Initially, AMD sold off (-5%) based on the missed Q4 revenue guide. After hours, the stock recouped and ended up flat once management clarified the miss is not from the data center segment. Rather, it was confirmed the Q4 data center will grow 50% QoQ, and perhaps most importantly, management guided for $2B in GPU sales in 2024 from AI rather than supercomputing. This was the moment the price action reversed, and is a positive as it translates to broader hyperscaler customers driving the $2B rather than the Department of Energy’s supercomputer El Capitan.
We had stated in our pre-earnings write-up: “[The 50% revenue growth in Q4] is exciting, yet the market will want to see more balanced, commercial demand beyond the government-owned supercomputer.” AMD’s management went out of their way to provide additional color on hyperscalers driving the 2024 revenue, and I’ve included that part of the transcript below.
Roughly speaking, the data center is a $6 billion segment for AMD after 10 years of Lisa Su being the CEO (she became CEO in 2014). This means within one or two quarters of the GPUs shipping; sales will be the equivalent to 30% of today’s data center revenue right out the gate. Lisa Su stated the MI300 will be the fastest product they’ve had reach $1 billion in sales – which is saying a lot because the EPYC CPUs are popular.
Per the opening comments: “Based on the rapid progress we are making with our AI road map execution and purchase commitments from cloud customers, we now expect Data Center GPU revenue to be approximately $400 million in the fourth quarter and exceed $2 billion in 2024 as revenue ramps throughout the year. This growth would make MI300 the fastest product to ramp to $1 billion in sales in AMD history.”
Notably, it’s out of character for this management team to discuss forward revenue beyond one quarter. I find this break in style interesting, and I also take this to mean the $2 billion is a baseline. We will see, but that’s how I interpret a very early guide that would normally come in February.
What is a bit unfortunate is that the gaming segment and embedded is weak, and these two segments overshadow AMD continuing to take market share on the CPU data center, and the company’s highly anticipated answer to Nvidia’s H100s. Per the CFO’s opening remarks: “In the fourth quarter, we expect to benefit from strong Data Center and Client momentum, driven by MI300 AI accelerated ramp and the strength of our high-performance leadership Zen 4 family of products despite lower sales in the Gaming segment and additional softening of demand in the embedded market.”
What is quite fortunate, however, is that some of AMD’s AI story is undercover, which is the PC and mobile market. There’s a bonus waiting for AMD investors as the AI story plays out, and while data center GPUs take up all of the attention, there is another powerful AI trend that is silently building strength in the background. I mentioned this in a previous write-up: “When discussing AMD’s AI opportunity, it is vitally important that we not lose sight of the opportunity AMD will have to expand its AI portfolio to the Client Segment.” This has already begun with the Ryzen AI on-chip accelerator contributing to the rebound in the client segment this quarter.
Revenue and EPS:
Revenue and EPS for Q3 came in a tad higher than expected at 4% growth for revenue of $5.8 billion. The company reported EPS of $0.70 versus $0.68 expected.
The guide for next quarter was problematic as it was a miss with management guiding for $6.1B in revenue versus $6.39B expected. However, the miss is not coming from the data center, and the market is digesting whether AMD is a “buy” given two of its segments are quite weak (gaming and embedded).
Margins:
Overall, the company came in as expected on margins. Gross margin came in at 47% which is a positive. On the call, it was mentioned that as the GPUs ramp, the revenue will be accretive to gross margin.
- Adjusted gross margin of 51% was in line with management guidance for adjusted gross profits of $2.963B
- Operating margin of 4% for operating profit of $224M is an improvement over the past few quarters of single digit negative GAAP operating margin. Per the CFO during those quarters, GAAP OM would improve with the Client segment recovery.
- Adjusted OM came in as expected at 22% for Adj operating profits of $1.27B
- GAAP net income was $299M with a margin of 5%
The CFO said the following about continued margin expansion:
“And in Q3, we saw very significant improvement with our client segment gross margin. I think going forward, the pace of Client segment improvement will moderate, but it will continue to drive incremental gross margin improvement in Client segment […] I think going forward, it's really mix, primarily mix, is driving our gross margin, but we feel pretty good about second half next year when we can expand the Data Center significantly and especially Embedded segment start to recover, we should be able to drive more meaningful gross margin improvement in second half.”
Cash Flow:
Operating cash flow has improved from last quarter although is still quite a bit lower than AMD’s peak in 2022. Operating cash flow of $421M is up from $379M last quarter, but is down from $965M in the year ago quarter. This should continue to improve with the Client segment bottoming.
Free cash flow of $297M is similar – an improvement from last quarter at $254M yet down from $842M in the year ago quarter.
The company has $5.8 billion in cash and short-term investments with $2.467B in debt. The company repurchased $511 million in shares.
Revenue Segments:
Data Center:
Data center came in as expected for Q3 at $1.6 billion in revenue, driven by the 4th Gen EPYC CPUs which offset a decline in adaptive SoC products. Per the opening remarks: “EPYC CPU revenue grew by a strong double-digit percentage sequentially” and also “we gained server CPU revenue share in the quarter as fourth-gen EPYC CPU revenue grew more than 50% sequentially, crossing over to represent a majority of our server processor revenue and unit shipments.”
Management has confirmed Q4 will be 50% sequential growth, or $2.4 billion in revenue. Of this, $400 million is from GPUs.
Client Segment:
The Client segment looks to have bottomed in a big way. Revenue of $1.5B was up 42% year-over-year and was up 46% QoQ. A full recovery would be in the $2.5B range. AMD released the Ryzen 7000 Series, which has helped CPU sales. Management also indicated that their partnership with Microsoft is a catalyst on the horizon as the Ryzen 7000 Series will power the biggest advancement in Windows in over 20 years.
Per management’s opening remarks: “Looking forward, we are executing on a multiyear Ryzen AI road map to deliver leadership compute capabilities built on top of Microsoft's Windows software ecosystem to enable the new generation of AI PCs that will fundamentally redefine the computing experience over the coming years.”
The Client Segment is expected to be strong next quarter, as well.
Gaming:
Gaming revenue of $1.5B was down (-8%) YoY due to a decline in semi-custom revenue but was offset by AMD Radeon GPUs. This segment is expected to decline next quarter due to a steep console cycle.
Embedded:
This segment is weighing on AMD as it’s lapping very high comps. As stated in our Pre-ER writeup, embedded is lapping a quarter with 1868% growth. Per the opening remarks: “Looking ahead, based on our current visibility, we expect Embedded segment revenue to decline sequentially as customers continue working through elevated inventory levels through the first half of 2024.”
The weakness in the gaming and embedded segments is expected to last (and perhaps worsen) through at least Q1. Per the CEO:
“And then from an Embedded and Gaming standpoint, we would say Embedded, think about it down similar levels sort of in the teens compared to sort of Q3 was down in the teens and Q4 will be down in the teens. And then Gaming, from a console standpoint, we do expect that to be down a bit more than that. And then as we go into Q1, again without being — there are lots of things that need to happen. We would expect that both gaming and embedded would be down into Q1 as well and sort of the other comments would be more around seasonality.”
Earnings Call:
It was key that management provide color on this call regarding the MI300 demand. The first question was centered the hyperscalers and how the MI300 is being used:
Toshiya Hari:
[…] My first one is on the Data Center GPU business. You talked about '24 revenue potentially exceeding $2 billion. I was hoping you could provide a little bit more color. What percentage of this is AI versus supercomputing or other applications?
Lisa Su:
Your question as to how the revenue evolves, so the way to think about it is, in the fourth quarter, we said revenue would be approximately $400 million, and that's mostly HPC with some — the start of our AI ramp. And then as we go into the first quarter, we actually expect revenue to be approximately similar in that $400 million range. And that will be mostly AI so with a very small piece being HPC. And as we go through 2024, we would expect revenue to continue to ramp quarterly, and again, it will be mostly AI.
The second question is when the stock price recovered after hours because this is when management made it clear the Q4 miss was not data center related. AMD had previously guided for 50% sequential data center growth (we covered this in great detail here) and this was reiterated:
Aaron Rakers:
[…] And how has that $400 million evolved underneath that? Has that — was it $300 million now going to $400 million? Just how has that changed over the course of the last quarter just to level set that Data Center expectation?
Jean Hu:
Yeah. So, I think for the second half, we said we expect Data Center business to grow approximately 50% versus first half. But right now, based on what we are seeing, we continue to see in that similar range of that 50%. So, we are very happy and pleased about the strong momentum of our Data Center business. On the GPU side, Lisa mentioned about $400 million, around $400 million […]”
The CEO let a comment slip that it would be “greater than $2 billion” for next year, and given how careful this management team is, I do think it’s important to note here:
Lisa Su:
Sure, Aaron. So, we've been planning the supply chain for the last year and we're always planning for success. So, certainly, for the current forecast of greater than $2 billion, we have adequate supply. But we have also planned for a supply chain forecast that could be significantly higher than that, and we would continue to work with customers to build that out.
For our purposes, as far as where this can go, the management team goes back to quoting 50% CAGR in this segment over the next few years: “So, I think we are big believers in the strength of the market. We previously said we believe that the compound annual growth rate could be 50% over the next three or four years.”
The March quarter is expected to be lumpy due to seasonality with the Client segment, Gaming, Embedded and then moving from El Capitan’s $400M in GPU revenue to $400M in Q1 from AI-driven GPU revenue (hyperscalers).
In regards to AMD’s AI-driven Client segment, here is a comment that helps solidify some of what our earlier analysis this year has discussed. From the CEO today: “What I'm most excited about in PCs is actually the AI PC. I think the AI PC opportunity is an opportunity to redefine what PCs are in terms of productivity tool and really sort of operating on sort of user data. And so, I think we're at the beginning of a wave there. We're investing heavily in Ryzen AI and the opportunity to really broaden sort of the AI capabilities of PCs going forward.”
Conclusion:
Gaming and Embedded will overshadow 4th Gen EPYC and also GPU sales in the near-term. However, we will be looking exclusively at the acceleration in the data center (EPYC and Instinct) and client segment (Ryzen AI) as the thesis. The market wanted to sell this report, yet AMD’s management team stood firm on their data center guide. For our purposes, some important hurdles were cleared – Q4 will come in as expected on the MI300s, Q1 will be the start of hyperscaler GPU sales, the margins will get better over time, and the Client segment is rebounding while also having its own AI story. Most importantly, we wanted to see AMD gain traction with hyperscalers, and that was confirmed this quarter for Q1.
Technically speaking, this report was stronger than Nvidia’s was this time last year despite the GPUs shipping at the same time seasonally – NVDA had 1% QoQ growth for data center revenue in the October quarter and then declined (-6%) QoQ in the Q4 January quarter. To jog your memory, it was the guide provided in May (for the July quarter) when Nvidia had its blowout quarter.
I don’t think AMD will take the exact path as Nvidia’s near-monopoly, rather, as was stated in the pre-earnings writeup, our goal is to see how this unfolds.
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