Advanced Micro Devices ( AMD ) reported better-than-expected second-quarter results Tuesday after the closing bell. Revenue rose 70% year over year to $6.55 billion, beating estimates of about $6.53 billion, according to FactSet. Adjusted gross margins rose 640 basis points over the year to 54%, beating expectations of around 53.5%. And adjusted earnings per share rose 67% on the year to $1.05, beating analysts’ expectations of $1.03 per share. Bottom Line Instead of the big earnings per share and upbeat outlook AMD investors have grown accustomed to seeing report after report, the company delivered a lower-than-expected third-quarter outlook and reiterated its full-year outlook tonight. We’re disappointed by that, so we’re not surprised to see the stock trade lower after hours tonight. But looking under the hood for the quarter, we believe AMD’s long-term case remains intact. One of the main reasons why AMD couldn’t increase the numbers was because of their more conservative view of the PC business. This has more to do with the weak macro environment than just AMD. More importantly, AMD’s data center business has risen strongly, is still taking tons of share from Intel ( INTC ), and good things are on the way with the release of its Genoa chip later this year. Also, AMD accelerated Xilinx’s revenue from embedded devices, and that’s always great to see in the early days of an acquisition. The company’s mediocre cash flow generation will raise some eyebrows overnight, but we think some of that is due to timing factors, so we’re willing to look beyond that. Overall, it wasn’t the result we were hoping to see from AMD, but it didn’t change the point either. The stock is down about 6% in after-hours trading tonight and we will patiently wait for the stock to rally before adding to our position. Despite the maintained outlook for the full year, we lower our price target to $130 to reflect multiple group compression. Results Breakdown This was the first quarter in which AMD reported revenue across four segments. They are: Data Center, which includes Server CPUs, Data Center GPUs, Pensando and Xilinx Data Center products. A customer segment that includes processors and chipsets for desktop and notebook computers. A gaming segment that represents discrete graphics processors and products for semi-custom game consoles (which include Microsoft’s Xbox and Sony’s PlayStation). The embedded segment includes embedded products from AMD and Xilinx. Since this was the first quarter of AMD’s new reporting style, unfortunately we don’t have consensus estimates to compare the results to. Data center revenue increased 83% year-over-year to $1.5 billion on strong sales of EPYC server processors from both cloud and enterprise customers. Management said the upcoming release and production of Genoa, what the company called the industry’s highest-performance general-purpose server processor, is on track later this year. Management believes this positions the data center business for greater growth and share gains. There was an interesting moment on the conference call when an analyst at Jefferies estimated that AMD took a 6.6% share of Intel in the quarter, up from about 6% in the previous quarter. Of course, some of this is due to Intel’s failures, but what we think it shows is that AMD’s profit history is still intact. Operating income in the segment was $472 million, representing 32% of revenue. That’s up from $204 million, or 25% of revenue, a year ago. Client segment revenue was $2.2 billion, up 25% year-over-year, driven by sales of Ryzen mobile processors. Average client processor selling prices (ASP) increased year-over-year due to an increased sales mix of Ryzen mobile processors. AMD believes it has gained share of client processor revenue for the ninth straight quarter. Operating income was $676 million, or 32% of revenue. Gaming segment revenue was $1.7 billion, up 32% year-over-year, driven by higher sales of semi-custom products, partially offset by a decline in gaming graphics revenue. AMD continues to expect record annual revenue from semi-customers this year. Operating income was $187 million, or 11% of revenue. Embedded segment revenue increased significantly for the year by $1.3 billion, driven by the inclusion of the Xilinx business. In particular, AMD said it accelerated sales of Xilinx products in the quarter thanks to AMD’s additional manufacturing scale and resources. Operating income was $641 million, or 51% of revenue. Guidance For the full year, AMD continues to expect approximately $26.3 billion in revenue, representing 60% year-over-year growth. The company still expects adjusted gross margins to be roughly 54% for the year, and that’s slightly below estimates of around 54.8%, for the third quarter AMD expects revenue of roughly $6.7 billion, plus or minus $200 million, which represents up 55% year-over-year, with growth from the data center and embedded segments leading the way. That outlook is slightly below estimates of $6.836 billion. Non-GAAP gross margin is expected to be approximately 54%, slightly below estimates of around 54.6%. During the conference call, management explained that the outlook for the third quarter includes a more conservative view of the PC business. AMD previously saw its PC business decline in the high single digits, and now guidance is baking into a decline in the mid-teens. Cash Flow and Capital Allocation During the quarter, AMD generated a record $1.04 billion in operating cash flow, well below estimates of $2.057 billion. Free cash flow was also less than expected at $906 million compared with estimates of $1.795 billion. This was a major disappointment, but there were several factors that explained the discrepancy between AMD’s significant revenue growth and limited cash flow growth. Some of the reasons for the difference include higher working capital, increased cash taxes, the timing of certain deliveries and increased investment in capacity in the form of prepayments. The company repurchased $920 million worth of stock, down from $1.9 billion in the previous quarter. Approximately $7.4 billion remains in the current authorization. (Jim Cramer’s charitable trust is long AMD. See here for a full list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling shares in his charitable trust’s portfolio. 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Lisa Su, president and CEO of Advanced Micro Devices Inc. (AMD).
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Advanced Micro Devices ( AMD ) reported better-than-expected second-quarter results Tuesday after the closing bell.