance, Google is looking forward to deploy EYPC processors to enhance data center environment and strengthen Google Cloud Platform. Moreover, Amazon’s (AMZN - Research Report) Amazon Web Services, Microsoft Azure, IBM Cloud, Tencent, OVH Cloud, among others, intend to utilize EPYC processors to enhance their respective data center architecture.
In enterprise domain, Lenovo Dell, and HPE have rolled out new platforms based on latest EPYC processors. Considering HPC vertical, U.S. Department of Defense intends to utilize AMD’s processors to power three distinct supercomputers.
Non-GAAP gross margin expanded 300 bps on a year-over-year basis to 43%, driven by strong adoption of EPYC and Ryzen processors and Radeon Gaming GPUs.
Operating expenses on a non-GAAP basis increased 13.2% year over year to $539 million, due to higher investments in Research & development (R&D) and product launches. R&D expenses surged 11.8% year over year to $406 million. Marketing, general and administrative expenses surged 25% year over year to $185 million.
Adjusted EBITDA improved 32.2% year over year to $300 million on earnings growth.
Non-GAAP operating income came in at $240 million, up 29% year over year. The year-over-year improvement was driven by improvement in sales from higher-margin offerings.
Segment wise, Computing and Graphics operating income soared 79% year over year to $179 million, courtesy of robust adoption of Ryzen processors. Enterprise, Embedded and Semi-Custom operating income was $61 million, down 29.1% from the year-ago quarter, on high operating expenses and lower revenue base.
Balance Sheet & Cash Flow
AMD ended the third quarter with cash and cash equivalents (including marketable securities) of $1.21 billion compared with $1.13 billion in the previous quarter.
Total debt (long-term plus short-term) was $872 million, down from $1.03 billion reported at the end of the previous quarter.
Operating cash flow came in at $234 million, compared with $30 million in the previous quarter.
Free cash outflow was $179 million compared with free cash outflow of $28 million in the previous quarter.
For fourth-quarter 2019, AMD expects revenues to be roughly $2.1 billion (+/-$50 million), up almost 17% sequentially and 48% year over year.
Management expects seasonal uptick on holiday season and robust sales from Ryzen, Radeon and EPYC products to drive year-over-year and sequential revenue growth.
Server revenues are anticipated to improve quarter over quarter, owing to ongoing momentum of the company’s latest second-generation EPYC processors.
The company notes that it is on track introduce mainstream desktop processor featuring 16-cores and third-generation Ryzen Threadripper processor family, to power high-end desktops and content creation applications.
Nonetheless, revenues from Semi Custom vertical are anticipated to be sluggish, as Sony and Microsoft intend to roll out new AMD-powered consoles in holiday of 2020.
Non-GAAP gross margin is anticipated to be 44%. Operating expenses are anticipated to be roughly $535 million.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -9.64% due to these changes.
At this time, Advanced Micro has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Advanced Micro has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.