AMD Reports Earning Results, Significantly Improves Gross Margin

AMD reported its Q3 2018 earnings on October 24, and the results are good, if a touch mixed in places. Revenue for the quarter was $1.65B, up 4 percent year-on-year and down 6 percent quarter-on-quarter. That’s a little unusual for AMD, Q3 has been the company’s best quarter for revenue since the PS4 and Xbox One launched. On the other hand, gross margin improved by three points to hit 40 percent. It’s been a long time since AMD recorded gross margins this high, and the company confirmed that the gains were due to increased product sales in the Compute and Graphics division. Net income was down slightly from Q2 ($102M versus $116M) but up substantially compared with Q3 2017 ($102M versus $61M).

AMD notes that the decrease in revenue was due to “lower graphics revenue in the Computing and Graphics business segment,” which isn’t really a surprise. With gamers expecting the Turing refresh from Nvidia, it makes sense that players would hold off to see what happened with the new RTX family. The boosted gross margin is also the result of IP-related income from AMD’s joint venture in China, with roughly two percent of the increase attributed to “IP-related revenue and memory and inventory related adjustments.” Still, no matter how you slice it, bringing its gross margin up is a critical step towards long-term sustainable profitability — and IP licensing ventures are a great way to ensure more regular cash flows.

Lower GPU Revenue Linked to Blockchain Decline?

One thing AMD makes clear in this quarter’s results is that GPU sales are responsible for its reduced overall earnings. Blockchain sales could explain this. The company’s Form 8-K states that in Q2, blockchain related revenue was “high single-digit” percentage of AMD’s total revenue. Based on Q2 2018 revenue and a target percentage of 8 percent, that works out to ~$140M in blockchain-based sales for Q2. AMD says that it offset some of this decline with higher Ryzen sales, and the difference between Q2 2018 and Q3 2018 is ~$103M. In short, the math works.

EESC (Enterprise, Embedded, and Semi-Custom) was also up compared with Q2 (that’s the seasonal impact of the console market, at least in part) but down compared with last year. This may surprise some analysts, who expected — and occasionally claim to continue to suspect, despite AMD’s repeated messaging to the contrary — that Epyc would launch, take 20 percent of the server market within six minutes, and then hit 50 percent within a modest six weeks. But the Epyc ramp has been much slower, with a modest mid-single-digit market penetration target by the end of the year. We’ve always known that the Xbox One and PS4 were designed to front-load their revenue payments and that income from these sources would decline over time, so the drop in EESC revenue year-over-year likely reflects some combination of decreasing console margins and lower overall shipments, combined with Epyc’s improved ramp. Again, there are multiple forces pushing the numbers in opposite directions.

AMD’s sales projections for Q4 2018 are just $1.45B, which seems markedly low compared with what the company made in Q2 and Q3, but there’s a note buried in the company’s 8-K that shifts how we evaluate its relative strength. Not only would $1.45B be an improvement on Q4 2017’s $1.34B, but the company also notes that in Q4 2017, “blockchain-related GPU sales of approximately low double-digit percent of overall AMD revenue.”

This implies that in Q4 2017, at least $134M of AMD’s revenue was driven by blockchain sales that won’t be present in Q4 2018 — but these temporary short-term sales last year effectively occluded some of the real improvement to AMD’s longer-term businesses. It’s still perfectly valid to compare the company’s year-over-year position in both cases, of course, but if what you care about is the long-term health of the CPU and GPU businesses, the short-term surge in cryptocurrency made it harder to gauge how well the company’s primary brands were performing — and the end of crypto sales may have made AMD look a little weaker now than it actually was.

AMD’s stock has plunged 22 percent on its news, but this may have more to do with the overall state of the market. The Dow Jones erased its entire gains for the year on the 24th, plunging more than 600 points. AMD’s Q3 report may not have been the shining beacon of light that investors were looking for, but on a day like today, it’s not clear any results would have made a difference.

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