As of early August, Advanced Micro Devices (AMD 2.37%) was aiming for full-year revenue of $26.3 billion. Tumbling demand for PCs and inventory reductions across the PC supply chain have thrown a wrench in those plans. The company's third-quarter revenue was more than $1 billion below its initial guidance, a miss that AMD warned about in October.
AMD now expects to produce just $23.5 billion of revenue in 2022, nearly $3 billion below its target a few months ago. The good news is that this still represents growth of 40%. The bad news is that around half this growth is from an acquisition.
Slower organic growth
AMD completed the acquisition of Xilinx in February. The additional revenue from Xilinx shows up in AMD's embedded segment. In the third quarter, embedded revenue surged 1,549% to $1.3 billion almost entirely due to Xilinx.
AMD expects embedded revenue to grow sequentially in the fourth quarter, so let's say Xilinx contributes $1.2 billion of revenue, similar to the third quarter. AMD expects total revenue in the fourth quarter to come in at $5.5 billion, or roughly $4.3 billion excluding the estimate for Xilinx. While reported revenue will be up 14% year over year, it will be down around 10% if Xilinx is backed out.
Taking that fourth-quarter estimate and adding the estimated contributions from Xilinx from the first three quarters of the year, Xilinx will contribute somewhere in the ballpark of $4.1 billion of revenue this year. Back that out of the 2022 guidance, and AMD's organic revenue will be $19.3 billion. That's up just 18% year over year.
A strong first half is offsetting a weak second half. Sales in the client segment, which covers PC CPUs, crashed 40% year over year in the third quarter, and another big decline is in the cards for the fourth quarter. The data center segment is still growing strongly, but if global economies enter recession next year, a slowdown is probably inevitable.
Profits are way down, but there's a catch
AMD's GAAP profits essentially disappeared in the third quarter, but that's largely an accounting consequence of the company's acquisition of Xilinx. The deal put nearly $50 billion of intangible assets onto the balance sheet, and some of those assets will be amortized over time. The charge for that amortization totaled $1 billion in the third quarter.
On an adjusted basis, which backs out this amortization as well as stock-based compensation and a few other items, net income rose 23% year over year. However, due to the additional shares issued for the Xilinx deal, adjusted earnings per share slumped 8% to $0.67. The embedded segment, which is mostly Xilinx, was the most profitable segment on an operating basis. The deal was a net positive for the bottom line, at least on an adjusted basis.
The PC business should improve in 2023
AMD's PC segment is doing much worse than the PC market. Global PC unit shipments were down 19.5% in the third quarter, according to Gartner, while AMD suffered a 40% decline in its PC segment. AMD's customers are reducing inventory levels to adjust to lower demand, so AMD is getting hit with a double whammy of lower end market demand and customers aggressively lowering their inventories.
This situation will improve sometime in 2023 as AMD's customers complete their inventory reductions. At that point, sales of AMD's PC CPUs should better track the market, plus or minus any market share gains or losses. Market share gains aren't a guarantee – Intel's Raptor Lake chips are a potent threat, beating AMD's latest Ryzen 7000 chips across the board.
Once AMD laps the Xilinx acquisition in February, that boost to the growth rates will disappear. Even if the data center and embedded segments continue to perform well, a weak PC market is going to make it tough for AMD to grow nearly as fast as it has over the past couple of years.
