So while some may dismiss a measly 1.2% drop in global PC sales, note that AMD is having to lay off another 5% of its workforce due to weak demand and lower average selling prices on their high-end server parts (where most of their profits are made, presumably). And if the weak economy persists, the weaker companies will die off eventually..Advanced Micro Devices (AMD) announced preliminary financial results on 10/11, noting that it would see a 10% sequential drop in revenues against the guided 1% drop, +/- 3%. Further, the company announced that its gross margins would be around 31%, rather than the previously guided 44%, due to both a $100M inventory write down, as well as lower than expected selling prices.
With the weakness in the PC space suggested by Intel's (INTC) pre-announcement, coupled with HP (HPQ) and Dell's (DELL) fairly weak results in their most recent quarters, it was natural to expect that AMD would also suffer some weakness. The problem here is that AMD's guidance for the current quarter was already particularly weak (whereas Intel's was quite bullish and revised down to bearish), so a warning on top of an already weak guidance is particularly painful.
A Net Loss Expected In The Quarter
With this updated guidance, it is now certain that the company will experience a net loss. With gross margins of 31%, revenues 10% down from the previous quarter to roughly $1.26B, and operating expenses down 7% from the prior quarter's $557M, the operating loss will likely be about $128M, or -$0.18/share. Assuming flat interest expense compared to the prior quarter of $43M, the net loss should be even wider than the straight operating loss.
Q4 Guide - Unlikely To Be Good
With the company writing down $100M of inventory, it is unlikely that the Q4 guide will be particularly strong. On the previous call, the company had assured investors that the majority of the new inventory that had been built up was next generation "Trinity" products and not, as feared, the previous generation "Llano" products. However, the inventory that had already been built -- especially on the desktop chip side -- remained.
AMD attempted to hold off the coming of the next generation "Trinity" parts on the desktop in order to clear inventories, but it seems that the company was unable to do so. A part of this is likely due to the fact that AMD had created something of an "Osborne Effect" by talking up its upcoming products while its new products had just hit the shelves. This likely had a material effect on the demand for its current products, as AMD created the perception that better stuff was perpetually "just around the corner." Another problem, of course, is that Intel is seemingly more aggressively competing in the low end that AMD seems to dominate.