Advanced Micro Devices' Quarterly Earnings Analysis: By the Numbers

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Advanced Micro Devices (AMD) just reported its preliminary financial results for the quarter that ended Sept. 30, based upon which we provide a unique corporate earnings release based analysis of its performance. Our analysis focuses on the company's performance for the same quarterly period on a year-on-year basis (unless stated otherwise).

This earnings release follows the earnings announcements from the following peers of Advanced Micro Devices: Intel (INTC) and Cypress Semiconductor (CY).

Highlights
  • Summary numbers: Revenues of $1.429 billion, Net Earnings of $17 million and EPS of $0.02. Performance focus more on top-line than bottom-line: same period year-on-year change of revenue of -2.19% vs. change in earnings of -64.58%.
  • Gross margins now 37.79% from 39.22% compared to the same period last year, EBITDA margins now 7.84% from 8.97%
  • Ability to declare a higher earnings number? Year-on-year change in Operating Cash Flow of -14.29% better than change in earnings.
  • Earnings decline from operating margin decreases as well as from unusual items
The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):

2013-09-302013-12-312014-03-312014-06-302014-09-30
Revenues1461.001589.001397.001441.001429.00
Revenue Growth (Qtr YOY)15.1337.5828.4024.12-2.19
Earnings48.0089.00-20.00-36.0017.00
Earnings Growth (Qtr YOY)130.57118.8286.3051.35-64.58
Net Margin3.295.60-1.43-2.501.19
EPS0.060.12-0.03-0.050.02
Return on Equity48.4272.80-15.17-28.4613.13
Return on Assets4.678.23-1.89-3.451.59

Revenue Growth Versus Earnings Growth

Companies sometimes focus on growing their top-line (Sales or Revenues) more than their bottom-line i.e. Earnings or Net Income. Investors should look at revenue growth to understand a company's ability to grow its market share, and earnings growth to look at the company's ability to generate returns. Comparing revenue growth to earnings growth helps understand a couple of items: (1) A company's focus on gaining market share vs. generating profits and (2) How additive or dilutive the revenue performance has been to earnings.


AMD's year-on-year change in top line compared to the same period last year of -2.19% is better than its change in earnings which was -64.58% - suggesting perhaps that the company's focus is on the top-line at the expense of bottom-line earnings. But more critically, this top-line performance is among the lowest thus far in its sector - inviting the potential of loss in market share as well this period. Also, for comparison purposes, revenues changed by -0.83% and earnings by 147.22% compared to the immediate last quarter.
Earnings Growth Analysis

The company's year-on-year decline in earnings has been influenced by the following factors: (1) Decline in gross margins from 39.22% to 37.79% and (2) issues with cost controls. As a result, operating margins (EBITDA margins) went from 8.97% to 7.84% in this period. For comparison, gross margins were 37.96% and EBITDA margins 8.12% in the immediate last quarter.
Gross Margin Trend

Companies sometimes tradeoff for improvements in revenues and margins by extending friendlier terms to customers and vendors. One quick way to check against such activity is to compare the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is quite possible that the company's performance is a result of truly delivering in the marketplace and not simply a prop up using the balance sheet.


The company's decline in gross margins is compounded by issues on the balance sheet side - there has been deterioration in working capital levels. The company's working capital days have gone up to 91.73 from 68.02 for the same period last year.
Operating Cash Flow Growth Versus Earnings Growth

Companies often post earnings numbers that are influenced by non-cash activities. One way to gauge the quality of the declared earnings number is to judge the deviation in the growth in earnings from the growth in operating cash flows. In general, an earnings growth rate that is higher compared to the operating cash flow growth implies a higher proportion of non-operating and even one-time activities - such activities are typically not sustainable over long periods.


AMD's year-on-year change in Operating Cash Flow of -14.29% is better than its change in earnings suggesting that the company might have been able to declare a higher earnings number. But, this change in Operating Cash Flow is less than average among the declared results thus far in its peer group.
Unusual Items

The company's decline in earnings has been influenced by the following factors: (1) Decline in EBIT margins from 5.07% to 4.41% and (2) unusual items that decreased pretax margins from 3.49% to 1.33%
EPS Growth Versus Earnings Growth

AMD's year-on-year change in Earnings per Share (EPS) of -66.67% is less than its change in earnings of -64.58%. This lower EPS growth suggests a likely larger dilution in the company's shares this period. Moreover, the change in earnings is less than the average among the declared results thus far in its peer group suggesting that the company is losing ground in generating profits in this group.
Supporting Data

The table below shows the preliminary results along with the recent trend for revenues, net income and other relevant metrics:

2013-09-302013-12-312014-03-312014-06-302014-09-30
Revenues1461.001589.001397.001441.001429.00
Revenue Growth (Qtr YOY)15.1337.5828.4024.12-2.19
Peer Average Revenue Growth (Qtr YOY)0.192.651.467.96-0.64
Earnings48.0089.00-20.00-36.0017.00
Earnings Growth (Qtr YOY)130.57118.8286.3051.35-64.58
Peer Average Earnings Growth (Qtr YOY)-0.7438.8971.8651.3512.44
Operating Cash Flow21.0021.00-204.00-28.0018.00
Peer Average Operating Cash Flow21.0021.0425.1944.3113.16
Operating Cash Flow Growth (Qtr YOY)293.33147.153750.00650.00-27.59
Peer Average Operating Cash Flow Growth (Qtr YOY)-4.81147.15144.4549.48-27.59
Gross Margin39.2237.9538.4437.9637.79
Peer Average Gross Margin51.9051.3851.4157.6657.05
EBITDA Margin8.978.948.458.127.84
Peer Average EBITDA Margin8.978.948.4513.3214.52
Net Margin3.295.60-1.43-2.501.19
Peer Average Net Margin3.295.60-1.435.196.85
Working Capital Days68.0269.9583.7786.3091.73
Peer Average Working Capital Days68.0269.9583.7786.3091.73
EPS0.060.12-0.03-0.050.02
Peer Average EPS0.060.12-0.030.060.08
EPS Growth (Qtr YOY)128.57119.0584.2150.00-66.67
Peer Average EPS Growth (Qtr YOY)040.0073.6850.0013.79
Return on Equity48.4272.80-15.17-28.4613.13
Peer Average Return on Equity21.5918.47-15.1719.0722.83
Return on Assets4.678.23-1.89-3.451.59
Peer Average Return on Assets4.678.23-1.894.866.57
Company Profile

Advanced Micro Devices, Inc. is a global semiconductor company that develops computer processors and related technologies for business and consumer markets. It offers x86 microprocessors, as standalone devices or as incorporated as an accelerated processing unit (APU), for the commercial and consumer markets, embedded microprocessors for commercial, commercial client and consumer markets and chipsets for desktop and mobile devices, including mobile personal computers, or PCs, and tablets, professional workstations and servers and graphics, video and multimedia products for desktop and mobile devices, including mobile PCs and tablets, home media PCs and professional workstations, servers and technology for game consoles. The company operates through two business segments: Computing Solutions and Graphics & Visual Solutions. The Computing Solutions segment is comprised of x86 microprocessors, as standalone devices or as incorporated as an APU, chipsets, embedded processors and dense servers. The Graphics & Visual Solutions segment is comprised of GPUs, including professional graphics, semi-custom SOC products, revenue from development services and royalties for game consoles. Advanced Micro Devices was founded by W. J. Sanders III and David John Carey on May 1, 1969 and is headquartered in Sunnyvale, California.

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