AMD is 'transforming', will be profitable this quarter, says CEO Read

PC market stagnant, so expansion into 'high-growth markets' will save the day

AMD has entered phase two of its "restructure, accelerate, and ultimately transform" realignment project, says company president and CEO Rory Read, who sees brighter days ahead.

"With our restructuring complete, our focus in the second half of the year is on continuing to accelerate our business," Read told the analysts and reporters tuned in to a conference call after AMD announced it financial results for the second quarter of 2013 on Thursday.

"We expect to return to profitability in the third quarter based on the mid-point of our revenue guidance," Read said.

According to CFO Devinder Kumar, also on the call, AMD expects its revenues to improve by 22 per cent in the third quarter of this year, plus or minus 3 per cent. Seeing as how revenues for the second quarter were $1.16bn, that would put the profitability bar at a bit under $1.42bn. Kumar also refined Read's statement, saying that profitability would be measured "at the net income level."

In the quarter dissected this Thursday, AMD's net-income loss was $74m GAAP* or $65m non-GAAP*. In the first quarter of this year, those negative numbers were $146m and $94m, respectively. In the last quarter of 2012, they were $473m and $102m in the hole; the quarter before that, $157m and $150m below zero.

In the quarter before that – the year-ago quarter from Thursday's report – the numbers weren't in negative territory, with GAAP net income being $37m and non-GAAP, $46m.

It may be that Read and Kumar are right, and that AMD will turn a profit when it announces the results for the current quarter on October 17. Don't expect huge numbers, but after the past four quarters, any number without a minus sign in front of it would be welcome.

From what the two execs reported, AMD has reason to be optimistic, despite the PC sales stagnation that is bedeviling companies from Intel to Dell to Microsoft. In fact, Read said, consumer reluctance to plop down big bucks for a desktop or laptop may be helping AMD. "Clearly the market is moving down into the entry and mainstream price points where we've played very well," he said, "and I think this is a very good opportunity for us to continue to build share."

AMD's general manager of global business units Lisa Su, also on the call, agreed with her boss. "We have typically been stronger in those lower price points, let's call it the $300 to $600 system range," she said, "and we have seen strength in that area. So overall I would say that our mix has shifted a little bit to the lower end, and I think that's typical of the market."

That's likely the case, but as Read noted, the PC market is not where the bulk of AMD's growth will come from – even considering that the company has design wins for its "Kabini" APU in laptops from such manufacturers as Acer, Asus, Dell, HP, Lenovo, and Samsung. Rather, it will be in the new markets into which AMD is moving: what he refers to as "semi-custom" SoCs for such markets as game consoles, industrial use, and even casino gambling.

"We are on target to generate 20 per cent of our revenue outside of the traditional PC space to semi-custom and embedded products by Q4 2013," Read said.

Those semi-custom chips are key to AMD's attempt to move into higher-growth markets. The plan is to use existing and future company CPU, GPU, and APU designs in chips that are configured for specific customers and baked in the fabs of AMD's foundry partners TSMC and GlobalFoundries – although Kumar could not be drawn out on which foundry is manufacturing the chips for AMD customers such as Microsoft for the Xbox, Sony for the PlayStation 4, and Nintendo for the Wii U.

Over the next two or three years, Read said, AMD aims to transform itself into a company that derives 40 to 50 per cent of its revenue from what he characterized as "high-growth markets" outside the x86 PC and server markets, including semi-custom SoCs, ARM-based server chips, professional graphics, and chips for ultra–low power devices such as tablets and embedded applications.

"Remember," Read said, "we're executing a three-step turnaround strategy. We did the reset and the restructure – we've completed that. Now we're in the beginning of the turn and the acceleration as we execute the product plan and the move." Next up will be the transition to that 40 to 50 per cent high-growth market mix.

According to Read, AMD is currently three or four quarters into its turnaround, and the strategy is "right on track." That optimism is, of course, exactly what a CEO should exhibit when talking with reporters and analysts after announcing financial results that may have beaten Wall Street expectations but still included a net income loss of $29m GAAP and $20m non-GAAP.

Check back on October 17 to see if AMD continues on that track or has been derailed. ®

* Bootnote

If the GAAP (generally accepted accounting principles) versus non-GAAP distinction leaves you shaking your head, you're not alone. One simple way of explaining the difference – and one that a true-blue bean counter will likely find overly simplistic – is that GAAP numbers, which take into account various and sundry one-time or short-term write-offs, payments, restructuring costs, and the like, reflect a company's situation, while non-GAAP numbers, which often ignore them, measure a company's performance in its core business activities.

A company can perform quite well in one quarter, but if it's bleeding torrents of money from a multitude of wounds, the GAAP numbers will reflect that danger. On the other hand, a company that's chugging along quite fine in its core business but has a big ol' one-time mistake to write off will look like GAAP crap, and so the non-GAAP numbers can be a better indication of its health – and its future, which is what the Wall Street moneymen want to know.