AMD Q4 2015 Earnings Beat Overshadowed By Weak Guidance

  • AMD has delivered Q4 2015 results with better-than-expected revenue and EPS in-line.
  • AMD stock price, however, plunged in after hours trade as the company issued weak Q1 2016 guidance.
  • What does the future hold for this beleaguered chip manufacturer?

Shares of chip maker AMD (NASDAQ:AMD) were down 6.2% in after-market trading after the company delivered fourth quarter and full-year 2015 results. AMD Q4 2015 earnings managed to beat consensus earnings but the company went ahead to provide a weak revenue guidance for Q1 2016. AMD reported revenue of $958M, down a huge 22.7% Y/Y but still $3.26M better than Wall Street consensus of $954.74M. Non-GAAP EPS of -$0.10 was considerably worse than the previous year comparable quarter reading of $0.02, but nevertheless better than third quarter loss of -$0.17.

AMD Q3 2015 Financial Results (Non-GAAP)
Q4'2015 Q3'2015 Q4'2014
Revenue $958M $1.06B $1.24B
Gross Margin 30% 23% 34%
Operating Income -$39M -$97M $52M
Net Income -$79M -$136M $18M
Earnings Per Share -$0.10 -$0.17 $0.02

Source: Anand Tech

AMD touted the performance of its Computing and Graphics unit which recorded the second straight quarter of double-digit sequential growth. The segment reported revenue of $470M, 11% better than third quarter revenue of $424M but still 23% down compared to revenue in Q4 2014. The segment posted an operating loss of $99M, considerably better than third quarter’s loss of $181M which was mainly due to a huge impairment charge related to write down of the company’s older APUs. The loss was, nevertheless, considerably worse compared to the $56M loss the segment posted during Q4 2014. Additionally, AMD attributed the lower loss to higher CPU ASPs which increased sequentially while GPU ASPs increased both sequentially and year-over-year.

AMD Q3 2015 Computing and Graphics
Q4'2015 Q3'2015 Q4'2014
Revenue $470M $424M $662M
Operating Income -$99M -$181M -$56M

Source: Anand Tech

AMD’s Enterprise, Embedded and Semi-Custom segment, which primarily consists of sales of gaming console products by Sony Corp's (NYSE:SNE) PS4 and Microsoft's (NASDAQ:MSFT) Xbox One, posted revenue of $488M, a huge 26% sequential drop which is most likely linked to the seasonality of gaming consoles. Gaming consoles tend to sell well during the holiday season in the fourth quarter. AMD must have booked most of fourth quarter gaming product sales during the third quarter hence the difficult sequential comps. The segment sales fell 15.4% Y/Y which can be explained by the huge 70% decline in sales of older consoles such as PS3 and Xbox 360. The segment posted an operating income of $59M compared to $84M during the third quarter and $109M during Q4 2014.

AMD Q3 2015 Enterprise, Embedded and Semi-Custom
Q4'2015 Q3'2015 Q4'2014
Revenue $488M $637M $577M
Operating Income $59M $84M $109M

Source: Anand Tech

AMD’s ‘‘All Other’’ segment reported a lower operating loss of $9M compared to $61M posted during the third quarter and $383M during the Q4 2014 due to the absence of the said goodwill impairment charge.

But what undid AMD stock was the weak guidance that the company provided for the first quarter of 2016. The company said that it expects Q1 2016 revenue to decline a huge 14% sequentially ±3%, which implies first quarter revenue in the range of $852.6M-$795.14M.

AMD Pinning its Hopes on Polaris and Zen

The latest set of results capped one of the most difficult periods for the company. Most notably, the company’s losses widened by a big margin--AMD finished FY 15 with EPS of -$0.53 compared to-$0.11 posted during FY 14. Meanwhile, revenue plunged in double-digits.

Now AMD investors are pinning their hopes on the launch of the company’s fourth-generation GCN CPU which it has dubbed Polaris, as well as the launch of Zen CPU platform during the latter half of 2016. Investors are particularly excited about Polaris since AMD demonstrated during the latest CES event that the new GPU architecture delivers considerably better performance than NVIDIA's (NASDAQ:NVDA) GeForce GTX 950. Polaris makes use of advanced 14-nanometer FinFET manufacturing technology compared to the 28-nanometer planar manufacturing technology that both AMD and Nvidia currently employ in their graphics cards.

AMD’s GPU sales could also get a nice boost in the future as virtual reality gaming takes off. A slew of VR products from tech stalwarts including Facebook (NASDAQ:FB), HTC, and Samsung, among others, are set to launch during the current year. Many of these products are powered by high-end graphic cards from AMD and Nvidia.

AMD should also benefit from the fact that leading gaming consoles such as PS4 and Xbox One have continued to sell well despite an industry-wide decline in console sales. Meanwhile, AMD is set to launch new semi-custom SoC products sometime in 2016 which the company see becoming a billion-dollar business:

“Those products will launch sometime in 2016. And timing is only dependent on the customers, I won't comment on that. But what I can come from as we said previously, there are two products, it's a billion dollars of revenue starting sometime in 2016. One of the products is ARM. And the last thing I’ll say is we are looking at our semicustom business as going beyond gaming.”

Investor Takeaway

There is a lot of pessimism already baked into AMD stock price which probably limits the downside. The shares are likely to remain depressed for the first half of the year but might rebound during the second half of 2016 and early 2017 as the company’s new GPU and CPU products gain traction. Bold contrarian investors should wait for the selloff to cool down before loading buying AMD stock for the long haul.

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