Advanced Micro Devices (NASDAQ:AMD) is set to report its second-quarter earnings after market close on July 16. After an update from AMD on July 6, which served to cut the company's outlook substantially, the second quarter is expected to be even worse than previously anticipated. AMD now expects revenue to fall 8% sequentially, or about 34% year over year, compared with previous guidance of a 3% sequential decline. As the weak PC market ravages demand for the company's products, AMD is struggling to even predict how bad its results will be.
2015 guidance may need an adjustment
Back in May, AMD held an analyst day event, providing an optimistic outlook for the rest of 2015. At the time, AMD expected to be profitable during the second half of the year, producing 15% revenue growth compared to the second half of 2014. Given the major correction to AMD's second quarter guidance, this may need an adjustment.
Along with lowering revenue expectations for the second quarter, AMD announced that it would be taking a $33 million charge associated with moving several product designs, originally designed for a 20nm node, to a leading-edge FinFET node. AMD has previously stated that some 20nm products would launch later this year, probably APUs, but this charge could mean that this is no longer the case.
AMD's optimistic forecast for the second half of the year was based on new products, but if no new APUs are set to be released, AMD will be relying on its recently announced graphics cards to do the job, along with a potential boost in PC demand related to Windows 10. IDC is predicting that the PC market will decline by 6.2% this year, so Windows 10 may not provide any boost at all.
AMD's new high-end Fury graphics cards introduced a real competitor to NVIDIA at the high end of the market after months of allowing NVIDIA free rein. Over the past few quarters, NVIDIA has grown its share of the add-in board market to 77.5%, up from around 60% that has been the norm over the past few years. Simply offering an alternative to NVIDIA should allow AMD to win back some market share, but since AMD failed to truly disrupt the market with its new products, NVIDIA should retain much of its advantage.
This leads to the conclusion that AMD's guidance for the second half is unrealistic, and just two months after first issuing it, I wouldn't be surprised if the company backtracked during its conference call. I don't see a scenario where AMD grows revenue by 15% and returns to profitability in the second half.
How big will the losses be?
During the first quarter, AMD posted an operating loss of $137 million, down from an operating profit of $49 million during the first quarter of 2014. There was an $87 million restructuring charge included in that figure, but no matter how you slice it, AMD lost money during the quarter.
The computing and graphics segment posted a $75 million operating loss, down from a slight gain of $3 million during the same period in 2014. Meanwhile, the enterprise, embedded, and semi-custom segment saw its operating profit nearly cut in half, to $45 million. Everything else, including that restructuring charge, contributed a $107 million operating loss.
With demand for PCs weaker than AMD anticipated, I would expect the computing and graphics segment to post an even bigger operating loss during the second quarter. The CPU and APU business is unlikely to improve going into the second half, and while graphics cards may provide a boost to sales, it's hard to imagine the segment posting a profit in the foreseeable future.
AMD can only cut costs so much, and R&D spending has already declined significantly over the past few years. A tech company without adequate R&D isn't going to stand the test of time, and it's becoming more difficult each quarter to believe that AMD can ever become competitive with Intel again. AMD investors still clinging to hopes of a turnaround aren't going to like AMD's second-quarter earnings.