AMD Posts Encouraging Third-Quarter Results
Despite manufacturing problems, firm's results were slightly ahead of our expectations.
Despite manufacturing problems, firm's results were slightly ahead of our expectations.
Advanced Micro Devices (AMD) reported third-quarter results that were slightly ahead of our expectations. For the quarter, revenue was $1.69 billion, up 7% sequentially and an increase from sales of $1.62 billion a year ago. Revenue came in ahead of the firm's outlook of 4%-6% sequential growth provided in September, when AMD lowered its original third-quarter forecast because of manufacturing yield issues for its Llano processors (which are aimed at mainstream notebooks and desktops) as well as some older products at foundry partner GlobalFoundries. The firm attributed the improvement to higher-than-anticipated demand from distribution channels toward the end of the quarter.
During the quarter, AMD's main computer processor segment achieved sales of $1.29 billion, up from $1.21 billion in the second quarter, thanks to record mobile processor shipments and higher server processor average selling prices (ASPs), partially offset by a limited supply of desktop chips. In fact, the firm indicated that mobile processor revenue increased 35% sequentially as AMD's new Fusion chips, which combine a computer processor and graphics capabilities onto a single piece of silicon, performed well in the market. In addition, server processor sales increased 27% quarter over quarter, driven by the initial shipments of server chips based on the firm's new Bulldozer architecture. In the graphics chip unit, sales increased 10% sequentially to $403 million, driven by both increased ASPs and shipments. On the profitability front, gross margin was 45%, down from 46% in the second quarter, due to the aforementioned supply issues. Operating income came in at $138 million, up from $105 million last quarter.
For the fourth quarter, management expects revenue to rise 1%-5% sequentially. This outlook is in line with the forecast from rival Intel INTC. Management noted that the fourth-quarter outlook would have been higher if AMD was not presently supply-constrained. Faced with the production problems at GlobalFoundries, AMD appears to have chosen to sacrifice shipments of desktop processors in order to shift more available manufacturing capacity toward notebook Fusion chips, and management indicated that Fusion chips now account for 90% of AMD's mobile processor shipments and 60% of total PC client processor shipments. As a result, although the firm appears to be gaining market share from Intel with Fusion, particularly in notebooks, these gains aren't yet showing up on the top line, as desktop processor sales likely will be temporarily depressed until the manufacturing yield issues are resolved in the upcoming quarters.
Finally, AMD began shipping its new Bulldozer processors for servers and high-end desktops in the third quarter. Although the reviews of Zambezi, the high-end desktop version of Bulldozer, have been somewhat mediocre, we expect the reviews of Bulldozer server processors Interlagos and Valencia to be better. The types of computing tasks run on servers are generally markedly different than the ones run on desktops, and Bulldozer was designed with servers in mind. As a result, we continue to believe that the Bulldozer server chips will be much more competitive against Intel. Investors should keep in mind that our thesis of share gains from Bulldozer is primarily in the server chip space, where the firm has much greater opportunities for market share gains and where profit margins are much more lucrative.
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