AMD’s second quarter financial results were released at the end of last week, and they were reasonably good, relative to the company’s current position and the strength of the PC market. AMD lost $74 million (£48 million) in Q2, compared to the $147 million (£96 million) loss it posted in Q1.
Computing Solutions revenue – that’s the CPU/APU side of the business – was up $90 million (£59 million), which is excellent news given the tough quarter the company has faced. AMD attributed the gains to strong initial shipments of Kabini and Temash, as well as some additional server volume. The gains were attenuated slightly by lower average selling prices, but that’s still a net improvement.
The company’s graphics business has been renamed the Graphics and Visual Solutions group, but sales were down slightly compared to Q1, with $320 million (£209 million) in revenue compared to $337 million (£220 million). That shift wiped out AMD’s net income from graphics; the segment reported as breaking even this past quarter.
While these results aren’t as strong as investors would like – the company is still losing money – the good news is that AMD has passed through what was an extremely difficult first half of the year for the entire business. Six months ago, there were questions as to whether the company would be able to maintain enough cash to avoid liquidity issues, but this didn’t prove to be a problem.
Console launches anchor back half of the year
By far the most interesting part of the financial call was the talk surrounding AMD’s upcoming console business. For the past decade or more, AMD and Intel have largely moved in lockstep – if Intel expects revenue to be higher for an upcoming quarter, AMD generally predicts higher revenue as well. This quarter, that’s notably different. Intel has cut its Q3 prediction sharply, down to $13.2 billion (£8.6 billion) from an initial $13.8 billion (£9 billion) – while AMD predicts that its own revenue will be 22 per cent higher than the second quarter.
That’s a significant departure from Intel’s predictions, but it’s tempered by some other statements AMD has made regarding margins. When asked about the console margins, AMD executive Devinder Kumar said: “I think we are giving guidance for Q3 and guiding to the low single-digit from a Q3 standpoint… looking out in the future it’s hard to tell, but at least at the starting point for the next couple of quarters I would target at the low double-digit.”
There have been several ridiculously enthusiastic articles on AMD’s console business, with some people predicting that the company would pocket between $60 to $100 (£40 to £65) in profit for every Xbox One or PS4 sold. This should throw cold water on such irrational exuberance – console margins simply aren’t that good. AMD’s own predictions for the impact on the company’s bottom line are very modest and should be treated as such.
Does that mean these wins aren’t important? Absolutely not. Building GCN technology into modern consoles has potential long-term upside for AMD – it gives game developers a common design target across the various platforms. An extra $80 million (£52 million) per quarter could make the difference between small profits and modest losses, and that’s revenue AMD could use. According to Read, one of the benefits of the semi-custom business is that the difference between gross margin and operating margin is fairly small – there’s not a lot of costs to account for once the R&D is finished and the products are shipping.
The PS4 and Xbox One aren’t going to change AMD’s future, but they should provide some much-needed stability. If Kabini and Temash continue selling well, AMD will be in a much better position to navigate a PC market that’s become extremely unstable as customers move to different products and operating systems.