AMD's Future Is In The Hands Of Samsung, Global Foundries And... Apple

| About: Advanced Micro (AMD)


AMD reported results in line with my expectations as of 2014 Q1, but disappointed the market, leading to a sell off.

Although AMD's future in consoles appears secure, its future in PC computing remains in doubt.

AMD's future ability to compete with Intel depends mainly on Global Foundries and Samsung making good on their collaboration on 14 nm FinFET.

As of calendar Q1, I characterized AMD as being left "with a holding action in PCs while using console sales to keep its head above water financially," and this is exactly what AMD (NYSE:AMD) produced for its Q2 earnings report. Despite improvements on Q1 results in key areas, investor disappointment in AMD's net loss of $0.05/share led to panic selling after hours, to the tune of a 17% drop (as of the Friday pre-market). AMD has been and will continue to be a bumpy ride through this year.

Holding in PCs, Gaining in Consoles

Overall, AMD's results showed considerable improvement over last year. Net revenue was up 24% y/y to $1.441 billion, and operating income was in the black at $63 million compared to the year ago loss of $29 million. The net income loss was primarily due to AMD's decision to refinance debt that was coming due in 2015, a non-operational cost of $49 million, and this pushed the net loss to $36 million. AMD is saddled with high long-term debt of $2.1 billion and servicing this debt also eats into profit. Interest payments this quarter totaled $46 million.

Net revenue and operating income also grew relative to last quarter at 3% and 28%, respectively. This was due to continuing strength in console chip sales and PC chip sales that stayed flat compared to Q1. Although Computing Solutions segment revenue was down significantly by 20% y/y to $669 million, operating income was up 350% to $9 million, indicating that restructuring has been successful in allowing AMD to sustain lower PC revenue without huge losses.

The Graphics and Visual Solutions segment was the continuing bright spot for the company, since this is where console chip sales are booked. Segment revenue grew by 141% to $772 million y/y and by 5% compared to Q1. This was despite a drop off of enthusiast graphics card sales as crypto-currency mining shifted to ASICs.

Perhaps some investors were expecting better results in the Computing Solutions segment, but given the fierce competition from Intel (NASDAQ:INTC) and its contra-revenue price cutting on Bay Trail, the best that AMD could hope for was to arrest the decline in its PC business, which it has done. AMD made its final payment of $200 million to Global Foundries as part of its 2012 wafer purchase obligation last quarter and I had predicted that as a result, Computing Solutions would be profitable going forward, which it was this quarter.

Near-Term Encouragement

There also was good news for the near term (next few quarters) in the form of new products. AMD's ARM based 64 bit server processor, Seattle, is currently sampling and expected to enter full production in Q4. Readers who follow my articles are probably tired of my harping about the impact of 64 bit ARM processors such as Apple's A7, so I'll tread lightly on this point. While 64 bit is still a nice-to-have for mobile, it's essential for a server processor. Given the intrinsic cost advantage of the ARM architecture, which I discussed at length in my review of Intel's most recent earnings, I believe the impact of Seattle and similar ARM processors that follow it will be huge.

With the growth of mobile computing and the cloud services that support it, companies such as Intel, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) have seen significant growth in their cloud-related businesses. Energy and capital equipment are the main cost drivers for cloud services, so a low-cost, energy-efficient ARM server processor is very well positioned to take market share away from Intel.

AMD also continues to affirm that it will have 1 or 2 more semi-custom wins this year. When asked the value by an analyst during Q&A, AMD gave an estimated lifetime value of $250-500 million, which would equal about 10-20 million units. This sure sounds like Nintendo and one other set-top box player, but AMD would not divulge any more details.

Longer-Term Prospects

Beyond the end of the year, AMD's fate really depends on the ability of silicon foundries such as Global Foundries to deliver 14 nm FinFET. Without an Intel-competitive process node, AMD simply can't compete with Intel in the long term, and its PC processor business will continue to shrink.

Intel supporters continue to maintain that none of the major foundries, such as Samsung (OTC:SSNLF), TSMC (NYSE:TSM) and Global Foundries, will ever be able to do that. My view is that it's only a matter of when, not if, the competing foundries will get 14 nm FinFET into production.

But when is still a question mark. The collaboration on 14 nm FinFET between Samsung and Global Foundries gained increased visibility at the 51st Annual Design Automation Conference, where GF presented its 14 nm roadmap. Not surprisingly, GF has given up on its own 14XM process in favor of Samsung's, and the projected production ramp up has been pushed into "early 2015" at GF's Fab 8 in New York state.

Despite the delay, I regard GF's claims as more credible now that Samsung is involved. The GF presentation, as well as a recent Samsung announcement confirms that the joint effort will implement Samsung's 14 nm FinFET process more or less simultaneously at Samsung's fabs in Korea and Austin, Texas, where Samsung currently builds Apple's A7 SOC.

I've long maintained that Apple (NASDAQ:AAPL) and Samsung have a mutual interest in countering the threat posed by Intel's 14 nm FinFET process by putting their own equivalent process into place. I don't doubt that Apple has helped fund capex for the new 14 nm facility at Austin, and I wouldn't be surprised if it is the first to go on line.

The involvement of Samsung, GF and Apple make the development of a competing 14 nm process all but inevitable, but probably AMD will have to wait until mid-2015 to make use of it. AMD appears to have the necessary cost-discipline and non-PC revenue sources in place to endure the wait, although this won't be easy for investors to endure.

The trading range for AMD has by now become well established. Investors should lock in profits when share prices rise substantially above $4 and look for buying opportunities in the frequent post-earnings dips.

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