PC pricing, demand take hit in second quarter

The traditional second-quarter bad news hit Advanced Micro Devices this week. The company reported late Thursday that revenue would fall short of its previous expectations, based on lower shipments of desktop and notebook processors for low-end and mainstream systems.

That the second quarter was a disappointment should not be a major surprise. PC and chip vendors have learned to expect little from April to June. Devoid of any major purchasing boost like the holiday season or the rush back to school, the second quarter is almost always the low point of the year. In a normal year, processor shipments fall about 2 percent to 4 percent in the second quarter compared with the first, according to Mercury Research.

But AMD's second-quarter revenue is now expected to be down 9 percent compared with the first quarter, failing to meet earlier expectations that revenue would be flat or slightly down. Analysts say poor demand, tough pricing pressure from chip giant Intel and weakness in desktop pricing all played a role in the disappointing quarter.

"The big question on everyone's mind today will be whether AMD's Q2 revenue miss resulted from market share loss to Intel, a weak environment overall or some combination of both. For our part we think that most of AMD's problems stem from lousy second-quarter demand," Merrill Lynch's Joe Osha wrote in a research report distributed Friday.

AMD is also dealing with severe pricing competition from Intel. Intel has looked to clear its decks of older processors during the second quarter to make way for the Core architecture chips coming this month and in August. The company has also been much more willing than usual to discuss future cuts, which has the effect of pushing demand from the second quarter into the third, Osha wrote.

"There's no question that the environment has gotten a lot more competitive with Intel lowering prices, and Dell has gotten very aggressive with pricing," said Richard Shim, an analyst with IDC.

In the retail PC market, demand hasn't fallen off the face of the earth, but the sales gains retailers are seeing are due in part to market share gains at the expense of direct sellers, said Stephen Baker, an analyst with NPD Techworld. Dell, of course, dominates the direct market, but AMD and Dell have yet to release a PC together, while retail PC companies like Hewlett-Packard, Gateway and Acer have embraced AMD.

The notebook edge
Demand has waned for desktop PCs, along with prices, Baker said. While AMD has become an industry darling for its strong market share gains in the server and desktop markets, Intel has held AMD off in the notebook market to a large extent.

AMD's technical advantage in other parts of the market has not held up in the notebook realm, where Intel has enjoyed a performance edge and courted customers with its popular Centrino marketing strategy. This isn't expected to change until next year when AMD rolls out a new chip designed specifically for notebooks.

Notebook shipments continue to grow much faster than those for desktops, and notebooks also hold their prices longer than desktops, Baker said. For example, at the beginning of the year the average price of a desktop PC with AMD's Athlon 64 processor was $608, according to NPD Techworld research. But by May, that average price had fallen to $526, a sharper decline than seen in PCs with AMD's dual-core Athlon 64 X2 processors or Intel's Pentium D processors.

AMD's problem in the PC market is that it doesn't have the same leverage over the vendors that Intel has, Baker said. "They get pushed into those positions where they want to maintain their share, but they can't maintain the pricing in the way that benefits them the most." AMD would like to use its Sempron processor in more low-end configurations, but vendors prefer to use the more powerful single-core Athlon 64 chip, and AMD winds up slotting that chip into price bands it would have preferred to avoid, he said.

Whether or not the overall market is in the tank, PC vendors will clearly be glad to put the second quarter behind them. Intel will launch two new chips for desktops and notebooks in July and August, respectively, that should help boost demand in the second half of the year, Osha wrote. Vendors will also start to order more chips to prepare for the back-to-school and holiday seasons, helping AMD get back on its feet as well.

AMD's stock was down 51 cents, or 2.14 percent, to $23.32 in Friday afternoon trading on the New York Stock Exchange. Intel's stock was also down a little--15 cents--to trade at $18.70 on the Nasdaq.