Advanced Micro Devices, Inc (NYSE:AMD) finally advances in right direction

Posted by Lynn Eisler July 24, 2013 0 Comment 979 views

Advanced Micro Devices, Inc (NYSE:AMD) has commenced on processor deliveries for the latest Microsoft and Sony game consoles and the company finally seems to be moving forward after its extended and steep revenue decline. This production ramp-up is expected to change AMD’s fortunes in the Q3. As far as investors are concerned, the one relevant question is- will AMD be able to sustain this profitability?

Logical question stumps execs

At the AMD speak conference, it was very evident that investors were pondering over the sustainability question after the company released its earnings report for the second quarter on 18 July 2013. There were many questions and theories and opinions floating around when the market closed that day but a particular analyst threw a question that almost sent the company’s executives into shock.

They were asked if the new revenue that pours in from the console Accelerated Processing Units (APU’s) would do no more than offset losses from royalties from the earlier console generation.

The sustainability issue

The fact of the matter is that the streams of revenue are not really comparable at all, even if the low end of the 5M per quarter APU shipments are taken into consideration. The analyst had obviously studied the company’s historical statistics like the back of his hand and estimated that the company made around $100-$150M in royalties on an annual basis. Assuming 5M APU shipments per quarter at $40 ASP, and a gross margin of 35%, the gross profits amounts to almost $70M.

Proportionately, the gross annual profit will work out to close to double of the assumed royalties. But the question managed to take away the air of relief and celebration the conference hall. More importantly, the question about whether AMD would be able to sustain its profitability post the third quarter was largely left unanswered.

About Lynn Eisler

Lynn Eisler is a national news reporter focusing on economic issues, data analysis and the financial health of state and local governments. Lynn has been honored with the H.L. Mencken Award for Investigative Reporting, the Champion of Justice Award for reporting on the drug war, and the John Hancock Award for business reporting. Lynn was also a Knight Medical School Fellow at the University of Michigan.

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