AMD Looks to Game Consoles to Help Fuel Future Growth

By Jeffrey Burt  |  Posted 2013-07-20

AMD Looks to Game Consoles to Help Fuel Future Growth

Advanced Micro Devices officials are expecting a lot from the company's wins in the game console market.

AMD, which will have its silicon in Microsoft's and Sony's upcoming game consoles, and already is in Nintendo's Wii U, is expected to return to profitability in the third quarter, due in part on the strength of the business generated from those wins.

Company executives also point to the game console deals as a driver for extending its reach in the booming PC gaming market, and as a proof point for its nascent semi-custom chip business.

"Growth in the second half of the year [is] primarily coming from our semi-custom SoC [system-on-a-chip] products for both the Sony and Microsoft next-generation game consoles," AMD CEO Rory Read said in a conference call with analysts and journalists July 18 to discuss the company's second-quarter financial numbers. "These tailored products are great examples of the opportunities we have to quickly diversify our product portfolio and enter into new markets where our IP and design capabilities provide us with a competitive advantage."

AMD has targeted the embedded and semi-custom chip space as one of several key growth areas—others include dense servers and ultramobile devices—for the company. Read and other executives said the company is on track to have the embedded and semi-custom chip units to account for as much as 20 percent of AMD's revenues by the fourth quarter, and for all the new growth areas to become 40 percent to 50 percent of the company's business within two to three years.

Reaching such milestones will be important to AMD, which like rival Intel and other tech vendors has been hobbled by the rapid slowdown in worldwide sales of PCs. Read has said that while the PC market is still an important one for AMD, the company needs to reduce its dependency on it.

The game console wins will help that, they said. AMD SoCs will power Microsoft's upcoming Xbox One console and Sony's PlayStation 4, which are both due in the fall. Nintendo's new console was released late last year. Revenues from the console business will fuel AMD's return to profitability in the third quarter, Read said.

Beyond the money the game consoles will bring into the company, officials also are expecting them to help fuel growth in the semi-custom business in other areas. Read and other executives since last year have been talking about building semi-custom chips, where AMD can leverage the company's wide range of intellectual property (IP) to design and build one-of-a-kind chip solutions for customers. AMD in May officially launched a business unit that will focus on the semi-custom chip work.

AMD has plans for the business unit beyond game consoles, in such areas as servers and home technology, according to Lisa Su, senior vice president and general manager of AMD's Global Business Unit.

"Semi-custom has been so far dominated by gaming, but we see a lot of other opportunities," Su said during the call. "We have a strong pipeline that can similarly use our graphics and computing capability and some of the markets are things like other consumer, specialty servers, those types of markets."

AMD Looks to Game Consoles To Help Fuel Future Growth

The work AMD does with the gaming consoles also will help it hone its technology in other gaming areas, including PCs, Read said. The hope for AMD is that such expertise will attract more game developers to the AMD ecosystem and help the vendor take share away from Nvidia, whose discrete graphics technology dominates the PC gaming space.

"Our strategy to make AMD the de facto standard for game developers continues to gain momentum as we launch the industry's fastest desktop and mobile graphics chips and cement our position as the technology provider of choice for all three next-generation game consoles," Read said.

Su agreed.

"We definitely believe there is a great synergy between the game console and the overall PC gaming market," she said. "I think gaming is one of the key pillars of AMD in our graphics and APU [accelerated processing unit] strategy. So, having the game consoles on the same graphics architecture does allow synergies in the software development and the work that we do with ISVs, and we are pursuing that quite aggressively."

Not everyone sees gaming consoles as being AMD's savior. Some analysts have questioned whether AMD can leverage the work with consoles into a larger share of the overall gaming market, and also point to the low margins on the devices. Read noted during the call that the company lowered projected gross margins for the third quarter from between 39 percent and 40 percent to 36 percent because of the consoles.

However, he and Devinder Kumar, senior vice president and CFO, both said the business model for game consoles is different than what AMD is used to. The costs are up-front and funded between AMD and the customer, and the gross margins are lower, but there is a big upside, Kumar said.

"The semicustom model has the potential of providing a long-term revenue stream based on high volumes, which results in gross margin that is lower than the corporate average but has significant revenue and earning power as volumes ramp," Kumar said. "Under this model, the majority of gross margin dollars fall due to operating income, and the operating margin for this business will be in the low double-digit range, [which] more than offsets the impact of the lower gross margin. In addition as we transition the shipping silicon products, game console royalty revenue included in the semi-custom business is expected to decrease moving forward, although the decline will be more than offset by our growing semi-custom development and product revenues."

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