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Advanced Micro Devices, Inc. (AMD - Analyst Report) recently slashed its revenue and gross margin guidance for the third quarter of 2012. Following the news, company shares fell sharply by 9.06% to $2.91 in extended trading hours.

The chipmaker now expects sales to decrease 10% sequentially versus its previous forecast of a 1% decrease (+/- 3%). The company also lowered its gross margin guidance to 31%, lower than the previous expectation of 44%. However, operating expenses are expected to decline approximately 7% from the prior quarter, owing to tight expense control measures.

Management said that the guidance cut was on account of weaker-than-expected demand across all product lines due to a weak global economy and lingering weakness in the U.S.personal computer market stemming from the growing preference for tablets.

Advanced Micro also stated that lower-than-anticipated average selling prices (ASPs) for the company's Computing Solutions Group products and lower utilization of its back-end manufacturing facilities have negatively impacted gross margins for the upcoming quarter.

Competition has also increased with price cuts in the PC business owing to 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) new product line up, as well as its growing capacity and lead at 22nm.

Until earlier this week, most of AMD’s chips were used in PCs but recently AMDhas entered the tablet market with its new dual core Z-60 microprocessor, known as an APU. The Z-60 will compete with ARM-based microprocessors from Qualcomm (QCOM - Analyst Report) and Broadcom (BRCM - Analyst Report) among others.

Though we remain encouraged by the company’s efforts to protect against market share loss, AMD’s strategy for the smartphone and tablet markets remains unclear as of now. We believe that the company will be able to deal with rivals Intel and NVIDIA Corp. (NVDA - Analyst Report) more effectively when it has built a presence in these fast-growing segments.

Advanced Micro is the second largest producer of microprocessors, GPUs and chipsets in the world. The company reported revenues of $1.41 billion in the second quarter, down 10.9% sequentially and 10.2% year over year.

Earnings of 6 cents a share also missed the Zacks Consensus Estimate by a penny. However, the company’s compelling product line-up, new products (Brazos, Llano and Bulldozer), its growing position in graphics and cost efficiencies should drive better results going forward.

This marks yet another guidance reduction in the semiconductor industry. Recently, chipmaker Intel slashed its sales forecast for the third quarter due to weak demand in the enterprise PC segment and a challenging global economy. Intel’s shares fell 3.61% to $24.19 following the guidance revision. Advanced Micro is expected to report third quarter results on October 18.

Advanced Micro shares currently carry a Zacks #4 Rank, implying a Sell rating in the short term (1–3 months).

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