Analysis: AMD's Financial Picture and Challenges
1/26/2012 by: Marcus Pollice
AMD [NYSE:AMD] recently reported the quarterly results for the fourth quarter of 2011 as well as the whole calendar year. In 2011 AMD achieved revenue of $6.57 billion, flat from 2010. The company reported a net income (profit) of $491 million, or 66 cents per share, while the operating income was $368 million. In the fourth quarter of 2011 the revenue was at $1.69 billion, which is flat sequentially and a 2% increase year over year. However, the company posted a net loss of $177 million (24 cents per share).
This is not to say the company didn't operate well, since their operating income was at $172 million for the quarter, with non-GAAP net income of $138 million. The reason for this number lies in a non-cash impairment charge of about $209 million related to their investment in GlobalFoundries. An evaluation resulted in a reduced long term value of shares in GlobalFoundries based on the business outlook given by the company. AMD reduced their ownership of the foundry to 8.8%. According to AMD's CEO Rory P. Read, their 8.8% in GlobalFoundries is worth 277 million dollars.
AMD can look back at a successful quarter and also a successful 2011. According to the CEO, the mobile APU platform Brazos can be called the most successful platform in AMDs history. The momentum with their APUs seems to continue, with increasing customer adoption of APUs going forward. Right now about 60% of their client CPUs are APUs. Another interesting figure the CEO threw out is that roughly 70% of PCs sold on Black Friday were powered by AMD technology.
AMD also launched the first product of their Radeon 7000 series – the Radeon HD 7970, which delivers a 150% increase in performance per mm². With this AMD is entering 2012 with the fastest GPU on the planet just like it did 2011. It remains to be seen whether NVIDIA can get back to the top spot again with Kepler architecture. Currently rumors are circulating, that Kepler will outperform the 7970 by a significant margin, but we would advise people to take such statements with a grain of salt until credible numbers are available.
In the following paragraphs we will go into detail with some of the peculiarities that have been discussed during the conference call following the earnings release.
In the fourth quarter the gross margin of AMD went up to 46%. This was mainly caused by very strong game console licensing revenue. On the graphics side they had a higher ASP (average selling price), but the result was offset due to lower revenue as a result of lower demand for discrete notebook and desktop graphics. This was mainly caused by the HDD shortage in the channel.
The CFO expects the margin to go back down to 45% in the first quarter, since the stronger console licensing revenue was a seasonal effect and the mix of products sold will move a bit towards cheaper products. Improved yields at the 32nm should add a positive effect to the margin, but will not be enough to offset the negative effects expected for the first quarter.
Server segment poised for growth
In the server space, it's been the 2nd quarter in a row with double digit growth, albeit on a quite low level. As a result of the increased server CPU sales, the company could also sell more chipsets going along with that. AMD is well-positioned to expand their share in this space according to the executives. They are very committed to this very profitable space and to improve relationships with enterprise customers. We have no doubt a seasoned salesman like Rory Read can improve AMDs position here. The CEO expects the ASP and mix of products in the server segment to go up once new products follow. This without doubts refers to a product refresh coming later this year.
HDD shortage only had a minor impact
As we expected, the flood in Thailand only had a minor impact on AMDs business. This is in line with their statement made in October that they don't expect it to have an effect on them. Indeed AMDs CPU business was mostly unaffected, but their GPU business took a hit according to the CEO. He expects this to continue into the first quarter. However, AMD will remain committed to this attractive business which allows them to use the IP across the whole space of the compute continuum.
We estimated in our own analysis that any hit on the PC market will have an impact on the supply chain, even if only temporary. Intel in comparison took a stronger hit from the HDD crisis, they even had to issue a forecast warning before their actual earnings.
Trinity pushed to mid-2012, poised to ramp fast and power Ultrathins
Back in September the CFO said on an investor conference, that the next mainstream Fusion APU codenamed Trinity will launch at the beginning of 2012. At CES 2012 it became evident that this will not be the case. During the earnings conference call it was repeatedly stated, that Trinity is due for a launch in mid-2012. This is very much in line with our original estimates, which expected Trinity to launch around the Computex Tapiei timeframe (note that certain company representatives criticized us for these estimates in the past). We would expect Trinity to pop up no earlier than Computex, with independent reviews and product availability at the beginning of July.
With Trinity AMD is well-prepared for ultrathin notebook designs which are slated to compete with Intels Ultrabooks. Given that Intel trademarked the name Ultrabook, AMD decided to default on the old name we heard from Toshiba back in 2003 timeframe: ultrathin. Ultrathin was used to describe the first Toshiba Tecra, which was the thinnest and lightest notebook (1.1 kg, 2.3 pounds) in the world. Read explained that he thinks that thin & light is actually nothing new since customers always wanted increased mobility. AMD plans to offer ultrathins with mobility, great graphics and low power at a mainstream price.
While not going into specifics, they strained that Trinity is poised for a faster ramp than Llano, since they can apply all the experience they have earned when tackling the yield problems of Llano to the manufacturing of the successor.
Stance on Windows on ARM competition
Similar to Intel, AMD does not recognize ARM as an immediate threat, both in the mobile and server markets. According to Rory Read the current implementations only include 32-bit ARM cores, while Windows is only really efficient with 64-bit CPUs, implying an imminent advantage. AMD stays committed to mobile devices by developing more and more power-efficient APUs that offer backward compatibility with existing software on the x86 platform - apparently the trump card of AMD and Intel.
Hints on Fusion technology for servers
During the earnings call, Rory Read hinted at multiple occasions that they are working on specifically tailored products for the server space, which enables them to offer specialized appliances. The CTO Mark Papermaster added
"...the investments we're making in low-power and performance per watt that we talked about earlier in Trinity are directly applicable to the server market."
Rory Read continued later:
"The work that we're doing around our strategy and around architecture to give us the agility, the time to market, the kinds of re-use around IP, to give us the ability to tailor these solutions at the SOC level, at the server and platform level, these are some of the strategy that we want to cover in our Analyst Day next week."
It takes no Crystal Ball to predict that they are talking about Fusion APUs tailored for the server and HPC space. It will be interesting to see what they will announce next week on their Analyst Day, but this already gives some sort of taste of what to expect.
On managing yield and manufacturing
Rory Read remarked that in the fourth quarter they were able to increase Llano production by 80% due to better yields. He strains that there is even further improvement possible and that AMD stays committed to improve execution going forward. Currently 32nm products make up around 1/3 of their mix, but this number is poised to increase. They have so-called tiger teams in place to observe and continuously improve the yield situation. This momentum is supposed to continue at the 28nm node as well.
While there have been some issues with the 45nm supply as GlobalFoundries was transitioning to 32nm production, these issues are mostly resolved now. According to the CEO there is still substantial demand for 45nm products, especially on the desktop platform. However, there is a transition going on that appears to be going well. For the first quarter of 2012, the CFO Thomas Seifert doesn't expect the company to be supply-constrained.
One of the analysts asked an interesting question how AMD plans to compete with Intel's manufacturing prowess, which is backed by an enormous amount of capital spending (that is often criticized by financial analysts). Rory Read said that there is an industry trend towards lower prices that could be detrimental to a business model that focuses on expensive assets. AMD tries to cater to those new markets where a lower price point is imperative for success. Read believes there is currently an inflection point that they want to embrace.
Thomas Seifert added in that they acknowledge the investment their main competitor makes, but one should not underestimate the investments made in the fabless ecosystem. According to him, GlobalFoundries together with their partnerships invest around $9 billion this year into manufacturing technology. TSMC puts another $6 billion into this business. So he concluded that the numbers are very comparable to Intel in terms of scale and absolute numbers. We believe that this comparison is a bit skewed since the aggregate investment of multiple players cannot be directly compared to the investments of a single player, who can better focus these investments.
They are also coming soon to an end with their negotiations with GlobalFoundries regarding a new wafer supply agreement (WSA). In April 2011 AMD made a major announcement regarding an amendment to their WSA on the 32nm due to the unsatisfactory yield situation. This agreement is soon running out. The CFO claims that it will have a black-and-white impact on their business model. In general they are very happy with the progress at GlobalFoundries and continue their execution focus in this regard. During the call, the company did not want to jerk GlobalFoundries' chain too much by mentioning TSMC, even though TSMC manufactured majority of Fusion products (E-Series, Z-Series are all on 40nm TSMC node).
We'll be covering next weeks' Financial Analyst Day, so stay tuned.
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