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Advanced Micro Devices, Inc. (AMD - Analyst Report) slashed its revenue guidance for the second quarter of 2012.

The chip maker now expects sales to decrease 11% sequentially versus its previous forecast of a 3% increase (+/- 3%). However, the company reiterated its gross margin guidance of flat to slightly up from the previous quarter.

We believe that management’s previous guidance was based on the strong product cycle (Trinity, Brazos2.0, 28nm GPU) and steady progress on 32nm yields. But demand appears to be weaker than expected due to softness in China, uncertainty in Europe as well as lingering weakness in the U.S. personal computer market.

Competition has also increased, with price cuts in the PC business because of the growing popularity of Apple Inc.’s (AAPL - Analyst Report) iPad and other tablets. Additionally, Advanced Micro faces growing competition from Intel's (INTC - Analyst Report) IvyBridge, as well as its growing capacity and lead at 22nm.

Advanced Micro is the second largest producer of microprocessors, GPUs and chipsets in the world. The company reported revenues of $1.59 billion in the first quarter, down 6.3% sequentially and 1.7% year over year. However, earnings of 17 cents a share were well ahead of the Zacks Consensus Estimate of 9 cents. The company’s compelling product line-up, new products (Brazos, Llano and Bulldozer), growing position in graphics and cost efficiencies should drive improved results going forward.

The company is expected to report second quarter results on July 19. We believe that the company will face increased competition this year when Microsoft Corp. (MSFT - Analyst Report)begins selling a new version of its operating system aimed at tablets and other mobile devices that will work on processors from Intel and NVIDIA Corp. (NVDA - Analyst Report).

However, we believe that most of AMD’s business is in chips for PCs that don’t have a meaningful presence in smartphones and tablets. In order to deal with Intel and NVIDIA, Advanced Micro also needs to enter into these emerging markets.

Advanced Micro shares currently carry a Zacks Rank of #3, implying a Hold recommendation in the short term (1–3 months).

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