In my last article on Advanced Micro Devices (AMD, Financial), I spoke about the new CEO appointed by the company – Lisa Su – at a time that surprised investors and analysts alike. Just a week before the earnings, the company promoted Lisa Su to be the CEO of AMD with the objective to execute the last leg of AMD’s restructuring for which she seemed the most capable. As I had mentioned therein, the company was planning to put Lisa Su in charge, for quite awhile, and finally implemented the decision in the last week. As per the company management, Lisa Su is much more aggressive and technical and has shown strong leadership skills since her induction in 2012.
A study of the results
Just yesterday, the company announced its third-quarter results which sent the shares tumbling and the semiconductor company had to experience a slide of around 7.6% in after-hours trading because of the earnings miss and soft guidance. The company reported an overall revenue of $1.43 billion, a 2 percent decrease year-over-year and net income of $17 million, or 2 cents a share. Wall Street was expecting AMD to report third quarter earnings of 4 cents a share on revenue of $1.47 billion and hence, the investors were disappointed when the company missed the topline estimate. One of the depressing aspects of the earnings call was the substantial reduction in cash and cash equivalents of the company from $1.2 billion in the last year to $938 million. Owing to the hard times and continuous bleeding, the new CEO has already announced a massive re-organization exercise which will see a 7% cut in AMD’s global workforce. (Discussed later in this article)
To continue further with the results, AMD’s computing and graphics segment took a sales hit of 6% year-over-year. To be honest, this might have come as a surprise to investors and analysts as the expectations were high from the said segment. AMD pointed out during the call that “challenging market conditions” were responsible for the unsatisfactory performance of its computing and graphics segment. With effect from July 1, 2014, AMD reorganized their reporting structure into two groups. The Computing and Graphics group focuses on desktop and notebook processors, chipsets, discreet desktop GPUs and workstation GPUs. The Enterprise, Embedded, and Semi-Custom group includes server processors, embedded processors, dense servers, semi-custom SoCs, engineering services, and royalties, which is pretty much every market AMD is in other than the traditional desktop/notebook market.
Intel is getting better and fast
Now, AMD stated that the lower than expected demand for chipset and GPU units led to the downfall in revenue for this division. Also, it is significant to note that rival chipmaker Intel (INTC, Financial)Â is already moving to 14nm chips whereas AMD has to rely on Global Foundries and other fabs in an attempt to catch up. In fact, Intel posted improved earnings and topped analyst expectations on its third quarter results. The Silicon Valley chip giant reported Tuesday that net income in the third quarter rose 12% on a 7.9% increase in revenue, reaching a record quarterly total for the 46-year-old company. Its results eased fears that Intel would suffer a slowdown that has hit other companies in the semiconductor sector and therefore, investors of AMD were further shocked to see the poor numbers.
Intel gained good leverage from the continuing demand for chips used in server systems, a space where it has an even better market share as compared to the PC processors segment. In fact, Revenue for its data center group, which sells server chips, rose 16%. Additionally, Intel’s thoughtful and significant entry into the tablet markets is going to bode well for company’s margins in the near future. The CEOÂ vowed last November to put Intel chips into 40 million tablets this year, and he offered subsidies to manufacturers to reach that goal. Shipments of tablet chips in the third quarter totalled about 15 million units, he said Tuesday, indicating that the company is on track to meet its quota.
Some good news
One item of good news that investors can rejoice about is that AMD remains in good status within its Non-PC market, particularly the Mac business. Apple's desktop line-up continues to feature AMD chips for graphics processing. It gives the chipmaker a bit more time to develop its outward strategy into different markets, notably into the burgeoning mobile and wearable market.
Also, the restructuring exercise, though being perceived as a negative one by analysts, can turn out to be a big time life-saver for the company. It is not kept from the investors that AMD is struggling financially and in times of distress, tough decisions have to be taken. As per reports, AMD forecasts restructuring charges of $57 million (mainly includes employee severance) and $85 million in 2015 OPEX savings. Hence, as it is visible, this move could fill some cash into company’s pockets.
Takeaway
To conclude, it is quite clear that AMD is struggling on all fronts and the headwinds in the semiconductor industry going to make it only tough for the chipmaker, to bounce back. However, the company is taking baby steps towards a sustainable recovery and I am optimistic in the new leadership of the company to achieve this goal. But, this clearly does not mean that I recommend a position in the stock. For now, the wisest decision is to watch from the side-lines and wait for some concrete signs of a turnaround.
