AMD Has Rough Q1, but Chinese Licensing Deal Brings Hope

Processor maker Advanced Micro Devices posted its financials for the first quarter of 2016, and, off the top, the results weren’t pretty. But there’s a lot more to the story than that, as you’ll read in a minute.

The company reported a sequential revenue loss of 13 percent over Q4 2015 and 19 percent year-over-year, with its Q1 2016 revenue of $832 million slipping far below that of the previous quarter, which was $958 million.

AMD’s net loss amounted to $109 million (GAAP), or 12 cents per share. Nonetheless, the stock price surged 21 percent on the news April 21 and was up a whopping 41 percent on April 22 at $3.70.

Why would the stock rise on such disappointing numbers? A breakthrough licensing deal in China provides the answer.

AMD has signed for a new joint venture to produce chips in China using its own proprietary IP. It will license that x86 technology to a new venture it is forming with Tianjin Haiguang Advanced Technology Investment Co., which in turn will use it to develop processors for server systems to be sold only in China.

As a result, AMD said it will receive an immediate $293 million in licensing fees plus royalties on sales of any chips developed by the venture.

The huge China market deal is something AMD has been working toward for a few years as the laptop and desktop PC markets slow down around the world.

Q1 for AMD was heavily impacted by a sliding PC market that has hit several tech companies, especially its top competitor, Intel, which announced layoffs in anticipation of lower numbers. All PC makers are suffering downward numbers as smartphones continue to cut into their business.

AMD shares have subsided more than 12 percent since July 1, recording an all-time low of $1.61 in mid-January. But the new China deal is clear reason for optimism, AMD’s CEO and analysts say.

“Our strategy to build a strong business foundation and improve financial performance through delivering great products is beginning to show benefits,” Lisa Su, AMD president and CEO, said in the earnings statement.

“We continued to strengthen the performance of our computing and graphics business as our customers and partners show a growing preference for AMD. We are optimistic about our growth prospects in the second half of the year across our businesses based on new product introductions and design wins.”

Analysts believe that Su has AMD on an effective turnaround course at this point.

“This is a great strategy Lisa Su has taken, because it will help AMD rapidly expand its footprint in the Chinese server market,” analyst firm Alpha Max said in Seeking Alpha. “Cash-starved AMD will earn quick royalties by licensing its server chip related IPs (intellectual properties), which could be an excellent way to earn revenues in China, the world’s fastest growing and second largest server market after the U.S.”

AMD also reported that during Q1 2016, its total cash flow exceeded its target minimum of $600 million.