[ad_1]
Advanced Microphones (AMD) made history in the second quarter. For the first time, a company has simultaneously leveraged production of next-generation consumer CPUs (central processing unit) and GPUs (graphical processing unit) and server CPUs. AMD has upgraded production of its 7 nm (nanometer) Ryzen 3000 CPUs and Radeon 5700 GPUs to prepare for its July 7 launch. It also shipped early volumes of its 7 nm EPYC server CPUs prior to launch on 7 August.
CEO Lisa Su stated that many additional 7nm products, such as higher end Navi GPUs and mobile CPUs, are scheduled for launch in the coming quarters. AMD is trading on these new products to cause growth in the second half. Despite these product launches, Su has lowered AMD's revenue guidance for 2019 to an average single-digit growth rate.
This downward guidance for 2019 came as a surprise, sending AMD down 8% in today's business. Analysts expected that new 7nm products, notably EPYC, will help AMD achieve its 2019 earnings guidance of high-digit growth. Should long-term investors care about the guidance? The answer is no. Let's talk about why.
AMD's third-quarter guidance misses estimates
AMD's business model is sloping to the second half, when a return to school and holiday season sales accelerates demand for computers and game consoles. In the third quarter, AMD expects its revenue to rise 9% YoY (year-over-year) and 17.6% consecutive to $ 1.8 billion, missing analysts' estimates of $ 1.95 billion. It expects 7-nm Ryzen, EPYC, and Radeon sales to drive this revenue growth.
AMD's new products have an additional gross margin of over 50%. The company expects a higher mix of new products to improve its non-GAAP (generally accepted accounting principles) gross margin to 43% in the third quarter from 41% in the prior quarter. It expects its operating margin to expand to 13.8% from 7.3% in the prior quarter.
Why has AMD downplayed its year-round leadership?
Weaker than expected third-quarter guidance prompted AMD to lower its year-to-date earnings guidance from the high single digits to the mid single digits. In dollar terms, it has reduced its revenue guidance by ~ $ 200 million. On AMD's second-quarter earnings, Su explained that its semi-regular revenue dropped more than expected in the first half. At the beginning of the year, the ragtag provider was expecting a 20% YoY drop in semi-regular revenue in 2019. Now, it expects a 35% YoY drop, prompting it to reduce its year-to-date leadership.
The decline in semi-standard revenue will be offset by strong revenue of 7 nm Ryzen, Radeon, and EPYC products. Additionally, AMD's GPUs will be used on Google's Stadia and Apple's new Mac Pro. AMD has also signed a multi-year deal with Samsung (SSNLF) to offer its GPU technology for the latter's mobile phones.
Su stated that AMD will raise $ 100 million in Samsung revenue in 2019. This revenue is spread over nine months beginning in April and is included in its year-round guidance. She added that AMD will incur some development costs for the Samsung chips, but that the overall profit of the chips will be above the corporate average.
What insights do AMD's leadership provide?
The above guidance shows that semi-habitual weakness mitigates the effect of strong growth in other segments. After excluding semi-regular revenue, Su expects AMD's revenue to increase by 20% YoY in 2019. However, this trend will reverse next year as semi-regular sales increase due to next-generation gaming consoles. AMD's chips will enable Sony's PlayStation 5 and the next-generation Microsoft console.
AMD's future growth banks on the success of its new products. However, several factors come into play to make a product successful. Initial reviews of AMD's new products have been positive, but competition is still rising. Its larger rivals Intel and NVIDIA have resorted to lower prices to compete.
The overall demand environment is weak because of the US-China trade war. Huawei's U.S. ban and some Chinese supercomputer companies include several of AMD's customers. Any escalation in the trade war will further affect AMD's revenue. Its new products have to deal with these headaches in order to gain market share and see improved profits. Once these macro windows are clear, AMD's 7-nm products should see strong growth.
Source link
