From manufacturers of chips, graphics cards and microprocessors, investors are expecting only tough results, as the challenges facing the industry have piled up in recent months.
To avoid a big disappointment to investors, Advanced Micro Devices (AMD) in early October got out front by publishing preliminary quarterly results. These showed that the group was anticipating much weaker growth than previously.
Investors were forewarned -- and three days later, the research firm Gartner released data on PC shipments in Q3. The report confirmed that the PC market was in steep decline.
Basically, businesses and consumers placed fewer orders for hardware, which hurts manufacturers like Dell, Lenovo, HP and others. In turn, PC makers reduced their orders for the semiconductors that power their hardware.
Worldwide PC shipments totaled 68 million units in Q3 2022, a 19.5% drop from the year-earlier period, Gartner said on Oct. 10. That's the steepest market decline since Gartner began tracking the PC market in the mid-1990s, the researcher said.
Bloated Inventory and Slowing Economy
"This quarter’s results could mark a historic slowdown for the PC market,” said Mikako Kitagawa, director analyst at Gartner. "While supply-chain disruptions have finally eased, high inventory has now become a major issue given weak PC demand in both the consumer and business markets."
Given this context and continued fears about growth, investors therefore expected poor quarterly results and gloomy forecasts for the rest of the year from AMD, which updated its performance on Nov. 1.
AMD's third-quarter revenue rose 29% from a year earlier, to $5.6 billion, according to a news release. Net income slumped 93% to $66 million, mainly due to charges related to the February acquisition of Xilinx, a chipmaker known for field-programmable gate arrays, for $49 billion.
For the fourth quarter, AMD expects revenue of between $5.2 billion and $5.8 billion, which signals a 14% year-over-year increase but is almost flat quarter over quarter.
Annual revenues are expected to range $23.2 billion to $23.8 billion. The gross margin should be 51%, narrowed from the 54% the company indicated in August.
These forecasts are below analysts' revenue expectations of $5.95 billion for Q4 and $23.88 billion for the year.
Surprise From the CEO
In general, AMD's forecasts are not a disaster. But what surprised most were CEO Lisa Su's comments. Su said the Data Center segment was weathering the economic downturn very well.
Demand remains healthy from cloud vendors -- Microsoft Azure, Amazon Web Services, Tencent, Baidu -- which manage company-IT infrastructures by providing them with storage and processing services for servers and applications.
AMD also said demand for its current generation of central processing units for servers remains good. The company plans to launch a fourth generation, known as Genoa, on Nov. 10.
"We will publicly launch Genoa next week and are ramping production to support initial cloud deployments and the introduction of fourth-generation EPYC processor platforms by HP Enterprise, Dell, Lenovo, Super Micro, and others," Su told analysts during the third-quarter-earnings call.
Clear PC Inventories and Cut Costs
Optimism seems to be returning somewhat.
"North America cloud is probably the most resilient out of the segments within the data center market, and this is where AMD is the strongest," Su said.
"We've had very good progress at the North America cloud vendors. And we continue to believe that, although there may be some near-term [-- let's call it optimization of, individual footprints --] and efficiencies at individual cloud vendors over the medium term.
She added: "As we go into 2023, we expect growth in that market, particularly customers moving more workloads to AMD, just given the strength of our product portfolio and overall -- Genoa coming forward. As we look through the other segments, I think China is -- has been very weak in 2022, and we're not forecasting a significant recovery in 2023."
The CEO also tried to reassure about PCs by indicating that AMD is now working to clear inventories.
"Clearly, the PC business has been very volatile and underperformed for us in the third quarter," Su said. "Our guidance is that PCs will be down again in the fourth quarter. We believe that that will be a significant step in clearing inventory between the third quarter and the fourth quarter. And of course, we'll monitor the macro conditions, but we'll certainly exit the year in a better place."
AMD further indicated that demand in the gaming segment was healthy. This is a good sign as the holiday season approaches. The chipmaker says demand for its graphics cards, or graphics processing units, which power the latest gaming consoles from Microsoft and Sony, remains strong.
Finally, the group will also reduce its costs to cope with the economic slowdown and a possible recession.
"We continue to focus on executing our long-term strategy while navigating current market conditions," Chief Financial Officer Devinder Kumar told analysts.
"We will prioritize the key investments for our product road maps and long-term growth while taking several near-term cost management actions, including prudently controlling operating expenses and head-count growth while actively managing inventory in line with our revenue expectations."
