Picking up from where we left off with Intel, earnings week has continued to roll along with most of the major tech companies having reported their Q3 earnings. As we noted in our look at Intel’s earnings, Intel is the traditional bellwether for the PC industry, and for Q3 that bellwether was reporting that the PC market had unquestionably grown weaker, and that Q4 was to be cast into even more doubt. As one of the strongest PC-centric tech companies Intel has significant exposure to any weakness in the PC market, but at the same time they’re also in the best position to weather whatever may come. For their partners and their competitors however, a weak market can be a significantly bigger drain.

This brings us to today’s major PC earnings announcement: AMD. AMD is by far the weaker CPU manufacturer, and while it has some level of diversification through its GPU division and embedded CPUs, like Intel they’re still significantly exposed to the PC market, setting the stage for a rough quarter. Furthermore rumors began circulating that AMD was looking at another round of layoffs – rumors that have seen been proven at least partially correct – which would indicate that AMD was struggling even more than anticipated. With these factors in mind there has been a great deal of anticipation for AMD’s Q3 earnings call, so let’s dive right in.

For Q3 of 2012 AMD reported $1.27B in revenue, with a net loss of $157M. Unfortunately for AMD (but not unexpected) this is a significant drop in both revenue and net income on both a quarterly and yearly basis, having furthermore pushed AMD back into the red after turning a slight profit in Q2. Compared to AMD’s Q3 2011 results, revenue is down approximately $420M, a nearly 25% drop; net income meanwhile swung from positive $97M to negative $157M, a shift of nearly $250M. Finally, AMD’s gross margin was an abysmal 31%, well below last year’s gross margin of 45%, which is generally where AMD needs to be to turn any kind of profit.

AMD Q3 2012 Financial Results
  Q3'2012 Q2'2012 Q3'2011
Revenue $1.27B $1.41B $1.69B
Net Income -$157M $37M $97M

The single biggest factor for this sudden change in fortunes is a $100M inventory write-down AMD had to take this quarter for unsold Llano inventory. In Q3 of 2011 Llano was the biggest factor in AMD turning a profit, but a year later those chips have been superseded by AMD’s new Trinity APU. Notably AMD is calling this a write-down and not a write-off, so it looks like they’re accounting for the loss of value of these APUs (i.e. they’ll have to sell them at lower prices than they planned for), as opposed to simply throwing out $100M in Llano APUs. Nevertheless, even if AMD had not taken the write-down they still would have lost around $50M for the quarter, so while Llano inventories were a big problem for AMD they are not the sole reason for AMD’s rough quarter.

Breaking down AMD’s numbers for the quarter, AMD’s Computing Solutions (CPU/APU) segment booked $927M in revenue, for an operating loss of $114M. This represents a 28% decline in revenue on a yearly basis, and like AMD’s overall profitability a flip from an operating income to an operating loss for the division. AMD looks to have been hit twice here; not only are overall sales lower, but their ASPs were also down.

AMD Q3 2012 Computing Solutions Division Financial Results
  Q3'2012 Q2'2012 Q3'2011
Revenue $927M $1.04B $1.28B
Operating Income -$114M $82M $149M

AMD doesn’t completely break down their CPU revenue by processor line, but they have stated a few facts. For client revenue (i.e. non-server) desktops were cited as being especially hard hit by lower sales volumes and ASPs. As for notebooks, AMD has stated that Trinity’s share of AMD notebook shipments has just surpassed 30%, which implies that the majority of AMD’s notebook APUs are still Brazos and Llano.

Meanwhile AMD’s Graphics division fared much better. For the quarter the Graphics division booked $342M in revenue, and once again turned a small but consistent operating income of $18M. This represents a 14% reduction in revenue over Q3 of 2011, while operating income has actually grown by $6M. AMD attributes the lower revenue to lower OEM sales, but noted that channel sales (i.e. retail) are higher than at this point last year. Interestingly despite the loss of revenue AMD’s GPU ASPs were also up compared to Q2, which is why they turned a greater operating income on lower revenues. Unfortunately as we’ve seen time and time again with AMD, while their Graphics division can consistently turn a small profit, at only 1/3rd the revenue of their Computing Solutions division it’s not nearly large enough to offset the losses AMD has run there.

AMD Q3 2012 Graphics Division Financial Results
  Q3'2012 Q2'2012 Q3'2011
Revenue $342M $367M $403M
Operating Income $18M $31M $12M

With all of that in mind, as bad as AMD’s Q3 was, much like Intel their projections are for Q4 to be even worse. Unlike Intel AMD doesn’t provide gross margin guidance, but for their revenue guidance they are predicting a further 9% (+/- 4%) decline in revenue.

This brings us to perhaps the most depressing news of the day: more layoffs. As part of their restructuring plan to return to profitability, AMD will be laying off nearly 15% of its workforce in Q4. They expect to take an $80M charge on this for severance payments, in return for $190M in projected savings in 2013. AMD is being intentionally vague about where these layoffs will come from, and it’s entirely possible they haven't completely figured that out at this time, so at this point it’s impossible to say if this will primarily hit one division (e.g. GPUs) or if it will be spread around all of AMD’s major divisions.

The layoffs are coming as part of a greater restructuring for the company, which will see them accelerating their previously announced shift away from the PC market in favor of mobile, servers, and semi-custom embedded chips. As the PC market continues to weaken – and AMD expects it to remain weak for several more quarters – they will be speeding up this transition in order to derive more of their revenue from non-PC sources sooner. Ultimately AMD wants to be in a position where 40-50% of their revenue comes from these fast-growing markets, with a specific goal of 20% of their revenue coming from semi-custom embedded APUs by Q4 of 2013.

To get there AMD will be simplifying their development cycles and increasing their focus on building reusable IP blocks, in essence transitioning to building their APUs in a more SoC-like fashion. AMD has been very careful to reiterate that they’re still an engineering company, and that graphics in particular are a cornerstone of the company. But much like the vague nature of the layoffs they are not making it clear what projects and products are being deprioritized or discontinued in order to achieve this simplification. What is clear is right now is that AMD will be reusing more IP and designs when they can to avoid having to undertake costly research and development.

Finally, AMD has also spent a bit of time talking about 2013 and beyond. On a financial side of things AMD’s goal is to get their operating costs to the point where a quarterly revenue of 1.3B would be their break-even point, which is part of AMD’s attempt to “reset” the company to survive on what would ultimately be lower margins. Meanwhile on the product side of things, silicon for Kabini (their 28nm Brazos replacement) is already back and AMD is working on a H1 2013 launch for that. As it stands nearly 85% of AMD’s current business is focused on the “legacy” PC market, so AMD is looking to shift into high margin, fast growing markets like tablets as soon as possible, which is where products like Kabini will take them.

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  • Dribble - Friday, October 19, 2012 - link

    The basic problem is ARM is so cheap - instead of spending hundreds on your cpu, you now spend $15 for the whole soc. The ratio [cost of cpu silicon : total device cost] has drastically changed and this doesn't suit Intel or AMD at all.
  • NuShrike - Friday, October 19, 2012 - link

    That was DEC's argument about microcomputers. Where are they now?
  • CeriseCogburn - Friday, October 19, 2012 - link

    Yes the doubly dribbling pretense is expected technological progress to come to a halt.
    Man duh duh duh duh da dooof !
  • tipoo - Sunday, October 21, 2012 - link

    You also sell more of them though, and looking at Qualcomm a company can become pretty sizeable off of ARM parts. People may buy one desktop what, every five or six years now for non-enthusiasts maybe, while they may buy a smartphone and a tablet every two years or so, and with individual devices for the whole family.
  • just4U - Friday, October 19, 2012 - link

    Most of you must by now realize that the cpu market has kinda hit a wall.. Sure we are seeing higher performance but for the most part the industry is taking steps to the side.. looking at cheaper manufactuering costs, better power consumption .. more integration etc.

    All well and good.. I am glad to see that.. but when you have machines happily trucking along from 2007-09 that's going to hurt sales. In my opinion, we got a huge boost with the X2 from AMD and then later another huge boost from Intel with the Core2 but since then? No must haves. Many are just fine on their 6600-Q9500s PIIs Early 1366 stuff (etc..) with no major incentive to jump. Nope.. they just add more ram, change out a psu, upgrade the os.. get a better video card .. stuff like that.

    We really haven't gotten to the next big jump yet.. just taking baby steps to the upwards and alot of leaps to the side. That a key reason for lagging sales as well.
  • twotwotwo - Friday, October 19, 2012 - link

    Yeah, good point, and it could apply to servers too. It's hard to figure out exactly what 'old servers are good enough longer' means for future sales, but it means something.

    Also, I wonder if we'll see a larger share of server chips bought by a few big 'cloud' companies with bargaining power, and if that's enough to change Intel/AMD's income per server substantially. Google may be the world's fifth-biggest Xeon buyer if you ask Intel, for instance (http://slashdot.org/topic/datacenter/google-the-fi...
  • twotwotwo - Friday, October 19, 2012 - link

    Fail posting the link; it was http://slashdot.org/topic/datacenter/google-the-fi...
  • Brainling - Friday, October 19, 2012 - link

    Unfortunately, much of that is purely perceived. Having went from a Q6600 to a Core i5 2500k, it absolute is a MUST HAVE. It's a massive upgrade.

    The problem is that it's not perceived to be, because the second generation Core CPU's were so amazingly good.

    The question isn't whether it's a huge upgrade (it is), it's whether you NEED that upgrade. Only a sliver of the PC market actually needs the power a modern CPU can provide. That's the issue. It's not that modern CPU's are all side grading (they aren't), it's that 90% of your market long ago stopped needing more power.
  • just4U - Friday, October 19, 2012 - link

    That's part of it to B..

    I don't think they are massive upgrades though. Their "ok" but they don't blow you away and that's why their not a must have. I constantly pop back and forth between systems going from a Q6600 (not overclocked) to a 8400 to a PII920 to a i7 920 to my own two personal setups a i72700 and a Trinity based 5800. Their all good.. you never sit there going omg this is sooooo slow.. because none of them are.

    Then I look around me seeing what others are using and most haven't even passed the C2D/PII stage yet and are still stuck in 2009 with no compelling reasons to upgrade.
  • betam4x - Sunday, October 21, 2012 - link

    I disagree. My Core 2 Quad Q6600 held it's own for many years. I only recently upgraded because i wanted a new motherboard with new tech (SATA 6Gbps, USB 3.0). Then again, I made a few rockin upgrades along the way (GF 8800 GT -> GTX 275, 4 -> 8 GB RAM, SSD, etc.) My new machine (Core i7 2600k, 16 GB, SSD) is definitely faster, but it wasn't the jump from the athlon 64 x2 4200+ to the Core 2 Quad that i did many years ago. I used to upgrade machines quite often, now i'm upgrading them once ever few years. Tech isn't progressing like it used to. Think about it. HD space was doubling every 3-6 months, CPU speeds almost equally so, GPU speeds, etc. All of a sudden, everything stopped. All at once. SSDs came along and are destroying the HD market. ARM came along and they are killing the x86 market. Same with mobile GPU. Intel and AMD don't need to adapt, they need to get back to creating kickass CPUs/GPUs. Create the technology and the developers will come.

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