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AMD’s Revenues Hit by Weakness in Semi-Custom Chip Sales

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May. 2 2016, Updated 9:07 a.m. ET

EESC unit at a glance

In the previous part of the series, we saw that Advanced Micro Devices’ (AMD) computing and graphics segment reported falling revenue in 1Q16.

However, the primary reason for the fall in the company’s overall revenue was seasonal weakness in the semi-custom processor business. This weakness is likely to fade in 2Q16. Let’s look at the EESC (Enterprise, Embedded, and Semi-Custom) segment’s performance in 1Q16.

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The EESC unit comprises the server and embedded processors, semi-custom SoCs (systems-on-chip), game consoles, and development services. Licensing has recently been added to this segment as the company looks to monetize its intellectual property. The unit accounted for 45% of the company’s revenue in 1Q16.

EESC’s 1Q16 performance

In 1Q16, EESC’s revenue fell 25.3% YoY (year-over-year) to $372 million, largely due to seasonal weakness in semi-custom chip sales. The segment’s operating profit fell 64.4% YoY to $16 million due to a rise in R&D (research and development) expenses.

AMD has been developing revolutionary products such as Zen architecture and virtual reality, which have increased its R&D spending.

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Semi-custom business

AMD, which competes with Intel (INTC) and NVIDIA (NVDA) in the CPU (central processing unit) and GPU (graphics processing unit) market, dominates the gaming console market. It’s the sole supplier of semi-custom processors for Japan-based (EWJ) Sony’s (SNE) PlayStation 4 and Microsoft’s (MSFT) Xbox. It has also won an order for Nintendo’s upcoming console, codenamed “NX.”

New design wins

Recently, AMD came into the limelight with several rumors floating around its gaming console, data center, and licensing business. Kotaku reported that Sony and Microsoft were looking to upgrade their consoles.

Amid these rumors, AMD president and CEO Lisa Su announced that the company had secured three semi-custom processor design wins for new consoles, but she didn’t give any details. She stressed that these wins were over and above the existing gaming consoles and would be available in the market in 2017, with the delivery of one SoC (system-on-chip) starting in 2Q16.

This created confusion as to whether or not these new design wins would be related to the rumored upgrades for Xbox and PlayStation 4.

Semi-custom revenue guidance

AMD expects to generate $1.5 billion in revenue from these new wins over the span of three years. Plus, the seasonal demand for traditional gaming consoles will pick up in 2Q16. With the launch of virtual reality headsets, the semi-custom segment’s growth is likely to pick up speed and drive AMD’s future revenue.

In the next part of the series, we’ll look at the server segment of the EESC segment.

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