The share price of AMD declined substantially following the release of third-quarter earnings; I think that was the "buy the rumor, sell the news" crowd as the company returned to operating profitability on an adjusted basis.
Overall, I am happy with the firm's financial performance during the quarter. One thing that I should point out that I learned during my research is that AMD did not include shares that would have been anti-dilutive to the tune of 7% of average shares outstanding. I'm not sure if these shares will dilute existing shareholders at some point, but that is a risk.
If you look at what I wrote October 6, 2013, that game plan is intact; management is executing my vision. I would like to see continued profitability and the debt footprint reduced; the current debt load could be an anti-takeover technique. All of that said, I'm bullish on AMD.
Including what I deem to be non-recurring income, operating income was $54 million in the third quarter of 2013. At the same time, operating expenses were roughly inline with where I need them to be at 30% of total net revenue. The operating expense reductions came out of the Computing Solutions segments, which I view as a low return segment. For right now, I'm fine with these operating numbers.
The Computing Solutions segment is facing headwinds from the PC market. I like that the PC portion of the business is becoming a smaller portion of overall operations. Looking forward, I think ASPs are declining with the shift in mix to tablets, and convertible tablets. Plus, I think AMD faces increased competition from Intel in this area as the tech giant attempts to save a large portion of its consumer business.
So, I like the move to dense server and embedded processors. Combining the focus areas of GPU, semi-custom SOC, embedded and dense server, you get a picture of a company that has more pricing power. While Intel (INTC) is battling Qualcomm (QCOM) for market share in tablet and smartphone and seeing ASPs decline, AMD is focused on growth areas with less competition. Consequently, AMD is producing revenues growth and increasing profitability while Intel faces significant headwinds, competition, and deteriorating profitability.
Adding a little bit more depth, Asharf Eassa in his article is saying Intel is turning the screws on AMD. Well, Compute Solutions is roughly a $3B annual revenues business for AMD; I do not mind Intel taking $500M to $1B, which is a drop in the bucket for Intel, of annual revenues from this segment because I do not want AMD competing over $200 tablets. By competing in a market with such low ASPs, Intel is turning the screws on itself and not on AMD.
There are a lot of positives from the AMD report. Inventories, and accounts receivable increased. The PPE sales are also a positive because I thought that the firm needed to right-size its operations.
There are some negatives. The financial leverage ratio is roughly 10, which is way too high. Also, the CFO was negative, but this was because of the increase in working capital. To unlock value, AMD should decrease the debt footprint and maintain operating expenses at 15-30% of total revenues. Also, I would like to see positive CFO and positive FCFE.
Overall, I consider the fundamentals bullish, and while the company does have some work to do, AMD is headed in the right direction. I won't go into the valuations because they haven't changed much since the last time I covered the company; I still think AMD is at least a $6B company.