Advanced Micro Devices (AMD) reported a loss of 9 cents per share for the second quarter of 2013, narrower than the Zacks Consensus Estimate of 12 cents loss per share owing to solid execution and cost control management.

Revenues

AMD generated revenues of $1.16 billion in the quarter, up 6.7% sequentially but down 17.8% year over year. The sequential increase was better than management’s expectations of 2% (+/- 3.0%) increase. The sequential increase was driven by a 12% increase in the Computing Solutions segment, partially offset by a 5% decrease in the Graphics and Visual Solutions segment.

Additionally, management stated that a number of large data center wins during the quarter led to the sequential revenue increase.

Revenues by Segment: During the second quarter, AMD renamed its Graphics segment to Graphics and Visual Solutions.

Computing Solutions comprised 72% of AMD’s sales in the last quarter, up 12.0% sequentially but down 19.6% from the year-ago quarter. The sequential increase was due to significantly higher notebook unit shipments, and higher server and desktop unit shipments, driven by demand for new Kabini and Temash products as well Opteron 6300 series of products.

The year-over-year decline was due to lower unit shipments and lower microprocess or average selling price (ASP).

AMD’s Graphics and Visual Solutions business generated the remaining 28% of its sales, down 5.0% sequentially and 12.8% from the year-ago quarter. The sequential decrease was due to lower game console royalties.

Management remains optimistic about the design wins in the notebook discreet market, which will drive its mobile share growth in the second half of 2013.

Operating Results

Reported gross margin for the quarter was 39.5%, down from 40.9% in the prior quarter and 45.2% in the year-ago quarter. The second quarter gross margin included an $11 million benefit from sales of certain previously reserved products.

Operating expenses of $479.0 million decreased 14.0% from $557.0 in the year-ago quarter. However, the reported operating margin of (2.5%) was below the year-ago quarter margin of 5.4% due to lower gross margins. As a percentage of sales, research and development (R&D) expenses decreased 10.7% year over year, while marketing, general and administrative expenses declined 19.3%.

The quarter’s GAAP net income was ($74.0) million or loss per share of 10 cents compared with net income of $37.0 million or 5 cents earned in the comparable quarter last year. Excluding restructuring charges and intangible amortization charges but including stock-based compensation expenses, non-GAAP net loss was $65.0 million or loss per share of 9 cents compared to a net income of $46 million or earnings of 6 cents a share in the year-ago quarter.

Balance Sheet

AMD exited the second quarter with cash, cash equivalents and marketable securities of approximately $968 million versus $1.0 billion in the prior quarter. Trade receivables were $670.0 million, up from $645.0 million in the prior quarter.

During the quarter, AMD paid $40 million cash to Global Foundries related to the 2012 wafer purchase commitment reduction.

During the quarter, AMD used $35.0 million of cash for operations, spending $28.0 million on capex.

Guidance

Management expects third quarter 2013 revenues to increase 22.0% (+/- 3.0%) sequentially. Gross margin is expected to be 36%. Operating expenses are expected to be approximately $450.0 million, down 6% sequentially.

Our Take

AMD’s top-line numbers for the quarter were better than its guidance, supported by new products and strong mobile design wins. The company’s bottom line also beat the Zacks Consensus Estimate. A more conducive market, increased game console wins, adoption of new products, position in graphics and good execution are expected to pull the company out of the weak PC market.

Additionally, the company is providing chips for game consoles to lessen the company’s dependence on the declining personal computer market. Management expects strong growth in the second half of the year coming from semicustom SoC products for both Sony (SNE) and Microsoft (MSFT) next generation game consoles.

We believe AMD is on the right track. It is trying to position itself strongly in the gaming market, which holds potential for growth in the next few quarters.

Also, the company plans to diversify its business into new embedded markets, including communication, industrial and gaming among others. It expects to increase revenue contribution from its embedded business and increase market share. AMD’s new APU’s, which power a number of thin and light touch notebooks are expected to drive strong double-digit sequential increase in mobile processor unit shipments.

Currently, AMD has a Zacks Rank #1 (Strong Buy).

Investors can also consider another stock, Scientific Games Corporation (SGMS) with an expected surprise prediction or ESP (Read: Zacks Earnings ESP: A Better Method) of +100.0% and a Zacks Rank #3 (Hold).

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