AMD confirmed a fundamental bottom with a beat this quarter and a beat for next quarter. Analysts were expecting revenue growth of 6.8% and AMD reported growth of 8.9%. Adjusted EPS marginally beat at $0.69 versus $0.68 expected. The results were aided by data center revenue reaching a record as growth accelerated to the triple digit range, at 115% YoY for $2.84 billion, marking a 35-percentage point acceleration from 80% in Q1. CEO Lisa Su said AMD’s “AI business continued accelerating and we are well positioned to deliver strong revenue growth in the second half of the year led by demand for Instinct, EPYC and Ryzen processors.”
We had stated on our most recent webinar and in the write-up AMD’s Future Looks Bright that we want to give AMD the space to fill the very big shoes an Nvidia contender has to fill. Data center growth in Q2 of 115% is a clue that AMD is a serious contender on AI accelerators. The only other companies that have posted triple digit growth from AI in a standalone segment are Nvidia and Super Micro. To be fair, some of the revenue is from EPYC CPU processors, but the majority of the growth is coming from Instinct GPUs. We can sparse out the growth as Instinct drove $1B in revenue this past quarter, with EPYC contributing $1.84 billion. Without Instinct, data center revenue would have grown 41.5% versus 115% with Instinct.
With AMD down (-6%) YTD while Nvidia is up 109%, the market continues to communicate “not good enough.” Yet, what makes these numbers intriguing is we are at the bottom for this company (not a top – this is key), with fundamentals improving and accelerating from here.
Revenue and EPS:
AMD’s revenue accelerated to 8.9% YoY in Q2, up from 2.2% last quarter due to data center revenue accelerating significantly this quarter.
- Q2 revenue was $5.84 billion, up 8.9% YoY and 6.6% QoQ from $5.47 billion last quarter.
- Adjusted EPS of $0.69 beat estimates by $0.01, representing YoY growth of 19% and QoQ growth of 11%.
- GAAP EPS of $0.16 missed estimates by $0.02 but represents 700% YoY growth and 129% QoQ growth as margins bottomed and turned up this quarter (this high growth is due to
- For Q3, AMD guided revenue to be $6.7 billion, +/- $300 million, for YoY growth of approximately 15.5% at midpoint. Analysts were expecting Q3 revenue to be $6.61 billion, for YoY growth of approximately 14.1%, so Q2 and Q3 beat/raised by 1 to 2 percentage points.
Key Segments:
AMD reported record data center revenue in Q2, with growth accelerating to the triple digits on strong CPU and GPU demand and the “steep ramp” of Instinct GPUs. The company stated it’s AI accelerator the MI300 contributed $1 billion in revenue.
Data center revenue was $2.83 billion, up 115% YoY and 21% QoQ. For reference, in Q1, AMD reported data center revenue growth of 80% YoY and 2.4% QoQ, so this is a rather sharp acceleration in just one quarter. Per management this was “driven by the steep ramp of Instinct MI300 GPU shipments and a strong double-digit percentage increase in EPYC CPU sales.” There is expected to be strong growth next quarter in the DC segment.
Client revenue was $1.49 billion, up 49% YoY and 9% QoQ, driven by sales of Ryzen processors. This was a solid print, as Client rebounded from a (6%) QoQ decline in Q1. This was “driven by strong demand for our prior generation Ryzen processors and initial shipments of our next-generation Zen 5 processors.” There is expected to be strong growth next quarter in the Client segment.
Gaming revenue was $648 million, down (59%) YoY and (30%) QoQ as the segment continues to weigh on growth. Management stated the gaming market remains soft and sales will decline further in the second half of the year, and will decline double-digit percentage next quarter.
Embedded revenue was $861 million, down (41%) YoY but up 2% QoQ as inventory levels normalize. Management guided last quarter for Embedded revenue growth to be flat, so the 2% sequential increase is slightly better than expected. Management expects Embedded to gradually recover in H2, and this segment will be up next quarter.
Margins:
AMD’s margins improved throughout, with data center driving a sequential improvement in GAAP operating margin.
- GAAP gross margin was 49% in Q2, up from 46% last year and 47% in Q1. Adjusted gross margin was 53%, in line with management’s guidance and up from 50% last year and 52% in Q1. Management said higher data center revenue was a primary driver of the gross margin expansion in the quarter.
- For Q3, AMD guided for adjusted gross margin of 53.5%, a slight 50 bp QoQ expansion; management has previously pointed to increasing data center mix as a gross margin tailwind.
- GAAP operating margin was 5% in Q2, up from 0% last year and 1% in Q1.
- This was driven largely by data center, which saw operating income rise more than 37% QoQ and 405% YoY to $743 million, for a 26.2% segment operating margin (up from 23.1% in Q1).
- Adjusted operating margin was 22%, up from 20% last year and 21% in Q1.
- Based on management’s expenses guide, adjusted operating margin is expected to come in just above 25% in Q3, a 300 bp QoQ expansion.
- GAAP net margin was 5%, up from 1% last year and 2% in Q1. Adjusted net margin was 19%, up from 18% last year but flat with Q1.
Cash and Debt:
- Operating cash flow was $597 million in Q2, a 10% margin. OCF rose more than 14% QoQ and 56% YoY.
- Free cash flow was $439 million, an 8% margin. FCF rose nearly 16% QoQ and 73% YoY as a result of higher operating cash flow generation.
- Inventory was $4.99 billion, an increase of 7.3% QoQ.
- Cash and equivalents totaled $5.43 billion, while debt totaled $1.72 billion. The company retired $750 million in debt with existing cash this quarter. The company will close Silo AI next quarter for $665 million in cash.
The company returned $352 million to shareholders, repurchased 2.3 million shares with $5.2 billion in share authorization remaining.
Earnings Call:
$4.5B in AI Revenue for FY2024, up from $4B
AMD’s AI accelerator, the MI300, is the fastest ramping product in AMD’s history. I said previously that this is saying a lot as it’s ramping faster than EPYC CPUs, which took a shocking amount of market share from Intel in the data center.
Per a previous write-up:
“My take is that the glass is 30% full and will likely exit the year half-full. Per the call, one analyst’s math is for $900M in GPUs next quarter. If we take $2.4 billion for the DC segment this quarter and assume strong double-digit growth, that puts us at a $3B data center segment next quarter (roughly). If this analyst’s math is correct, this means within two quarters of shipping; GPUs will be 30% of DC segment in Q2. I can’t think of another company that has ramped this fast outside of Nvidia.”If this analyst’s math is correct, this means within two quarters of shipping; GPUs will be 30% of DC segment in Q2. I can’t think of another company that has ramped this fast outside of Nvidia.”
This quarter, AMD seconded this by shrugging off rumors there may be issues with qualifying the MI300: “I think there's a lot of noise in the system. I wouldn't really pay attention to all that noise in the system. I mean this has been an incredible ramp. And I'm actually really proud of what the team has done in terms of just definitely fastest product ramp that we've ever done to $1 billion here in the — over $1 billion in the second quarter and then ramping each quarter in Q3 and Q4.”
EPYC took about 10 years to reach $1.7B in quarterly revenue. AMD will likely reach this quarterly revenue by 2025, or in less than two years with Instinct 300 Series GPUs.
The next MI300 Series release will be the MI325 due out this year with double the memory, and the highly anticipated MI350 will be out early next year to compete with Nvidia’s Blackwell. From there, AMD will continue with a one-year product road map. Look for rack scale systems in the MI350 release next year, which is critical for AMD to keep pace with Nvidia on Blackwell at the hyperscaler and Tier 2 OEM level.
AI Software
The Silo AI acquisition is big news as it will boost AMD’s ability to compete with Nvidia at the enterprise level. We covered the acquisition on our pre-earnings writeup here. Per management: “It's a great acquisition for us. 300 scientists and engineers. These are engineers that have experience with AMD hardware and are very, very good at helping customers get up and running on AMD hardware. And so we view this as the opportunity to expand the customer base with talent like Silo AI, like Nod.ai, which brought a lot of compiler talent. And then we continue to hire quite a bit organically.”
At the Big Tech level, AMD announced that Microsoft has announced the general availability of the MI300X instances. The Azure virtual machines combine AMD’s RocM software platform for “leadership-inferencing price performance.” Hugging Face has adopted the Azure instances “to deploy hundreds of thousands of models on MI300X GPUs with one click.”
On the developer side, Meta’s Llama 3.1 model is supported by MI300 accelerators, Stable Fusion announced they are working with MI300s for their image generation LLM, and AMD supports Flash Attention-2, an algorithm used to enhance efficiency for Transformer models.
RocM is AMD’s attempt to remove the CUDA roadblock the company faces in competing with Nvidia. We’ve covered this here in AMD is Ready to Rival on AI Acceleration. The following update was shared in terms of the progress that’s being made: “the exciting part of this is that the ROCm capability has really gotten substantially better because so many customers have been using it. And with that, what we look at is out-of-box performance, how long does it take a customer to get up and running on MI300. And we've seen, depending on the software that companies are using, particularly if you're based on some of the higher-level frameworks like PyTorch, we can be out-of-the-box running very well in a very short amount of time, like, let's call it, very small number of weeks. And that's great because that's expanding the overall portfolio.”
UALink: Standardizing GPU Interconnects
AMD is being tapped by a consortium of AI acceleration companies, such as Broadcom, Intel, Cisco and Big Tech to assist in creating an Ultra Acceleration Link (UALink) open standard for GPU interconnects to reduce dependency on Nvidia’s NVLink. NVLink is a GPU interconnect that scales GPUs into pods with their own data and computational domain. AMD is being tasked to create an open standard that will serve as an alternative to Nvidia’s NVLink based on AMD’s Infinity Fabric.
The takeaway is AMD is not only viewed as a runner-up to Nvidia, but is actively sought after by the industry to stave off its monopoly. If you read between the lines, this is an important nod to AMD’s capabilities. Look for more updates in Q3.
AI PCs and Zen 5 EPYC Processors
A major part to AMD’s AI story is laptops, desktops and edge devices. I can’t emphasize this enough!
The Ryzen AI 300 laptops and the Ryzen 9000 series for desktops are powered by the 5th generation of the Zen architecture. The Ryzen AI 300 laptop has a XDNA 2 neural processing unit (NPU) that is designed for Microsoft Copilot+ AI software. This will deliver 50 TOPS of AI performance. To put this into perspective, the Macbooks with the M4 chip from Apple – considered the most advanced AI laptop on the market – is capable of 38 TOPS of AI performance.
The laptops are already on the market as of now and the desktops will hit the market in August. Management stated investors can expect a strong H2: “As we go into the second half of the year, I think we have better seasonality in general, and we think we can do, let's call it, above-typical seasonality given the strength of our product launches and when we're launching. And then into 2025, you're going to see AI PCs across sort of a larger set of price points, which will also open up more opportunities.”
AMD’s Zen 5 architecture will have 128 cores and 256 thread count and will double the chiplets from eight to 16. The cache is getting a massive upgrade to 512 MB, which was not possible on the Zen 4 architecture at this core and thread count.
In the data center, Turin EPYC processors will have 192 cores and 384 threads. Per the opening remarks: “We publicly previewed Turin for the first time in June, demonstrating our significant performance advantages in multiple compute-intensive workloads. We also passed a major milestone in the second quarter as we started Turin production shipments to lead cloud customers. Production is ramping now ahead of launch, and we expect broad OEM and cloud availability later this year.” Management stated they believe Turin will help them “continue to grow market share” in the second half of the year.
Conclusion:
At the close of the opening remarks, Lisa Su stated the company is “well positioned to grow revenue significantly in the second half of the year” and “our data center business is on a steep growth trajectory.” These are the words of a company at a fundamental bottom.
There is no doubt, this company ticked every box we have on our checklist this evening. We don’t chase price, rather we look for quality companies. This often means we are early to a move in either direction. You can expect this to be a leading position of ours into the foreseeable future as we patiently wait to see how this bottom unfolds, especially come 2025 for AMD.
Damien Robbins, Equity Analyst for the I/O Fund, contributed to this analysis.
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