AMD’s formula for profitability
In fiscal 2016, Advanced Micro Devices (AMD) improved its financial position by improving non-GAAP (generally accepted accounting principles) operating profits, reducing debt, and increasing cash. After years of losses, AMD reported non-GAAP operating income of $44 million in fiscal 2016.
In 2016, AMD operated in the low-end CPU (central processing units) and GPU (graphics processing units) market where profits depend on volume sales. The company is looking to improve its margins in fiscal 2017 by entering the high-end market with its Ryzern CPUs and Vega GPUs, which are priced on the north of corporate average.
AMD improved its non-GAAP gross margin from 31% in fiscal 3Q16 to 32% in fiscal 4Q16 as it reported strong revenue growth in the Computing and Graphics segment. Meanwhile, Intel (INTC) and Nvidia (NVDA) reported gross margins of 63% and 59.7% for the same quarter.
There is a vast difference between the gross margin of AMD and its rivals, as its rivals dominate the high-end market. AMD is entering the high-end market, but here it’s adopting an aggressive pricing strategy to gain market share. The company aims to increase its gross margin in the range of 36%–40% over the long term.
Operating and interest expenses
AMD has been increasing its non-GAAP operating expenses as it spends on research and development and new product launches. Its operating expenses increased from $353 million in fiscal 3Q16 to $357 million in fiscal 4Q16. It expects this expense to increase to $360 million in fiscal 1Q17 as this quarter has an extra week.
While AMD is increasing its operating expense, it is reducing its interest expense by repaying and restructuring debt. The company reduced its interest expense from $43 million in fiscal 3Q16 to $34 million in fiscal 4Q16. It expects to reduce this expense to $30 million in fiscal 1Q17.
Operating and net profit
AMD’s operating income fell from $70 million in fiscal 3Q16 to $26 million in fiscal 4Q16 as the company’s revenue from its profitable semi-custom business fell. The company’s operating income is likely to fall further in fiscal 1Q17 as revenue continues to fall.
With revenue declining and expenses increasing, AMD could not maintain its fiscal 3Q16 net income of $27 million and posted a net loss of $79 million in fiscal 4Q16. The company expects its net loss to widen in fiscal 1Q17. However, the company is likely to return to profits in fiscal 3Q17 when it starts reaping the benefits of its new high-end products.
AMD is looking to improve its profits through licensing. We’ll look into this in the next part of the series.