Routing misses $1 billion as a customer revenue pit

In a sign of a difficult second half of the year that appears to be shaping up for the entire tech industry, this afternoon AMD became the latest tech company to warn investors that this quarter’s revenue will come in significantly under previous guidance. When releasing its preliminary third-quarter financial results statement, AMD reported revenue for the quarter would come in at approximately $5.6 billion, which is more than $1 billion less than AMD’s previous guidance of $6.7 billion. This unexpected drop in revenue left the customer market exceptionally weak, with revenue down 40% compared to Q321, causing AMD’s largest market segment by revenue to become the smallest in a single quarter.

At a high level, AMD’s positioning mirrors the rest of the technology industry, particularly other chip competitors such as Intel and NVIDIA. For a variety of reasons, from declining consumer demand to preparations for a possible recession, PC manufacturers are drastically reducing their stocks of completed systems and parts. OEM inventories have become relatively swollen in the wake of the pandemic, as OEMs have surged to meet the surge in demand for new customer systems for a newly remote workforce. But as the pandemic recedes, so has the demand for new systems.

As a result of gradual inventory drawdowns, OEMs are currently ordering relatively few new customer processors. This, in turn, is affecting chip suppliers hard as orders from their largest customers are seeing a sharp decline.

As a result of AMD, simply put, customer revenue declined for the third quarter. AMD’s customer segment, which covers desktop and CPU/APU sales, is expected to book approximately $1 billion in revenue for the third quarter. This is down 40% year over year, and 53% bigger on a quarterly basis. And while AMD doesn’t issue official guidance for specific segments—which means it’s not possible to say how far customer revenue is from AMD’s expectations—the annual decline is a sharp change for a product segment that in the past quarter has experienced solid growth.

Complicating matters further, AMD has its own stock of inventory to manage. The sharp drop in OEM CPU orders means that AMD is forced to write down the value of its chip inventory to account for lower ASP, which will translate into an additional $160 million in third-quarter earnings. It should be noted here that fees aren’t just for the customer’s business, but rather the “graphics and customer business,” suggesting that while the bulk of AMD’s immediate pain is in the CPUs, they also feel some pressure on the graphics business.

As a result of these fees and a decline in customer sales, AMD’s customer segment is now, by revenue, the smallest of the company’s four core segments, and comes even lower than the combined Xilinx segment. In their place, AMD’s data center and gaming divisions (GPUs & Console SoCs) are now its number one divisions, each pegged at about $1.6 billion each under AMD’s raw numbers.

The net impact on AMD’s business, in turn, is that revenue for the quarter comes in about $1.1 billion less than AMD’s previous guidance. AMD isn’t reporting any net income/profitability numbers with its preliminary results, but that means that along with the immediate drop in revenue, GAAP gross margin drops to ~42% – down from 46% in the previous quarter – while gross margin The non-GAAP is 4% less than AMD’s guidance for the third quarter.

Despite all that, however, AMD’s total revenue for the third quarter is still about 29% higher than last year’s quarter, which is the bright side that AMD is focusing on at the moment. While the customer segment underperformed significantly in the third quarter, the rest of AMD’s data center, gaming and integrated segments “increased significantly year-over-year in line with company expectations,” driving the company’s overall growth. The data center business in particular is up 45% year over year, a huge jump that comes despite the fact that the current generation of AMD processors in Milan is nearing the end of its cycle as AMD prepares to launch its next Genoa processors at a later date. this quarter.

AMD will have a full accounting of third-quarter results on November 1^Street, when the company submits its full earnings report. Besides providing the final revenue numbers and a look at what they mean for profitability, it will also be our first look at what AMD expects to see customer demand in the last quarter of the year. Given the nature of inventory pulls, this soft-client market likely won’t be a quarterly event for AMD, so it will be interesting to see what this means for their operations in the next few quarters.