Here we go again…
Shares of Advanced Micro Devices (AMD) for the third sequential quarter following earnings suffered a decline in spite of their inline EPS, return to profitability, and progress they have made toward their recovery. AMD has demonstrated forward momentum and announced that they have successfully completed the second of three stages for their restructuring plan. In my first article on Seeking Alpha, I proposed three reasons why AMD would beat on earnings and although they were an important attribute, the losses from AMD's Computing Solutions segment made the candle flicker for the company's future. AMD is trying very hard to deter their revenue from relying on the PC, and by 2015 AMD expects to see revenues from other sources make up for more than 50% of AMD's total income. For the third quarter in a row we have watched the company's shares decline, making us wonder if it's time to buy on the dip, again.
The results for Q4 2013 & fiscal year 2013
AMD announced a fourth quarter revenue of $1.59 billion, making it a solid beat on the estimated $1.54 billion as well as a 9% increase sequentially and 38% increase year-over-year. Their net income (non-GAAP) was $45 million, or $0.06 per share coming in line with estimates from the Street, but still missed as many investors wanted to see more. Concluding the year we saw revenues at $5.3 billion with a net loss of $84 million, or $0.11 per share. A loss of 11 cents is better than the 16 cent loss for 2012, but it was still an unprofitable year.
AMD has only demonstrated two quarters of profitability, leaving us with a limited pool of information to judge the company's situation accurately. For the first two quarters of 2013, AMD was focused on reducing costs, and with a lack of compelling products to sell they resulted in a loss of $159 million for the first half of 2013. During the second half of the year, AMD benefited greatly from the refresh of new consumer graphics cards, next generation gaming console sales, and its spot in the new Mac Pro, which features two of AMD's FirePro professional graphics cards. This led to the second half of the year bringing in a profit of $76 million, ultimately being an impressive improvement but not enough to offset the losses from the first half of the year.
What hurt most
The most painful part of the earnings was seeing revenues from their Computing Solutions segment drop 9% sequentially and 14% year-over-year in spite of a recovering PC market. AMD's available product line-up for the quarter was not competitive enough to gain any market share. To help improve the CS segment, they are showing a strong focus on their Accelerated Processor Units (APU), a promising new architecture by AMD. I believe in the potential of AMD's APU and recently wrote that this unique architecture will strongly benefit AMD and may even revolutionize computing altogether. Unfortunately for 2013 earnings, due to the timing of the new APU's release, Kaveri, which was only available to venders in December and consumers in January, CS segment showed massive declines as expected. Although Kaveri is a promising new processor with the first full HSA features ever, it is still too early to tell whether or not it will add a strong boost to AMD's CS revenues in the future. We are also expecting APUs Beema and Mullins later this year as they promise double the performance per watt but it is still unclear how it will stack up against competition.
AMD completed their second step in restructuring
On the brighter side, AMD completed the second of their three-phase restructuring plan that was announced in Q3 2012. The three keywords to this plan are: restructure, accelerate, and transform. Earlier this year, AMD completed the first phase by dramatically decreasing operating expenses while increasing revenues. The second step involved boosting revenues dramatically with an entire new set of products, specifically being the gaming consoles, new graphics cards, and Mac Pro FirePro professional graphics solutions for the fourth quarter of 2013. Being halfway through their recovery, AMD's final plan involves a complete transformation of their offering with an even further diversification in product line-ups ranging from semi-customs, ultra-portable, servers, professional graphics, and more. The goal is to have these growth businesses generate at least 50% of their revenue by the end of 2015.
It's going to take some time
Unfortunately AMD's turnaround is going to take time as this is not something that's going to happen tomorrow or even this quarter. The reality was that many investors were really hoping that AMD would annihilate on earnings, and when they failed to satisfy the hype it resulted in a heavy 12% sell-off on the post earnings trading session. AMD, as said by CEO Rory Read, is only halfway through a multi-year turnaround and it will likely take at least a year before we start to see a strong foundation under the company. Lastly, they announced that their goal for 2014 was just to generate a profit or at least stay out of the red, and with the last two quarters easily showing increasing profitability, I believe this is a very conservative goal that should easily be exceeded.
AMD has demonstrated on-time results for its restructuring promise in everything except computing solutions, now being their new focus. As AMD continues their turnaround, I believe that they have what it takes to meet and exceed the expectations of the market. Please note that when investing AMD, just like Contributor Justin Jaynes said, it is wise to use extreme caution and note that we are dealing with a company that has a very blurry future. It's also fair to note that AMD trades with a beta of 2.21, meaning it is more than twice as volatile as the market, so again caution is advised. That aside, AMD is my number one pick for 2014.