With new product launches still at least a few months away, signs of a turnaround are unlikely to show up in Advanced Micro Devices' (NASDAQ:AMD) first-quarter earnings report. Results will be announced Thursday following the market close, and if analyst estimates are correct, investors can expect a steep decline in revenue and earnings.
Demand for PCs remained weak during the first quarter, with IDC reporting that global unit shipments declined by 11.5% year over year. AMD's core business is heavily dependent on the PC, and without any indication that demand is stabilizing, returning to revenue growth will be difficult for the company. AMD plans to launch new GPUs and CPUs later this year, and both are expected to improve the company's competitive position, but a weak PC market will make executing a turnaround far more difficult.
What analysts are expecting
The average analyst estimate calls for AMD's first-quarter revenue to decline by 20.6% year over year to $818.2 million. This estimate is in line with AMD's guidance for a sequential revenue decline of 14%, plus or minus 3%. The computing and graphics segment, which contains both CPUs and GPUs aimed at PCs, has been the biggest driver of AMD's recent revenue declines. But the enterprise, embedded, and semi-custom segment, which contains AMD's game console chip business, suffered a revenue decline as well during the fourth quarter, suggesting that AMD's game console revenue this cycle may have already peaked.
A non-GAAP loss of $0.13 per share is expected by analysts, down from a loss of $0.09 per share during the prior-year period. The semi-custom segment has been a source of profits for the company in recent years, but losses in the computing and graphics segment have overwhelmed those gains. AMD's debt load is also a factor, with quarterly interest payments of about $40 million knocking down profitability.
Analysts are expecting things to improve going forward, with just a 3.5% revenue decline expected for the full year and a 5.4% revenue increase in 2017. Analysts are also predicting losses to shrink in 2016 compared to 2015. Hitting these numbers will require AMD's upcoming Polaris GPUs and Zen CPUs to drive meaningful market share gains, an outcome that is far from guaranteed.
AMD's first quarter will likely be more of the same. The PC market hasn't improved, and without any new products, it's unlikely that AMD has managed to win back much market share. In the GPU market, rival NVIDIA (NASDAQ:NVDA) shipped just shy of 80% of discrete graphics cards during the fourth quarter, and while AMD has been slowly clawing back share, the gap between the two companies is far larger than it was just a few years ago.
AMD's 2015 graphics card launch, which included new high-end cards like the Fury X and a rebranding of the rest of the lineup, did little to improve AMD's position in the industry. Polaris, which will bring significant improvements in both performance and efficiency, in part due to the move to a 14nm manufacturing process, will be up against NVIDIA's Pascal architecture, which promises similar gains. An exact launch date for Polaris hasn't been announced, although rumors point to June. Expect management to discuss the upcoming launch during AMD's earnings conference call.
On the CPU front, AMD's Zen microarchitecture is planned to debut toward the end of this year. AMD has lost considerable market share to Intel (NASDAQ:INTC) over the past few years, and a weak PC market is now ravaging both companies' results. During the fourth quarter, Intel reported that desktop and notebook unit volumes dropped by 9% and 10%, respectively, contributing to a decline in net income.
Market share gains prior to Zen will be tough for AMD, which means that the next few quarters are unlikely to show much improvement. If Zen delivers, Intel could face serious competition in both the PC and server CPU markets. But if Zen falls short of expectations, a return to profitability becomes more difficult to imagine.
AMD's first-quarter numbers are going to be ugly, continuing a trend that has persisted for the past couple of years. The turnaround will begin in earnest with the launch of Polaris in a few months and pick up steam with Zen. That's the hope, at least. For now, AMD investors will need to continue to stomach the company's terrible results.