AMD (NASDAQ:AMD) released its Q4 2015 earnings Tuesday, after the stock dropped 8 cents on the day. Following the earnings report, it dropped an additional 12 cents after hours, leaving it at $1.83, as of Tuesday evening. The stock is at $1.81 right after the bell Wednesday morning.
Having read the earnings report, and listened to the conference call, this seems like a complete overreaction, and just a symptom of a market in a dour mood; the stock should have gone up.
I'll do a quick summary for those who do not have the earnings in front of them. Revenue dropped 10% from Q3, in line with guidance, and due mainly to the seasonal drop in console sales. Gross margins increased by 1%, allowing for one-time charges in Q3. Operating loss narrowed dramatically to $39 million from $97 million sequentially, non-GAAP net loss narrowed from $136 million to $79 million.
So, why the big drop? Revenue was in line with expectations, although I did think they were sandbagging it a bit at the time, and thought 6% was more likely. Possibly others did, especially since they did for Q3 revenue. The company clearly is managing expenses quite well, as losses have narrowed considerably. Of course, Q1 is seasonally even weaker for console sales, and will not have the benefit of seasonally strong Q4 PC sales, with the company indicating a drop of 14% in quarter-to-quarter revenue. I would guess this latter part weighed heavily on investors, although I think it is a bit misunderstood. Not completely, however.
If we look at Q1 2015, we saw revenue of $1.03 billion, with a sequential decline of 17%, and a 26% decline year-to-year. In that sense, the decline is less, being 14% and 17%, respectively, but is still very troublesome. On the other hand, the company did mention that it expected revenue to grow in 2016 for the full year.
Lisa Su also mentioned that she believed AMD gained market share in CPUs, which seems very likely given Intel's (NASDAQ:INTC) sequential revenue growth of 3% in its CCG group, with volumes flat. This would be higher were it not for the enormous drop in tablet processor sales, but still would not appear consistent with AMD's growth of 11% revenue in its Computing and Graphics division. Considering both Intel and AMD measure items other than PC processors in both of their groups, it is not possible to know precisely how much market share AMD gained. However, it does seem likely AMD again gained market share from Intel, but it was probably small. This relates primarily to notebooks, as AMD mentioned it was the primary driver for sequential growth, as well as increased uptake of Carrizo, which is a mobile processor. Management also noted continued market share gains in the commercial market, as sales in this segment increased 15% from the first half of the year. Given how little commercial share AMD has, it is not clear how significant this is.
AMD's projection for revenue growth in 2016 is not difficult to believe, although it might seem at first blush considering the soft Q1 guidance. If we look at 2015, it has to be remembered that AMD had to clear downstream inventory in the channel for much of the year, which will not be necessary in 2016. The product lineup will also be more competitive, particularly with GPUs, which were completely outclassed by Nvidia products for a good part of the year. The Fury line helped somewhat in the latter part of 2015, particularly with Windows 10 and DX12 showing the potential of AMD GPUs. In 2016, the Fury line will be available much sooner, with the Polaris-based GPUs coming in the middle of the year to catalyze sales. According to AMD, these will offer twice the performance per watt of existing GPUs, which seems realistic considering the huge advance in manufacturing technology they will be using.
It is also important to note the company will be generating revenue from another semi-custom win in the second half of 2016. This is in addition to expectations that console unit sales will be up, albeit with a "modest" decrease in ASP.
I do not believe ARM-based solutions will be a significant source of revenue in 2016, particularly since "Seattle" is clearly an example of too little, too late. Seattle is based on the outdated A57 ARM core, which has already been replaced by the considerably superior A72 core. Su also mentioned that x86 had much stronger momentum in the server space, and thus was a higher priority from the company. Considering the cost, performance, power use, company focus, and infrastructure, ARM will not be a big part for AMD in 2016.
Zen will likely have little impact on revenue in 2016, as by all indications it will come very late in the year. The server version of this chip will not be available until 2017.
All things considered, it seems to me that not only is revenue growth possible, but very likely. This is very significant considering the spiral AMD has been in for so many quarters. A solid revenue base should give investors more confidence in the company.
There are two tidbits I thought were very important in the conference call. One was that Lisa Su indicated the Opteron version of the Zen would cover about 80% of the server market, the other 20% being the very high-end. This most likely reflects a limit for the number of sockets these processors will work in, although it may also reflect fewer cores than Intel's highest end products.
Perhaps more important, although easier to miss, was that Su mentioned Zen had over 40% improvement in per core performance. The keyword there is "over", as before we were told 40%, but not over. Given how conservative AMD management has been for the last few years, it shows considerable confidence in the product. This has consistently been the case regarding Zen.
All in all, this appears a very good time to get the stock. Below $2 AMD has rewarded its investors quite well, particularly when the drop is not based on anything particularly bad. Although we still have to see if Polaris and Zen measure up to understand the long-term health of the company, at below $2, the risk seems very much worth the reward.
Disclosure: I/we 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.