- AMD delivered excellent Q3 results, progressing on nearly every key front.
- AMD's wider GAAP losses and Q4 guidance aren't as bad as they've been made out to be.
- AMD may have neutralized NVIDIA's latest salvo, at least to some extent, by slashing prices.
By now, most of us know that AMD's (NSDQ:AMD) Q3 results beat consensus estimates of revenue and non-GAAP EPS (Earnings Per Share). AMD's Q3 was exceptional on most counts. Yet, the stock tanked over 6.3%. While AMD's Q4 guidance was the dampener for some, others pinned the blame on wider than expected GAAP losses. Put in perspective, neither of the two seem to justify the post-earnings reaction. As it appears, NVIDIA's latest salvo in the graphics cards market around the same time, seems to be the only explanation. And AMD's move to slash prices might just have neutralized that threat, at least in part.
AMD's Q3 Earnings Didn't Justify The Correction
AMD's Q3 results delivered on every key front, possibly more than investors could've expected. AMD's Q3 revenue of $1.3 billion beat consensus estimates by a solid ~8%, implying a sequential growth of 27%, and a Year-on-Year (YoY) growth of 23%. AMD's non-GAAP EPS of 3 cents a share, exceeded expectations of zero cents, marking a return to non-GAAP profitability after a gap of six quarters. The chipmaker also restructured its long term debt, which increased GAAP losses for Q3 by ~$61 million but improved the long-term outlook for AMD, strengthening its balance sheet significantly.
AMD raised ~$1.4 billion, using a combination of equity and debt issuances, to partly refinance, and partly pay-off its long-term debt. AMD significantly reduced its exposure to debt due for repayment in 2019 and 2020, carrying interest rates of 6.75% to 7.75%. AMD funded this rejig partly with the issuance of convertible debt due in 2016, at a significantly lower interest rate of 2.125%, and partly by issuing common stock. While the short-term negative impacts are equity dilution for shareholders and costs involved in the restructuring, including a premium to recall higher interest rate bearing debt, the move puts shareholders in a significantly better position going forward. For starters, the move allows AMD to lock in at lower interest rates, and for longer, now that interest rates in the US look poised to only move higher. Further, the restructuring brings AMD's value of shareholders' equity back into positive territory, at $385 million, up from a negative value of $413 million.
AMD delivered positive free cash flows for the first time this year. One of the goals AMD outlined in its investor presentation was to turn free cash flow positive for FY 2016. And AMD's $20 million worth of free cash flow, albeit small, is one step further in that direction. To sum up, AMD made progress on most key fronts, significantly improving the long term outlook for shareholders. Moves like the debt restructuring weren't even anticipated at the end of Q2, and AMD's Q3 clearly put investors in a much better position. So, what disappointed investors? Reportedly, a wider than expected GAAP loss, and AMD's Q4 guidance. Let's look at each of these factors in detail.
Don't Read Too Much Into AMD's Q4 Guidance
For Q4, AMD projected a sequential revenue decline of 18%, give or take 3%. At its midpoint, that still represents a YoY growth of 12%, not far from the 14% growth it had projected for Q3. While AMD's projection seems less ambitious than some would've liked, it's important to note that AMD has often in the past, guided conservatively. And the fact that AMD has beaten its own guidance, in each of its last 5 quarters, is a reflection of that. On average, AMD has beaten its own guidance by 4.2% over 5 quarters, with Q3 revenue exceeding its own projection by a solid ~8%. Last but not the least, opinions are divided on this front. In fact, AMD's Q4 revenue projections reportedly exceeded expectations according to Barron's.
Wider Than Expected Losses Really A Factor?
AMD reported a GAAP net loss of $406 million, driven largely by a $340 million charge arising from a five-year amendment in its Wafer Supply Agreement (WSA) with GlobalFoundries. For those unfamiliar, GlobalFoundries was spun-off from AMD in 2008, to separate chip design and chip fabrication, and including the recent amendment, AMD has amended its WSA with the entity 6 times so far. So clearly, this isn't a charge that's expected to recur on a quarterly basis. What's more, for a company like AMD, which still carries a high bankruptcy risk, such an occasional hiccup is of less significance. What matters is the larger picture, and as we've discussed through this post, that picture is very much intact. Growth is the single most important metric for AMD right now, and the chipmaker's Q3 performance is encouraging to say the least.
NVIDIA's Latest Salvo A Big Threat?
NVIDIA recently announced the 25th October launch of its budget graphics cards, threatening AMD's position in the entry-level discrete graphics cards space. One of the highlights for AMD over the last few quarters had been its ability to claw back some market share in this space from NVIDIA. However, NVIDIA's latest video cards, which are reportedly slightly faster (in theory), and competitively priced, seem to have jolted the returning confidence of investors. It remains to be seen how the launch will impact AMD, but with AMD slashing prices for its competing Radeon RX 460 and 470 cards, the games have begun, and AMD might just have neutralized the threat from NVIDIA, at least in part.
Summing It Up
AMD delivered impressive sales growth, and returned to non-GAAP profitability after a good six quarters. The chipmaker also favorably restructured and cut down its long-term debt, shored up cash reserves, and registered positive free cash flows for the first time this year, progressing towards its goal of achieving positive free cash flows (cumulative) for FY 2016. So, Q3 was a great quarter on most counts. As it appears, it was NVIDIA's latest salvo in the budget graphics cards space, and not Q3 earnings which caused the post earnings collapse. And AMD's move to slash prices might just have neutralized that threat, at least in part.
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