Nvidia’s dominance and AMD’s potential are both massive, which is why the battle between these two companies is far more exciting than the Mag 7 combined. Where else can you find the most powerful trend we’ve seen in decades come head-to-head between two companies? The MI300 will ramp in Q4 with El Capitan, but it’s the additional color management provides in terms of Q4 data center commentary that the market will be looking for. It may come in Q4 or the management team may force investors to wait for additional color until early 2024. Regardless, this is a highly anticipated earnings report, not only for the I/O Fund but I suspect many will be watching this report with interest given the catalyst that AMD is sitting on — and most crucially, must execute on.
Revenue and EPS:
Revenue for this quarter is expected to be $5.7 billion, per both management guidance and analyst consensus. This represents growth of 2.3%. This should be the bottom for AMD with revenue consensus at 14% next quarter and accelerating for the next four quarters through September of 2024. When there’s a catalyst on the horizon, I tend to see analyst estimates as a baseline.
EPS also rebounds from here with $0.60 EPS expected this quarter, yet EPS will reach $1.11 EPS by September 2024.
Margins:
GAAP gross margin was 46% last quarter. The last few quarters, GAAP GM was affected by the Xilinx acquisition. Typical range is GM of 45% in 2022 and 48% in 2021.
AMD’s guidance for Q3 is adjusted gross margin of 51%. This represents 100 basis points improvement from the previous quarter.
The operating margin was 0% last quarter. The CFO has been clear that it will recover when client sales of PCs recover. According to most industry analysts who track PC sales, we have bottomed in Q3 or will bottom in Q4 (see below). The GAAP OM was 5% in 2022 and 25% in 2021.
Adjusted operating margin was 20% last quarter for adjusted operating profit of $1.06 billion.
Net margin was 0% while adjusted net margin was 17.5%.
Cash Flow:
AMD reported operating cash flow of $379 million last quarter. This is low for the company as the last two fiscal years have been $3.6B and $3.5B, respectively.
Free cash flow was $254 million in the most recent quarter, for a margin of 4.70%. This compares to a FCF margin of 13% last year and a FCF margin of 20% in 2021. The company has $6.3 billion on its balance sheet with $2.46 billion in debt.
Key Segments:
Data Center:
The data center segment has been reporting negative growth due to tough comps. Last quarter growth was (-11%) compared to 83% in the year ago quarter.
Investors should expect revenue growth to be flat YoY for Q3 yet is expected to report double digit growth QoQ. For Q4, DC is expected to report 50% sequential growth as there will be sizable revenue from MI300s powering the El Capitan supercomputer that launches in November. We covered this here following the last earnings report. For a deep dive on AMD’s MI300 GPUs and how they compare to Nvidia’s H100 GPUs, reference this analysis here.
According to the earnings call Q&A, the acceleration in the data center between Q3 and Q4 will be about 50% growth. This is exciting, yet the market will want to see more balanced, commercial demand beyond the government-owned supercomputer. I’ve included the transcript that references the 50% growth below as this is what most of the near-term price action will be based on.
In terms of when AMD will show up with broader MI300 GPU sales, it took Nvidia six months from initial shipments in October through the April quarter to see a more obvious impact. That’s a general idea of what to expect. It could be a bit sooner or a bit later.
Per our write-up last quarter, management stated: “In the datacenter market, we see a mixed environment as AI deployments are expanding. However, cloud customers continue optimizing their datacenter compute and enterprise customers remain cautious with new deployments. Against this backdrop, we expect strong growth driven by higher fourth gen EPYC and Ryzen 7000 processor sales and initial shipments of our Instinct MI300 accelerators in the fourth quarter.”
Regarding fourth gen EPYC, this is an important series to help AMD resume strength in the data center. Last quarter 4th Gen EPYCs carried the segment as CPU revenue nearly doubled while 3rd Gen inventory levels were high. In September, the company released 4th Gen workload-specific CPUs for edge computing and telcos. This needs to be monitored closely as we want to see 4th Gen strength overtake 3rd Gen weakness.
Here is the transcript on the discussion around Q4’s 50% revenue impact from El Capitan:
Matt Ramsay:
“Last quarter, you had given us some metrics around potentially being able to grow your datacenter business by 50% in the second-half of the year versus the first-half. And maybe you could give us a little bit of an update on how you're thinking about that milestone and the drivers of growth across CPU and accelerator for the back-half? Thanks.”
Lisa Su:
“And we are still looking at a zip code of, let's call it, 50% plus or minus second-half to first-half. So, it's a big ramp, but when we look at all the components, I think that the customer pull is certainly there. And it's exciting to be in this part of the industry.”
When asked whether the company has the supply to meet the demand, the CFO stated:
“We feel that we have ample supply for an aggressive ramp in the fourth quarter and into 2024. But this is certainly one of the areas that we spent quite a bit of time to ensure that we do have that confidence.”
Per management, El Capitan will contribute “several hundred million” in revenue for Q4. Of the obstacles that AMD must overcome, our analysis made it quite clear it was the software part of the equation that AMD must solve.
Per management: “There is a sort of large, call it, lumpy supercomputer win, so our El Capitan win will be in the fourth quarter primarily, with a little bit in the first quarter” and later it was stated by management: “You can assume that the El Capitan is several hundred million” of the Q4 data center revenue.
Ideally, AMD announces commercial customers soon. I’m sure Meta will be one of the first customers, considering the company has been ordering Bergamo from AMD, was on stage at AMD’s conference recently in June, and PyTorch is optimizing its framework for AMD’s software stack RocM. It’s just a guess at this point, but that’s a lot of collaboration.
ONE MORE COMMENT ON THE 50% QoQ RAMP in Q4:
“Aaron Rakers
[…] I think, last quarter, you had alluded to, for the full-year, the expectation is still growing 10% or double digits, I should say, for the full-year the Datacenter business, just confirming that. And what I'm really trying to ask is, given the guidance of flat year-over-year growth in Datacenter in 3Q, it would seem, if my math is correct, you're implying a 50% or so increase sequentially into 4Q. I'm just trying to frame exactly how you're thinking about the cadence of what 4Q looks like, underpinning that expectation?
Jean Hu
Hi, Aaron. Thanks for the question. I think as Lisa just mentioned earlier, it's a very dynamic market. There are puts and takes. We have a tremendously strong momentum with our product portfolio, but there is continued softness in enterprise market, and also call it, the optimization is still ongoing. So, overall on balance, we think year-over-year it's probably more like a high single-digit. It's really strong ramp, not only in Q3, right, sequentially earnings double-digit — strong double-digit. And the Q4, of course we're going to see continued sequential strong ramp.”
Last year, in FY2022, the data center segment reported $6.043B in revenue. This means at high single-digit, or 9% growth, FY2023 DC segment will report $6.586B. This leaves $3.986B for the next two quarters given $2.6B has already been reported in Q1 and Q2 this year.
The CFO is implying $1.6B for this upcoming quarter per the “flat YoY” comment. This also matches the “double digit” QoQ growth. This leaves $2.386B revenue for Q4. These are the approximate numbers to watch in the upcoming quarter.
Client Segment/PCs:
Although data center is where the focus tends to gravitate, the Client Segment is going to be critical in the upcoming report. Last quarter the Client / PC segment was up 35% QoQ yet was down (-54%) YoY. The March quarter should have marked the bottom at $739M in revenue, with the June quarter showing some improvement at $998M in revenue.
Per management in the last earnings call: client segment will grow in the seasonally stronger second half of the year” including a launch of a dedicated AI engine for the mobile 7040 Ryzen CPUs.
Industry analysts at Gartner are targeting Q4 as the rebound quarter for PCs. The CFO of AMD likely has a good idea as to their unique levels of demand, therefore, we are looking for Q3 to be the rebound given the CFO’s comments. Whether it happens in Q3 or Q4, it’s a good supportive segment to the data center ramp that El Capitan will provide, at minimum.
Gartner’s most recent report on PC sales:
- Worldwide PC shipments totaled 64.3M units in the third quarter of 2023, a 9% decrease from the third quarter of 2022, according to preliminary results by Gartner.
- While the third quarter's results mark the eighth consecutive quarter of decline for the global PC market, Gartner is expecting to see growth again starting in the fourth quarter of this year. "There is evidence that the PC market's decline has finally bottomed out.”
- The good news for PC vendors is that that the worst could be over by the end of 2023,” said Kitagawa. “The business PC market is ready for the next replacement cycle, driven by the Windows 11 upgrades. Consumer PC demand should also begin to recover as PCs purchased during the pandemic are entering the early stages of a refresh cycle.”
- Gartner is projecting 4.9% growth for the worldwide PC market for 2024, with growth expected in both the business and consumer segments.
An analyst from Citi has September as the rebound, per an analyst note: “Christopher Danely notes that notebook shipments were up 7% month-over-month in September, which was well above the firm's expectation of down 2% month-over-month, driven by stronger seasonal demand and pull-in from Q4. As a result, Q3 notebook shipments were up 6% quarter-over-quarter, which is above the firm's prior expectation of up 3% quarter-over-quarter.”
Gaming:
Gaming is expected to decline again this quarter. We will look for comments on when this segment will bottom. The Radeon 7000 series built on RDNA 3 architecture is still ramping, but the company has been facing tough comps. Last quarter, the segment reported (-4%) YoY revenue of $1.6B.
Embedded:
The embedded segment will be weaker than usual over the next two quarters. Per management: “Embedded segment revenue to decline in the back-half of the year as lead times normalize and some customers reduce their inventory levels.” Embedded has been reporting very high and unusual growth due to the Xilinx acquisition with triple digit growth and even four-digit growth (it was up 1,868% in the Dec quarter). Look for embedded to normalize.
A Note on the Software Platform RocM:
In the deep dive on AMD entitled AMD is Ready to Rival on AI Acceleration, the analysis broke down the differences between CUDA and RocM. There is where Nvidia has the largest lead over AMD. As the two competitors face off, there will be many new developments to track, most recently AMD’s recent acquisition of Nod.ai to (quickly) expand its open AI software capabilities. I imagine analysts will be asking about this acquisition on the call, and our post-ER write-up will cover any Q&A on AMD’s plans with this acquisition.
Conclusion:
AMD is the top earnings report for our firm to watch over the next few quarters. We are not looking for a H100 moment, rather we are looking for a MI300 moment. For AMD, this is characterized by undercutting the competitor on price while bringing the heat on performance. If the performance is there (to be determined by benchmark tests) than AMD will fare well with the hyperscalers. Let’s see how this unfolds.
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