Advanced Micro Devices (AMD) reported earnings of 3 cents per share in the third quarter of 2014, which missed the Zacks Consensus Estimate by a penny.

Following the announcement, shares plunged 5.3% in after-hours trading due to the weak sales guidance. Though the overall PC market is improving, the consumer market continues to remain under pressure. As a majority of Advanced Micro's chips is integrated into consumer desktops, it could likely suffer and apparently lose market share to Intel (INTC).

Revenues

Advanced Micro generated revenues of $1.43 billion, down 0.8% sequentially and 2.2% year over year. The decrease was due to lower chipset and GPU sales, partially offset by strong sales of semi-custom System-on-chips (SoCs). Third-quarter revenues were below the Zacks Consensus Estimate of $1.47 billion.

Effective Jul 1, 2014, Advanced Micro reorganized its business into two reportable segments — one focused on the traditional PC market and the other on adjacent high-growth opportunities. The details of these segments have been discussed below:

The Computing and Graphics segment includes desktop and notebook processors and chipsets, discrete GPUs and professional graphics. This segment comprised 55% of Advanced Micro’s sales in the reported quarter, down 5.7% sequentially and 15.6% from the year-ago quarter. The sequential decrease was due to lower chipset and GPU sales, while the year-over-year decline was due to drop in notebook processor and chipset sales.

Advanced Micro’s Enterprise, Embedded and Semi-Custom segment includes server and embedded processors, dense servers, semi-custom SoC products, engineering services and royalties. This segment generated the remaining 45% of the sales, up 5.7% sequentially and 20.9% from the year-ago quarter, largely driven by increased sales of semi-custom SoCs.

Operating Results

Reported gross margin for the quarter was 34.6%, flat sequentially but down 110 bps from the year-ago quarter due to unfavorable product mix.

Operating expenses of $431.0 million increased 1.2% from $426.0 million in the year-ago quarter. However, as a percentage of sales, both research and development (R&D) and marketing, general and administrative expenses declined. As a result, reported operating margin was 4.4% compared with 6.5% in the year-ago quarter.

Advanced Micro Devices, Inc - Earnings Surprise | FindTheBest

The quarter’s GAAP net income was $17.0 million or earnings of 2 cents per share compared with $48.0 million or 6 cents reported in the comparable quarter last year. Excluding loss on debt redemption and intangible amortization charges but including stock-based compensation expenses, non-GAAP net earnings were $20.0 million or 3 cents per share versus $31 million or earnings of 4 cents in the year-ago quarter.

Balance Sheet

Advanced Micro exited the third quarter with cash, cash equivalents and marketable securities of approximately $9.38 billion versus $9.48 billion in the prior quarter. Trade receivables were $973.0 million, up from $872.0 million in the prior quarter.

Total debt (short- and long-term) in the quarter totaled $2.21 billion, flat sequentially.

During the quarter, cash from operations were $18.0 million and expenditure was $29.0 million. Free cash flow was negative $11.0 million in the reported quarter.

Guidance

Management expects fourth-quarter 2014 revenues to decrease 13% sequentially, (+/- 3%), due to lower semi-custom revenues and a weak consumer PC environment. Non-GAAP gross margin is expected to be 35%. Operating expenses are expected to be approximately $385.0 million and interest expense is expected to be approximately $46 million.

Our Take

Advanced Micro reported weak third-quarter results with both top- and bottom-line figures missing the Zacks Consensus Estimate due to ongoing weakness in the PC market. A more conducive market, increased game console wins, adoption of new products, position in graphics and good execution are expected to lower the company’s dependence on the PC market.

In the quarter, Advanced Micro’s semi-custombusiness was strong as it shipped a record number of units for its game console customers. The company also secured semi-custom SoC contracts, which are expected to deliver nearly $1 billion in revenues over approximately three years. We believe Advanced Micro is on the right track. The company is trying to position itself strongly in the gaming market, which has enough potential to grow over the next few quarters.

Additionally, as part of its restructuring program, Advanced Micro plans to cut 7% of its workforce to reduce operational costs. This layoff is an attempt by the company to optimize its cost structure, deploy resources in high growth areas and thereby improve competitiveness. The workforce reduction is expected to be over by the end of fourth-quarter 2014.

However, the weak sales guidance indicates that Advanced Micro will continue to be impacted by the ongoing weakness in the consumer PC market. It will not gain as expected from a rebound in corporate spending, which is a reason for concern.

Currently, Advanced Micro has a Zacks Rank #4 (Sell). Other better-performing stocks that are worth considering include Ambarella, Inc. (AMBA) and Avago Technologies Limited (AVGO) sporting a Zacks Rank #1 (Strong Buy), and Diodes Incorporated (DIOD) carrying a Zacks Rank #2 (Buy).

Read the Full Research Report on AVGO
Read the Full Research Report on AMD
Read the Full Research Report on DIOD
Read the Full Research Report on AMBA


Zacks Investment Research