Please note, this was originally published for Premium Members on May 2nd when the stock was down (9%) and prior to the Microsoft announcement. This helps to illustrate our conviction in the face of a fickle market reaction, as two days later, AMD’s AI strategy became clearer with the Microsoft announcement and the stock was up quite a bit. Also, due to a tight earnings schedule for our portfolio and pipeline, you can expect to receive the May stock tip before the end of this week or Monday at the latest.Microsoft announcement. This helps to illustrate our conviction in the face of a fickle market reaction, as two days later, AMD’s AI strategy became clearer with the Microsoft announcement and the stock was up quite a bit. Also, due to a tight earnings schedule for our portfolio and pipeline, you can expect to receive the May stock tip before the end of this week or Monday at the latest.
Back in the Fall, when Nvidia was badly beaten up, I wrote two editorials about Nvidia’s gaming bottom and how the company was “ready to rumble” with H100 GPUs. I could repeat these editorials and simply replace the headlines by saying AMD is bottoming on PCs and that AMD is “ready to rumble” with Genoa, Bergamo — and most especially, the highly anticipated MI300 GPUs. Considering Nvidia was down roughly 60% when I wrote those articles, AMD being up roughly 50% YTD doesn’t feel so contrarian – but it is a bit contrarian because the company is on the precipice of proving it’s up for the task of AI acceleration.
The product road map for AMD is particularly exciting right now and also a bit complex because AMD’s AI ambitions are also found outside the data center. We’ve focused on AMD taking market share from Intel for three years with EPYC processors, but now we need to switch our focus and prepare for the next three years. You can expect a fresh deep dive on AMD come this June that drills into this particular company’s AI opportunity. It’ll be the end of a chapter on our site to place our focus beyond Intel for AMD’s growth, but now is the right time so we can prepare for AMD’s moment in AI.
Q1 Highlights/Lowlights:
Data center growth declined 23% sequentially and was flat year-over-year. Per the conversations on the call, data center growth is expected to be up year-over-year and this implies a 50% growth rate in H2 (see below). The sequential decline this quarter is a reflection of enterprise sales and not from EPYC CPUs, which remained strong.
The Client segment was down (65%) due to PCs. The strategy has been to undership for a quicker rebound, which was Nvidia’s strategy for gaming. This makes it more painful in the short term but sets up a better recovery in the long term. According to management, this is the bottom for PCs with a meaningful rebound in H2.
For comparison, we covered this strategy to undership gaming units for Nvidia in the Q2 August earnings report when we wrote:
The CFO Collette Kress stated: “Across those two quarters, the Q2 of ‘23, the Q3 of ‘23, we have likely undershipped gaming to our end demand significantly. We expect that sell-through or essentially our end demand for those combined two quarters of Q2 and Q3 to be approximately $5 billion […].”We expect that sell-through or essentially our end demand for those combined two quarters of Q2 and Q3 to be approximately $5 billion […].”
She is referring to about $1 billion being under shipped (or reduced sell-in) if we assume flat growth for gaming next quarter as the company attempts to rebalance inventory. It would be even more of an under shipment if gaming does decline sequentially.
Gaming was down (6%) but is expected to benefit from the Radeon 7000 Series release. However, gaming is expected to modestly decline again next quarter.
Embedded remains strong with 60% growth and this is part of what our deep dive will discuss as AMD’s product road map on AI is broader than the data center. Notably, coming off strong growth for 4-5 quarters, next quarter Embedded is expected to report a modest decline.
Margins are weaker than usual and this is due to the Client segment/PCs. When product mix returns to normal, margins will stabilize again. Notably, the data center segment had a lower margin of 11% compared to 33% last year. This was due to the Pensando acquisition and AI investments in GPUs.
Reference our Pre-Earnings Writeup here for more information.
Financials:
AMD beat on revenue and EPS in the current March quarter yet revenue missed consensus for Q2 ending in June.
Revenue for Q1 was $5.4 billion compared to $5.3 billion expected. Guidance of $5.3B missed consensus of $5.52B.
EPS beat at $0.60 versus $0.56 consensus.
Margins are lower than usual but came in as expected. Per the note above and the earnings call discussion below, margins will stabilize when PCs return to growth. This is expected to be the bottom for the PC slump.
GAAP Gross Margin is soft at 44% compared to 48% in the year ago quarter. Adjusted gross margin has been steady at 50% and is expected to be 50% again next quarter.
It’s better to focus on adjusted operating margin for now as GAAP operating margin includes expenses from Xilinx and Pensando acquisitions. Adjusted operating margin of 21% was weaker than 31% in the year ago quarter.
Cash flow margins are down with FCF margin of 6% compared to 16% a year ago. Cash and debt has not changed at $5.9 billion and $2.5 billion, respectively.
The company returned $241 million to shareholders through share repurchases. There is $6.3 billion in remaining authorization for share repurchases.
Earnings Call:
Data Center Growth in H2:
There were two important discussions around what data center growth will be in the second half of the year. The first analyst believed the growth would be in the 30% range but it was later confirmed it’ll be in the 50% year-over-year range. AMD investors need the data center to participate in a big way in the second half, therefore both discussions are important, and are highlighted below.
Vivek Arya:
For my first one, Lisa, when I look at your full year Data Center outlook for some growth, that implicitly suggest Data Center, right, could be up 30% in the second half versus the first half, right? And I'm curious, what is your confidence and visibility and some of the assumptions that go into that view?
Is it — do you think there is a much bigger ramp in the new products? Is it enterprise recovery? Is it pricing? So just give us a sense for how we should think about the confidence and visibility of the strong ramp that is implied in your second half Data Center outlook?
Lisa Su
Right. So Vivek, thanks for the question. Maybe let me give you some context on what's going on in the Data Center right now. First of all, we have said that it's a mixed environment in the Data Center. So the first half of the year, there are some of the larger cloud customers that are working through some inventory and optimization as well as a weaker enterprise.
As we go into the second half of the year, we see a couple of things. First, our road map is very strong. So the feedback that we're getting working with our customers on, it's ramping well. It is very differentiated in terms of TCO and overall performance. So we think it's very well positioned. Much of the work that we've done in the first half of the year — in the first quarter and here in the second quarter is to ensure that we complete all of that work such that we can ramp across a broader set of workloads as we go into the second half of the year.
And then I would say, from an overall market standpoint, I think enterprise will still be mixed with the notion that we expect some improvement. It depends a little bit on the macro situation. And then as we go into the second half of the year, in addition to Genoa, we're also ramping Bergamo. So that's on track to launch here in the second quarter and will ramp in the second half of the year. And then as we get towards the end of the year, we also have our GPU ramp of MI300. So with that, we start the ramp in the fourth quarter of our supercomputing wins as well as our early cloud AI wins. So those are all the factors. Of course, we'll have to see how the the year play about how we're positioned from an overall product and road map standpoint for Data Center.”
Below, is where the year-over-year growth rate was confirmed:
“Stacy Rasgon
For my first one, Lisa, can you just like clarify this explicitly for me. So you said double-digit Data Center. Was that a full year statement? Or was that a second half year-over-year statement? Or was that a half-over-half statement for Data Center?
Lisa Su
Yes. Let me be clear. That was a year-over-year statement. So double-digit Data Center growth for the full year of 2023 versus 2022.
Stacy Rasgon
Got it. Which just given what you did in Q1 and sort of are implying for Q2 needs something like 50% year-over-year growth in the second half to get there. So you're endorsing those — you're endorsing that now?
Lisa Su
I am…
Jean Hu
Yes, your math is right.”
Comments on the Client Segment Stabilizing in H2:
Arguably, how the Client segment performs is equally important to how data center performs simply because this segment has been a bit awful for a wide range of companies.
Per the opening remarks:
“Now turning to our client segment. Revenue declined 65% year-over-year to $739 million as we shipped significantly below consumption to reduce downstream inventory. As we stated on our last earnings call, we believe the first quarter was the bottom for our client processor business. We expanded our leadership desktop and notebook processor portfolio significantly in the quarter. In desktops, we launched the industry's fastest gaming processors with our Ryzen 7000 X3D series CPUs that combine our Zen 4 core with industry-leading 3D chiplet packaging technology.”
There were questions in the Q&A with the CEO, Lisa Su, saying the following:
“Lisa Su
Yes. So we've been undershipping sort of consumption in the Client business for about 3 quarters now. And certainly, our goal has been to normalize the inventory in the supply chain so that shipments would be closer to consumption. We expect that, that will happen in the second half of the year, and that's what the comment meant that we believe that there will be improvements in the overall inventory positioning.
And then we also believe that the Client market is stabilizing. So Q1 was the bottom for our business as well as for the overall market. From what we see although it will be a gradual set of improvements, we do see that the overall market should be better in the second half of the year. We like our product portfolio a lot. I'm excited about having AI-enabled on our Ryzen 7000 series. And we have leadership notebook platforms with Dragon Range. Our desktop road map is also quite strong with our new launch of the Verizon 7000 X3D products.
And so I think here in the second quarter, we'll still undership consumption a bit. And by the second half of the year, we should be more normalized between shipments and consumption, and we expect some seasonal improvement into the second half.”
Comments on the MI300 Release:
The MI300 will be released in Q4 and is expected to contribute to revenue by early 2024. I will expand on this in the upcoming deep dive. Here is what was said in the opening remarks:
“Customer interest has increased significantly for our next-generation instinct MI300 GPUs for both AI training and inference of large language models. We made excellent progress achieving key MI300 silicon and software readiness milestones in the quarter, and we're on track to launch MI300 later this year to support the El Capitan exascale supercomputer win at Lawrence Livermore National Laboratory and large cloud AI customers.”
There were many questions about the MI300, one of the more important one being from Ross Seymore who hints toward Nvidia being hard to compete against. Lisa Su’s answer points toward potentially undercutting Nvidia on price and also having strong relationships from EPYC CPUs:
Ross Seymore
And pivoting for my follow-up on the AI side and MI300. I just wanted to know what you would describe as your competitive advantages? Everybody knows that's a market that's exploding right now. There's tons of demand. You guys have all the IP to be able to attack it. But there's a very large incumbent in that space as well.
So when you think about what AMD can bring to the market, whether it's hardware, software, heterogeneity of the products you can bring, et cetera, what do you think is the core competitive advantage that can allow you to penetrate that market successfully?
Lisa Su
Yes. There's a couple of aspects, Ross. And — yes, since we haven't yet announced MI300, all of the specifications will — some of those will come over the coming quarters. MI300 is the first solution that has both the CPU and GPU together, and that has been very positive for the supercomputing market.
I think as it relates to generative AI, and we think we have a very strong value proposition from both a hardware and again, it's a performance per dollar conversation, I think there's a lot of demand in the market. And there's also — I think given our deep customer relationships on the EPYC side, there's actually a lot of synergy between the customer set between the EPYC CPUs and the sort of 300 GPU customers.
Conclusion:
This is the kind of earnings report where you’d have to listen to the call to piece it together. Journalists and others who cover dozens of stocks will rush the conclusion (beat this quarter, lower guidance quarter) but there a lot of depth to AMD right now – perhaps more depth than any other stock we own right now since the product road map is loaded for the second half.
I’m still feeling Zen after this earnings report and also feeling like it’s time to dedicate a new deep dive to the company. It’ll be a bit nostalgic to come back to Xilinx again as I called the company “a heavy hitter AI stock” four years ago. The MI300 GPUs are exciting but Xilinx is also a large piece to AMD’s AI opportunity. Keep an eye out for this deep dive in the next couple weeks as we carefully, patiently, and with an exceptional level of due diligence, build out the world’s very best AI portfolio.
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