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Advanced Micro Devices, Inc. (NYSE:AMD) is a global semiconductor company with facilities around the world. Recently, the company has been receiving a tailwind from design wins in the PS 4 and Xbox One. My initial estimate is for a $700 million revenues benefit to AMD, thus far. I think the company's financial performance should continue to benefit from the ramp of the new gaming consoles during the first half of 2014.

On the other hand, PC sales are expected to continue to slump during 2014. Declining CPU and GPU ASPs exacerbates the slump in PC sales. While I expect a 5% sequential increase in net revenue during the fourth quarter, I think net revenue could decline 5% in 2014. I think a smaller restructuring could be announced during the fourth quarter results. I would like to see operating expenses at about $400 million per quarter during fiscal 2014.

But an increase in revenues during 2014 on a stronger than expected PC market and/or stronger than expected semi-custom ramp could leave management with sufficient cash flow from operations to decrease the net debt footprint and unlock equity value. For the time being, I continue to think of AMD as a $6 billion to $10 billion company, which is trading at $3 billion.

Recent Developments

  • The organization announced the AMD Radeon R7 and R9 Series graphics cards, which also include AMD TrueAudio Technology.
  • AMD's SeaMicro SM15000 servers power Verizon's high-performance public cloud.
  • AMD detailed its plans to offer both 64-bit ARM and x86 embedded solutions starting in 2014.
  • Combined Xbox One and PS 4 sales topped 7M; I estimate $700 million of revenues for AMD.

Business Summary

Advanced Micro Devices, Inc. is a global semiconductor company with facilities around the world. The company offers x86 microprocessors, as standalone devices or as incorporated as an accelerated processing unit, chipsets, embedded processors, dense servers, graphic processing units, semi-custom SOC products and technology for game consoles.

The decline in net revenue from Computing Solutions is partly attributable to declining unit shipments and partly attributable to declining average selling prices. Industry unit shipments are forecasted to decline 10% in 2014 with a continued decline in average selling prices. Consequently, I expect a decline in net revenue from Computing Solutions in the 8% to 14% range during 2014.

With dense servers, AMD moved deeper into the high-profit server market. Dense servers offer high-density and energy efficiency for virtualization, cloud, and big data. The AMD SeaMicro SM15000 brings together compute, networking, and storage in a single 10 RU energy efficient system. Essentially, it is a data center in a box.

The SM15000-OP features 64 Octal Core Servers with AMD Opteron processors while the SM15000-XH features 64 Quad Core Servers with Intel Xeon E301265Lv3 processors (the "Haswell" microarchitecture). The SM15000-XN features Intel's Ivy Bridge microarchitecture and the SM15000-XE features Intel's Sandy Bridge microarchitecture. Future configurations are expected to continue to feature both AMD and Intel microarchitecture with AMD increasing the quantity of its CPU configurations.

From a storage perspective, AMD offers multiple storage enclosures with some offerings containing as little as 48TB of storage to as much as 5 petabytes of storage.

At the end of 2012, management started to restructure the company's operations. The structuring is beginning to pay dividends as AMD reported an operating profit in the third quarter of 2013. Looking forward, it is imperative that management maintains operating expenses below 30% of revenues. Slumping PC sales pose a near-term risk to continued operating profits.

At the end of the calendar third quarter, total cash and cash equivalents and marketable securities were a reported $1.06 billion. The cash ratio was 0.60 and the current ratio was 1.67. Net working capital was $1.18 billion. The financial leverage ratio was 9.95, which is up from 7.43 at the end of 2012. The increase in leverage is mostly attributable to an increase in the accumulated deficit. I think the solvency position could improve during the first quarter of fiscal 2014 as the payable to Global Foundries is reduced.

For the first nine months of 2013, $169M of cash was used in operating activities as an increase in accounts receivable and inventories was only partly offset by an increase in accounts payable. Cash was provided from operating activity during the fiscal third quarter. I need to see positive cash flow from operating activities during the first six or nine months of fiscal 2014.

During the fourth quarter, AMD should continue to benefit from increased semi-custom net revenue. I'm looking for revenues of $1.53 billion with operating income of $112 million and EPS of $0.08. For the full year, operating income could be $80 million with an interest expense of $180 million. The EPS could be $-0.15.

Looking into 2014, I see a smaller restructuring as being on the table. Management said they are looking for a 10% decline in PC sales during 2014. I think the combination of slumping PC sales and slowing revenues from semi-custom could lead to a slight decline in 2014 revenues relative to 2013. I view $400M per quarter in operating expenses as a desirable level and think shares could rally during 2014 if operating expenditure is decreased and/or revenues increase relative to 2013.

Risks

  • Competition from Intel Corporation could adversely impact the results of operations.
  • Variations in market growth and demand for AMD's products could adversely impact the results of operations.
  • PC market conditions could adversely impact the results of operations.
  • Global economic conditions could weigh on the results of operations.
  • The share price is likely to remain volatile and investors could lose a portion or all of their investment.
  • Investors should judge the suitability of an investing in AMD in light of their own unique circumstance.
  • Risks not mentioned in this section could cause a significant decline in the share price.
Source: AMD: Why I Am Leaving A Small Restructuring On The Table