We heard last month from semiconductor company Advanced Micro Devices (AMD 13.40, +0.54) that it expected to fall short of its previous first quarter revenue forecast of $1.6 billion to $1.7 billion. AMD didn't provide any specific guidance at the time, but today, it has offered some granularity saying it expects revenues to be approximately $1.225 billion.
The updated guidance is nearly 25% below the mid-point of its original guidance range and marks a 31% decline form the fourth quarter. In turn, it falls well below the current Reuters Estimates consensus estimate of $1.54 billion.
.....
This isn't good news, yet shares of AMD are trading higher in response to the additional announcement from the company that it will be restructuring to increase operational efficiencies and to lower its operating cost structure. As part of this plan, AMD will reduce 2007 capital expenditures by roughly $500 million, significantly reduce discretionary expenses, and limit hiring to critical positions.
AMD's market capitalization is 7.4 billion. This places it in the top 25 of semi-conductor based companies according to Google Finance. In other words, AMD is a pretty important company.
Notice the train of events. Earnings are decreasing, so the company is cutting back on capital spending. According to the latest BEA GDP numbers, nonresidential investment decreased 3.1% in the 4th quarter of 2006. Investment in equipment and software decreased 4.8%. Also remember durable goods orders have decreased 4 of the last 5 months.
AMDs announcement confirms businesses are decreasing their investment spending because of the slowing earnings picture. That may in turn further hinder GDP growth going forward.
