Advanced Micro Devices, Inc. (AMD) Results: Better Than Expected’s Still Bad

On Thursday afternoon, troubled chip maker Advanced Micro Devices, Inc. (NYSE:AMD) reported a non-GAAP loss of $0.13 per share on revenue of $1.09 billion. The revenue and earnings results were both slightly better than Wall Street expected, and AMD also guided Q2 revenue somewhat above expectations. AMD is attempting to transform its business away from its current reliance on PC sales, which seem to be in permanent decline. CEO Rory Read wants the company to focus on sales of embedded and semi-custom processors, graphics processors, and other growth initiatives, in order to diversify away from the company’s bread-and-butter of selling x86 processors in competition with Intel Corporation (NASDAQ:INTC).

That said, AMD’s Q1 results were still pretty discouraging. Revenue was down more than 30% from the prior-year quarter, and the company swung from non-GAAP EPS of $0.12 in last year’s Q1 to this year’s loss. Advanced Micro Devices, Inc. (NYSE:AMD)expects to continue losing money and bleeding cash in the current quarter, before (hopefully) returning to profitability in the second half of the year. However, its guidance for a return to profitability depends to a large extent on the popularity of new products like Sony Corporation (ADR) (NYSE:SNE)‘s PlayStation 4 and Microsoft Corporation (NASDAQ:MSFT)‘s expected Xbox 360 successor, as well as better customer acceptance of Windows 8. To put it another way, AMD’s revival depends on things almost completely outside of the company’s control. This does not sound like a good investment case to me.

Stabilizing the business
I will give Rory Read credit for taking decisive action to stabilize AMD’s financial position and reduce its operating expenses. Considering the 31% slide in revenue last quarter, strong gross margin and reduced expenses kept the net loss relatively small. Furthermore, AMD was able to close a sale-leaseback transaction for its Austin campus in March, which generated $164 million of cash and kept the company’s cash balance steady.

AMD is also entering a significant product launch cycle, and management believes it can retake share from Intel, particularly for entry-level PCs. The management team is also bullish about its ability to regain share in GPUs from NVIDIA Corporation (NASDAQ:NVDA) following new product launches later this year. However, the big long-term goal seems to be gaining embedded and semi-custom design wins, and Advanced Micro Devices, Inc. (NYSE:AMD) has made progress here by winning the slots for Nintendo Co., Ltd (ADR) (PINK:NTDOY)‘s new Wii U, the PlayStation 4, and (reportedly) the new Xbox.

Problems linger
However, AMD’s pursuit of game console design wins may prove futile. Early sales results for the Wii U have been poor, and there is no guarantee that the new PlayStation or Xbox entries will fare better. NVIDIA is making big bets on cloud gaming and mobile gaming with its GRID gaming platform and Project Shield handheld gaming device, both announced at CES earlier this year. Cloud gaming in particular could render the home game console obsolete, by centralizing the computing power on servers, while delivering the output to TVs, tablets, or even smartphones. Plenty of game console enthusiasts will upgrade, but there is a good chance that console sales peaked in the last generation.