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AMD Warned that Its Margins Would Suffer in 2Q15

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Weakness in the PC sector caused AMD’s earnings to shrink

In the earlier part of the series, we discussed that AMD’s (AMD) announcement of an 8% reduction of its revenue guidance in fiscal 2Q15 caused a severe fall in its share price. AMD blamed weakening consumer PC demand for its recent reduced earnings guidance. AMD also announced that its gross profit margin in fiscal 2Q15 would be 28% compared to the earlier guidance of 32% as stated in its 1Q15 earnings release.

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Weak demand from PC manufacturers has impacted the demand of AMD’s APU (accelerated processing unit) chips. APU chips combine computing and graphic processing capabilities. Microsoft’s (MSFT) Windows 10 launch and Intel’s (INTC) new Skylake CPU platform are increasingly looked upon to revive demand in the declining PC market. However, it appears not much hope is left there.

PC market decline will impact AMD’s computing and graphics segment

AMD stated that weakness in the PC market had affected its original equipment manufacturer (or OEM) accelerated processing unit (or APU) sales. As a result, its computing and graphics segment’s APU unit volumes will suffer due to weaker-than-expected OEM PC product demand.

Also, a manufacturing transition from its 20-nanometer process to the latest FinFET node is expected to cause a one-time charge of $33 million, further shrinking the company’s profit margins. The expected decline in the margins is due to AMD’s increased revenue shift towards enterprise, embedded, and semi-custom segment sales. Semi-custom and embedded chip sales are low margin businesses. Their increased proportion towards overall revenues will translate to lower margins.

Micron Technology (MU), which also recently announced its fiscal 3Q15 results, blamed DRAM pricing and “weakness in the PC sector” for its poor earnings.

If you’re bullish about Micron Technology, you can invest in the Technology Select Sector SPDR (XLK). XLK invests about 0.77% in Micron.

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