Operating segment’s performance and contribution to margins
In 2011, AMD’s (AMD) Computing Solutions segment contributed 76% to its revenues. A slowdown in the PC market forced the company to re-devise its business strategy. The Computing Solutions segment’s contribution reduced to 53.5% and 46.4% for overall revenue in fiscal year 2013 and 2Q14. Graphic solutions’ contribution increased from 24% in 2011 to 46% in 2Q14.
As of 2Q14, AMD earned ~40% of its revenue from the high growth markets. Through its restructuring strategy and improvements in its graphics technology, it wants to generate ~50% of its revenue from the high-end markets in the future.
If AMD continues to post good results, it will benefit exchange-traded funds (or ETFs) like the First Trust Technology AlphaDEX Fund (FXL) and the iShares PHLX Semiconductor ETF (SOXX). The ETFs have significant exposure to AMD.
Cash, debt, and cash flows
As of June 30, 2014, AMD generated a forward cash flow (or FCF) of $51 million. In 2013, it reported a negative FCF of $232 million. As of June 2014, it holds cash and equivalents worth $948 million. It has a total debt of $2.2 billion—compared to cash worth $1.12 billion and debt worth $2.05 billion last year.
In 2Q14, AMD issued debt of $500 million notes to be payable in July 2024. High debt and limited cash and cash flows show that the company has poor liquidity. The company doesn’t pay dividend.
Investments in research and development and acquisitions
AMD was initially focused on a single segment strategy in the PC market. However, it has diversified into chip operations and adjacent markets—game consoles, embedded chips, and dense servers. The company identifies these as high growth markets.
The transition and diversification strategy has started to show results. It will still take some time to determine whether or not the strategy helped AMD.
The technology sector is a research driven industry. AMD invests ~22–24% of its revenue in research and development. However, AMD’s expenditure on research and development is falling because the company wants to achieve cost efficiency. Intel (INTC) spends ~20–21% of its revenue on research and development. Nvidia (NVDA) invests a considerable amount of finds in research and development. In 2013, it invested ~32% of its revenue on research and development.
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