The Turnaround Accelerates For AMD

| About: Advanced Micro (AMD)

Advanced Micro Devices (NYSE:AMD) reported earnings on Thursday which were slightly better than the company's guidance. Top line revenue beat estimates at $1.09 billion and bottom line losses were better as well at $-0.13 per share. Most importantly, AMD's cash position is healthier than the best projections which buy it the time it needs to return to a positive free cash flow position while it waits for revenue from its new products to begin coming in.

A report like this one raises management's credibility which is something that AMD sorely needs. In previous articles, I've discussed why I think the company's future is better than most people believe and most of that revolves around the new low-power, compact Jaguar cores that will be the new A4 and A6 series APUs and power the next Playstation from Sony (NYSE:SNE).

AMD's management has decided, rightly in my opinion, that having simplified, modular designs for its CPU and GPU cores that can be mixed together and ported between fab processes is the key to future operational efficiency and growth, giving them the flexibility to build custom solutions in markets they were shut out of previously. This may not be news to the ultra tech savvy, but it is important to reiterate when we look at where the company is today and where it will be in six to nine months.

Jaguar core APUs, code-named Kabini and Temash, will be built on TMSC's 28nm process. There are conflicting reports of where the PS4 APU will be fabbed. But, we do know that it is capable of being ported to GlobalFoundries 28nm process. While we haven't gotten the official word from Microsoft (NASDAQ:MSFT), it is the worst kept secret in technology that the "Xbox Next" will be an AMD CPU/GPU for the game processing and an ARM Holdings (NASDAQ:ARMH) core for running the OS and set top box functions. With Microsoft apparently a silent member of the HSA, it doesn't make any sense for them to not be building an x86 based SoC.

AMD is setting itself up to be in the driver's seat for the next decade of game development, much to the consternation of Nvidia (NASDAQ:NVDA) who will steadily lose influence in this arena as the next couple of years unfold. This is just one of the reasons why I have a bearish call on Nvidia and a bullish one on AMD. Nvidia has pushed itself into a corner strategically it cannot compete from long term. It will be squeezed out by its own poor choices and, I think, arrogance in thinking it could go it alone when it should have let Intel (NASDAQ:INTC) buy them years ago.

So, while there has been a lot of talk about the death of the PC, there are no signs of the imminent demise of the computer gaming industry. It's the opposite. And this is where the elegant solution of the APU is paying off. AMD is ahead of Intel in the integration of the CPU and GPU into a seamlessly working unit. Kaveri, based on the next generation Steamroller cores, will have a shared memory architecture. The upcoming Richland APUs incorporate a lot of improvements in power management, enabling serious performance gains and flattening the performance curve across the platform's SKUs.

This is important because Intel has pretty much ceded the low end of the market with Haswell to AMD's Kabini/Richland APUs. Why? Because the only way for Haswell to even come close to competing with the graphics performance of AMD's chips, it has to include the dedicated Level 4 cache - Crystalwell - with the GPU. Crystalwell is only going to ship with Core i-7's, not the Core i-3 and i-5's that are competing directly with Kabini/Richland. The early benchmarks show improvement from Haswell's HD4600 GPU but is still trails even Trinity in most applications. With Richland benchmarks showing 40+% GPU performance over Trinity it will still require OEM's to mate a discrete mobile GPU to the CPU.

I know there are people who think that Bay Trail will be able to compete in every way with Jaguar but it won't. By the time Bay Trail hits the market Jaguar will be approaching its first refresh and Beema will be right around the corner. It's good that Intel is finally getting serious about small cores and power efficiency, but without the graphics capability to match it, the value proposition to system manufacturers just isn't there.

With Jim Keller coming back to AMD and now Raja Koduri being poached from Apple (NASDAQ:AAPL), AMD once again has two of the best designers in the world working on the next stages of its turnaround. There's a lot to like in the company's quest to diversify itself from simply selling CPUs and GPUs. Getting the development pipeline back into shape and rebuilding relationships with OEMs was the first step. Setting a roadmap and executing on it reliably is now the challenge. Kabini and Richland shipped on time, if a little ahead of schedule. Kaveri must do the same.

This earnings report was an uneventful one in that we are still waiting on the arrival in the marketplace all of these new products. Q2 will give us a much better understanding about how far AMD has come and how far it has to go.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own a couple of AMD powered computers.