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Why is AMD Stock Jumping?

Why is AMD Stock Jumping?
by Daniel Nenni on 07-30-2016 at 7:00 am

 One of my favorite pastimes is listening to the quarterly investor calls of the leading semiconductor companies. I can then match up the talking points with the calls I do with Wall Street, the conferences I attend, and the other data points I have collected while working inside the fabless semiconductor ecosystem for more than 30 years. Rarely do all the points match up but sometimes they are so off it makes for an interesting conversation.

As usual the prepared statements were a bit obscure and convoluted so it was very hard to draw any specific conclusions but there are several points worthy of discussion:

First and foremost, it is getting harder to differentiate the reasoning behind GAAP and non-GAAP results. For example, AMD sold a majority interest (85%) in their assembly and test operations to another firm to raise cash. As a result they recorded a significant profit on this sale ($127M after provisions for taxes).

This (one-time) profit was included in GAAP results. The CEO proudly said, “We achieved profitability this quarter, for the first time since 2014.” Yet, without this one-time operations spin-out, the net operating results were a significant loss.

It is also interesting to note that there are not many key AMD assets left for sale or spin-out. It was reported that the iconic Sunnyvale campus is for sale so AMD can move to a smaller facility. Unfortunately, AMD does not actually own the property so it cannot be used to bolster future GAAP.

Second, AMD is paying an average of almost 7% on long-term bond interest, a total of ~$2B, which will start to mature in 2018. There is clearly insufficient operating income to pay off these bonds so they’re going to have to start rolling them over, assuming their credit rating holds up.

Third, the PC market is still rather weak with “upper single digit declines to be expected this year”, according to the webcast call.

The last Bulldozer-based APU (CPU + GPU) product release occurred earlier this year, but there was no specific mention of this product on the webcast call. (As AMD has already pre-announced the replacement core architecture “Zen” it’s likely that this last APU refresh will not generate much new revenue or market share in the consumer PC or laptop area.)

They did indicate that the initial Zen-based server chip is with first customers for evaluation, and that “sales should begin in the first half of 2017”.

Fourth, AMD is benefiting from both the XBox One and the PS/4 for the coming Christmas season, although one of the analysts said, “OK, that’s a nice ramp in revenue, but the price takedown negotiated with Microsoft and Sony over time means this is likely a low margin return.”

AMD countered with, “We are also ramping for the mid-life refresh of the consoles, as well — we’re excited about Microsoft’s announcement of the XBox One S, a new console with improved High-Dynamic Range rendering support.” Unfortunately, Microsoft also has announced another refresh in 2017 which will likely cut into XBox One sales this year.

Bottom line: AMD is definitely counting on a very well-received Christmas buying season for game consoles which may not happen.

Fifth, AMD announced a refresh of their discrete GPU card plug-in product family. The good news is they priced it very aggressively, and it appears to be selling well. The bad news is two-fold — (1) this is just a FinFET-based replacement to an existing product line with better power dissipation but no significant performance boost that one would expect with a new GPU architecture and (2) Nvidia just announced their stripped down version of their new architecture and a competitive performance and price point. Some games play better on one or the other. Hard to imagine a mid-range, aggressively-priced GPU refresh generating sustaining revenue growth.

Sixth, there is a new joint venture with a Chinese firm to provide a specific x86-based server. Last quarter, when this JV was announced, AMD recorded “operating revenue” to address the R&D applied to this project. On the conference call this quarter, if I understood correctly, they recorded the payment from the Chinese firm as “IP licensing” and they said they had hit the first project milestone and expected the scheduled payments to continue.

Seventh, no mention of AMD’s ARM-based server product initiative, either the existing “Seattle” 28nm design (announced late last year) or its supposed refresh (using the ARM A72, in a 14nm process, due early 2017, as I recall). Remember, AMD bought ARM based server company SeaMicro in 2012 for $334M only to shut it down in 2015.

Eighth, there are high hopes for the Chinese JV, but that’s a couple of years away from generating any significant sales. It’s just R&D reimbursement currently.

Bottom line, expect a strong game console sales bump this year (but with pressure on margins). A GPU refresh will generate a bump in revenue (again, not at the high-end with its commensurately higher margins). PC revenues will decline. Server revenue is still very weak. And, there is a rather large debt redemption pending.

It’s all going to come down to whether the Zen-based x86 refresh captures new server (and subsequently, consumer PC) market share away from Intel. Time will tell, although the fact that the initial 14nm GPU part was somewhat “underwhelming” in power/performance does not bode particularly well for the Zen-based server part in 2017. I should also note that the original architect and team leader of Zen (Jim Keller) now works for Tesla as do several of his team members.

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