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Picking up from where we left off with Intel, earnings week has continued to roll along with most of the major tech companies having reported their Q3 earnings. As we noted in our look at Intel’s earnings, Intel is the traditional bellwether for the PC industry, and for Q3 that bellwether was reporting that the PC market had unquestionably grown weaker, and that Q4 was to be cast into even more doubt. As one of the strongest PC-centric tech companies Intel has significant exposure to any weakness in the PC market, but at the same time they’re also in the best position to weather whatever may come. For their partners and their competitors however, a weak market can be a significantly bigger drain.

This brings us to today’s major PC earnings announcement: AMD. AMD is by far the weaker CPU manufacturer, and while it has some level of diversification through its GPU division and embedded CPUs, like Intel they’re still significantly exposed to the PC market, setting the stage for a rough quarter. Furthermore rumors began circulating that AMD was looking at another round of layoffs – rumors that have seen been proven at least partially correct – which would indicate that AMD was struggling even more than anticipated. With these factors in mind there has been a great deal of anticipation for AMD’s Q3 earnings call, so let’s dive right in.

For Q3 of 2012 AMD reported $1.27B in revenue, with a net loss of $157M. Unfortunately for AMD (but not unexpected) this is a significant drop in both revenue and net income on both a quarterly and yearly basis, having furthermore pushed AMD back into the red after turning a slight profit in Q2. Compared to AMD’s Q3 2011 results, revenue is down approximately $420M, a nearly 25% drop; net income meanwhile swung from positive $97M to negative $157M, a shift of nearly $250M. Finally, AMD’s gross margin was an abysmal 31%, well below last year’s gross margin of 45%, which is generally where AMD needs to be to turn any kind of profit.

AMD Q3 2012 Financial Results
  Q3'2012 Q2'2012 Q3'2011
Revenue $1.27B $1.41B $1.69B
Net Income -$157M $37M $97M

The single biggest factor for this sudden change in fortunes is a $100M inventory write-down AMD had to take this quarter for unsold Llano inventory. In Q3 of 2011 Llano was the biggest factor in AMD turning a profit, but a year later those chips have been superseded by AMD’s new Trinity APU. Notably AMD is calling this a write-down and not a write-off, so it looks like they’re accounting for the loss of value of these APUs (i.e. they’ll have to sell them at lower prices than they planned for), as opposed to simply throwing out $100M in Llano APUs. Nevertheless, even if AMD had not taken the write-down they still would have lost around $50M for the quarter, so while Llano inventories were a big problem for AMD they are not the sole reason for AMD’s rough quarter.

Breaking down AMD’s numbers for the quarter, AMD’s Computing Solutions (CPU/APU) segment booked $927M in revenue, for an operating loss of $114M. This represents a 28% decline in revenue on a yearly basis, and like AMD’s overall profitability a flip from an operating income to an operating loss for the division. AMD looks to have been hit twice here; not only are overall sales lower, but their ASPs were also down.

AMD Q3 2012 Computing Solutions Division Financial Results
  Q3'2012 Q2'2012 Q3'2011
Revenue $927M $1.04B $1.28B
Operating Income -$114M $82M $149M

AMD doesn’t completely break down their CPU revenue by processor line, but they have stated a few facts. For client revenue (i.e. non-server) desktops were cited as being especially hard hit by lower sales volumes and ASPs. As for notebooks, AMD has stated that Trinity’s share of AMD notebook shipments has just surpassed 30%, which implies that the majority of AMD’s notebook APUs are still Brazos and Llano.

Meanwhile AMD’s Graphics division fared much better. For the quarter the Graphics division booked $342M in revenue, and once again turned a small but consistent operating income of $18M. This represents a 14% reduction in revenue over Q3 of 2011, while operating income has actually grown by $6M. AMD attributes the lower revenue to lower OEM sales, but noted that channel sales (i.e. retail) are higher than at this point last year. Interestingly despite the loss of revenue AMD’s GPU ASPs were also up compared to Q2, which is why they turned a greater operating income on lower revenues. Unfortunately as we’ve seen time and time again with AMD, while their Graphics division can consistently turn a small profit, at only 1/3rd the revenue of their Computing Solutions division it’s not nearly large enough to offset the losses AMD has run there.

AMD Q3 2012 Graphics Division Financial Results
  Q3'2012 Q2'2012 Q3'2011
Revenue $342M $367M $403M
Operating Income $18M $31M $12M

With all of that in mind, as bad as AMD’s Q3 was, much like Intel their projections are for Q4 to be even worse. Unlike Intel AMD doesn’t provide gross margin guidance, but for their revenue guidance they are predicting a further 9% (+/- 4%) decline in revenue.

This brings us to perhaps the most depressing news of the day: more layoffs. As part of their restructuring plan to return to profitability, AMD will be laying off nearly 15% of its workforce in Q4. They expect to take an $80M charge on this for severance payments, in return for $190M in projected savings in 2013. AMD is being intentionally vague about where these layoffs will come from, and it’s entirely possible they haven't completely figured that out at this time, so at this point it’s impossible to say if this will primarily hit one division (e.g. GPUs) or if it will be spread around all of AMD’s major divisions.

The layoffs are coming as part of a greater restructuring for the company, which will see them accelerating their previously announced shift away from the PC market in favor of mobile, servers, and semi-custom embedded chips. As the PC market continues to weaken – and AMD expects it to remain weak for several more quarters – they will be speeding up this transition in order to derive more of their revenue from non-PC sources sooner. Ultimately AMD wants to be in a position where 40-50% of their revenue comes from these fast-growing markets, with a specific goal of 20% of their revenue coming from semi-custom embedded APUs by Q4 of 2013.

To get there AMD will be simplifying their development cycles and increasing their focus on building reusable IP blocks, in essence transitioning to building their APUs in a more SoC-like fashion. AMD has been very careful to reiterate that they’re still an engineering company, and that graphics in particular are a cornerstone of the company. But much like the vague nature of the layoffs they are not making it clear what projects and products are being deprioritized or discontinued in order to achieve this simplification. What is clear is right now is that AMD will be reusing more IP and designs when they can to avoid having to undertake costly research and development.

Finally, AMD has also spent a bit of time talking about 2013 and beyond. On a financial side of things AMD’s goal is to get their operating costs to the point where a quarterly revenue of 1.3B would be their break-even point, which is part of AMD’s attempt to “reset” the company to survive on what would ultimately be lower margins. Meanwhile on the product side of things, silicon for Kabini (their 28nm Brazos replacement) is already back and AMD is working on a H1 2013 launch for that. As it stands nearly 85% of AMD’s current business is focused on the “legacy” PC market, so AMD is looking to shift into high margin, fast growing markets like tablets as soon as possible, which is where products like Kabini will take them.

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  • Ibertkc1 - Monday, October 22, 2012 - link

    No offense, but 85% of AMD's employees are in Germany, Southease Asia or Latin America. Not sure why our president has any responsibility for their employment. As far as I'm concerned, every foreigh job cut is an opportunity for Americans to get back into the game. I am assuming Americans want these jobs. By the way I am a republican. Reply
  • CeriseCogburn - Friday, October 26, 2012 - link

    Everyone knows amd is a traitor company. Reply
  • CeriseCogburn - Tuesday, October 30, 2012 - link

    Take a look at Fiat and the president's bailout and making those cars in China.
    LOL
    You're not sure why, not sure anyone else is sure why either, but there it is son.
    Reply
  • codedivine - Thursday, October 18, 2012 - link

    They did talk about Kabini launching in the 1st half but I don't think there was a mention of Kaveri today if I remember correctly. That is potentially worrying. Reply
  • twotwotwo - Friday, October 19, 2012 - link

    "AMD is looking to shift into high margin, fast growing markets like tablets as soon as possible."

    I think AMD is right to shift there -- GPUs are very important there, and Intel doesn't have a stranglehold and nor does it look on the verge of getting one -- but 'high margin' does not seem right from the SoC vendor's perspective. Anand noted in the iPhone 4 review that $15-30 has been a typical mobile SoC price so far--a chunk of that is fabbing cost, a lot will go to paying back R&D costs, etc. AMD will have faster chips that they can charge more than $30 for. And for a while Windows 8, etc. might open up a 'laptop-replacement tablet' space (think Surface Pro) with higher prices and a good chance for AMD to compete with Intel on price without totally blowing their margin. And they can get profitable quarters and relevance out of it.

    Longer term I think tablets costing 500 bucks or less, and chips cheaper than most stuff Intel sells, end up dominating. ARM is following the same Moore's Law as everything else, and users don't seem to be demanding faster clients. (Consider some ARM speed boosts in the pipeline: Cortex-A15 and Apple Swift 2.0; ARMv8 and 64-bit; process bumps galore.) Apple makes their own chip IP and Samsung fabs its own chips so there's arguably some advantage to ARM for the two most profitable mobile product makers today. Software's getting redesigned and user expectations are getting reset around today's ARM platforms. And AMD will deal with not just ARM but Intel and maybe a global economy that wants its computers cheap more than it wants them to have fast CPUs.

    The server market has a much longer fuse on it, but I wouldn't assume ARM will never show up:

    - Some server loads can parallelize OK across lots of low-power cores
    - 64-bit ARM is coming, so RAM won't be a bottleneck forever
    - If market forces take capital from Intel and give some to Samsung/Qualcomm/Nvidia/Apple/ARM, Intel's R&D lead could start to slip
    - x86 made the client-to-server transition; why not ARM someday?

    So I think going into mobile is the right thing to do, and could get AMD a profitable future. I DON'T think that will mean ~$50 left over after fab costs on each consumer/office chip over the long run. AMD will need huge volume, because they'll be in a position more like, say, today's Nvidia selling Tegra than today's Intel selling Core. I wonder if they should see their key threats as PowerVR/Adreno/Mali, not Haswell/Saltwell. I wonder if they should get into mobile GPU IP or even consider ARM SoCs or core designs further out. I really wonder if they should compete more aggressively on price, even if it doesn't seem optimal for quarterly profit, to stay relevant.

    Okay, that was incredibly pessimistic for AMD and Intel and very optimistic for everyone tied to ARM. I'd love to peek a decade out to see what I got and missed.
    Reply
  • NuShrike - Friday, October 19, 2012 - link

    Wow, does nobody remember AMD/ATI sold their Imageon/Adreno mobile GPU IP to ... Qualcomm?

    This was during Windows Mobile's last days when nobody seemed to care about mobile GPUs until Apple came along and told everybody to sit in the corner.

    AMD said it was so they could focus on their core disciplines after the ATI merger.

    Now that Nvidia has an out of the PC market with their high flying Tegra3, what are the other big ARM GPUs? PowerVR, Mali, and ... Adreno.

    Even if AMD could enter the ARM SoC market, they have to restart the GPU IP from scratch without infringing their own Adreno IP.

    Boy, that focus of AMD was actually cutting their lifeline.
    Reply
  • twotwotwo - Friday, October 19, 2012 - link

    Ha, yeah, you're right, I didn't know! Kids these days.

    Maybe they have a fighting chance still--mobile SoCs are aspiring to laptop-like performance, so maybe with enough effort to scale down power use of their integrated GPUs they could be competitive with Qualcomm's attempts to scale up Adreno, sort of how Intel is trying hard to scale laptop IVB down to much lower power points for Haswell. Not that either one of those is easy, but they're strategies at least.
    Reply
  • CeriseCogburn - Friday, October 19, 2012 - link


    LOL - it's so freaking bad it must be so terribly embarrassing for the AMD insiders.

    They don't listen to any good advice, then they cut their own throats, over and over again.

    When they finally trash the last bit of ATI employee backbone left in Q4, that part of AMD will crumble into complete disrepair as the rest of AMD.

    Whatever the real story behind the scenes is concerning the success of the K6-2 and even the 64x2, AMD had better wake up and try emulate it. I suppose that FIX would upset so many inside the company clinging on for dear life, that it will never, ever come.

    "Leadership", or even internally the right stuff, is just not there, even though their 69xx and 79xx series cards hung tough, it just was not a win like the 580 was, so there's just nothing and even less of course in the cpu division.
    Reply
  • FearfulSPARTAN - Friday, October 19, 2012 - link

    I know, I remember saying in class that amd could have a chance of out lasting intel in the worst possible situation simply because of their graphics division. They could design gpus for mobile, and then i read a year later they sold their ultra mobile gpu group to qualcomm a few years back O_O. I cant help but laugh a little bit, I want amd to survive but its just funny when you read things like this and it seems like their just killing their mobile chances or however you want to put it. Reply
  • Mishera - Monday, October 22, 2012 - link

    To be fair, Nobody knew mobile would take off like this. I didn't like the deal when they did it as it seemed a bit rash to sell of a profitable business when they were losing money but I'll give them R&D costs. It really was a bad time for them and they REALLY were about to go under, and had Asset Light not have happened, they would have been gone by now. It's just the way the dice rolls sometimes...

    But that's absolutely no excuse for their performance recently. Their brazos and/or Trinity processors would have been PERFECT for Win8 pcs, and the fact that we haven't seen them is a joke, especially considering that their CEO came from a laptop company. We should have at least seen some models by now. In fact, their probably shouldn't even be an Arm Surface, but just one x86 version with a Amd apu.

    Amd doesn't need adreno, that was the beautiful thing about brazos. It was a chip that gave them a serious entry into the tablet market with one die shrink, but they had to push the roadmap out for a few months. Amd missed the boat on that one big time, and it looks like again they'll be fighting for relevance.
    Reply

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