Advanced Micro Devices (AMD) Stock Up In Spite Of Q2 Loss

Advanced Micro Devices (NASDAQ:AMD) incurred a loss of 7 cents per share in second-quarter 2016, lower than the Zacks Consensus Estimate of a loss of 11 cents.

Following the results, shared surged more than 7% in after-hours trading. The rally in the share price was driven by strong demand for its semi-custom and graphics products. Also the company gave a strong third-quarter guidance.

Revenues

Advanced Micro generated revenues of $1.03 billion, up 23.4% sequentially and 9.0% year over year. The increase was backed by higher sales of semi-custom System on Chips (SoC) and better-than-expected seasonal graphics sales. Also, first-quarter revenues were above the Zacks Consensus Estimate of $955 million.

Advanced Micro has two reportable segments — Computing and Graphics (focused on the traditional PC market), and Enterprise, Embedded and Semi-Custom (focusing on adjacent high-growth opportunities). The details of these segments have been discussed below:

Computing and Graphics includes desktop and notebook processors and chipsets, discrete GPUs and professional graphics. This segment accounted for 42% of Advanced Micro’s sales, down 5.0% sequentially but up 15.0% year over year. The sequential decline was due to lower client desktop processors and lower chipsets, partially offset by stronger-than-seasonal GPU sales.

The company saw strong growth in GPU sales. It launched Polaris-based RX 480 GPUs, which gave a boost to higher desktop channel GPU shipments. Going forward, management expects strong demand to continue and help drive revenue growth in the third quarter, with the launch of RX 470 and RX 460 desktop GPUs and Polaris-based notebooks. The company also saw strong growth in mobile APU sales. The new seventh generation APU systems which is expected to be widely available in the coming months will further drive APU sales.

Enterprise, Embedded and Semi-Custom includes server and embedded processors, dense servers, semi-custom SoC products, engineering services and royalties. This segment brought in the remaining 58% of sales, up 59% sequentially and 5.0% year over year due to higher sales of semi-custom SoCs.

For this segment, management expects demand to remain strong in the upcoming quarter driven by new game consoles from both Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) .

Operating Results

Pro-forma gross margin was 31.1%, down 127 basis points (bps) sequentially but up 643 bps year over year. The sequential decline was primarily due to a higher mix of semi-custom SoC sales.

Adjusted operating expenses of $334.0 million decreased 1.8% sequentially but increased 14.8% year over year. Also as a percentage of sales, both research and development (R&D) expenses and marketing, general and administrative expenses decreased. As a result, pro-forma operating margin was (1.5%), down 707 bps sequentially and 480 bps year over year.

The quarter’s GAAP net income was $69.0 million or earnings of 8 cents per share compared with net loss of $181.0 million or loss of 23 cents a year ago. Excluding all special charges but including stock-based compensation expenses, pro-forma net loss was $57.5 million or loss of 7 cents against net loss of $112.0 million or loss of 14 cents in the year-ago quarter.

Balance Sheet

Advanced Micro exited the second quarter with cash and cash equivalent balance of $957 million, up $241 million from the prior quarter. The increase was due to net cash proceeds received from the ATMP JV transaction with NFME that closed in the second quarter. Inventory was $743 million, up from $675 million in the previous quarter.

Total debt (short term and long term) was $2.24 billion, flat sequentially. During the quarter, cash used from operations was $85.0 million, while capital additions were $21 million.

3Q Guidance

Management expects third-quarter 2016 revenues to increase 18% sequentially (+/- 3%) driven by strong demand for Semi-Custom and Graphics products. The Zacks Consensus Estimate is pegged at $1.12 billion.

Non-GAAP gross margin is likely to be 31%. Non-GAAP operating expenses are projected at approximately $350.0 million due to an increase in R&D investments. IP monetization licensing gain is expected to be approximately $22 million. Non-GAAP interest expense taxes and other are projected at approximately $45 million.

Our Take

Advanced Micro reported decent second-quarter results with both the top and the bottom lines exceeding the Zacks Consensus Estimate.

The company is strengthening its position in key markets with the introduction of several APUs and GPUs. Its Radeon Technologies Group focuses on the graphics business and on improving its performance in traditional graphics markets. At the same time, the company is taking initiatives in immersive computing markets like virtual and augmented reality.

During the quarter, the company closed its ATMP joint venture transaction with Nantong Fujitsu Microelectronics. The deal helped AMD to bolster its cash position. It will also accelerate the company's growth and better monetize its valuable assets.

Currently, Advanced Micro has a Zacks Rank #3 (Hold). A better-ranked stock in the same space is Silicon Motion Technology Corp. (NASDAQ:SIMO) , sporting a Zacks Rank #1 (Strong Buy).