With the PC market stronger than expected during the second quarter, and with Intel (INTC +7.06%) reporting significant growth in its PC segment, expectations were high for Advanced Micro Devices (AMD +7.24%) going into its second quarter earnings report. The stock tumbled, however, after the struggling company reported lackluster results, including a staggering 20% year-over-year decline in its computing solutions segment, along with a disappointing outlook. This drop marks a continuation of a volatile year for AMD investors.
With Intel clearly winning CPU market share from AMD during the second quarter, it's difficult to be optimistic on the long-term prospects of AMD's CPU business. But while the bad heavily outweighs the good, AMD has managed to do one thing right.
Improving profitability
Despite the massive decline in computing solutions revenue, AMD managed to increase the operating profit derived from the segment. A $9 million operating profit on $669 million of revenue during the second quarter is an improvement compared to the same period last year, when the segment generated just $2 million in operating profit on $841 million of revenue.
AMD's PC strategy is not to aggressively go after market share, but instead to maximize profitability, going after the portions of the market where it can effectively compete. CEO Rory Read stated during the company's conference call:
Our PC strategy remains focused on developing profitability by diversifying into the commercial, stabilizing the overall PC business and leveraging the channel to deliver profitability.
Of course, a 20% decline in revenue doesn't seem like stabilization to me, especially considering that the PC market as a whole was flat during the quarter. But at least part of this decline was due to AMD losing low-end market share to Intel's Bay Trail, and the year-over-year increase in microprocessor average selling price for AMD points to the higher-end products holding up a bit better.
Trouble at the low-end
During AMD's conference call, COO Lisa Su commented on the company's loss of PC market share to Intel's low-power Bay Trail chips:
So if you take a look at U.S. specifically about Bay Trail and we certainly see Bay Trail no question about it, we see them at, very, very low entry price points going up into the mainstream of the notebook and desktop market. And there are places where we chose not to compete because it's just not profitable business.
While Intel pointed out during its conference call that Bay Trail has allowed the company to expand into the low-end PC market without sacrificing margins, AMD is apparently unable to turn a profit in those same markets. It's not that AMD has chosen to not compete in these segments, it's that it was forced out by Intel.
Intel's manufacturing advantage is certainly a factor here, with AMD's products currently at 28nm and built at third-party foundries. Intel's products are built on a 22nm process, and Cherry Trail, the next iteration of Intel's Atom processors after Bay Trail, will be moving to 14nm next year.
AMD's inability to be profitable at the low-end of the PC market could cause problems as the company targets tablets and 2-in-1s. Energy efficiency is important for mobile devices, and if AMD can't compete with Bay Trail in the PC market, what chance does it have in the mobile market, especially with Intel subsidizing its tablet chips? Performance-per-dollar is important, but so is performance-per-watt, and being at least a generation behind Intel in terms of process technology represents a big disadvantage for AMD going forward.
The bottom line
The 20% decline in AMD's computing solutions segment looks terrible given the growth of Intel's PC business, but improving profitability is a silver lining for AMD investors. The real bad news, though, is that AMD appears to be unable to compete at the low-end of the PC market, and that makes any tablet ambitions that the company may have look far-fetched at best. So while AMD has been able to wring out some profitability from its CPU business, it appears unlikely to be a source of growth for the company.
