AMD Beats Wall Street’s Expectations, Posts Non-GAAP Earnings of 3 Cents Driven By Outstanding Console Sales

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AMD’s third quarter earnings are out and the company has beaten Wall Street’s expectations (on a non-GAAP basis) on both revenue and earnings, posting a non-GAAP EPS of 3 cents a share on a net income of $27 Million. Analysts were expecting non-GAAP earnings to be flat (no profit, no loss). The company also managed to generate a revenue of $1,307 million beating analyst's expectation of $1.21 Billion. of On the GAAP side, the Sunnyvale chip manufacturer posted a loss per share of 5 cents on a net loss of $406 Million.

Advanced Micro Devices, Inc (NASDAQ:AMD) beats on non-GAAP expectations, posts GAAP loss per share of 5 cents on net loss of $406 Million

AMD (NASDAQ:AMD) shares are down more than 5.7% (at the time of writing) as a result of the earnings announcement, because while the company has beaten on both revenue and eps as far as non-GAAP earnings are concerned, the GAAP side of the story paints a slightly darker picture. The primary driver that drove the net loss of $406 Million on the GAAP side was the WSA charge of $340 Million (without which AMD would have gone into 'operating profitability') which was excluded under IFRS guidelines on a non-GAAP basis but is a very real charge for the company to bear - one that is not going away anytime soon.

The Wafer Supply Agreement was amended quite recently and represents a material 'special charge' for the company to bear on an ongoing basis. This is why even though it's being classified as such, the nature of the agreement makes this very much an operational expense and quite significant to investors. The new terms of the agreement have put quite a lot of financial hoops for AMD to jump through including an array of monetary payments to GlobalFoundries. For more information, you can read our exclusive deep dive into WSA and its impacts.

AMD (NASDAQ:AMD)'s CEO had the following to say:

"Our third quarter financial results highlight the progress we are making across our business," said Lisa Su, AMD president and CEO. "We now expect to deliver higher 2016 annual revenue based on stronger demand for AMD semi-custom solutions and Polaris GPUs. This positions us well to accelerate our growth in 2017 as we introduce new high-performance computing and graphics products."

Another thing that we have covered in the past is the fact that AMD received approximately $1.4 Billion after a seasoned issue of common shares and convertible senior debt but this was used to pay off outstanding debt. Approximately $796 of outstanding term debt has been retired as well as $226 Million of outstanding ABL balance using the net proceeds of $1.022 Billion. Since the company does not have any Term Debt maturities till 2018, the company's strategy here is to minimize its payables for the coming few years (the load will be replaced by the WSA charges to some extent) while it rolls out what could be the most important product for the existence of its ongoing concern: Zen.

Now let's talk a bit about how the different segments did. The Computing and Graphics segment (which consists primarily of Radeon Technologies Group) saw its revenue increase 9 percent sequentially and 11 year over year, which is a very healthy growth rate considering the backdrop of the "diminishing" PC industry. The real rock stars of the company (NASDAQ:AMD)'s earnings, however, was the Enterprise, Semi-Custom and Embedded segment which generated a revenue of $835 Million and saw a growth of a massive 41 percent sequentially and 31 percent year over year. This was driven primarily by sales of semi-custom SOCs (think consoles). This is one trend that will hopefully continue for the foreseeable future since not only has AMD managed to bag the contract for the PS4 Pro but with next generation consoles such as Xbox Scorpio and console refreshes coming more frequently than before, this is a very lucrative business and AMD is in the dead center of it. The company is also increasing its focus on the enterprise segment through the introduction of Zen based server chips such as Naples.

And on that note, I would like to conclude by saying that AMD (NASDAQ:AMD) has never been in a better position to turn the ship around, yet practical constraints like the amended WSA agreement make that very difficult to happen. And of course, the one thing that goes without saying: Zen is crucial to AMD's success as a company. This is the first architecture after the now outdated Bulldozer architecture and marks a very different approach for the company in terms of its compute implementation. A lot is riding on Zen and the company needs to get everything just right if it's to preserve the investor's confidence.

GAAP ResultsQ3-16Q2-16Q3-15
Operating loss$(293)M$(8)M$(158)M
Net income (loss) / earnings (loss) per share$(406)M/$(0.50)$69M/$0.08$(197)M/$(0.25)
Non-GAAP ResultsQ3-16Q2-16Q3-15
Operating income (loss)$70M$3M$(97)M
Net income (loss) / earnings (loss) per share$27M/$0.03$(40)M/$(0.05)$(136)M/$(0.17)

Financial Segment Summary

  • Computing and Graphics segment revenue of $472 million increased 9 percent sequentially and 11 percent from Q3 2015. The sequential and year-over-year increases were driven primarily by increased sales of GPUs, offset by decreased sales of client desktop processors and chipsets. The year-over-year increase was also driven by increased sales of client mobile processors.
    • Operating loss was $66 million, compared with an operating loss of $81 million in Q2 2016 and an operating loss of $181 million in Q3 2015. The sequential improvement was driven primarily by higher GPU revenue, and the year-over-year improvement was primarily due to higher GPU revenue and the absence of an inventory writedown charge.
    • Client average selling price (ASP) decreased sequentially driven by lower mobile and desktop processor ASPs and was flat year-over-year.
    • GPU ASP increased sequentially and year-over-year driven by higher channel and professional graphics ASPs.
  • Enterprise, Embedded and Semi-Custom segment revenue of $835 million increased 41 percent sequentially and 31 percent year-over-year due to higher sales of semi-custom SoCs.
    • Operating income was $136 million compared with $84 million in Q2 2016 and $84 million in Q3 2015. The sequential improvement was primarily due to higher revenue and the year-over-year improvement was primarily due to higher revenue and a $24 million IP licensing gain.
  • All Other category operating loss was $363 million in Q3 2016 compared with $11 million in Q2 2016 and $61 million in Q3 2015. The sequential increase was primarily driven by a $340 million WSA charge.
  • AMD completed capital markets transactions that raised approximately $1.4 billion in cash, before issuance costs, to lower overall debt, reduce interest expense payments, and further support growing business opportunities.
  • AMD announced a five-year amendment to the WSA with GF that strengthens the strategic partnership, while providing AMD with flexibility in sourcing foundry services and greater financial predictability.

Q4 2016 Outlook for AMD

  • Revenue to decrease 18% sequentially, +/- 3%, primarily driven by seasonally lower semi-custom sales. The midpoint of revenue guidance would be up 12% year-over-year.
  • Non-GAAP gross margin to be approximately 32%,
  • Non-GAAP operating expenses to be approximately $350 million,
  • IP monetization licensing gain of approximately $25 million,
  • Maintain non-GAAP operating profitability,
  • Non-GAAP interest expense, taxes and other to be approximately $32 million,
  • Cash and cash equivalents balances to be up, in-line with our guidance of ending the year free cash flow positive excluding cash from capital markets transactions and net proceeds from the ATMP JV,
  • Inventory to decline to approximately $660 million,
  • Basic share count to be approximately 930 million shares which includes 115 million shares related to the Q3 2016 equity issuance.
  • Expect full year 2016 revenue to be up approximately 6% from 2015 based on the midpoint of Q4 2016 revenue guidance.