This afternoon, AMD announced their third quarter earnings for the 2018 fiscal year, and while there are a couple of issues they’ll have to work through, this quarter was another strong one from the company. Revenue was up 4% year-over-year to $1.65 billion, and possibly more importantly, AMD achieved a gross margin of 40%, which is up 4% from a year ago. That’s a big win for the company which struggled with margins over the last several years, dipping to as low as 29% in Q4 2014. Operating income was up 26% to $150 million, and net income was up 67% to $102 million. This resulted in earnings per share of $0.09, up 50% from a year ago.

AMD Q3 2018 Financial Results (GAAP)
  Q3'2018 Q2'2018 Q3'2017
Revenue $1653M $1756M $1584M
Gross Margin 40% 37% 36%
Operating Income $150M $153M $119M
Net Income $102M $116M $61M
Earnings Per Share $0.09 $0.11 $0.06

AMD attributes the growth in gross margin to the launches of new products like Ryzen and EPYC, but also due to IP related revenue, which accounted for half of the gross margin increase. While that revenue stream may not last, even without it, 38% puts them in a much better position than they have been previously.

Looking at their segments, Computing and Graphics saw revenues climb 12% year-over-year to $938 million, and the segment had operating income of $100 million, up 37% from a year ago. Strong Ryzen desktop and mobile sales were actually offset though by lower GPU revenues with the fall of the cryptocurrency market. AMD says that blockchain revenue for this quarter was negligible, and it’s unlikely to grow with the current state of cryptocurrency. What this does lead to though is AMD having a glut of products in the channel where crypto sales haven’t happened, which is likely to impact upcoming quarters.

AMD Q3 2018 Computing and Graphics
  Q3'2018 Q2'2018 Q3'2017
Revenue $938M $1086M $835M
Operating Income $100M $117M $73M

AMD’s other major segment is Enterprise, Embedded, and Semi-Custom, which helped them with the lean years thanks to AMD wins in both the Xbox and PlayStation. Revenue for this segment was $715 million, down 4.5% from a year ago. Operating income was $86 million, up 16.2%. The lower revenue is due to lower semi-custom product and IP related revenue, which isn’t surprising given how long the consoles have been on the market. This was offset though by increase server sales with EPYC, and the additional EPYC sales also helped with the margins, thanks to enterprise offering much better returns than consumer plays. AMD has also said their Radeon Instinct line of datacenter graphics products also were a key factor to their income growth this year.

AMD Q3 2018 Enterprise, Embedded, and Semi-Custom
  Q3'2018 Q2'2018 Q3'2017
Revenue $715M $670M $749M
Operating Income $86M $69M $74M

Looking ahead to next quarter, AMD expects revenue to be $1.45 billion, plus or minus $50 million, and non-GAAP gross margin to be 41%.

Source: AMD Investor Relations

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  • FullmetalTitan - Thursday, October 25, 2018 - link

    Exact same thing happened after Q2 earnings report, for missing guidance by a few $M due to crypto demand drying up. They acknowledged that loss of market back in July, so I don't know what Yojimbo is going on about them deceiving investors with predictions of crypto profits in Q3 Reply
  • Yojimbo - Thursday, October 25, 2018 - link

    "Exact same thing happened after Q2 earnings report, for missing guidance by a few $M due to crypto demand drying up. They acknowledged that loss of market back in July, so I don't know what Yojimbo is going on about them deceiving investors with predictions of crypto profits in Q3"

    If they acknowledged it in Q2 then it's even worse, isn't it? Because then they should have told investors that their channel was full and the weak GPU demand should not have been a surprise.

    From the Q3 conference call, Lisa Su said: "Third quarter revenue was $1.65 billion, an increase of 4% from a year ago. Looking at our Computing and Graphics segment, third quarter CG segment revenue increased 12% year-on-year, driven by significant growth in both client processor and OEM GPU sales that offset a larger-than-expected decline in channel GPU sales."

    So why were the GPU sales declined larger than expected if they knew about it in Q2?

    Later she reiterates: "Channel GPU sales came in lower than expected, based on excess channel inventory levels, caused by the decline in blockchain-related demand that was so strong earlier in the year."

    Later, when answering a question: "We are expecting that it might take a couple quarters to completely get back to, let's call it, a normal channel. However, it is factored into our Q4 guidance."

    If they knew "blockchain" was drying up then why did they fill the channel? They thought their 2 year old cards that only managed to capture 20% of the gaming market before crypto would suddenly be in high demand with gamers? And if the channel was filled because of an expectation for more sales in Q2 and they knew those Q2 sales never came then they already knew it would become filled when they made their Q2 conference call. Why didn't they tell people their channel would be filled then?
    Reply
  • FullmetalTitan - Thursday, October 25, 2018 - link

    I will give you the benefit of the doubt re: guidance on blockchain. I swear I read in their Q2 report that they had pegged crypto-related GPU sales as a "negligible component" of revenue going forward, but I can't seem to find it now.

    As for speculation on increased GPU production leading to an excess of inventory, I think there were multiple factors involved in that decision based on the market demands early in the quarter. I concede that they may have been bullish on blockchain demand for GPUs, but I suspect the story is more complicated, especially given that supply lead times for a GPU are ~3-4 months from wafer fab in to packaging/shipment. Unless they had actually adjustment production well ahead of the Q2 report then we would only expect the bump in volume to hit shelves around September, a time frame that sets them up for failure because of NVIDIA announcements of Turing.
    Reply
  • Targon - Thursday, October 25, 2018 - link

    I can explain why things didn't happen as expected, the timing of the NVIDIA RTX series of chips. Many people decided to put any GPU purchase on hold until after the launch of the new NVIDIA chips. If you hear that Ford has a really new and revolutionary truck engine that will show up in the 2020 model year trucks, anyone who pays attention to trucks and knows that Ford has some knowledge of the industry will go into a "wait and see" mode, unless they need to purchase immediately or can't wait for whatever reason. As a result, not only will Ford sales drop on the rumors of new engines, but competing truck makers will wait, just to see if the rumors/hype are true. It may not even change their choice, but they WILL wait, just because that is what so many others will be doing.

    That is also why it will take 1-2 quarters, because people have still been waiting to hear about if ray tracing will even be implemented by game developers, or if DLSS will actually make enough of a difference to justify the higher prices of the new NVIDIA cards. Will there be a 7nm Vega that might be competitive in gaming? All of these things are working against AMD on the GPU side.

    I can definitely say that as long as AMD releases Ryzen 3rd gen in Q1, sales will be high enough to overcome any soft GPU sales figures.
    Reply
  • Yojimbo - Thursday, October 25, 2018 - link

    No, Their Q3 results were not as expected. They missed on revenue.
    "Third quarter revenue was $1.65 billion, an increase of 4% from a year ago. " As you pointed out, guidance was $1.7 billion.

    And their Q4 guidance is significantly lower than expected. They guided $150 million less than analysts expected.

    "And- it they produced more Polaris chips than needed- then that will not go to waste, as they are not releasing a replacement for them for another ~9months at least."

    That's not the point. The point is shady practices by management that obscure a view of that company's business from its shareholders. Using the channel to hit numbers is against SEC regulations. It's what the CEO of Krispy Kreme was forced to resign over in about 2004. Stock price manipulation by management is a serious issue, it doesn't matter if that inventory will eventually be sold (and in the most extreme cases it may not be, because the company may be allowed to go bankrupt after the management has cashed in).
    Reply
  • neblogai - Thursday, October 25, 2018 - link

    Guidance was 1.650 to 1.750B, and with crypto sales ending, AMD made 1.653B, so within the guideline. Now, of course, this is on the low end- but had the crypto stayed relevant- AMD would have had extra revenue right on top of this 1.65B point. They made inventory for it. Sales to miners did not happen in Q3. But if you say that end of crypto was not a surprise to AMD (as if they could have known in Q2 what is going to happen)- it should not have been a surprise to investors either (I'm talking about the stock price drop only today, while crypto was dormant all Q3). Reply
  • Yojimbo - Thursday, October 25, 2018 - link

    "Guidance was 1.650 to 1.750B, and with crypto sales ending, AMD made 1.653B, so within the guideline."

    It doesn't work that way. Not when a company's stock price is up over 150% YTD, it's selling at rich price to earnings and price to revenue ratios and that guidance itself already represents only a 4% year over year revenue increase. And everyone concerned knows it doesn't work that way.

    "it should not have been a surprise to investors either"

    So the investors shouldn't have believed AMD at their Q2 conference call. On that I completely agree with you. The stock never should have been bid up to 34 dollars a share. Personally I think 12 makes sense. But it's really hard to know. It's hard to get a good picture of Ryzen because they hide it with their GPU revenue and crypto helped them do that.
    Reply
  • Holliday75 - Thursday, October 25, 2018 - link

    Yojimbo, who do you write for? I want to follow your financial guidance because you are the only person I have ever read claiming what you claim. The rest of the "experts" are either idiots or lying. Reply
  • Targon - Thursday, October 25, 2018 - link

    A lot of what makes a stock price go up comes from expectations for the future of the company, as well as for the stock price itself. Looking at the position AMD is in on the CPU side, you have AMD gaining ground in CPU market share as well as mind share, where more consumers are gaining awareness of AMD and AMD products. On the server side, getting market share becomes easier as hardware makers become more familiar with the products.

    Looking at projections of Intel, where capacity issues are causing shortages, not having 10/12nm based processors until Q4 2019 at the earliest, and a general feeling that Intel is losing its competitive edge, AMD looks better as well.

    So, if AMD gets 7nm Ryzen processors going out to consumers by April of 2019, AMD will be gaining a lot of market share and income, at the expense of Intel.

    On the GPU side, AMD isn't talking a lot, because Navi isn't expected to come out until the second half of 2019. This means that AMD is going to try to get that inventory level down before they announce their next generation part. They will NOT announce that Navi may be ready in June, because that will trigger consumers to wait on purchases and make it tougher to sell through that inventory. Remember NVIDIA having problems selling through all those 1000 series chips? The same applies here, but NVIDIA was stupid in releasing the RTX cards before they got rid of enough of that inventory.

    Too many people get fixated on one product category, and they lose sight of the big picture. Analysts are only interested in short-term stuff, they couldn't have comprehended how well Ryzen would do for AMD as a whole in Q2 2017, because they don't care about the quality of products, they don't understand what even one amazing product release can do for the long-term prospects for a company. The very concept of gaining traction when it comes to selling server processors is beyond their comprehension, even though it is like the process of trying to clear out the short sale people who keep pushing down stock prices, and once you hit a certain "critical mass", suddenly things will improve.

    The very momentum that you talk about when it comes to stock price, and what SHOULD hold a stock price back is exactly in that same area, getting people either impressed by a company and driving up stock price, or people not seeing the potential growth within the company, because they have a vested interest in the competition.

    AMD stock DOES deserve to be up at the 34 dollars per share level, but it will take another two quarters, time for Ryzen 3rd generation to be released in order for news of AMD really having a product that will beat Intel in all areas for them to realize it.

    Remember, these same analysts are the ones who keep driving up Amazon, Apple, and other highly hyped stocks. Those stocks don't deserve those high prices or market caps either, but they get them because of the hype. Another recession will knock these companies down a LOT, while AMD and Intel won't lose too much by comparison.
    Reply
  • Targon - Thursday, October 25, 2018 - link

    How many GPUs did NVIDIA end up having stuck in inventory before they just accepted it and just released the RTX cards anyway? RTX card launch stalled sales of video cards for both AMD and NVIDIA, but NVIDIA has new cards to generate income, AMD won't have a big GPU launch until July of next year at the earliest. Reply

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