AMD’s operating expense
Advanced Micro Devices’ (AMD) 2019 target is to improve its profit margins, and it has achieved some success on the gross margin front by increasing the mix of higher margin Ryzen, EPYC, and Radeon processors. The company is executing its product roadmap successfully by investing in go-to-market activities and R&D (research and development), which is increasing its operating expense.
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In the first quarter, AMD’s non-GAAP (generally accepted accounting principle) operating expense rose 12% YoY to $498 million, whereas its revenue fell 23% YoY. The revenue decline increased AMD’s operating expense ratio by 1,200 basis points YoY to 39.2%. The level was last seen in the first quarter of 2016 when the company was preparing to launch its first 14-nm (nanometer) Ryzen processor. A 39% ratio is way above its long-term target of 26% to 30%. However, this ratio will improve to 33.6% in the second quarter as the money spent on product roadmap starts generating revenue.
Intel’s operating expense
While AMD is increasing its operating expense, Intel (INTC) is cutting its expenses under the leadership of Bob Swan. After reporting quarterly operating expenses of $5 billion and above for more than three years, Intel reduced expenses to $4.9 billion in the first quarter, which helped it contain its operating expense ratio at 30.4%. Intel will reduce its R&D expense by exiting the low-margin 5G smartphone modem business.
AMD’s operating margin
A higher operating expense ratio negatively impacted AMD’s non-GAAP operating margin, which fell 260 basis points YoY to a two-year low of 6.6% in the first quarter. The change in operating margin was less than the change in operating expense, which rose as a $60 million licensing gain from the THATIC (Tianjin Haiguang Advanced Technology Investment) joint venture partially offset the impact of higher expenses.
AMD expects the operating margin to improve in the coming quarters as it launches its 7-nm portfolio. For the second quarter, it expects an operating margin of 7.4% and an operating expense ratio of 33.6%.
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