Just 10 days from its formal earnings release, chipmaker Advanced Micro Devices (NASDAQ:AMD) pre-announced that its revenue for the quarter will come in lower than expected. In particular, AMD is now calling for an 8% sequential drop in sales from the first quarter, a significantly larger decline than the 3% drop it had originally called for.
This weakness, per AMD's press release, has been driven by "weaker than expected consumer PC demand," leading to lower APU sales to system vendors.
AMD also reduced its gross profit margin guidance for the quarter (on a non-GAAP basis) from 32% to just 28%. This reduction is due to a "higher mix of Enterprise, Embedded, and Semi-Custom segment sales," as a result of the aforementioned PC weakness.
Finally, the company announced that its GAAP gross profit margin will take a one-time hit associated with scrapping product designs that had been started on the 20-nanometer manufacturing node but are now being transitioned to FinFET manufacturing.
Although AMD laid out an optimistic long-term view at its recent Financial Analyst Day, the reality here is that AMD's business seems to be going from "bad" to "worse."
Is this "just" a PC problem, or is it an AMD problem?
It won't be too long now before both AMD and PC processor peer Intel (NASDAQ:INTC) report their full quarterly results. A question that will be of critical importance to AMD is whether this revenue shortfall is due just to the rough shape the PC market's in, or if AMD is continuing to lose significant market share to Intel.
My guess is that the full quarterly results from both chipmakers will show a combination of both. I expect that Intel's Skylake chips will offer better performance per watt than anything AMD will be able to field this year. Furthermore, given the status of the PC market and that Intel has factories to keep filled, I wouldn't be surprised if Intel gets more aggressive on pricing its chips in a bid to capture additional market share.
Will guidance for the second half of the year need to come down?
At AMD's financial analyst day back in May, CFO Devinder Kumar said the company expects to grow revenue by 15%, give or take 3%, in the second half of the year from levels seen in the first half of 2015. Additionally, Kumar said AMD's gross profit margin will move from 32% in the first half to 32%-34% in the second half and operating expenses would come down from $715 million to between $680 million and $700 million.
All told, that prior guidance called for AMD to see a net profit and positive free cash flow in the second half of the year.
I expect AMD to bring down its full-year revenue guidance, although by how much isn't clear yet. In its prior guidance for the second half of the year, AMD was looking for operating profit of about $69 million (assuming $2.3 billion in sales, 33% gross profit margin, and $690 million in operating expenses).
Note that AMD brought in $1.03 billion in revenue last quarter and now expects revenue for the second quarter to be down by 8% from that level, implying a first half of 2015 revenue base of about $1.98 billion.
If AMD lowers its second-half growth estimates to 10% from 15% (which still might be optimistic) and hits the low end of its previously stated gross profit margin (32%-34%) and operating expense ($680 million-$700 million) ranges, it could still eke out a $17 million operating profit for the second half of the year.
However, if AMD guides for revenue growth in the second half of the year that's meaningfully lower than that, or if its gross margin comes under further pressure, then AMD could very well wind up losing money in the second half of the year as well.
Things don't look good for AMD today and it's hard to see things getting much better anytime soon.
Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.