Advanced Micro Devices (NASDAQ: AMD) Q2 2017 Earnings Dissected: AMD Is Back
AMD (NASDAQ:AMD) recently announced the second quarter results for the fiscal year of 2017 and successfully beat analyst expectations of EPS and revenue. The consensus was a break even and $1.16 Billion in revenue (on a non-GAAP basis) and the silicon giant was able to beat with an EPS of 2 cents and a revenue of $1.22 Billion. While pundits are focusing on the financials of the company, we will take this opportunity to take a look at what is happening behind the scenes.
Key Indicators for Growth as AMD (NASDAQ:AMD) jumps 10% on non-GAAP profitability
AMD is back! Well, sort of.
- Lets start with the reconciliation of GAAP EPS and non-GAAP EPS. While the company was able to dole out an EPS of 2 cents on the dollar on a non-GAAP basis, the GAAP result is actually a loss per share of 2 cents. With a net income (non-GAAP) of 19 Million, the primary adjustments needed to arrive at a loss of 16 Million are: stock based compensation of 24 Million, an equity loss of 3 Million, debt redemption loss of 3 Million and non-cash interest expense related charge of 5 Million. While these adjustments were done in good faith, they tend to highlight the fact that AMD as a company is so on the precipice of profit and loss that typically negligible line items become very significant.
- Secondly, there is something very interesting to note in the financial statements. There is no penalty/charge paid to GlobalFoundries under the 6th amendment of the WSA. This is something that is very material for investors of AMD. What it basically means is that the company is able to fabricate all of its products (including Ryzen, Threadripper, EPYC and Vega) at GlobalFoundries and does not need to incur extra charges by hiring pure play fabs like TSMC. Not only does this mean lowered cost of fabrication that GloFo will be able to provide but it also means that no financial penalty is incurred under WSA's 6th Ammendment.
- While the Zen architecture shook things up quite nicely, Threadripper is one of the most disruptive products out there right now. It is going to be putting massive processors in the hands of consumers at giveaway pricing. We already know that Threadripper took Intel by surprise and they were not ready for it at all as is clear by the fact that their lineup was increased from a maximum of 10 Cores to 18 Cores at the 11th hour before launch. Intel's build philosophy is very different from AMD and we have our doubts that it will be able to compete with AMD on a value basis. In other words, Threadripper, which is launching on August 10 is going to be one of the biggest rainmakers in AMD's history.
- EPYC processors are also going to be taking the server market by storm. The biggest clients in this segment are the Big Seven+1 (Google, Facebook, Amazon, Microsoft, Baidu, Alibaba, Tencent, and AT&T) and representatives from several major companies took to the stage and expressed support for the platform including the Big Seven + 1 members. Baidu, Microsoft, Supermicro, Dell, Xilinx, HPE, Dropbox, Samsung, and Mellanox were all there. AMD also has the support of OEMs like Dell and HPE, but Sugon also enables AMD to tap into the ODM market. Xilinx and Mellanox are also key partners that might help offset Intel’s goals with Purley’s integrated networking and FPGA features.
- AMD (NASDAQ:AMD) does not report the revenue streams from the GPU and CPU segment differently, so it is hard to spot weakness in any one business unit.
- AMD's RX Vega Gaming graphics card is not looking good. It was an incredibly expensive chip to make and had a very large die and is at best a GTX 1080 competitor (if priced accordingly). Unless AMD has an ace up its sleeve that we are not aware off, the company is going to lose out in the GPU department this cycle.
- This also brings me to another important point. Part of the problem with Vega can be blamed on GlobalFoundries which historically has not had a very efficient process. TSMC has a much more reliable node but AMD cannot source from them without incurring heavy penalties. Since the company was short on cash recently, we can see why it would choose to go with Vega being fabricated at GloFo and a compromising GPU that could potentially focus on the performance per $ proposition.
- We do know that the company profited from the crypto currency boom that recently happened with Etherium. While it is not clear just how impactful this event was on the company's numbers, the boom is now more or less over and things have reverted back to normal for the time being with Etherium reverting to $200 levels.
- AMD's Zen architecture is not optimized for the HPC segment. This means that EPYC processors will only be able to compete with Intel on a perf per $ basis in this particular market. This is because AMD’s EPYC is based on a revision of Zen – B1 to be exact. And one of the known weaknesses of Zen is that it has a 2x 128-bit FMA implementation which is equivalent to the Sandy Bridge uArch. Haswell had a 2x 256-bit FMA implementation and Intel Skylake-SP has a 2x 512-bit FMA implementation. This results in 8 DP FLOPS/clock for Sandy Bridge/Zen, 16 DP FLOPS per clock for Haswell/Broadwell and 32 DP FLOPs/clock for Skylake-SP with AVX-512. This is roughly 4x the performance of Zen’s architecture and clearly the superior choice for HPC tasks.
Well, AMD has certainly exceeded expectations in most regards when it comes to earnings this quarter. Since the sentiment regarding the stock is based primarily on future potential, I can safely say that these earnings will go a very long way in building support levels at the price point of yesterday. I have been posting for over a year now that Zen is going to be disruptive in the sense that it breaks Intel's x86 monopoly. Based on the resounding success of the Zen uArch, the response of Ryzen and what we expect from Threadripper and EPYC, I can say that the growth indicators currently outweigh the caveats and the stock is a Buy for most investors who are willing to dabble in this kind of volatility and risk. If you follow the Warren Buffet approach, then it's a hold.
Keep in mind that based on AMD's guidance and our own assumptions we believe that AMD will turn in an even better quarter in Q3 (with Threadripper going live and even VEGA contributing to the revenue stream) so we firmly see it as a buy call right now. While the GPU business has been a bit disappointing so far, and it does not look like VEGA will be any different, its sales should only add to the revenue streams by the new rock stars of AMD: Ryzen, Threadripper and EPYC.
(NASDAQ:AMD) Q2 2017 Results
- On a GAAP basis, revenue was $1.22 billion, up 19 percent year-over-year, driven by higher revenue in the Computing and Graphics segment. Revenue was up 24 percent sequentially, driven by increased sales in both business segments. Gross margin was 33 percent, up 2 percentage points year-over-year due to a richer product mix and a higher percentage of revenue from the Computing and Graphics segment, driven by the first full quarter of Ryzen processor sales. On a sequential basis, gross margin declined 1 percentage point due to a higher percentage of revenue from the Enterprise, Embedded and Semi-Custom segment. Operating income was $25 million compared to an operating loss of $8 million a year ago and an operating loss of $29 million in the prior quarter. Net loss was $16 million compared to net income of $69 million a year ago and a net loss of $73 million in the prior quarter. Loss per share was $0.02 compared to diluted earnings per share of $0.08 a year ago (which included a pre-tax gain of $150 million related to our ATMP JV transaction) and a loss per share of $0.08 in the prior quarter.
- On a non-GAAP(1) basis, operating income was $49 million compared to operating income of $3 million a year ago and an operating loss of $6 million in the prior quarter. Net income was $19 million compared to a net loss of $40 million a year ago and a net loss of $38 million in the prior quarter. Diluted earnings per share was $0.02 compared to a loss per share of $0.05 a year ago and a loss per share of $0.04 in the prior quarter.
- Cash, cash equivalents, and marketable securities were $844 million at the end of the quarter, compared to $943 million in the prior quarter.
Quarterly Financial Segment Summary
- Computing and Graphics segment revenue was $659 million, up 51 percent year-over-year, driven by demand for graphics and Ryzen desktop processors.
- Operating income was $7 million, compared to an operating loss of $81 Million in Q2 2016. The year-over-year improvement was driven primarily by higher revenue and improved product mix.
- Client average selling price (ASP) increased significantly year-over-year, as desktop processor ASP increased due to the first full quarter of Ryzen processor shipments.
- GPU ASP increased year-over-year.
- Enterprise, Embedded and Semi-Custom segment revenue was $563 Million, down 5 percent year-over-year primarily due to lower semi-custom SoC sales. In the quarter, AMD reached an important milestone by recognizing initial revenue from EPYC datacenter processor shipments.
- Operating income was $42 Million, compared to operating income of $84 Million in Q2 2016. The year-over-year decrease was primarily due to lower revenue and higher datacenter related R&D investments.
- All Other operating loss was $24 Million compared with an operating loss of $11 million in Q2 2016. The year-over-year difference in operating loss was related to stock-based compensation charges and a $7 Million restructuring credit in Q2 2016.
AMD Q2 2017 GAAP Quarterly Result
|Operating income (loss)||$25M||$(29)M||$(8)M|
|Net income (loss)||$(16)M||$(73)M||$69M|
|Earnings (loss) per share||$(0.02)||$(0.08)||$0.08|
AMD Q2 2017 Non-GAAP Quarterly Result
|Operating income (loss)||$49M||$(6)M||$3M|
|Net income (loss)||$19M||$(38)M||$(40)M|
|Earnings (loss) per share||$0.02||$(0.04)||$(0.05)|
Outlook for Q3 2017
The following statements concerning AMD (NASDAQ:AMD) are forward-looking and actual results could differ materially from current expectations. Investors are urged to review in detail the risks and uncertainties in AMD’s. For Q3 2017, based on a 13 week quarter, we expect:
- Revenue to increase 23% q/q, plus or minus 3%. The midpoint of guidance would result in a y/y increase of 15%,
- Non-GAAP gross margin to be approximately 34%,
- Non-GAAP operating expenses to be approximately $400 Million,
- Non-GAAP interest expense, taxes and other to be approximately $28 Million,
- Non-GAAP diluted share count to be approximately 1.14 Billion, and
- Inventory to be down versus Q2 2017.