Advanced Micro Devices (AMD +3.55%) pre-announced some details regarding its second quarter in early July, so the ugliness of AMD's results, which were announced on July 16, should come as no surprise. Revenue fell off a cliff, as was expected, and the company continued its recent trend of posting massive losses. Here's what investors need to know about AMD's second-quarter earnings.
A rough quarter
AMD reported revenue of $942 million, down 35% year over year, and down 8% sequentially. The computing and graphics segment, which contains AMD's CPU and GPU businesses, suffered from a staggering 54% year-over-year revenue decline. Revenue for the segment was just $379 million, compared to $828 million during the same period last year.
The enterprise, embedded, and semi-custom segment also declined year over year, but by a much smaller 8%. The segment brought in $563 million during the quarter, surpassing the computing and graphics segment for the first time.
AMD reported an operating loss of $137 million, and a net loss of $181 million, almost exactly the same numbers as the first quarter. This compares to a $63 million operating profit, and a $36 million net loss during the second quarter of 2014, so the year-over-year deterioration is fairly dramatic.
AMD's profitability actually got worse sequentially if restructuring charges and the $33 million node-transition charge from the second quarter are removed. Non-GAAP operating income fell to a loss of $87 million during the second quarter, worse than the $30 million loss reported for the first quarter.
Gross margin also contracted to 25%, falling seven percentage points sequentially, and 10 percentage points year over year. This was driven by a higher mix of non-PC products, as well as the $33 million non-cash charge.
The computing and graphics segment posted an operating loss of $147 million, nearly double the operating loss from the previous quarter. The enterprise, embedded, and custom segment saw its operating profit contract to $27 million, down from $45 million during the previous quarter, and $97 million during the same period last year.
AMD expects third-quarter revenue to grow sequentially by 6%, which would represent a 30% year-over-year decline. New graphics cards announced by AMD last month will likely provide a small boost, but the CPU business is unlikely to improve any time soon. The company did not provide earnings guidance, although it did state that it expected to be profitable on a non-GAAP basis in the second half during an analyst day presentation earlier this year.
No good news
There's nothing to like about AMD's results. The PC business is a mess, revenue and profits from game console chips no longer counteract weakness in the rest of the business, and there's essentially no hope of things getting any better before AMD launches its new processor core, Zen, next year.
Meanwhile, research and development spending continues to decline. During the second quarter, R&D spending fell by 15% year over year. This is necessary to cut costs as revenue declines, but a technology company attempting a turnaround isn't going to get very far by slashing R&D.
Inventory levels are also troubling. At the end of the second quarter, AMD was sitting on $799 million of inventory, up 16.6% year over year and up 16.1% since the end of March. Some of this may be related to AMD's new graphics cards, but with revenue down 35% year over year, an inventory write-off may be inevitable. AMD is likely stuck with products that it can't sell in a declining PC market, especially one that ended up being much worse than the company originally expected.
AMD's business continued to unravel in the second quarter. Losses are growing, adjusted for one-time items, and the company is running out of time to turn things around. During the past six months, AMD's free cash flow was a loss of $270 million. With $829 million of cash on the balance sheet, AMD still has time, but the situation is starting to look grim.
