Advanced Micro Devices' (NYSE:AMD) Q4 quarter was not bad. AMD earned $0.06 a share after a loss of $0.14 a year ago, in line with the Thomson Reuters estimate. Revenue increased 9% sequentially to $1.59 billion and 38% year-over-year, which beat the consensus estimate of $1.54 billion. On a year-over-year basis however, total revenue was down by 2%. So while the company is gaining short term momentum, the overall yearly picture still does not make for a perfect picture.
In addition, guidance from the company was a little bit disappointing, with management calling for a 16% drop in Q1 revenue. While this is in line with what the market was expecting (minus $20 million in revenue), I think the market was expecting guidance to surprise to the upside, given all the chips the company is selling to game console makers Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE).
However game console chip sales did not save the day, because the computing solutions segment recorded a sequential revenue decrease of 9% and 13% year over year. In other words, lower worldwide PC sales are still weighing on the company. Having said that however, management did guide for an increase in full year revenue and said it would be free cash flow positive. But that was not enough to get anyone excited, because the positive guidance was only marginal.
But I don't think the current quarterly report was the reason that the stock took a dive. See, by virtue that AMD is a turnaround stock, the turning around has mostly to do with the balance sheet. Problematic companies such as AMD usually underperform because they have balance sheet issues, and not because they don't have fluffy earnings. And AMD's balance sheet issue, is its high debt load.
Now personally I don't think the company will have a hard time dealing with its debt, because I personally think it's on a path to recovery. It has a lot of things going for it, and the console business is just a small part. However the market usually sells first and asks questions later if it doesn't get what it wants. And in AMD's case, I think it was looking for some kind of sign that the company would have lower its debt at a faster pace.
In AMD's defence, the balance sheet did deleverage a little. AMD reduced long term debt by $46 million sequentially, which is not bad. The current ratio also improved and currently stands at 1.78 vs 1.66 for the previous quarter. Also, total liabilities -- total current liabilities, plus long term liabilities, plus other long term liabilities -- were lower by about $100 million sequentially. That's about a 3% debt reduction from quarter to quarter. And if the company keeps this up, they will be off the "debt hook" in several quarters.
Interest expense for this quarter was $44 million compared to $47 for the previous quarter. If the company can continue performing like it did this quarter, or even surprise us during the year (or maybe find some way to reduce debt fast), I think the market will look at AMD's stock in a whole different way. But for the time being, unless it gives the market a very big surprise, the market will doubt first and take a look at the stock afterwards.
Combined, Sony and Microsoft sold more than 7 million units in less than two months. This is more than double the number of prior generation consoles sold upon introduction. The reason this is important is because overall sales of consoles over the long run will probably be higher than in previous generations, which will give the company a higher and a more predictable revenue stream.
The company is a leader in the graphics space, its chips are in Apple's (NASDAQ:AAPL) new Mac Pro and its Kaveri chip should do very well. And while the company expects PC sales to be lower in 2014, they did say they see signs of stabilization. In addition, the company is seeing interest from traditional OEMs in the dense server space, and cloud customers looking to expand into the data center. All this I think will be enough to offset lower PC demand. And when PC demand comes back, things will change for the better very fast, and the turn around will be complete.
So I am I still positive on AMD? The answer is yes, and the reason is simple. Due to the company's turnaround special situation, the slightest positive news over the year will totally change the perception the market has on AMD.
Yes there are risks associated with this theme, but there are risks to everything. In AMD's case, I think the risk is well worth the potential reward. And if I am right, we should see a positive surprise from the company within 2014. And if that happens, I also think that AMD has a very good chance of doubling over the next 12 months.