To put it bluntly, Advanced Micro Devices (NASDAQ:AMD) had a terrible fourth quarter. Revenue fell 22% year over year, according to the processor maker's latest earnings release, while earnings, adjusted for some big write-offs, landed at breakeven. While the gaming consoles business kept AMD afloat, the PC business appears to be falling apart. Computing and graphics revenue fell 16% year over year, with the segment losing $56 million during the quarter. Additionally, an inventory write-off related to the company's APUs doesn't exactly vindicate the company's strategy.
While the PC market has stabilized, with Intel (NASDAQ:INTC) reporting rising PC chip volumes in both the fourth quarter and 2014 as a whole, AMD is still suffering from huge sales declines. With AMD grouping CPUs and GPUs in the computing and graphics segment, it's difficult to tell exactly how each business is doing. But it's clear Intel continues to win market share from AMD, despite already dominating the market.
Of course, Intel has some enormous advantages. While AMD relies on third parties to manufacture its chips, Intel produces its own chips, and it is shipping its new Broadwell processors built on a 14-nanometer process. AMD is still stuck at 28 nanometers, and its upcoming Carrizo APUs, set to launch in the first half of this year, will remain a generation behind Intel. This will make it difficult, if not impossible, for AMD to keep up on power efficiency.
During the fourth quarter, AMD wrote off $58 million of inventory related to its desktop APU products. This should not be ignored: AMD's entire PC strategy has revolved around the powerful integrated graphics in its APUs, but it appears demand simply isn't there. In contrast, Intel reported that its desktop CPU volume fell just 1% during the fourth quarter.
The average selling price of AMD's GPUs also declined year over year, although the company did not disclose any information about volume. Part of this weakness is likely due to the demand from cryptocurrency miners, which buoyed AMD's GPU business in late 2013 and early 2014, vanishing, as pointed out by CEO Lisa Su during the company's conference call. During the third quarter, rival NVIDIA (NASDAQ:NVDA) claimed about 70% of the GPU market by unit volume, and its recent GPU products forced AMD to slash prices late last year.
This is what a train wreck looks like
It seems the investment thesis for AMD over the past few years has been that, while things aren't great now, the next batch of products will return the company to prosperity. AMD is launching new APUs later this year, as well as new GPUs, and both come with a bit of hype.
It's the same story, though, every time AMD launches a new product. Expectations are high, but ultimately the company fails to deliver. Both Intel and NVIDIA keep winning market share, and those promising APUs had to be written off in the fourth quarter. AMD is starting to sound like a broken record.
AMD expects revenue during the first quarter to decline by 15% sequentially, anticipating just $1.05 billion in total. The company did not mention how big of a year-over-year decline this would represent, probably because that number is much scarier. AMD is guiding for an astonishing 25% year-over-year revenue decline next quarter. It also expects lower revenue than it collected in the first quarter of 2013, which occurred well before the game consoles even launched.
At this point, any profits from the game console business are being eaten by PC losses and interest payments. Research and development spending is collapsing, down 19% year over year during the fourth quarter. While cost reductions will help profitability, it's hard to imagine how AMD is supposed to keep up with Intel and NVIDIA by constantly slashing R&D.
Banking on a miracle second half, driven by new product launches, is extremely optimistic. Past new product releases have done little to fix AMD's PC business, and it doesn't look any different this time around. AMD doesn't have the resources to fight multiple wars on multiple fronts with both Intel and NVIDIA, and this is showing in its results. AMD's PC business is unraveling, and there appears to be little hope it can be saved.