AMD: Q2 revenue hit a trough for the year

We covered AMD's financial state over here but some more interesting snippets were revealed during the company's conference call with financial analysts. We'll cover these in a small series of posts, first up is some more background about the company's various segments and expected future performance.

AMD CEO Lisa Su explains her company got hit by weaker than expected consumer PC demand in advance of the Windows 10 launch and points out OEMs cleared out Windows 8 notebook inventory which resulted in significantly lower sales of AMD's laptop processors. Sales of the Carrizo APU were also hit as some OEMs chose to align Carrizo launches with Windows 10:

Computing and Graphics segment revenue decreased 29% sequentially, based on soft consumer demand. This also impacted sales of our 6th Generation A-Series APU, code name Carrizo, as some OEMs chose to align Carrizo launches with the Windows 10 launch. We expect our mobile unit shipments will rebound and ramp in the second half of the year as more than 35 Carrizo platforms come to market globally.

Interestingly, AMD claims desktop processor revenue in the channel increased sequentially due to solid demand for it FX processors and the A-series APUs:

In the channel, we saw a sequential increase in desktop processor revenue due to solid demand for our FX processors and our A-Series APUs. We also reduced downstream inventory levels in the quarter largely completing our multi-quarter channel rebalancing effort.

But GPU revenue declined sequentially in line with seasonality even though the firm is positive about the initial demand for the new 300 series and the Fury lineup.

GPU revenue decreased sequentially in line with seasonality. We did see good initial demand for our new 300 Series GPUs and latest flagship Radeon R9 Fury X, which launched late in the quarter and contributed to a sequential improvement in GPU channel revenue and ASP. Fury X is powered by our Fiji GPU, the industry's first graphics chip to feature die-stacked high-bandwidth memory, which can deliver unprecedented performance in an extremely quiet and compact graphics card. We are pleased with the initial ramp-up of our Fiji GPUs and will expand our industry-leading HBM GPU offerings in the coming quarters as we introduce the Fury, Nano and a high-end duel Fiji GPU card.

AMD's Lisa Su mentioned revenue is expected to get back on track the rest of the year thanks to strong demand for game consoles, combined with the ramp of the Carrizo APU, the new GPU products and improving OEM demand with the launch of Windows 10.

Looking forward, we believe the second quarter will be our revenue trough for the year, based on stronger second half demand for game consoles, combined with the ramp of our newest APU and GPU products, and OEM demand improving as the market transitions to Windows 10. That said, the PC market remains volatile. We must further align our cost structure with our revenue profile, as we focus on our strongest market opportunities and continue investing in the high-performance Computing and Graphics technologies that can enable us to create great products and reestablish AMD as a leader across our target markets.

Later on in the call, Stacy Rasgon from Bernstein & Co. questioned the company's optimism for the rest of the year and asked what would be the plan if growth doesn't come back:

Stacy A. Rasgon - Sanford C. Bernstein & Co. LLC
Hi, guys, thanks for taking my questions. First, I just want to dig into this a bit. You said Q3 obviously is a peak for Semi-Custom. You said Q2 was the trough for the company for the year, which it implies in Q4, Semi-Custom should be down, which means a pretty big ramp of the Computing Graphics business into Q4. I mean, high double digits, at least, if not more. I guess, what gives you confidence that that's going to happen and what are the consequences if that ramp doesn't come to play, given than you're building a ton of inventory that's supposed to sell out in Q4?

Devinder Kumar - Chief Financial Officer & Senior Vice President
I'll start and then Lisa can add. I think if you look at what happened with the actions that we took going back several quarters, one thing we have done and we feel good about that is in the PC space and the channel inventory in particular, all of the actions that'll be started in the Q4 timeframe and Q1, Q2 largely completed. And as we said, the channel sales quarter-on-quarter were up and we feel good about that. Those are very directed actions taken in an aggressive manner by us. And in Q2, we did have the impact on the OEM APU sales in particular with our transition of Indostan (39:07).

And as we get to the second half, especially with the new products, we think we can ramp those products and the Q3 guidance as Lisa said earlier, takes into account an improvement both on the EESC segment, as well as the CG segment. Q4, we're not providing guidance, but as you get to the Q4 timeframe, we think the PC market continues to stabilize and that helps us from that standpoint. And that's the way we have it baked in.

On the inventory question that you have, as I explained earlier to another question, it is up from Q2 to Q3, but we are actively working with our partner, GLOBALFOUNDRIES, to go ahead and re-profile those commitments that we made earlier this year. And I think that should help from an inventory standpoint to go ahead and manage it, to where we think it's more comfortable and in line with the revenue outlook.

Stacy A. Rasgon - Sanford C. Bernstein & Co. LLC
Right. I guess – I mean, you're telling me you feel good about Q4, but I mean, let's be honest, you haven't been able to forecast a month and a half out, let alone two quarters. It just seems to me like there's a setup here for more bad things to happen if that market doesn't stabilize. And even if it does stabilize, I mean, your business has been – let's be honest, it hasn't been stable, versus where the market's been either. I'm just wondering what the risk is, given the way you're setting up inventories and setting up expectations for that Q4 ramp.

Lisa T. Su - President, Chief Executive Officer & Director
Yes, Stacy, so look, that's a fair comment. I'll take that. Now if I tell you what I see going forward, we'll give you the best information we have at this point in time. So the Semi-Custom business, Q3 will be the peak. We need a few more data points to really call Q4 correct. But so far, what we see is a solid market on the Semi-Custom side. On the Computing and Graphics side, there are – basically think about it as four pieces to the business. So we have OEM processors, we have channel processors, we have graphics, consumer graphics and then we have professional graphics.

So amongst those four segments from what we see, we are being a bit cautious on Q3, just given we need to see exactly how the OEMs ramp; the Windows 10 launch, we think Windows 10 is a good product, but we need to see how that launches. As we go into holiday, we believe we'll make progress in graphics. We believe we'll make progress in professional graphics. I've said that the channel looks like it's healthier for us and we need to see how the OEM demand looks. But those are the ways I think about Computing and Graphics. So clearly we're not happy with the performance in Q2 but as we look forward, we need to manage the business the way we see it and this is how we see it today.

Stacy A. Rasgon - Sanford C. Bernstein & Co. LLC
Got it. Thank you. That's helpful. For my follow-up, I just wanted to see what other options you have besides OpEx cuts to arrest cash burn if that growth doesn't come back. We've already gone through, I guess, selling assets. You've stretched out your cash conversion cycle significantly this quarter. You've maxed out half of your revolver. What are your other options above and beyond that if the OpEx cuts themselves aren't enough, if the environment doesn't recover?

Devinder Kumar - Chief Financial Officer & Senior Vice President
I think there are always options. I think everything you just said in terms of managing the working capital and managing the cash, managing the inventory, making sure that's in line with the revenue profile from an outlook standpoint allows us to do that. And from a standpoint of cash, we've done a good job managing the cash over the last several quarters and several years. And I have confidence of doing that on a go-forward standpoint. And we'll monitor and see what is needed. And as I said earlier if the need arises, we will access the capital market. I still have the ABL availability as you just observed, and we'll do what's needed to continue to fund the business.

Stacy A. Rasgon - Sanford C. Bernstein & Co. LLC
Capital markets means raise equity if you needed to, or debt?

Devinder Kumar - Chief Financial Officer & Senior Vice President
I'm not going to get into the details on this call, Stacy, but I'm sure we can access capital markets if the need arises.

Stacy A. Rasgon - Sanford C. Bernstein & Co. LLC
Got it. Thank you very much, guys.

Transcript courtesy of Seeking Alpha