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AMD Sales Forecast Misses on Tepid Game-Console Chip Demand

Ian King

(Bloomberg) -- Advanced Micro Devices Inc., the No. 2 maker of computer processors, gave a disappointing third-quarter sales forecast, indicating lower-than-expected orders for game-console chips from Microsoft Corp. and Sony Corp., two of its biggest customers.

Revenue in the current period will be about $1.8 billion, Santa Clara, California-based AMD said Tuesday in a statement. That missed the average of analysts’ projections of $1.94 billion, according to a survey by Bloomberg. The company also pared its forecast for annual revenue, and shares tumbled in extended trading.

Chief Executive Officer Lisa Su is trying to remake her company into more than just a purveyor of cut-price alternatives to Intel Corp.’s PC chips. While sales of PC-related products are improving, the company said revenue is taking a hit because demand from game-console makers is falling short of its original forecasts this year. In the second quarter, revenue in the division that includes server processors and custom chips for consoles declined 12%, AMD said.

Console sales are dropping as the current versions of Microsoft’s Xbox and Sony’s PlayStation are in their seventh year of life and the companies have started talking about their replacements.

Su, the chip industry’s first female chief executive officer, said her company is where she had hoped it would be in terms of unveiling competitive chips, and AMD is ready to take back share from Intel, whose products still garner 90% of revenue in the processor market. As the year progresses, she said, more of AMD’s recently announced chips will be available in electronic devices, boosting the company’s market footprint.

“There’s a real pull for the products,” Su said. “I feel really good about the customer engagements.”

The company’s second-quarter net income fell to $35 million, or 3 cents a share, compared with $116 million, or 11 cents, a year earlier. Excluding certain items, profit in the recent period was 8 cents, matching analyst predictions. Revenue in the period was $1.53 billion, 13% lower than a year earlier but topping analysts’ average projection of $1.52 billion.

Gross margin, or the percentage of sales remaining after deducting the cost of production, widened to 41% in the second quarter, in line with the average analyst estimate. A year earlier, that measure of profitability came in at 37%.

AMD said it now expects full-year revenue to gain at a percentage in the mid-single digits, compared with an earlier prediction for annual sales to rise in the high single digits. Analysts had projected an annual sales increase of about 6%. At the same time, the company slightly raised its forecast for gross margin for all of 2019, to 42%.

The company’s shares fell about 5% in extended trading following the report, after earlier climbing 1.2% to $33.87 at the close in New York. The stock has been on a tear this year, gaining 83% so far.

Last week, Intel gave an upbeat forecast and said second-quarter demand had exceeded its earlier outlook. Buyers of computer components stocked up ahead of the potential for tariffs to be levied on trade between the U.S. and China, Intel said. Still, executives warned that the temporary boost can’t be expected to continue. Demand for servers from corporations and government agencies was weak, particularly in China.

Under Su, AMD has been staging a comeback in the lucrative business of chips for servers, machines that are the backbone of corporate networks and the internet. The company owned about a quarter of that market a decade ago, until delays to new chips and lagging performance allowed Intel to banish AMD to less than 1% market share. AMD’s new Epyc range of server processors is aimed at clawing back those lost orders.

AMD is also trying to exploit Intel’s delays in shifting production to more advanced technology. AMD now outsources manufacturing of its best chips to Taiwan Semiconductor Manufacturing Co., which analysts calculate is now more than a year ahead of Intel in implementing new processes.

Su’s efforts have had an impact. At the end of last year, AMD had 3.2% of the market for server chips, up from 0.8% 12 months earlier. AMD has made faster progress in laptops and desktop computers, where it has more than 10% share of shipments, according to Mercury Research.

(Updates with CEO comment in sixth paragraph.)

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Dan Reichl

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