AMD chief touts video game chips as big diversification opportunity

Advanced Micro Devices chief executive Rory Read credited the company’s growing video game business for its improving financial outlook, including the chip maker’s return to profitability in the current third fiscal quarter ending Sept. 30.

Read said in a conference call with analysts that the company has cemented its leadership in game consoles by getting its chips into all three major consoles: the Nintendo Wii U, the Microsoft Xbox One, and the Sony PlayStation 4. While Nintendo’s console debuted last fall and isn’t selling as well as hoped, expectations are high for the other two game machines when they release this fall. AMD views the game market as a place where it can distinguish itself from Intel and reuse the intellectual property that it develops for PC microprocessors.

“These tailored products are great examples of the opportunities we have to quickly diversify our product portfolio and enter into new markets where our intellectual property and design capabilities provide us with a competitive advantage,” Read said in the call.

The focus on semi-custom silicon, which include video game chips, is part of AMD’s multistep strategy to restructure and transform the company’s growth in the future. He said that AMD is striving to become the “defacto standard for game developers” in consoles, PCs, and mobile devices. Read said the company grew share in graphics in part because of its Never Settle bundle, which combines free games with high-end AMD graphics cards.

Revenue in the third quarter is expected to grow 22 percent from the second quarter’s $1.16 billion, and AMD expects to be profitable at the midpoint of its guidance in the net income category. In the fourth quarter, about 20 percent of AMD revneue will come from the semi-custom and embedded businesses in the fourth quarter, with the growth mainly due to sales of chips for the Sony and Microsoft consoles.

Read expects to see AMD’s traditional accelerated processing units (APUs, or chips that combine graphics and processing in the same chip) showing up in $400 laptops this fall from PC makers including Acer, Asus, Dell, HP, and Lenovo.

AMD executive Lisa Su said she expects “good yields” for the wafers for the game console chips. Typically, first-half sales are weaker than the second half, when consoles sell in larger numbers, she said.

“These are long-term deals we have with customers, given the length of the design wins,” she said. So the prices are pre-negotiated. Read said they run from five to seven years and that, “over time, you’d expect prices to move lower and so would costs.”

AMD is also putting emphasis on chips for micro servers, or those that densely pack low-performance, low-power chips into small server racks. By 2014, AMD hopes to launch ARM-based chips that go into these micro servers, which were pioneered by SeaMicro, a company that AMD acquired.

Over time, the new businesses are expected to account for 40 to 50 percent of revenue in the next two to three years, Read said. AMD said its inventory rose to $711 million, up $98 million sequentially, largely driven by semi-custom products.