Advanced Micro Devices: Consoles And Semi-Custom More Profitable Than Expected
Based on Q3 numbers, to achieve the ~$450M OPEX goal, R&D spending totaled ~$290M, with SG&A expenses at ~$160M. Note, these numbers are not the actual Q3 numbers, but rounded to sum to AMD's target $450M OPEX.
During Q3, we can see this reduction in OPEX greatly assisted AMD in returning to profitability. And it's this reduction in OPEX that gives the semi-custom business so much clout.
In order to explain, in Q2 AMD's CS (computing solutions) operating segment generated an operating income of $2M on $841M in revenues, whereas GVS (graphics and visual solutions) was break even on $320M. Overall results for Q2 was an operating loss of $29M, with a net loss of $74M (interest expenses of $42M). If, in Q2, AMD had met the company's goal of $450M OPEX, it would have had a break even quarter at the operating level, with losses stemming mainly from interest charges.
AMD creates CPU cores for the company's CS segment, and creates GPU cores for the GVS segment. The IP created to create CPUs, APUs, and GPUs is then used to create custom silicon, with the customer funding a large portion of the NRE (non-recurring engineering expense). This allows AMD to keep OPEX minimal (little R&D required on AMD's part to design the chips), while growing revenues.
The concern was the focus on gross margin, but this is the wrong view of the semi-custom model. Gross margin should be the concern of traditional products as AMD needs to recoup the R&D that goes into building them. Because there is little overhead from expenses like marketing, SG&A expenses also come in lower in semi-custom. So while AMD may take a gross margin hit to supply custom chips, most gross margin dollars fall to the bottom line, unlike in the traditional business.