AMD Q4 2017 Earnings Analysis: Profitable Fiscal Year Ends With Cautious Optimism As Fundamentals Start To Take Flight

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Feb 1
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AMD announced its fourth quarter results the day before yesterday and we thought it was time to do an earnings and fundamentals analysis on the phenomenal results. The red giant announced revenue for the fourth quarter of 2017 of $1.48 billion, operating income of $82 million and net income of $61 million or diluted earnings per share of $0.06, non-GAAP diluted earnings per share was $0.08.

Notably, this is the first year in quite some time that the company has reported a profitable quarter (with 43 Million to spare). For fiscal 2017, the Company reported revenue of $5.33 billion, operating income of $204 million and net income of $43 million or diluted earnings per share of $0.04. Non-GAAP diluted earnings per share was $0.17. Without any further, here’s the breakdown:

AMD (NASDAQ:AMD 12.07 1.94%) for the bulls: Strong server growth expected with EPYC, tap more TAM with Ryzen and Vega, capitalize on Intel Meltdown & Spectre vulnerabilities

Disclaimer: At the time of writing, the author owns no long or short position in AMD or related semiconductor stocks, nor plans to take one for the foreseeable future.

It has been an absolute rollercoaster of a ride for the company and it looks the stock is finally on the path to take flight in 2018. The company’s management, against all odds, not only managed to return to competitiveness in the x86 sector but was able to give Intel a run for its money in performance department for a short period of time while it reacted to the disruptive Threadripper platform this year. The comapny’s Zen architecture has been an absolute goldmine and is singlehandedly responsible for pretty much every good thing coming the company’s way.

Here’s the thing however, the TAM for Zen based products such as EPYC, Ryzen Mobile and Threadripper are nowhere near saturation. In fact, an argument can be made for the exact opposite. We expect to see AMD occupy a lot more market spaces with its data center efforts pushing into the corners and possibly even overthrowing Intel (in small to medium enterprises that are spooked by the Meltdown/Spectre problem). If the company manages to close a deal with the big cloud companies like AWS and Google Cloud, it could result in a huge windfall and considering with AMD its usually a matter of a few millions which makes or breaks the quarter, we expect to see good things going forward.

Another very important segment that we want to talk about is the Ryzen and Vega synergy. Ryzen mobility as well as the Kaby Lake G platform will both be huge cash cows for AMD in 2018. The Ryzen mobility platform was not fully seeded in 2017 and Kaby Lake G launched just recently. The full impact of both will be felt in a much stronger manner in 2018. Not to mention that the company plans to focus a lot more on its CPU division and introduce some micro-architecture refinements in Q1 2018.

Finally, there is the industry signal that easily favors AMD: cryptocurrency mining. AMD’s RX Vegas are absolutely insane at XMR mining. In fact, one RX Vega can mine more than a $3000 TITAN V card and can pay back its original ROI in just under 6 months. Since the cryptocurrency market is currently stable, we can expect demand for GPU mining to stay for the duration of 2018 at the very least (assuming of course that the overarching cryptomarket doesn’t correct heavily to unsustainable levels).

AMD will have an effective tax rate of 10% in 2018, which is pretty decent.

AMD (NASDAQ:AMD 12.07 1.94%) for the bears: Graphics card performance crown conceded to NVIDIA for the year of 2018, new leadership adjustment and uncertainty with RTG, lawsuit woes

Disclaimer: At the time of writing, the author owns no long or short position in AMD or related semiconductor stocks, nor plans to take one for the foreseeable future.

This is also where we see the first semblances of risk for the company. A bubble burst in the crypto space could have severe consequences for the graphics card segment as the markets will become flooded with cheap second hand GPUs from mining operations with revenue streams drying up for the company.

Secondly, the company has confirmed that it has no plans to roll out a Vega successor in 2018. We have it on good authority that the Vega successor will tape out in Q4 2018, which means you should see the final product hitting the shelf sometime in 1H 2019. This of course means, that the situation is now inverted. Where once AMD was very competitive in the GPU space (to NVIDIA) and lagging behind in the CPU space (against Intel), the situation will now be the opposite. NVIDIA will hold the performance crown throughout 2018 and can put a few more miles in the headstart it currently has on Radeon GPUs. The company can try to mitigate this by going for the value proposition but there is only so much you can do that.

This is why the company is exposed to even further risk with cryptocurrency mining – because without that, the RX Vega will probably not bring home alot of sales at the retail pricing levels (which are usually $200-400 above MSRP even under usual conditions). Another point of note is that Raja Koduri, a long time leader of RTG has left the company and that will have morale based consequences for the RTG division. New leadership has been already recruited but it remains to be seen how well they will gel into the company and just how much they can fill in the shoes that Raja left behind.

Verdict: We believe that the bullish indicators currently outweigh the bearish indicators for AMD and expect that the stock will show significant growth in 2018. Key indicators of strength and weakness that investors need to look out for are: signs of cryptocurrency market collapsing, launch of Ryzen refresh, EPYC design wins as well as Ryzen Mobility OEM numbers.

Highlights for Q4 2017

  • AMD expanded its presence in the datacenter with new AMD EPYC™ processor-powered solutions and deployments:
  • AMD continued its commitment to bring innovation and competition to every segment of the PC market with the launch of its Ryzen Mobile Processors with Radeon Vega graphics, including the AMD Ryzen™ 7 2700U processor – the world’s fastest processor for ultrathin notebooks. Combining the power of the “Zen” CPU and “Vega” GPU architectures, Ryzen mobile processors deliver up to 3x the CPU performance, up to 2.3x the GPU performance, and up to 58 percent less power consumption compared to the previous generation AMD notebook processors. Ryzen mobile-based notebooks are currently available from Acer, HP, and Lenovo, with more systems expected from Dell and other OEMs in Q1 2018. AMD and Qualcomm announced a collaboration to bring smooth and fast PC connectivity based on Qualcomm® Snapdragon™ LTE modem solutions to high-performance AMD Ryzen mobile processors designed for consumer and enterprise notebooks.
  • At CES 2018, AMD announced details for upcoming computing and graphics products including its first 7nm product, a Radeon “Vega” GPU specifically built for machine learning applications, as well as next-generation Ryzen CPUs and desktop Ryzen APUs.
  •  AMD designed a semi-custom GPU that will be integrated into the 8th Gen Intel® Core™ processor with Radeon RX Vega M Graphics.
  • AMD released a major update to its advanced GPU software suite for Radeon graphics, the Radeon Software Adrenalin Edition.
  • AMD expanded its leadership team with the appointment of graphics industry leaders Mike Rayfield as senior vice president and general manager of AMD Radeon Technologies Group (RTG) and David Wang as senior vice president of engineering for RTG. Rayfield will be responsible for all aspects of strategy and business management for AMD’s consumer graphics, professional graphics, and semi-custom products. Wang will be responsible for all aspects of graphics engineering, including the technical strategy, architecture, hardware, and software for AMD graphics products and technologies.

 

  • Computing and Graphics segment revenue was $958 million, up 60 percent year-over-year and 17 percent sequentially. The year-over-year and sequential increases were primarily driven by strong sales of Radeon graphics and Ryzen desktop processors.Operating income was $85 million, compared to an operating loss of $21 million in Q4 2016 and operating income of $70 million in Q3 2017. The year-over-year and sequential improvements were primarily driven by higher revenue. Client average selling price (ASP) was up year-over-year driven by higher Ryzen desktop processors ASP. Client ASP was flat sequentially. GPU ASP increased year-over-year and sequentially due to higher desktop and professional graphics ASP.
  • Enterprise, Embedded and Semi-Custom segment revenue was $522 million, up 3 percent year-over-year driven by server revenue. Sequentially, revenue decreased 37 percent driven by seasonally lower semi-custom SoC revenue.Operating income was $19 million compared to $47 million in Q4 2016 and $84 million in Q3 2017. The year-over-year decrease was primarily due to the absence of  a $31 million licensing gain in Q4 2016 and an increase in R&D expenses, partially offset by the benefit from a richer product mix. The sequential decrease was primarily due to seasonally lower semi-custom SoC revenue.
  • All Other operating loss was $22 million compared with operating losses of $29 million in Q4 2016 and $28 million in Q3 2017. The year-over-year and sequential improvement was primarily related to lower stock-based compensation charges in Q4 2017.

AMD (NASDAQ:AMD 12.07 1.94%) Q4 2017 Financial Results

WccftechQ4-17Q3-17Q4-1620172016
Revenue$1.48B$1.64B$1.11B$5.33B$4.27B
Operating income (loss)$82M$126M$(3)M$204M$(372)M
Net income (loss)$61M$71M$(51)M$43M$(497)M
Earnings (loss) per share$0.06$0.07$(0.06)$0.04$(0.60)

WccftechQ4-17Q3-17Q4-1620172016
Revenue$1.48B$1.64B$1.11B$5.33B$4.27B
Operating income$103M$155M$26M$301M$44M
Net income (loss)$88M$110M$(8)M$179M$(117)M
Earnings (loss) per share$0.08$0.10$(0.01)$0.17$(0.14)

AMD Outlook Q1 2018

  • AMD expects revenue to be approximately $1.55 billion plus or minus $50 million, an increase of 32% y/y primarily driven by the strength of the ramp of new Ryzen, GPU and EPYC products.
  • For comparative purposes, under the new accounting method, Q1 2017 restated revenue was $1.18 billion and Q4 2017 restated revenue was $1.34 billion.
  • Non-GAAP gross margin to be approximately 36%,
  • Non-GAAP operating expenses to be approximately $435 million, or approximately 28% of revenue,
  • Non-GAAP interest expense, taxes and other to be approximately $30 million,
  • Inventory to be up sequentially in support of higher revenue.

Guidance for Q1 2018 and the year-over-year comparison are under the new revenue recognition accounting standard (ASC 606). AMD is adopting the new revenue recognition standard by applying the “full retrospective” method. For comparative purposes under the new standard, Q1 2017 restated revenue was $1.18 billion and Q4 2017 restated revenue was $1.34 billion. For fiscal 2018, AMD expects the impact of the new standard on revenue to be immaterial.

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