AMD CEO says laptop sales dropped more than expected in advance of Windows 10 launch

Advanced Micro Devices chief executive Lisa Su said that the consumer PC market was “decidedly weaker” than expected in advance of the launch of Microsoft’s Windows 10 operating system.

She made the remarks in a conference call with analysts after the company posted mixed results for the second quarter, as it hit expectations on earnings but missed on revenues.

The Sunnyvale, California-based company reported a loss of 17 cents per share on revenues of $942 million for the quarter ending June 30. AMD’s financials are closely watched as a barometer of the PC business, since it is a major supplier of graphics chips and processors for PCs.

Analysts expected AMD to report earnings per share of 16 cents on revenues of $956 million. AMD had previously guided expectations downward earlier in the quarter. A year ago, AMD reported a profit of 5 cents a share on revenue of $1.44 billion. In after-hours trading, AMD stock is up 2 percent.

“The softer-than-expected consumer PC demand in advance of the Windows 10 launch caused our original equipment manufacturer (OEM) notebook sales to slow late in the quarter as our OEM customers and retailers actively worked through their inventory of Windows-8 based systems. This significantly impacted our second quarter PC notebook sales and reduced our gross margin as we ended the quarter,” Su said.

Gartner predicts that PC shipments will fall about 4.5 percent in 2015. But it noted that in the second quarter, shipments fell 9.5 percent to 68.4 million units, the steepest decline since the third quarter of 2013. The market players hope that hesitation before the adoption of Windows 10, Microsoft’s new operating system that debuts on July 29, may be the reason.

In the semi-custom segment, AMD makes chips for video game consoles such as the Nintendo Wii U, Microsoft Xbox One, and Sony PlayStation 4 consoles. That segment did reasonably well, up 13 percent from the previous quarter but down 8 percent from a year ago.

But AMD’s core business of processors and graphics chips fell 29 percent from the previous quarter and 54 percent from a year ago. AMD said it had decreased sales to manufacturers of laptop computers.

Mizuho Equity Research’s Vijay Rakesh said in an interview this week with Barron’s that he believes AMD is still in play as a “takeover target.” AMD has declined to comment in the past on those possibilities. AMD’s market value on the stock market is just $1.5 billion today, compared to about $3.2 billion at the beginning of March.

In the previous first quarter, AMD reported a loss of nine cents per share on revenues of $1.03 billion for the quarter ending March 31. AMD previously said it would exit its dense server systems business, formerly SeaMicro, as part of the strategy to “simplify and sharpen the company’s investment focus.”

Besides PC processors, AMD makes graphics chips, embedded processors, enterprise chips, and semi-custom chips such as game console processors. AMD supplies chips to the Nintendo Wii U, Microsoft Xbox One, and Sony PlayStation 4 consoles.

For the third quarter, AMD expects revenue to increase 6 percent (plus or minus 3 percent), sequentially. The third quarter will be the peak for semi-custom chip sales as Sony and Microsoft ramp up for holiday game console sales. Devinder Kumar, chief financial officer, said the company will no longer return to profitability in the second half of the year, as it previously planned. He said the company is contemplating restructuring to align its costs with revenues.

The company began work on a new “semi-custom” design during the quarter. That work is still confidential.

AMD is pinning a lot of its future on the 6th generation A-series accelerated processing unit (APU), a chip code-named “Carrizo” that combines computer and graphics processing, as some customers chose to align Carrizo launches with Windows 10, according to Su.

“We expect our mobile unit shipments will rebound and ramp in the second half of the year as Windows 10 launches and more than 35 Carrizo platforms come to market globally,” she said.

“AMD’s Q2 results were, at best, a big challenge, driven by weak consumer PC market and AMD’s weaker Q4/14 and Q1/15 PC assortment which hindered APU sales in Q2,” said Patrick Moorhead, analyst at Moor Insights & Strategy, in an email. “They cleaned up their channel, too, which is good leading into Windows 10. The good news for AMD is that their Fiji-based graphics are more competitive than I’ve seen in years and they’re first with high-bandwidth memory (HBM), a differentiator.”

He added, “I expect some interesting cards from AMD in the future, leveraging HBM and the benefits it can yield. Carrizo, which started shipping this quarter, is the most competitive notebook part I have seen from AMD in five years. AMD’s short-term future rides on flawless execution of Fiji and Carrizo and mid-term, on future products designed for HPC and workstation markets. Long-term, it’s all about Zen, their new processor core architecture.”