On August 22, AMD held a Corporate Responsibility Program and Activities Conference Call. Although the stated purpose was not financial, there was some additional financial forecasted by management.
I almost did not read the Seeking Alpha transcript, because I thought the conference call was not related to the financial status of AMD. I think most other investors also failed to listen to the call, and did not read the transcript.
The purpose of this article is to analyze the additional info, so as to gain greater understanding of what AMD management knows. The additional new financial info relates to cash balances and cash uses, which allows a free cash flow forecast to be formulated for the next few quarters.
I have been analyzing the forecasted inventory and cash numbers, that were presented by AMD corporate vice president Ruth Cotter, that you can read here:
" What's critical is obviously liquidity to AMD, the minimum thresholds to run the business is approximately $700 million. So, we believe the optimal zone is $1.1 billion and what we mean by that is enough of a cushion between $700 million and $1.1 billion to facilitate the company if any unforeseen circumstances were to occur. So, inventory will go up to about $800 million in the third quarter of this year, another unusual fact about AMD is that between 90% and 95% of our cash is actually held domestically, which is very attractive. And even if you think about cash burn over the next several quarters and we have one large payment to one of our foundry suppliers in the first quarter of 2014 of $200 million, and notwithstanding that payment, we still believe we can stay in the $1.1 billion cash range."
" We expect that inventory will go up to about $800 million in the third quarter of this year, and that's largely based on the products we are building for this semi-custom business, and AMD has about $2 billion of that."
My Analysis for Q3
AMD Q2 balance sheet showed inventory of $711 million, so if "inventory will go up to about $800 million in the third quarter of this year," that is a rise of about $89 million.
The statement, "we still believe we can stay in the $1.1 billion cash range," indicates to me that AMD will be generating at least $43 million in cash from operations in the third quarter. The reason that number is not higher is because of the sale lease back announcement, that is expected to generate $46 million net of all fees, in the third quarter.
AMD used 752 million shares fully diluted in their Q2 10Q, so $43 million of cash from operations equals approximately 5.7 cents per share, in Q3 from operations.
My Analysis for Q4 2013 and Q1 2014
This statement is worth re-reading:
" And even if you think about cash burn over the next several quarters and we have one large payment to one of our foundry suppliers in the first quarter of 2014 of $200 million, and notwithstanding that payment, we still believe we can stay in the $1.1 billion cash range."
AMD is essentially forecasting that they will generate $200 million of cash between Q4 2013 and Q1 2014, which if split equally is $100 per quarter.
If we assume that this cash generation is all from operations, that equals approximately 13 cents per quarter. 13 cents per quarter for Q4 2013 and Q1 2014 is substantially above the Street consensus for operating cash flow.
Furthermore, 13 cents per quarter is at an annualized rate of about 52 cents per quarter. While actual reported earnings will be less due to depreciation and amortization, free cash generation from operations is the most important metric that value investors like Warren Buffett consider, when looking for investments.
AMD is Uniquely Positioned
This is another quote from the conference by Ruth Cotter, which is worth meditating about:
"When we think about dense servers, it's all about low power and leveraging the differentiated IP we have there through the acquisition of SeaMicro. We have over 80 customers in the market today with thousands of systems already proven and working in the market which differentiates us significantly from the competition in that space. And we're uniquely positioned in this market because we offer both x86 and next year we will bring our first ARM-based 64-bit server solutions to market, which we're very excited and pleased about, and that will allow us to continue to grow this segment of the market."
AMD is forecasting that their super low power ARM 64-bit based server chips will start delivery in mid-2014, which should be the second stage booster rocket to the AMD transformation, with the first stage based upon the gaming console market domination.
Therefore, I see AMD's sales and profits accelerating in the second half of 2014 because of domination in the low power server market.
Intel currently owns about 95% of the server market. It makes no sense for Intel to cannibalize their high end CPU server domination by aggressively trying to compete with AMD at the low end. If Intel were to reduce prices to compete with AMD, the result would be a significant reduction in profits, in Intel's only healthy division.
While there is still concern about the PC market, AMD appears to have survived the storm, and is now positioned for better than consensus sales and growth over the next couple of years.
Furthermore, management seems to have enough insight, at more than half way through Q3, to reiterate their positive guidance not only for Q3, but all the way to the end of Q1 2014.
With over 121 million AMD shares sold short, as of the last public report, the cynics will be forced to buy heavily on any additional good news.
A hint about future good news, can be read in this statement, that is also taken from the conference transcript from Seeking Alpha:
"As I had mentioned, we're targeting in the embedded space. It's low-end processors, it is attractive business because it's long in terms of design wins. Design wins can last beyond five years. However, the design win cycle in securing design wins is up to 18 months. So there is a lot of ahead-of-time work that goes into that segment of the market, and over coming quarters, we hope to report progress on that front."
I believe the facts indicate that the shorts have made a huge mistake by building such a massive short position against AMD. Furthermore, the shorts will be providing additional buying pressure, as the transformation continues to unfold over the ensuing quarters.