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AMD Misses on Q4 Earnings & Revenues Estimates, Shares Down

Zacks Equity Research

Advanced Micro Devices AMD reported fourth-quarter 2018 non-GAAP earnings of 8 cents per share which missed the Zacks Consensus Estimate by a penny. However, the bottom line was up by 7 cents from the year-ago period but down 38.5% sequentially.

Revenues increased 6% year over year to $1.42 billion but lagged the Zacks Consensus Estimate of $1.44 billion. Notably, roughly 65% of total revenues came from new product rollouts. Strong computing and graphics segment revenues drove year-over-year growth.

However, on a sequential basis, revenues were down 14%, primarily owing to lower revenues in the Enterprise, Embedded and Semi-Custom segment.

Following the announcement of fourth-quarter results, shares plunged more than 4%. Further, weak first-quarter guidance negatively impacted the share price. Graphics revenues are expected to suffer from lack of blockchain related sales. Semi-custom sales were also down during the reported quarter.

Notably, AMD’s stock has returned 40.1% year over year, substantially outperforming the industry’s growth of 1.2%.

Segmental Details

Computing and Graphics segment (69.4% of total revenues) revenues increased 9% year over year and 5% sequentially to $986 million. This marks the eighth consecutive quarter of year-over-year growth. The increase can be attributed to accelerated sales of Ryzen desktop and mobile processors, partially offset by lower GPU sales.

Ryzen processor sales contribution to total client revenues increased more than 80%.

However, management stated that blockchain-related GPU sales were negligible in the reported quarter, which impacted year-over-year Graphic sales.

Client processor average selling price (ASP) increased on a year-over-year and quarter-over-quarter basis due to higher Ryzen processors sales. Moreover, GPU ASP increased year over year and sequentially on higher datacenter GPU sales.

Notably, Client processor unit shipments increased more than 50% year over year.

In CES 2019, AMD launched the much-awaited next generation 7-nanometer (nm) Radeon Vega GPU, AMD Radeon VII. The card has been designed to deliver more than 29% of computing performance, offering extreme gaming details with 2X superior brightness and color volume.

The company also announced availability of the second generation AMD Ryzen 3000 series mobile processors featuring 12nm technology for ultrathin laptops and notebooks. The company also stated that AMD Athlon 300 series mobile processors, which are developed on Zen 3 core architecture, will made available from early 2019.

The company also introduced 8th GenAMD A-Series processors tailor-made for Chromebooks. Further, the company unveiled its new Radeon RX 590 graphics card. Powered by the latest “Polaris” architecture, the graphics card will support AAA, eSports and Virtual Reality (VR) titles, giving it the desired speed for optimal graphics solutions required for notebooks and desktops.

Additionally, AMD revealed its new Radeon Software Adrenalin 2019 Edition. This updated version will feature the WattMan technology and be based on the AMD Radeon Graphics Processing Units (GPUs).

These launches are likely to provide AMD an edge against the likes of NVIDIA NVDA and Intel INTC.

Enterprise, Embedded and Semi-Custom segment (30.6% of total revenues) revenues were flat year over year and down 39% sequentially to $433 million. The decline can primarily be attributed to lower semi-custom product, partially offset by higher EPYC datacenter processor sales.

Adoption of EPYC datacenter processor is significantly strong among original equipment manufacturers (OEMs), including Cisco, Dell and Hewlett Packard Enterprise. Notably, Microsoft MSFT and Amazon Web Services announced new solutions for their respective cloud services powered by the EPYC processor.

During the quarter under review, AMD added dozens of new end customers and HPC wins across oil & gas, healthcare, aerospace, banking and other industries, driven by superior performance of EPYC processors in both data analytics and general purpose virtualized workloads.

The company is also sampling 7nm EPYC processor, codenamed “Rome,” and is on track to launch in 2019. AMD expects to achieve double-digit server unit share with Rome, driven by strong competitive position and robust adoption.

Operating Details

Non-GAAP gross margin increased 700 basis points (bps) on a year-over-year basis to 41%, driven by strong sales of new products, including Ryzen and EPYC processors.

Operating expenses on a non-GAAP basis increased 9.5% year over year to $474 million. As percentage of revenues, operating expenses surged 110 bps to 33.4%.

Adjusted EBITDA increased from $58 million reported in the year-ago quarter to $152 million.

Non-GAAP operating income came in at $109 million, up from $19 million reported in the year-ago quarter. The year-over-year improvement was primarily due to the robust products margin in the Computing and Graphics segment. Operating margin decreased 650 bps to 7.7%, mainly owing to seasonally lower Enterprise, Embedded and Semi-Custom segment revenues and the absence of IP-related revenue.

Segment wise, Computing and Graphics operating income soared from $33 million reported in the year-ago quarter to $115 million.

Enterprise, Embedded and Semi-Custom operating loss came in at $6 million compared with a loss of $13 million reported in the year-ago quarter.

Balance Sheet & Cash Flow

AMD ended the fourth quarter with cash and cash equivalents (including marketable securities) of $1.16 billion compared with $1.06 billion in the previous quarter.

Total debt (including current portion) was $1.25 billion, down from $1.30 billion reported at the end of the previous quarter.

Cash flow from operating activates during the reported quarter came in at $120 million.  Free cash flow was $79 million as compared with $62 million in the previous quarter.

FY18 Highlights

AMD reported fiscal 2018 non-GAAP earnings of 46 cents per share up from 10 cents reported in the year-ago quarter but down 38.5% sequentially.

Revenues increased 23% year over year to $6.48 billion. Strong computing and graphics segment revenues drove year-over-year growth.

Computing and Graphics segment (63.7% of total revenues) revenues increased 39% year over to $4.125 billion.

Enterprise, Embedded and Semi-Custom segment (36.3% of total revenues) revenues increased 3% year over to $2.35 billion.

Guidance

For first-quarter 2019, AMD expects revenues to be roughly $1.25 billion (+/-$50 million). The projected figure is much less than the current Zacks Consensus Estimate of $1.45 billion.

Management expects weakness in graphics channel, which faces seasonality in the first quarter. Moreover, management expects lower graphics sales in the forthcoming quarter owing to absence of blockchain related GPU revenue and lower memory sales. Semi-custom is projected to decline sequentially in the reported quarter.

However, AMD Ryzen, EPYC and Radeon datacenter GPU sales are expected to increase.

Non-GAAP gross margin is anticipated to be 41%, driven by higher sales from Ryzen, EPYC and datacenter GPU processor sales. Operating expenses are expected to be roughly $480 million.

For 2019, AMD expects revenues to increase high-single digit on a year-over-year basis. Full year 2019 revenues are projected to increase on the back of robust growth in Ryzen, EPYC and Radeon datacenter GPU sales and ramping of 7nm products.

Non-GAAP gross margin is anticipated to be more than 41%. Operating expenses as percentage of revenues are expected to be almost 29%.

Zacks Rank

AMD currently carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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