AMD beats earnings estimates thanks to console sales, but APU outlook is bleak

After Intel missed its earnings expectations last week and predicted that 2014 would be a flat year for the company, eyes have been watching Sunnyvale to see how AMD’s sales would break. Historically, Intel has been the bellwether of the semiconductor industry; a bad quarter for Intel typically means AMD is headed off a cliff. This time was different.
For Q4 2013, AMD reported income of $1.59 billion, up 9% from Q3 and 38% year-on-year. Total yearly sales were $5.3 billion (down 2% from the whole of 2012), but gross margins hit 37%, far higher than 2012′s 23%. This wasnt’ enough for AMD to return to full profitability — Sunnyvale still posted a loss of $83 million for the whole of 2013 — but a net income of $89 million in the fourth quarter and earnings per share of 0.12 both beat industry expectations.
The company’s strong sales and overall position are thanks to its surging graphics revenue from its console business and new Radeon sales. In fact, if this were focused solely on computing solutions, the story there is abysmal. Take a look at how AMD’s market shifted in 2013…

AMD’s graphics business surged just as the bottom fell out of APUs. Kaveri may help reverse this trend, depending on uptake, but that’s still unknown territory. AMD claims that adoption of Kaveri, Mullins, and Beema are all strong, but wasn’t ready to name partner names for future product shipments on the latter two parts. Kaveri should ship in desktop systems in the near future, with mobile Kaveri arriving later this year. Beema and Mullins will ship in the back half of the year, which is when we’ll see any gains in tablets and low-cost laptop segments.
This neatly captures both the success of AMD’s new strategy and the difficulty of holding on to that success if the APU business doesn’t start to recover. The bottom may have fallen out of the PC market as a whole, but AMD ate a far higher percentage of that decline than Intel did. According to AMD, the decline in APUs was driven by “decreased chipset and notebook unit shipments.” GPU revenues increased sequentially thanks to the launch of new R7 and the R9 produt families, but AMD doesn’t break out exactly how much ASPs or GPU shipments were up last quarter.
Finally, AMD will pay Global Foundries $250M in the first quarter of this year. as part of the 2014 WSA. It missed its wafer purchases in Q4 2013 (960M worth of wafers instead of $1.15B for the year), but did not incur a penalty for this shortfall.

Looking ahead to 2014

AMD’s 2014 roadmap shows a steep decline in Q1 of this year with sales dropping an estimated 16%. That’s a greater-than-typical seasonal decline; it reflects an increased drop-off on console sales as those products move out of Q4, combined with the normal seasonal decline in PC sales. Overall, AMD expects the PC space will decline in 2014,  The company’s plans for the year as a whole won’t be surprising to anyone who follows it — the company believes it can derive as much as 50% of its revenue frm the non-PC space, it plans to launch ARM servers later in 2014, and it’s bullish on the ramp of its refined Kabini hardware.
Underneath the marketing there’s a message: AMD doesn’t want to just be a PC company anymore, and it’s well aware of the dangers of clinging to strongly to a semicustom business based solely on console parts. That’s why the focus in the semicustom space is built on pushing AMD hardware into new low power and embedded markets, and its why AMD wants to capitalize on its SeaMicro business with a new ARM part. That part will be ready to sample by the end of the quarter (AMD claims it has strong interest).
AMD CEO Rory Read did what he said he’d do. He’s returned AMD to profitability. With the PC market still in flux, it’s not clear if this will remain true, and we remain convinced that Steamroller is the wrong core for AMD’s long-term success — but we’ve got to give credit where credit is due. While AMD isn’t out of the woods at this juncture, it’s come a long way from 2012.
AMD’s stock has fallen some 10% since this earnings news broke — Wall Street evidently isn’t satisfied with these figures, despite strong growth, better-than-expected earnings, and a net income of $89M for the last quarter.