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Earnings Preview: Advanced Micro

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Advanced Micro Devices, Inc. (AMD) is scheduled to announce its second-quarter results on July 19, 2012. We witness significant downward movements in the analysts’ estimates in the build-up to the release.

Prior-Quarter Synopsis

AMD’s first-quarter non-GAAP earnings were 17 cents a share, ahead of the Zacks Consensus Estimate of 9 cents on better-than-expected gross margins.

Revenue came in at $1.59 billion, down 6.3% sequentially and 1.7% year over year. The Computing Solutions segment which accounted for 76% of AMD’s quarter sales was down sequentially due to seasonality, while the Graphics business segment, which generated the remaining 24% of its sales, was flat sequentially.

Gross margin was up 34 basis points (bps) sequentially and 142 bps year over year to 46.1%, driven by improving 32nm yields and a favorable mix. However, operating margins shrunk 184 bps sequentially to 8.3% due to higher R&D expenses.

Second Quarter Guidance

Recently, AMD reduced its sales guidance, expecting its revenue to be down 11% sequentially versus its previous forecast of a 3% increase (+/- 3%). However, the company reiterated its gross margin guidance of flat to slightly up from the previous quarter.

Agreement of Analysts

Out of the 27 analysts providing estimates for the second quarter, 23 made downward revisions in the last 30 days. Over the same period, 1 out of 3 analysts decreased the estimate for fiscal 2012.

The company stated that the reduced sales guidance was due to softness in China, uncertainty in Europe as well as lingering weakness in the U.S personal computer market.

Also, U.S. technology research firm Gartner Inc. announced that worldwide PC unit shipments declined 0.1% year over year to 87.5 million units in the second quarter. Shipments were also below the prior-quarter level of 89 million units.

Hence, with the Gartner report indicating sluggish PC market and AMD lowering its revenue guidance, the majority of analysts expect weak second quarter results.  They remain concerned about not only the weak end demand but also expect market share losses.

They contend that the company will be limited by stiff competition from Intel Corp. (INTC) due to the ramp up of Ivy Bridge for PC clients and Romley for servers.

On the other hand, a handful of analysts believe that once the macro environment improves AMD will likely benefit from share gains in servers and cloud computing, and increasing content in notebooks and desktops. They expect value-priced Trinity based ultrathins to be a solid driver in the second half of 2012.

Magnitude of Estimate Revisions

In the past 30 days, the Zacks Consensus Estimate fell by 7 cents for the second quarter and 14 cents to 60 cents for fiscal 2012.

Over the 90-day period also, the Zacks Consensus Estimate fell by 5 cents and 6 cents for the second quarter and fiscal 2012, respectively.

Our Recommendation

AMD is the second largest producer of microprocessors, GPUs and chipsets in the world. The company’s robust product portfolio, strength in graphics, and advancements in 32nm manufacturing are quite encouraging.

However, weakening consumer demand, macro issues, and market share losses remain a matter of concern. Despite AMD’s strong product line, Intel new products lined up, which along with its growing capacity and lead at 22nm, should keep it ahead of AMD

Moreover, competition has increased with price cuts in the PC business because of the growing popularity of Apple Inc.’s (AAPL) iPad and other tablets. We believe that the company will face increased competition this year when Microsoft Corp. (MSFT) begins selling a new version of its operating system aimed at tablets and other mobile devices that will work on processors from Intel and NVIDIA Corp. (NVDA).

Hence, AMD shares carry a Zacks Rank of #3, implying a Hold recommendation in the short term (1-3 months).

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