Advanced Micro Devices Inc. (AMD:US), the second-biggest maker of personal-computer processors, fell the most in nine months after forecasting a drop in third-quarter gross margin, even as it predicted higher sales.
The shares (AMD:US) tumbled 13 percent to $4.03 at the close in New York, the steepest decline since Oct. 19. The stock had gained 93 percent this year through yesterday, while the Standard & Poor’s 500 Index added 18 percent.
Gross margin, the percentage of sales left after deducting the cost of production, will drop to about 36 percent this quarter from 40 percent in the second quarter, AMD said yesterday. The narrowing margin indicates that AMD’s new custom-chip business isn’t as lucrative as expected and that a planned further expansion won’t deliver high returns, according to Chris Caso, an analyst at Susquehanna Financial Group in New York.
“Typically when you run a custom solution your margins are higher,” said Caso, who has the equivalent of hold rating on AMD shares. “What are you going to get from other folks? It seems like they sold themselves short.”
Chief Executive Officer Rory Read is looking to get more than 20 percent of AMD’s revenue from new sources, including from chips for game-console processors for Sony Corp. (6758) and Microsoft Corp. (MSFT:US) as the PC market shrinks.
Revenue in the current period will rise 22 percent, plus or minus 3 percent, from the second quarter’s $1.16 billion, Sunnyvale, California-based AMD said yesterday in a statement. That indicates a range of $1.38 billion to $1.45 billion. Analysts on average had estimated sales of $1.23 billion, according to data compiled by Bloomberg.
For the second quarter, AMD’s net loss was $74 million, or 10 cents a share, compared with a profit of $37 million, or 5 cents, a year earlier. Analysts on average had estimated a loss of $102.9 million, according to data compiled by Bloomberg. Sales fell 18 percent to $1.16 billion, while analysts had estimated $1.1 billion.
Microsoft will use an AMD processor in its next Xbox game machine, the software maker said in May. That followed an announcement by Sony that the PlayStation 4 will also use AMD parts.
Gross margin is a less important indicator for console chips because the company has already paid for the research and development and won’t have to spend on marketing, said Chief Financial Officer Devinder Kumar on the call.
AMD is on track to report net income in the third quarter, Read said, speaking on the same call. That hasn’t happened since mid-2012 (AMD:US). Most of the improvement in revenue will come from console chip sales.
While the PC market will grow “slightly” in the second half of 2013 from the first half, it will decline on an annual basis this year, Read said.
Second-quarter personal-computer shipments dropped for a fifth-straight period, the longest losing streak on record, according to market researcher Gartner Inc. Global unit shipments fell 10.9 percent to 76 million, and sales slid from a year earlier in all regions, including a 1.4 percent drop in the U.S., Gartner said.
AMD has fired workers and sold assets, seeking to generate enough cash to overhaul its product line in an attempt to break into new markets.
“It was a great report but a lot of the good news is already priced in,” said Betsy Van Hees, a San Francisco-based analyst for Wedbush Securities. She has the equivalent of a hold rating on the stock. Investors will need more evidence of success in other new markets before the stock can move higher, she said.
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