Shares of Advanced Micro Devices (AMD: Charts, News) soared 10% yesterday, after the chip maker surprisingly beat lowered expectations. For its fourth quarter, AMD reported a loss of 63 cents per share, or $473 million, on revenue of $1.16 billion. After adjusting for one-time charges and other items, AMD posted a loss of 14 cents per share. Analysts had forecast a loss of 21 cents per share on revenue of $1.15 billion.
Despite topping estimates, AMD’s revenue dropped 32% from the prior year quarter. Investors had been fearing the worst from AMD, since last week Intel posted a 27% profit decline on a 3% revenue drop. Intel’s bleak outlook for a 6% drop in first quarter PC sales also kept most investors away from AMD, which trails as a distant second-place x86 processor manufacturer.
AMD and Intel (INTC: Charts, News) are the only major manufacturers of x86 processors, which still run on the aging x86 instruction set introduced in the first batch of Intel processors in 1978. U.K.-based ARM Holdings (ARMH: Charts, News), which designs mobile processors with their own instruction set, took over 90% of the smartphone and tablet market over the last decade with lower-powered chips, catering to the need for longer-lasting mobile devices. ARM, which sells licenses to its technology but does not actually manufacturer any chips, has attracted a strong following from smaller chip makers such as Marvell (MRVL: Charts, News) and Qualcomm (QCOM: Charts, News).
AMD CFO Devinder Kumar reported that revenue from CPU sales slid 13%, due to a “cautious” approach to selling Windows 8 PCs. Graphics revenue, from its subsidiary ATI’s chips, also slid 9% due to declining PC sales. Quarterly reports from both Intel and AMD indicate that sales actually declined when Windows 8 was released, hinting that Microsoft’s (MSFT: Charts, News) new operating system is unlikely to reverse the trend of declining PC sales caused by the rise of smartphones and tablets.
AMD CEO Rory Read stood behind Windows 8, stating, “We do think that Windows 8 is a very important event in the industry, and I think that impact, or effect, will build over the course of the year.” However, he did not expect to see results right away. “We expect the second half to be stronger than the first half from my perspective,” he said.
AMD also mentioned that it had $1.2 billion in cash, since bearish critics have been worried that the company would eventually run out of money to maintain operations. AMD needs a minimum of $700 million in cash to stay operational.
During the quarter, AMD invested more in its enterprise segment and its SeaMicro server business, to shift away from its traditional market of laptops and desktops. The higher margin enterprise business is seen as a way to offset losses caused by smartphones and tablets.
Intel and ARM Holdings are already battling it out in the enterprise business, with competing lower-powered 64-bit chips – Intel’s Centerton and ARM’s Cortex A6 – as flagship processors in the war between x86 and ARM technology.
AMD was also able to raise prices, increasing margins slightly, during the downturn in PC sales. However, its sales volume declined as a result, contributing to its drop in fourth quarter revenue. AMD also bet heavily that its Trinity APU – a combination of a CPU and graphics chip – would drive its sales during the holidays. Unfortunately, PC manufacturers, such as Hewlett-Packard (HPQ: Charts, News) and Dell (DELL: Charts, News), cut down on their orders during the fourth quarter due to declining demand. Some analysts believe that AMD’s Temash and Kabini APUs, the successors of Trinity, stand a chance of helping AMD get back on its feet if Windows 8 sales start to pick up in the second half of the year.
For now, traditional financial metrics such as P/E and PEG ratio won’t help gauge AMD’s growth, since it isn’t profitable. All investors can hope for is that the company survive 2013 in one piece, and that its cash flow remains steady.
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