AMD Hit by Weak Consumer PC Sales, Slumping Economy

Ultrathin notebooks and an expanded partnership with ARM could help AMD navigate the difficult waters, according to analysts.

Advanced Micro Devices is being squeezed by a weakening consumer PC market and strong rivals in both traditional x86 processors and the booming mobile device space.

How CEO Rory Read and the executive team that he has put together over the past few months respond will go a long way in determining the future for AMD, currently the world€™s second-largest processor vendor behind Intel.

AMD followed through on a warning it issued earlier this month, announcing July 19 that in the second quarter the company earned $37 million€”a drop from $61 million during the same period last year€”on $1.41 billion in sales, a 10 percent drop. And officials don€™t expect it to get much better in the current quarter€”the forecast is for revenues to do anything from grow 2 percent to fall 4 percent over the second quarter, to between $1.36 billion to $1.44 billion.

AMD is being impacted by the same trends that are dogging larger rival Intel and systems makers like Hewlett-Packard and Dell, in particular a consumer market where buyers are increasingly turning their attention away from PCs and toward tablets and smartphones. Microsoft€™s Oct. 26 release of Windows 8 may bolster PC sales to some extent, but the trend is underway.

€œConsumers are less interested in spending on PCs as there are other technology product and services, such as the latest smartphones and media tablets that they are purchasing. This is more of a trend in the mature market as PCs are highly saturated in these markets,€ Mikako Kitagawa, principal analyst at Gartner, said in a statement earlier this month, reporting that second-quarter PC sales were stagnant.

Read, in a conference call July 19 with analysts and journalists, suggested that the industry will have to accept that PC sales probably will not rebound to previous levels, thanks to both falling consumer interest and the uncertain global economy.

€œIt is clear that global economic activity is slowing, and this is impacting the PC market,€ he said. €œFor the first time since 2001, client PC shipments have declined sequentially for three consecutive quarters and have been below historical averages for the last seven quarters. We expect macro headwinds will continue for the third quarter. We also believe the PC industry may be resetting to a new baseline and that full-year industry growth estimates will be reduced.€

Much of AMD€™s problems are of its own doing, and are within the company€™s ability to fix, Read said. When issues at manufacturing partner Globalfoundries€™ facilities limited supplies of the company€™s 32-nanometer €œLlano€ PC chips, AMD responded by ensuring that OEMs€™ needs were met, at the expense of the channel. This caused problems within the channel, leading to softer-than-expected sales in China and Europe. Fixing the channel issues is a key priority for AMD, he said.

There are a number of issues the company needs to address that go beyond execution, according to analysts. Not only is AMD€”which is tightly tied to the consumer space€”seeing consumer PC sales drop, but it also has to deal with Intel in its traditional businesses and ARM Holdings in the growth area of mobile devices.

€œThe thing they€™re facing is slowing growth in their main markets and strong competitors all around,€ Roger Kay, principal analyst with Endpoint Technologies Associates, told eWEEK.

AMD also is hampered by situations that occurred under the previous management team, including missed deadlines and missed business opportunities, according to Charles King, principal analyst with Pund-IT Research. €œIt€™s not the sort of thing they can turn around in a quarter or two,€ he said.

There are areas where AMD can make inroads, the analysts said. The company has a solid story to tell around performance, energy efficiency and costs, Kay said, though even in those areas any lead they held has narrowed. Intel executives on July 17 said they stole market share from AMD in the low-end PC space, and Nvidia is having growing success with its low-power ARM-based Tegra 3 chip.

However, AMD€™s strength in those areas should play well in systems sold in emerging markets such as Brazil, India and China, and the company could get some traction with €œultrathins€€”extra thin and light notebooks€”which sell for less than comparable Ultrabooks powered by Intel processors.

€œWe are €¦ seeing good response to the recently launched Trinity systems, including the first ultrathins from HP and Samsung that hit the mainstream price points,€ Read said during the conference call. €œWe expect a second wave of ultrathins will launch in the second half of the year aligned around the Windows 8 introduction.€

AMD also is seeing encouraging signs elsewhere, he said, noting that shipments of Trinity accelerated processing units (APUs) in the second quarter more than doubled the number in the first quarter and that there are no supply constraints, and that the new Brazos 2.0 chips will help drive sales of notebooks costing less than $500.

There€™s also the intriguing possibility that AMD expands its partnership with ARM, the analysts said. AMD officials in June announced they were integrating ARM€™s TrustZone security technology into future APUs, fueling speculation that AMD may adopt ARM€™s architecture for some chips. Kay pointed to Nvidia€™s success combining ARM chip designs with its own graphics technologies to create the Tegra line. AMD also has strong graphics, and following Nvidia€™s lead could make sense to them, he said.

It also could help it move out of Intel€™s shadow a bit, King said. It would echo the last time AMD took a significantly different route from Intel€”when in 2002 AMD unveiled Opteron, the first 64-bit, x86-based processor. The move significantly boosted AMD€™s server chip market share and forced Intel to eventually respond with 64-bit features in its Xeon chips.

€œHaving some kind of partnership with ARM would be a good differentiator between Intel and AMD,€ he said.

Given the issues surrounding the weakening consumer PC space, AMD officials will have to start making strides soon, the analysts said.

€œWe€™re seeing how badly companies like HP, with its high consumer exposure, are faring right now,€ King said. €œAMD is right in the middle of it.€