Struggling chip maker Advanced Micro Devices (AMD 2.34%) is expected to report its second quarter earnings result and provide guidance for its third quarter on an earnings call scheduled for Thursday, July 16.
The company recently negatively preannounced its second quarter results, stating that revenue will be down 8% from the prior quarter, against prior guidance of a 3% decline, give or take 3%. AMD also said that its gross profit margin for the quarter would be just 28%, down from prior expectations of 32%, as the company's revenue mix shifted more toward lower margin semicustom and embedded chip sales from PC microprocessors.
When AMD reports, here are three things that investors should watch closely.
Second half of 2015 guidance
At its Financial Analyst Day, AMD said that it expected its revenue to grow by 15% in the second half of 2015 over that of the first half of 2015. I am looking for a forecast reduction on AMD's part, driven principally by a weaker-than-expected demand for its PC APU products.
Right now, analyst consensus calls for AMD to deliver $4.1 billion in sales for the balance of the year. Given that AMD did $1.03 billion in sales during the first quarter of the year and an 8% reduction from those levels puts sales for the second quarter at roughly $948 million, consensus estimates are calling for just 7.2% growth from the first half of the year to the second half of the year.
If AMD revises guidance for the second half of the year to something greater than a 7.2% increase from the first half, then this could be a positive for the stock. Similarly, if AMD's guidance for the second half comes in lower than that, shares could see further pressure.
Progress in gaining market segment share
On the last earnings call, AMD CEO Lisa Su told analysts that management sees opportunities to grow its market segment share "particularly in the graphics business" during the second half of the year. I would be interested to hear management discuss its progress on this front and whether management still thinks it can regain share in the graphics and PC microprocessor markets during the second half of the year.
What about margins?
During the first quarter of 2015, AMD's gross profit margin percentage (on a non-GAAP basis) was 32%, and now management expects that figure to come in at 28% in the second quarter.
It will be interesting to see how the company's gross profit margin percentage trends during the second half of 2015, particularly as management's prior margin guidance for the second half of the year was in the range of 32-34%.
Given that AMD's margins were negatively affected by lower PC processor sales in the second quarter, a downward revision to PC processor shipment expectations might also mean lower margins in the second half of the year. Lower margins, coupled with potentially lower-than-expected revenue, might make it difficult for AMD to hit its forecast of profitability during the second half of the year.
Investing takeaway
I'm not expecting much in the way of "positive surprises" on the upcoming earnings call. The situation for AMD doesn't look good, and in the near term I don't think there's much that the company can do about it.
Over the medium term and the long term, AMD is betting on a wave of new products to help improve its competitive positioning in the PC market, grow its semicustom business, regain share in discrete graphics, and reestablish itself as a credible player in the server market.
Whether AMD is able to turn itself around and deliver on the vision that it outlined at its Financial Analyst Day, only time will tell.
