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Will AMD’s Operating Margin Improve in 2018?

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Operating efficiency

Advanced Micro Devices (AMD) is on track to improve its profit margin by accelerating revenue growth through high-end products and the reduction of expenditure. In the previous article, we saw that the company expects to expand its gross margin to 36%. The benefit of this is expected to trickle down to the operational level.

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Operating expenses

On the operational front, AMD reduced its non-GAAP (generally accepted accounting principles) operating expenses as a percentage of its revenue from 37% in 1Q17 to 27.8% in 4Q17, bringing it within its long-term target range of 26%–30%. The company expects to maintain its operating expense ratio at 28% in 1Q18 and 2018. It will channelize its operating expenses toward Ryzen, Vega, and EPYC products that generate higher returns.

In dollar terms, AMD’s operating expenses are expected to rise 5.6% sequentially as the company invests in product development and new product launches. A better way to look at operating expenses is as a percentage of revenue, as it shows a company’s operating efficiency—that is, whether its expenses are generating sufficient revenue or not.

If we compare AMD’s operating expense ratio to those of its peers, it’s more efficient than Intel (INTC) but less efficient than NVIDIA (NVDA). NVIDIA largely invests in GPUs (graphics processing unit), whereas AMD invests in both CPUs (central processing unit) and GPUs.

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Operating margin

AMD’s lower operating expense ratio should convert into a higher operating margin. It expects its non-GAAP operating margin to expand from 7% in 4Q17 to 7.9% in 1Q18.

AMD’s operating margin is less than one-quarter of NVIDIA’s operating margin of over 40%, as the latter has a high ASP (average selling price). AMD isn’t looking to beat NVIDIA and Intel in terms of technology, but it is looking to compete with them by offering a better price-to-performance ratio. This goal gives AMD room to improve its operating margin in the long term.

EPS

AMD does not provide EPS (earnings per share) guidance, but analysts expect the company to report EPS of $0.06, a fall of 25% sequentially. However, analysts expect the company’s full-year EPS to rise 88% YoY (year-over-year) to $0.32 in 2018. Stifel Nicolaus analyst Kevin Cassidy expects AMD’s 2018 EPS to be in the range of $0.28–$0.41, as he expects the sales of EPYC server CPUs to increase in 2Q18, thereby increasing the company’s overall profits.

In the long term, AMD aims to achieve EPS of $0.75. Next, we’ll look at each of AMD’s segments and the factors that could drive their growth in 2018.

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