AMD issued a warning this evening on its expected performance in Q2, and the company's stock has been hammered as a result. Originally, AMD forecast a non-GAAP gross margin of 32% with revenue down 3% quarter-on-quarter (plus or minus 3%). The company's new guidance is notably worse -- it now expects non-GAAP gross margin of 28%. Revenue is expected to decrease by 8% sequentially, "due to weaker than expected consumer PC demand impacting the company’s Original Equipment Manufacturer (OEM) APU sales." Channel sales and inventory reduction efforts are still expected to be in-line with expectations, which is good, but there's additional costs to be accounted for as well.
According to AMD, it will pay a one-time charge of $33 million related to moving fab designs from 20nm to FinFET architectures. The company notes that it "started several product designs in 20nm that will instead transition to the leading-edge FinFET node." This was actually expected -- we knew AMD had done work to move the Xbox One, at least, to 20nm and there were rumors from well-placed sources that confirmed it began work on a 20nm GPU variant as well, but both of these projects would have begun before it became clear that the 20nm was going to be mobile-only.
AMD's cash flow position from FAD 2015
AMD went on to say that "Cash and cash equivalents at the end of the second quarter are expected to be approximately $830 million, in line with expectations." That $830 million target would put the company above its minimum $600 million target for ongoing operations, but well below the "optimal zone" target that had previously been established as the ideal. AMD has previously stated that it could tap a $500 million line of credit in order to secure additional funding if needs be, and the company has no major debt due before 2019 -- so while this announcement has been treated as a heavy blow to its stock price, it's not the end of the line for the company.
AMD: Hanging on through 2016
AMD is in a tight position. It now seems clear that neither it nor Intel expect Windows 10 to dramatically boost hardware sales. Microsoft's free upgrade policy may have worked against any uptick in hardware sales, or the PC market may simply not be primed for any kind of recovery. AMD and Intel have both taken profit hits from these trends, but AMD has had much less room to maneuver. This is nothing new.
We don't know yet if the weaker-than-expected demand for AMD APUs hit established products first or primarily impacted Carrizo. That question could have significant implications for the next 12 months of AMD's roadmap, as Carrizo is the last expected APU update before the Zen CPU family hits market sometime in 2016 (rumors have pointed to the back half of the year). AMD can expect some uplift from Xbox One and PS4 revenues in Q3 / Q4, but the console business isn't going to single-handedly save the company. The new Fury line of GPUs will be helpful, but AMD didn't deliver the clean sweep from Fury that readers might have hoped for (I swear I have more to say about that GPU).
We know AMD has several other embedded design wins that will begin yielding revenue in 2016, but this business is expected to be additive, not transformative. It could deliver some modest financial improvement (we candidly hope it does), but it's not going to reinvent AMD's core computing business or single-handedly propel the company back to an even footing. AMD has proven that it can build a CPU and GPU on a single die and create a sophisticated heterogeneous computing platform that takes advantage of both components, but right now, the company's long-term future is resting on a single product: Zen. AMD's GPUs have maintained better long-term competitive standing, but the bulk of the company's revenues is driven by APU sales in consoles, computers, and embedded hardware.
We've written a great deal about AMD's attempts to reinvent and reposition itself, and not all of the headwinds the company has faced are of its own making -- but as far as technology is concerned, everything is riding on this next-generation core. If the initial Zen launch is strong and the chip moves over to APUs quickly, then AMD may have a fighting chance -- particularly if it can launch its own next-generation GPU architecture on 14/16nm next year as well.
But between now and then, it's going to be a rocky ride.
