AMu WrlLe-up

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AMu, Advanced Mlcro uevlces, ls a global semlconducLor company founded ln 1969. 1hey
produce x86 mlcroprocessors (boLh sLandalone and lncorporaLed as an acceleraLed processlng unlL
(Au)) for boLh consumer and commerclal markeLs, embedded mlcroprocessors, and chlpseLs for
deskLop and moblle devlces. 1hey also offer graphlcs, vldeo, and mulLlmedla producLs for deskLops,
moblle devlces, professlonal worksLaLlons, servers, and game consoles.
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CusLomers of mlcroprocessors conslsL prlmarlly of orlglnal equlpmenL manufacLurers (CLMs),
orlglnal deslgn manufacLurers (CuMs), and lndependenL dlsLrlbuLors ln domesLlc and lnLernaLlonal
markeLs. ln 2012, P and 4 oLher CLMs accounLed for 39 of neL revenue , and flve cusLomers
accounLed for 48 of neL revenue for Craphlcs.
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AMu's prlmary compeLlLlon comes from lnLel, who domlnaLes Lhe mlcro-processlng markeL. lL's
markeL share, marglns, and flnanclal resources enable lL Lo acL aggresslvely and Lhus decrease sales for
AMu. lnLel ls Lhe domlnanL force ln Lhe markeL for lnLegraLed chlpseLs and ln Lhe markeL for embedded
graphlcs processors and lC chlpseLs. lmprovemenLs ln lnLegraLed graphlcs Lechnology coupled wlLh
hlgher shlpmenLs of AMu's Aus may drlve a decreased ln plaLforms wlLh dlscreLe graphlcs componenLs.
lnLel could Lake acLlons LhaL place AMu's dlscreLe Cus and lnLegraLed chlps aL a dlsadvanLage.
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CenLral processlng unlLs, or Cus, serve as Lhe braln of a compuLer. 1he performance of Lhe Cu
ls vlLal Lo Lhe performance of a compuLer and numerous oLher devlces. erformance ls usually measured
ln work-per-cycle (lnsLrucLlons execuLed per cycle), clock speed, whlch measures Lhe raLe aL whlch Lhe
Cu's lnLernal loglc operaLes (usually measured ln glgaherLz) and power consumpLlon. Mlcroprocessors
are deslgned Lo processes 32 blLs or 64 blLs of lnformaLlon aL once. 1he blL raLlng denoLes Lhe largesL
slze of daLa LhaL Lhe processor can handle aL once (maklng a 64-blL sysLem capable of greaLer
performance).8ecenLly, mulLlple core processors allow lncreased efflclency and processlng power
wlLhouL as blg a [ump ln power consumpLlon.
Aus, or acceleraLed processlng unlLs, comblne Cus and Cus (graphlcal processlng unlLs) lnLo
a slngle plece of slllcon. AMu belleves LhaL hlgh performance compuLlng workloads, such as vlsual ones
or Lhlngs such as phoLo/vldeo edlLlng , or oLher mulLl-medla appllcaLlons can beneflL from such
archlLecLure.
AMu WrlLe-up
AMu's mlcroprocessors are lncorporaLed lnLo compuLlng plaLforms LhaL lnclude Cus and core
sofLware Lo enable and advance Lhe compuLlng componenLs. 1hey belleve LhaL performance ls
enhanced by comblnlng Lhese elemenLs lnLo one plece of slllcon as an Au.
ln March 2012, AMu acqulred SeaMlcro lnc., an efforL Lowards focuslng on provldlng Cloud-
cenLrlc daLa cenLers wlLh hlghly dlfferenLlaLed AMu-based soluLlons. ln addlLlon Lo Lhelr Lhree SeaMlcro
serles, Lhey offer Lhree CpLeron serles processors more focused Lowards LradlLlonal offlce use.
lor moblle processors, AMu ls Lrylng Lo focus on power consumpLlon wlLh processlng power.

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Aus (acceleraLed processlng unlLs) and lCs dellver Cu performance for value and
malnsLream Cs, whlle havlng a separaLe Cu (aka graphlcs card) work ln Landem wlLh Lhe Cu are
generally for hlgher end graphlcs. lor many consumers, Lhe C ls Lurnlng lnLo an enLerLalnmenL hub,
lncreaslng demand for hlgher performance graphlcs. AMu also leverages Lhelr core vlsual processlng
Lechnology lnLo Lhe game console markeL by llcenslng cusLomlzed Cus for graphlcs ln vldeo game
consoles. Powever, Aus Lend Lo consume less power maklng Lhem more ldeal for moblle devlces.
AL one polnL, AMu held 48.4 of Lhe Cu markeL ln comparlson wlLh lnLel's 31.6. As Llme wenL
on, AMu found lLself wlLh a repuLaLlon of belng more of a value purchase and second raLe. 8ecenL
Lrends show AMu loslng on boLh Lhe Cu and Cu fronL, AMu's graphlcs card markeL share decllned
from 36.3 Lo 33.7 year-over-year, whlle nvlulA's share rose from 63.4 Lo 63.7 and AMu's Cu's
markeL share ls down Lo 16.7 from 27.7 from a year ago whlle lnLel's rose from 72.3 Lo 83.3.

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1he revenues LhaL AMu's producLs produce from consoles are generally ln Lhe form of non-
recurrlng englneerlng fees charged for deslgn and Lhlrd parLy royalLles. Powever, Lhls wlll change for Lhe
elghLh generaLlon of consoles as AMu wlll be produclng Lhe Cus for all Lhree of Lhem. As Lhe 7Lh
AMu WrlLe-up
generaLlon console cycle comes Lo an end, royalLles from Lhem have been decreaslng. lL ls noL yeL clear
wheLher Lhe revenue from Lhe nexL cycle wlll merely offseL Lhese loses or be a subsLanLlal parL of Lhe
company's revenue for Lhe nexL 6-7 years.
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Cverall, AMu has around 1 bllllon ln cash, 2.04 bllllon ln debL and a cash flow of 471 mllllon
(down 180.7 Lhe pasL Lhree years). 1haL, coupled wlLh rlslng expenses, parLlcularly ln 8&u Lo Lry and
keep pace wlLh lLs compeLlLors, does noL leave lL wlLh flnanclally healLhy ouLlook assumlng lL doesn'L
shlfL lLs currenL markeL sLraLegy. Powever, managemenL does expecL a reLurn Lo proflLablllLy ln C3 of
l?13 due Lo cosL cuLLlng, lncreased revenue and an average 34 gross margln.

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AMu announced LhaL ln 2014, lL wlll produce "SeaLLle," Lhelr an A8M based server. A8M based
servers offer a subsLanLlal power advanLage over LradlLlonal x86 ones and are more geared Lowards
Web companles whose severs need Lo perform a large number of Lasks LhaL requlre low processlng
power. Powever, Lhe A8M archlLecLure loses ln power whaL lL has ln power efflclency. A8M servers are
polsed Lo Lake greaLer markeL share from Lhelr x86 counLer parLs over Lhe nexL few years wlLh Lhe
growLh of moblle devlces. Powever, a scenarlo where A8M wlll challenge x86 for Lhe llon's markeL
share ln daLa cenLers ls a number of years away. AMu produces boLh A8M and x86 processors (alLhough
Lhelr x86s are usually consldered lnferlor Lo lnLel's). Whlle Lhey do agree LhaL ln Lhe shorL Lerm, Lhelr
A8M buslness may cannlballze Lhelr x86 buslness, AMu belleves Lhelr lnvesLmenL ln A8M ls polsed for
long Lerm growLh. AMu hopes Lo LranslLlon 40-30 of Lhelr revenue Lowards hlgher growLh markeLs
such as seml cusLom, dense servers, professlonal graphlcs, ulLra lower power cllenL, and embedded
producLs. 1hese hlgh denslLy mlcro-servers would be sold Lo Web companles such as 1wlLLer and
lacebook, wlLh Lhe hope LhaL Lhey wlll requlre huge quanLlLles of relaLlvely low processlng
requlremenLs. 1he acqulslLlon of SeaMlcro wlll ln Lheory help lL sell Lo web companles lnsLead of
hardware ones (uell, P, eLc., whaL Lhe CLC wanLs Lo become less dependenL on) and help develop Lhe
AMu WrlLe-up
2014 A8M based CpLeron chlps. lL ls esLlmaLed LhaL Lhe markeL for Lhese mlcro servers wlll be worLh
26.33 bllllon by 2018.
AMu ls golng Lo produce Lhe processors for all Lhree nexL generaLlon consoles. LsLlmaLes based
off of Lhe laLesL earnlng call predlcL low double dlglL marglns for Lhese consoles. AMu ls dependenL on
Lhe sale of Lhese consoles Lo offseL Lhe decrease ln royalLles due Lo prevlous generaLlon and also ls
hopeful LhaL Lhere wlll be a neLwork effecL whlch wlll splll over lnLo Lhe C buslness.
AnalysL esLlmaLed LhaL AMu made 100-130m ln royalLles per year.
lf Lhey shlp 3 mllllon Aus per quarLer aL $40, lL would Lake a 33 gross margln for Lhem Lo
make $70m ln gross proflL per quarLer, almosL double whaL Lhey make ln royalLles.
o 1hey would only need Lo make 18.73 margln Lo make up Lhe 130m ln revenue.
o Colng by earnlngs call, AMu expecLs "low double dlglL" marglns.
AMu ls predlcLlng a 22 lncrease, or $260m lncrease ln LoLal revenue for C3. Assumlng growLh
ln graphlcs ls negllglble (whlch ls pro[ecLed), revenue from lL wlll be around 320m. CrowLh ln Lhe
C markeL seems doubLful, as Lhe enLlre markeL ls choppy and AMu ls second flddle Lo lnLel.
1hls would mean LhaL aL 33 margln, AMu would need Lo shlp 12 mllllon Aus ln C3
(Sony/MlcrosofL's bulldup of lnvenLory for hollday season) Lo reach LargeL revenue of 1.1 bllllon
(1here ls 1 Au ln every console, so 12 mllllon ls by no means an unreallsLlc number. PlsLorlcal
Lrends puLs Lhls number beLween 10m-13m and Lhere are sLrong pre-order number).
Powever, console sales wlll Laper off afLer Lhe hollday season, meanlng LhaL Lhe company may
reLurn Lo unproflLablllLy.
o lnLel's 8ay 1rall ls slaLed Lo be released soon, whlch could puL a serlous denL ln AMu's
revenues.
AMu 's Aus, whlch aL Lhe momenL are lLs only serles of producLs ln whlch Lhe besL one beaLs
lnLel's besL (malnly because lnLel hasn'L glven Lhem Loo much aLLenLlon), would only have a
markeL wlLh Lhe moblle audlence.
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Whlle AMu deflnlLely has valuable asseLs, l, and some solld revenue sLreams, Lhere ls a loL of
uncerLalnLy ln lLs fuLure, causlng lLs sLock Lo be under-valued (as of rlghL now). luLure revenue models
hlnge upon hlgh reLurns from console processor sales, a neLwork effecL from Lhose console sales, and
Lhe success of Lhelr mlcro-severs (whlch are beLLlng on a blg shlfL ln Cu archlLecLure from x86 Lo A8M).
lf LhaL does happen, Lhen AMu should see solld revenue from lL, buL mosL analysLs agree LhaL lL ls sLlll a
few years away. lor Lhe mosL parL, Lhelr mlcro-processers for Cs and LableLs are consldered second
raLe Lo lnLel's and Lhelr C/noLebook Cu buslness ls loslng ground Lo nvlulA. AlLhough Lhe company
wlll probably reLurn Lo proflLablllLy ln C3, lL ls dublous how susLalnable lL ls, especlally lf lLs gambles
don'L payoff. 1he ouLlook ls especlally bleak lf lnLel's 8ay 1rall llves up Lo expecLaLlons.