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AMD's Guidance Wasn't Terrible, but Is a Sign of Stiff Competition

There was little said in either AMD Inc.'s (AMD - Get Report) Q3 report or earnings call to raise alarm bells about where the company stands. Results beat expectations (though there is an asterisk attached), guidance was a little above consensus and management provided upbeat comments about key CPU and GPU product ramps.

But after soaring from less than $2 per share in early 2016 to over $14 by February and staying near that level since, the market's expectations for AMD have long been above consensus estimates. And relative to this expectations, AMD's numbers (its guidance especially) were a bit of a letdown. One that probably has much to do with the strength of Intel Corp. (INTC - Get Report) and Nvidia Corp.'s (NVDA - Get Report) product lines.

That still doesn't arguably justify the 11% after-hours selloff AMD saw following its report. But revenue-wise, the story here is more complicated than it might look at first glance.

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AMD reported Q3 revenue of $1.64 billion (up 26% annually) and adjusted EPS of $0.10, topping consensus analyst estimates of $1.51 billion and $0.08. Growth was driven by a 26% sequential and 74% annual sales increase for AMD's Computing and Graphics segment, which covers its PC CPU and GPU offerings, to $819 million. Revenue for AMD's Enterprise, Embedded and Semi-Custom segment, which covers (among other things) game-console processor and server CPU sales, was up 46% sequentially (seasonality) but flat annually.

And while AMD guided (due to seasonally weaker console processor demand) for Q4 revenue to be down 15% sequentially, plus or minus 3%, that still implies a range of $1.34 billion to $1.44 billion, above a $1.33 billion consensus and spelling 26% annual growth at the midpoint.

Importantly, both of AMD's main product reporting segments got a Q3 revenue boost from a patent-licensing deal that had been undisclosed to date. With AMD 8 months removed from suing LG, Vizio and chipmakers MediaTek and Sigma Designs Inc. (SIGM - Get Report) for patent infringement, it's possible that the company settled with one of those firms. And while AMD isn't forecasting a similar IP-related boost for Q4, CEO Lisa Su stated on the call AMD has "a pipeline of IP deals" it's pursuing.

Possibly worrying investors a little bit: Su mentioned on the call that AMD expects "some leveling off" of GPU demand from cryptocurrency miners, and that it has begun seeing a restocking of graphics card channel inventory that had been depleted by heavy mining-related demand. But a crypto market slowdown has generally been expected -- especially since Ethereum, the cryptocurrency that has done the most to boost GPU sales this year, has cooled off some following big early-2017 gains and also seen major increases in mining difficulty.

Also: Some analysts signaled disappointment with AMD's Q4 gross margin guidance of 35%. Though above a year-ago GM of 32%, it's only flat relative to Q3 even though console processors, which carry relatively low margins, will account for a smaller portion of total sales. Q3 GM rose from a Q2 level of 33% and a year-ago level of 31% thanks to the IP licensing deal and the launch of higher-margin CPUs and GPUs.

But Q4 sales guidance seems to be the main concern. With AMD having...

  1. Recently begun OEM shipments of its Ryzen desktop CPUs (they gradually launched over the course of 2017) in volume.
  2. Launched its Vega high-end GPUs in Q3, and forecast they'll ramp with OEMs in Q4.
  3. Begun shipping its Epyc server CPUs -- like Ryzen parts, they're based on AMD's new Zen CPU core architecture -- to cloud service providers, ahead of major Q4 OEM launches.
  4. Forecast its Ryzen Mobile notebook processors -- they pair a Ryzen CPU with a Vega-architecture GPU -- would begin shipping in Q4 for consumer systems.

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