Did AMD Really Have A Disaster Quarter?

Jan.22.14 | About: Advanced Micro (AMD)

In the after-hours of Tuesday, AMD's (NYSE:AMD) shares saw a sell-off as the company announced the results of the last quarter. By now, AMD's investors already know that the company's stock always rallies before the earnings report and sells off on the news of the earnings release, and this quarter was no exception to this rule. Coincidentally, the company's share price was around the same spot where it was last quarter as the company was announcing its third quarter results, and the sell-off we are seeing right now is pretty much the same sell-off we saw that evening as the company announced its quarterly results. Having said that, did AMD really have such a bad quarter, or are investors being overly emotional? This article will try to find an answer to that.

First, let me say that the company actually met the analyst expectations both in revenues and net profit. AMD generated $1.59 billion in revenues, which was roughly beat the analyst estimates of $1.54 billion and the company's net profit of 6 cents per share was in line with what the analysts were looking for. Nothing in AMD's last quarter was that surprising or shocking. The sell-off we are seeing in AMD's shares at the time of writing this article is a result of two things. One, many investors were expecting the company to beat the analyst estimates by a large margin, and two, the company's guidance for the first quarter of this year was weaker than what analysts were looking for.

Compared to the fourth quarter of 2012, AMD's revenues jumped 38%, up from $1.16 billion to $1.59 billion and compared to the previous quarter, the company saw a revenue increase of 8.9%. Given the recent declines in the volume of the PC industry, it looks like AMD's non-PC segments are picking up the slack and helping the company grow. AMD's operating profit of $135 million was up sharply from the previous quarter's $95 million, and it was tremendously better than the fourth quarter of 2012 when the company reported an operating loss of $422 million.

For the full-year of 2013, AMD's revenues were down slightly from $5.42 billion to $5.30 billion, while the company's operating profit was up from negative $1.06 billion to positive $103 million. The company still reported a loss of 83 million or $0.11 per share for the full-year of 2013; however, this is much better than the net loss of $1.18 billion of $1.60 per share it reported in 2012. Things are definitely improving at AMD, even though the rate of improvement might not be as fast as what many investors were looking for.

Many investors are also worried about AMD's declining margins since the company had to move away from a declining PC industry with high-margins to different kinds of industries with lower-margins but stronger growth. Basically, AMD had to choose between short term margins and growth and it made its decision towards growth. This was already known by the investors and we were already expecting a decline in gross margins. I don't know why investors act like the decline we are seeing in the company's gross margin is a huge surprise. Quarter-to-quarter, AMD's gross margin fell by 1% whereas year-to-year the decline was 4% if we look at the non-GAAP figures. In 2012, AMD's GAAP gross margin was 23% and the company's non-GAAP gross margin was 41%, compared to last year's GAAP gross margin of 37% and non-GAAP gross margin of 37%. Basically, AMD had several large one-time charges in 2012 that hurt the company's GAAP margins but those charges did not happen in 2013.

In the last couple years, one of the biggest concerns for AMD investors was centered on the company's mountain of debt. Many investors were unsure whether the company would be able to service its debt or default on its obligations. AMD spent $44 million on interest expenses in the last quarter and the company spent $177 million on this item in the year of 2013. Considering how the company's net income for the last quarter was only $89 million, it is safe to say that AMD's debt payments eat a big chunk of the company's profits. In fact, AMD's debt payments are the biggest threat in front of the company's profitability in the near future because the company has to pay about $15 million per month in interest expenses alone. During the quarter, AMD's long-term debt fell from $2.04 billion to $2.00 billion and the company's short term debt rose from $5 million to $60 million, whereas the company's total debt rose by about $9 million. AMD will have to grow its profits big time before it can stop worrying about its debt. On a positive side, the company has $1.2 billion in cash, short-term investments and highly liquid assets. This number was unchanged from last quarter; however, having some cash on the side makes it less likely that the company will be defaulting anytime soon.

During the quarter, many investors were very excited about the company's new projects, particularly its work with Microsoft's Xbox One and Sony's PlayStation 4. The two consoles sold about 6 million copies during the holiday season and AMD benefited greatly from this. Still, a lot of investors were probably looking for more, because the company has 100% of the market share in the new generation consoles and these consoles were coming out after a break of 7 years, which means a lot of consumers were looking forward to get their hands on a copy. It turns out that the holiday season of 2013 was weaker than expected for the consumer electronics, evidenced by the recent weaknesses we saw in GameStop (NYSE:GME) and Best Buy (NYSE:BBY).

AMD's PC business saw its revenues decline from $790 million to $722 million during the quarter and this resulted in the segment posting a loss of $7 million. Compared to the same quarter last year, the decline in the company's PC business was as large as 13%; however, the company's graphics and visual solutions business grew solidly from $326 million to $865 million, which more than offset the declines in the PC business.

It looks like AMD's troubles will continue in the short term but there is light at the end of the tunnel as long as the company keeps executing. The road for AMD investors will be a little bumpy but I don't really see a reason to sell AMD right now. In fact, I might initiate a long position soon to take advantage of the ongoing sell-off.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AMD, over 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.