In a market with dozens of device manufacturers, winners like Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) (OTC:SSNGY) easily came out on top due to their ability to vertically integrate all the way down to the silicon. Since these companies have the resources and abilities to produce and tailor their own silicon solutions to be exactly what they want, they can produce one-of-a-kind devices that other OEMs can only dream of. With AMD's (NYSE:AMD) semi-custom unit, it wants to provide OEMs with custom silicon solutions that enable them to create more versatile products. Sony (NYSE:SNE) and Microsoft's (NASDAQ:MSFT) latest gaming consoles were the first to take advantage of this unit by carrying custom Jaguar APUs, and together they have already shipped over 14 million units in less than seven months.
The semi-custom business doesn't stop with the new consoles as AMD already stated that more design wins are underway. This sector restored the company to profitability and arguably saved the company and it seems that it will do substantially more than just that.
AMD's semi-custom unit
In an effort to target OEMs who suffer from a lack of wiggle with silicon selection, AMD developed the semi-custom unit that allows manufacturers to create customized silicon solutions that enable them to create devices that go beyond former boundaries. For example, Sony and AMD worked together on the PS4 and created a SoC with an 8-core Jaguar CPU and according to ExtremeTech, they slapped on a full HD 7870 GPU on it. The end result is a very large 328mm^2 die that is 34% bigger than AMD's latest Kaveri APUs for the desktop.
The semi-custom unit is focused on creating custom solutions for a wide range of products from gaming, set-top boxes, smart TVs, tablets, servers, PCs, high-performance computing, and infrastructure applications. The first design win in this sector were Sony and Microsoft's latest gaming consoles, but AMD executives have confidently stated that at least one design win will be announced by the end of the year.
AMD, we choose you
When Sony and Microsoft began developing the latest gaming consoles, they realized that they needed more than just a high-performance gaming machine to captivate a bigger audience. They needed an affordable gaming console that could also watch Netflix, play Blu-ray movies, video chat, and have a large ecosystem of available apps. With such a demand they were calling for a very special chip. In the end, they opted in for the high-performance, developer friendly x86 architecture, but wanted a SoC (system on chip) design over separate discrete parts that are less efficient and cost more. Despite superior CPU solutions, high performance graphics wasn't Intel's (NASDAQ:INTC) specialty. AMD was the perfect processor and the added flexibility of the semi-custom unit made AMD the best choice.
The benefits of the semi-custom business
While the low-margin business of console making wasn't in Intel's or Nvidia's (NASDAQ:NVDA) interest, AMD was still more than the last man standing; as I said they were the best choice. Thanks to the solutions available, Microsoft and Sony resulted with incredible, high-performance and extremely affordable machines. Just listen to the crowd roar as Sony first announces the PS4's launch price of $399. This was beyond everyone's expectation and AMD played a role in this. To add, Sony is actually generating a profit unlike the previous generation that sold at a huge loss.
While people complain about low margins, it hardly hurts AMD. It's actually a relatively safe and exciting business. The following excerpt is taken from a Seeking Alpha transcript of Devinder Kumar's presentation at the Bank of America Merrill Lynch Global Technology Conference.
"There is really no expenses from R&D standpoint, no sales and marketing dollars and whatever dollars you generate from a gross margin standpoint, falls to the bottom-line and that's what excites us."
The benefits don't stop with Sony and Microsoft. By welding AMD's expertise in computing with the creativity of its customers, together more companies can create solutions that work exactly how they need with no compromises. AMD has noted that there is a strong customer interest in this sector with upcoming design wins to come.
More design wins underway
AMD has teased us several times on its plans to announce one or two semi-custom design wins by the end of the year while adding that it plans to do the same next year. Also during the Bank of America conference, Devinder mentioned that the upcoming design wins are fairly large opportunities in the range of $200 to $500 million plus. He also stated that these are very real opportunities and is extremely confident in it happening.
AMD is very proud of the customer interest and progress it's made in the semi-custom business. However, at this time they're unable to announce any information on the upcoming wins. They are at the mercy of its customers, just like with the gaming consoles. In 2012, AMD warned us of upcoming semi-custom wins, which were the consoles, but these wins weren't officially announced until a several months into 2013. However, being such an enormous and highly-anticipated project, much information was leaked before its official announcement.
The semi-custom business is an attractive business for OEMs, AMD, and investors. This is a new business model so it will take time before we see the new business add more design wins, but I am confident that more will continue to come through the next several years and beyond.
Earnings is next week Thursday, July 17th, and questions on the upcoming design wins may surface. While we may not hear anything, keep your ears open on Thursday or over the next several months as these wins could potentially add a nice boost for future revenues.
Disclosure: The author is long AMD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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