AMD Stock Jumps 52% After Q1 Earnings Beat, New SoC Licensing Deal

  • AMD has posted Q1 2016 results that exceeded both top and bottom line estimates for the company.
  • AMD has also announced a chip licensing deal with a Chinese firm.
  • AMD provided good Q2 guidance and is upbeat about its fortunes during the second half of the year.

Advanced Micro Devices, Inc. (NASDAQ:AMD) has posted good Q1 2016 results that topped estimates and then announced a licensing deal with a Chinese firm that sent its stock soaring. AMD reported first quarter revenue of $832M, good for -19.2%Y/Y and $13.84M above the consensus on Wall Street. Net loss of $96M(-$0.12) was considerably higher than Q1 2015 loss of $73M(-$0.09) but $0.01 better than analysts' average estimate.

To top the earnings beat, AMD reported that it had clinched a $273M licensing deal with Chinese firm THATIC to develop SoCs tailored for the Chinese market. The positive news triggered a massive rally in AMD shares which climbed 52.3% post-earnings.

Also Read: Shorts Are Running Away From AMD Stock

AMD Stock 5-Day Returns

AMD-1

Source: CNN Money

AMD Segment Performance

Investor expectations for AMD were low going into the earnings and investors were happy about the earnings beat despite the fact that it still represented double-digit top and bottom line declines by the company. AMD's bulls were, however, able to carry the day after the company provided upbeat second quarter guidance.

AMD financial segments performed as follows:

  1. Computing and Graphics Segment (desktop CPUs, notebook CPUs, and graphic processing units)-- revenue for the quarter was down 14% Y/Y which the company chalked up to depressed sales of client desktop and notebook processors courtesy of a weak PC market. Operating loss clocked in at $70M compared with an operating loss of $75M a year ago.

Client processor ASP decreased both sequentially and year-over-year due to a decline in desktop and notebook processor ASPs.

GPU ASP fell sequentially due to lower client GPU ASPs but increased year-over-year due to an increase in professional GPU ASP.

  1. Enterprise, Embedded, and Semi-custom segment (server processors, console processors, and custom AMD-based CPUs and GPUs)--segment revenue was down 25% Y/Y to $372M mainly due to lower semi-custom sales. Segment operating profit was $16M compared with $45M a year ago which the company attributed to higher R&D expenses.
  2. All other segments (special charges)-- first quarter operating loss of $14M compared to a loss of $107M a year ago. The lower losses were driven by an absence of restructuring and special charges as well as AMD's exit from the dense server system business.

Second Quarter Guidance

AMD provided upbeat Q2 2016 guidance saying it expects revenue to increase by 15% (+/-3%) sequentially which points to revenue in the range of $931.84M-$981.76M. That is well above the Wall Street consensus of $889.2M (7% Q/Q growth). The midpoint of AMD's guidance calls for a 1.6% Y/Y revenue growth which, though small, would be the first time the company records positive revenue growth after several years of revenue decline.

Further AMD provided upbeat guidance for the second half of the year saying:

"We are optimistic about our growth prospects in the second half of the year across our businesses based on new product introductions and design wins.''

Although AMD has not definitively confirmed it, rumors are that its semi-custom division is likely to see good business from Sony Corp's (NYSE:SNE) 4K-capable PlayStation 4 dubbed PS4.5 that will feature powerful AMD CPU/GPU.

Investors are also looking forward to higher GPU sales by the company when it launches its Polaris line of GPUs to compete with NVIDIA's (NASDAQ:NVDA) upcoming Pascal GPUs.

AMD has already forecast $1.5B in future revenue from three gaming processors over the lifetime of the processors (about 3 years).

Details Of The Licensing Deal

AMD has announced an x86 server SoC licensing deal and a joint venture with Chinese consortium THATIC that will see the company get $239M in licensing fees as well as royalties from products sold from the JV. Investors are of course excited that the deal will bring in a significant infusion of cash to AMD and also give the company a good foothold to compete with Intel (NASDAQ:INTC) in the Chinese server market. AMD might manufacture server chips for the venture using its upcoming Zen architecture which would help it compete favorably with Intel.

AMD Stock A Long Term Buy

After a truly brutal period in 2014 and 2015, there are solid signs that decline in AMD's core business could be close to bottoming out and things are finally looking up. Several very significant developments emerged during the company's latest earnings call which could keep the stock hot in the coming quarters. Investors will be eager to check and see whether AMD will become non-GAAP profitable later this year as it had promised and also whether its top line will finally start showing signs of positive growth after multiyear declines.

AMD stock remains a good contrarian play that bold investors should buy for the long haul. This stock is, however, not for everyone due to its extreme volatility.

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