AMD revenue forecast falls short as gaming console chip demand drops

(Reuters) - Advanced Micro Devices Inc AMD.O forecast third-quarter revenue below Wall Street estimates on Tuesday, hit by lower demand for its chips used in gaming consoles and sending its shares down 4% after the closing bell.

FILE PHOTO: Lisa Su, president and CEO of AMD, gives a keynote address during the 2019 CES in Las Vegas, Nevada, U.S., January 9, 2019. REUTERS/Steve Marcus

Gamers are delaying purchases of current models of Microsoft Corp's MSFT.O Xbox One console and Sony Corp's 6758.T PlayStation 4 as both are considered out of date. Next-generation devices are expected to launch next year and will be powered by AMD chips.

“People assumed game consoles would be normal seasonally. We previewed the quarter and said this business would be weaker because it is the end of this seven-year product cycle,” Rosenblatt Securities analyst Hans Mosesmann said.

The company also trimmed its 2019 revenue forecast to grow at a mid-single digit percentage, rather than high-single digits seen earlier as growth in its Ryzen, EPYC and Radeon processors offset lower-than-expected semi-custom revenue.

Sales in AMD’s enterprise, embedded and semi-custom segment fell 12% in the second quarter to $591 million, but higher sales of its EPYC server processor helped the segment beat FactSet estimates of $544.3 million.

AMD expects revenue of about $1.8 billion, plus or minus $50 million for the three months ending September. Analysts on average had expected revenue of $1.95 billion, according to IBES data from Refinitiv. [nGNX6SHpJ4]

The chip industry has been pressured, with research firm Gartner forecasting a 9.6% drop in global semiconductor revenue in 2019, to $429 billion. U.S.-China trade tensions, including tariffs on some products and the restrictions on sales to Huawei, are squeezing chipmakers.

AMD said it saw some uncertainties across its supply chain driven by tariffs, trade concerns and the U.S. entities list.

“In the second quarter, we stopped shipping to customers added to the U.S. entities list.” AMD Chief Executive Officer Lisa Su said on a post-earnings call, adding that any impact from it was limited.

AMD re-entered the server chip market with EPYC chips in 2017, tapping into a booming market as the shift to cloud encourages AMZN.O, Microsoft MSFT.O and Alphabet Inc's GOOGL.O Google to invest billions of dollars to set up state-of-the-art data centers.

Since then, the company has chipped away at Intel’s dominant position in the server chip market.

AMD launched its 7 nanometer-based Ryzen 3000 desktop CPUs and 7nm-based Navi gaming GPU earlier this month. AMD will launch its next-generation EPYC server processors called “Rome” in the third quarter.

In the quarter ended June 29, net income fell 69.8% to $35 million. Excluding items, it earned 8 cents per share, in line with estimates.

Revenue fell 12.8% to $1.53 billion, edging past estimates of $1.52 billion.

Reporting by Arjun Panchadar in Bengaluru; Editing by Bernard Orr and Sriraj Kalluvila