Advanced Micro Devices (AMD - Analyst Report) incurred a loss of 12 cents per share in fourth-quarter 2015, in-line with the Zacks Consensus Estimate.

Following the results, shared plunged more than 6% because of weaker-than-expected first-quarter guidance. Management believes that lower demand for graphic chips used in consoles due to seasonality and economic slowdown in China will likely impact first-quarter revenues.

Revenues

Advanced Micro generated revenues of $0.96 billion, down 9.7% sequentially and 22.7% year over year but matched the Zacks Consensus Estimate. The sequential decrease was due to lower sales of semi-custom System on Chip (SoC), while lower client processor sales led to the year-over-year decline. However, the Computing and Graphics segment performed well.

Advanced Micro has two reportable segments — Computing and Graphics (focused on the traditional PC market), and Enterprise, Embedded and Semi-Custom (focusing 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 accounted for 49% of Advanced Micro’s sales, up 11% sequentially but down 29% year over year. This segment witnessed the second straight quarter of double-digit percentage revenue growth, driven by higher notebook processor sales. However, lower client processor sales resulted in the annual decrease.

The company saw strong growth in mobile APU sales, driven largely by increased Carrizo shipments. Commercial APU unit shipments increased more than 15% in the second half of 2015. Management expects commercial shipment to grow backed by high volume wins across both larger enterprises and the public sector.
  
The Enterprise, Embedded and Semi-Custom segment includes server and embedded processors, dense servers, semi-custom SoC products, engineering services and royalties. This segment brought in the remaining 51% of sales, down 23% sequentially, due to lower sales of semi-custom SoCs. Also, revenues in this segment decreased 15% from the year-ago period due to lower game console royalties and server and embedded revenues.

The company made an annual record for semi-custom unit shipments of more than 50 million semi-custom APUs in 2015.

Operating Results

Pro-forma gross margin was 29.5%, up 701 basis points (bps) sequentially and 49 bps year over year. The increase was driven by improved product mix in the Computing and Graphics segment.

Adjusted operating expenses of $304.0 million decreased 1% sequentially but increased 8.6% year over year. However, as a percentage of sales, research and development (R&D) expenses increased, while marketing, general and administrative expenses decreased. Pro-forma operating margin was (2.2%), up 422 bps sequentially but down 865 bps year over year.

Advanced Micro Devices Inc. - Earnings Surprise | FindTheBest

The quarter’s GAAP net loss was $102.0 million or loss of 13 cents per share compared with net loss of $364.0 million or loss of 47 cents a year ago. Excluding all special charges but including stock-based compensation expenses, pro-forma net loss was ($95.0) million or loss of 12 cents as against earnings of $2.0 million or 1 cent in the year-ago quarter.

Balance Sheet

Advanced Micro exited the fourth quarter with cash and cash equivalence balance of $785 million, up $30 million from the prior quarter. Inventory was $678 million, down from $761 million in the previous quarter.

Total debt (short-term and long-term) was $2.26 billion, flat sequentially. During the quarter, cash used from operations was ($32.0) million.

Guidance

Management expects first-quarter 2016 revenues to decrease 14% sequentially (+/- 3%). Non-GAAP gross margin is likely to be 32%. Non-GAAP operating expenses are projected to be approximately $320.0 million, while interest expense, taxes and others are expected to be roughly $42 million.

Our Take

Advanced Micro reported decent fourth-quarter results with both revenues and earnings coming in line with the Zacks Consensus Estimate.

The company is strengthening its position in key markets with the introduction of several APUs and GPUs. Its Radeon Technologies Group focuses on the graphics business and improving its performance in traditional graphics markets. At the same time, the company is taking initiatives in immersive computing markets like virtual and augmented reality.  

Also, AMD has signed a few agreements and partnerships to gain traction in markets like high-performance processor and gaming, among others. These deals should help it to design high-performance technologies and products that drive profitable growth.

Currently, Advanced Micro has a Zacks Rank #2 (Buy).

Stocks to Consider

Other well-ranked stocks in the same space are Diodes Incorporated (DIOD - Snapshot Report), Infineon Technologies AG (IFNNY - Analyst Report) and Integrated Device Technology, Inc (IDTI - Snapshot Report). All the stocks sport a Zacks Rank #1 (Strong Buy).