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Semi-Custom Business Is the Secret to AMD’s Profits

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Nov. 2 2016, Updated 7:05 a.m. ET

AMD’s revenue segments

In the previous part of the series, we saw that Advanced Micro Devices (AMD) turned its earnings declines to growth thanks to its revolutionary Pascal GPU (graphics processing units) and orders from console makers.

AMD earns revenue through two major business segments: CG (Computing and Graphics), which accounts for 36% of the company’s revenue, and EESC (Enterprise, Embedded, and Semi-Custom), which accounts for 64% of the company’s revenue. EESC is the company’s only profitable segment. Let’s see what factors are impacting the segment’s earnings.

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EESC earnings trend

As seen from the above graph, fiscal 3Q is a seasonally strong quarter for the EESC segment, as game console makers stock up for holiday sales. AMD dominates the game console market with its semi-custom APUs (application processing units) used by Sony (SNE), Microsoft (MSFT), and Nintendo.

In fiscal 3Q16, EESC revenue rose 41% sequentially and 31% YoY (year-over-year) to $835 million as it started realizing revenue from its three new semi-custom orders. These orders are for Sony’s new PlayStation 4 Pro, which will likely ship in November 2016, and Microsoft’s new Xbox Scorpio, which will likely ship sometime in 2017. However, AMD lost its Nintendo account to Nvidia (NVDA), which will supply GPUs for Nintendo’s new console Switch.

EESC’s operating income rose 62% YoY to $136 million in fiscal 3Q16 driven by high revenue and a rich product mix of high-margin SoCs (system-on-chips). For fiscal 4Q16, the company expects EESC revenue to decline as the seasonal demand fades.

AMD’s dependence on the game console market

AMD’s profits largely come from the game console market. In this market, sales and profits peak in the first few years after a new console is launched and then fall until the launch of a new upgrade. The upgrade cycle is also lengthy. The company needs to diversify its semi-custom business to bring stability to earnings, and it’s doing just that.

AMD stated that of the three semi-custom orders, one is for a non-game console. However, it didn’t disclose the details. There are rumors that AMD might supply semi-custom SoCs integrated with its Polaris GPU and Zen CPU (central processing unit) for Apple’s (AAPL) future low-end MacBooks.

Next, we’ll look at AMD’s enterprise business and understand the factors impacting its earnings.

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