Computing and graphics technology company Advanced Micro (AMD 19.36, -3.42) pares opening losses at this juncture, though still loses about 15.1% to three-month lows, after reporting a mixed third quarter and warning about weakness in the graphics business as well as slowing blockchain-related demand which was strong a year earlier.
AMD’s mixed Q3 had earnings per share (EPS) narrowly edging out market expectations at $0.13 on worse than expected revenue growth of 4.4% to $1.65 billion; sales gains were driven largely by the accelerated adoption of Ryzen, EPYC and datacenter graphics products. Further, client and server processor sales increased significantly although graphics channel sales were lower in the quarter.
Gross margins grew to 40%, up 4 percentage points year-over-year, primarily driven by the ramp of new products, including Ryzen and EPYC processors. On a sequential basis, gross margins were up 3 percentage points primarily driven by IP-related revenue and the ramp of new products. Excluding IP-related revenue and memory and inventory related adjustments, gross margin would have been 2 percentage points lower.
Specifically by business, Computing and Graphics revenue was up 12% in Q3 to $938 million. Year-over-year revenue growth was primarily driven by strong sales of Ryzen desktop and mobile products, partially offset by lower graphics revenue. According to AMD, Blockchain-related GPU sales in Q3 were negligible. For context, in last year’s Q3 blockchain-related GPU sales were approximately high single digit percentage of total AMD revenue. The quarter-over-quarter decline was due to significantly lower graphics revenue driven by high channel inventory, partially offset by higher Ryzen processor revenue.
Enterprise, Embedded and Semi-Custom segment revenue were down about 5% year-over-year to $715 million driven primarily by lower semi-custom product and IP-related revenue, partially offset by higher server sales.
All Other operating loss was $36 million compared with operating losses of $28 million a year ago and $33 million in the prior quarter.
Looking ahead, for Q4 AMD expects revenue to be approximately $1.45 billion, plus or minus $50 million on non-GAAP gross margins of approximately 41%, driven by sales growth of Ryzen, EPYC and datacenter GPU processor sales. AMD management noted on the conference call that the graphics business is slated to be a $100 million headwind in Q4, and suggested the business will not be very strong in the first half of 2019.
For the full year 2018, AMD continues to expect annual revenue growth of mid-20s percent and to be free cash flow positive, and the company now expect non-GAAP gross margin in excess of 38%.
Despite AMD’s steep losses on the penultimate session of the week the broader semiconductor group recoups a portion of yesterday’s decline as evidenced by the 1.3% gains in the VanEck Semiconductor ETF (SMH 90.00, +1.18). The broader market push higher, too, aids in the recovery in the group today which sees XLNX +12.80%, TER +6.48%, ASML +5.47%, MXIM +3.43%, QRVO +3.02%, ON +2.85%, and INTC +2.81% all decently higher. The disconnect between AMD and peers Texas Instruments (TXN 91.45, -0.56, -0.6%), MKS Instruments (MKSI 71.56, +1.07, +1.5%), and STMicroelectronics’ (STM 13.67, -0.02, -0.2%) warnings and today’s action may signal that the group is at, or near, a potential bottom.