We recently published a deep dive on the potential of AMD’s MI300s here. In the medium-term, starting later in 2023 and into 2024, we laid out reasons why we are very positive about the competitive and financial opportunity it presents for AMD.
In the short-term, AMD faces a delicate balancing act of confronting weakness in PCs while providing assurances of a 2nd half rebound and acceleration into 2024. In that regards, AMD Q2 earnings report will be closely watched for evidence of this. For the past 3 months, analysts have steadily reduced their quarterly earnings estimates to reflect weakness from the consumer-facing PC segment. However, the multiple has expanded in part due to the optimism surrounding AMD’s AI opportunity. It’s also helpful that AMD continues to take market share from Intel on CPUs, which we’ve covered extensively.
Here are the Q2 estimates going into earnings announcement on 8/1 (amc).
All numbers for current quarter and YoY unless otherwise stated
EPS & Revenue:
- EPS: Consensus estimates $0.57 vs $0.60 last quarter
- EPS: Next quarter consensus estimates $0.74
- Revenue: Mgmt midpoint guidance of $5.3B (-19% y/y) vs Consensus of $5.32B
- Next quarter revenue consensus of $5.32B
- Full year revenue consensus of $23B (-2.5% y/y)
Group sales by division (a reference guide of what was reported the last two quarters)
- Data centers – $1.3B Q123 vs $1.7B Q422
- Client segment – $739m Q123 vs. $903m Q422
- Gaming – $1.8B Q123 vs $1.6B Q422
Gross Margins based on midpoint
- Mgmt adj guidance of 51% vs last quarter of 50% actual
- Mgmt adj $ guidance of $2.65B vs last quarter of $2.68B actual
Operating Margins based on midpoint
- Mgmt adj op margin guidance of 19.8% vs last quarter of 21% actual
- Mgmt adj operating margin $ guidance of $1.6B vs last quarter of $1.1B actual
Cash flow + Cash
- Last quarter operating and free cash flow was $486B and $328B for a margin of 9% and 6%, respectively
- Last quarter cash stood at $2.8B and $333m in debt
Here are the things we’ll be looking for:
Will Q223 mark the bottom?
The market will be looking to see if this is the bottom in yearly revenue growth
And improvement on a sequential quarterly basis.
When an anticipated bottom is approaching, a beat can be aptly rewarded. Also, the opposite, a miss can be severely penalized. The reason the pressure is on when a bottom is expected is because a beat often translates to a quicker recovery where a miss at this junction translates to a slower or delayed recovery. Our goal is to see AMD come in as expected (at least) and offer strong commentary on H2.
In providing their Q223 guidance, this is how AMD described the factors driving y/y decline and improvement (less negative) sequentially.
“Now turning to our second quarter 2023 outlook. We expect revenue to be approximately $5.3 billion, plus or minus $300 million, a decrease of approximately 19% year-over-year and approximately flat sequentially. Year-over-year, we expect the Client, Gaming and the Data Center segment to decline, partially offset by Embedded segment growth. Sequentially, we expect Client and Data Center segment growth to be offset by modest Gaming and Embedded segment decline.”
Data Centers:
AMD has indicated the decline in Data Center revenue was primarily due to lower enterprise server processor sales plus some inventory correction: “Data Center segment revenue of $1.3 billion was flat year-over-year with higher cloud sales offset by lower enterprise sales. In cloud, the quarter played out largely as we expected. EPYC CPU sales grew by a strong double-digit percentage year-over-year but declined sequentially as elevated inventory levels with some MDC customers resulted in a lower sell-in TAM for the quarter.”
However, due to the visibility AMD has, H2 is expected to be quite strong – note, that doesn’t necessarily help us AMD investors with Q2 but it’s good to know management is expecting a shift on the horizon in terms of growth. You may recall that we pulled out the conversation below because we felt it was important to portray management’s confidence level for H2 growth rates. You can view more important quotes from the last call on our post-earnings write-up here.
Question
“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.”
Question
“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.
Client and Gaming Segment
The decline in these 2 segments will be less compared to Data Centers. Per AMD’s CFO Jean Hu:
“Client and Gaming segments would be seasonal. So you would expect that the Data Center would be more than seasonal. So maybe to help you size that, think about the Data Center sequential drop as double digit, whereas the Client and the Gaming segments are more like single digit, if that helps.”
PCs will be an important factor for both the Client and Gaming segment. AMD’s plan to navigate PC weakness was to under ship 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 and they expect a rebound in H2.
In Intel's Q223 earnings call, they gave positive indications that the pc environment was improving.
“We have worked closely with our customers to manage client CPU inventory down to healthy levels. As we continue to execute against our strategic initiatives, we see a sustained recovery in the second half of the year as inventory has normalized.”
Profitability
Despite the decline in sales, AMD has been able to maintain steady gross margins. For Q2FY23, AMD has guided for an adj gross margin guidance of 51% vs Q123 of 50% actual vs Q422 of 51% actual.
If Q2 is in fact the bottom, we will look for comment on what levels of profitability can be achieved when these segments return to growth.
MI300 release – We’ll listen for any updates on MI300 which is due to be released in Q4 and is expected to contribute to revenue by early 2024. You can read more about these highly anticipated GPUs in our most recent analysis here.
Here’s what analysts are saying
07/31 Susquehanna analyst Christopher Rolland lowered the firm's price target on AMD to $135 from $145 and keeps a Positive rating on the shares. The firm previewed AMD's Q2 results and said they face a number of near-term headwinds including softer Genoa, console, GPU, Xilinx and an elevated DC expectation, putting Street estimates at risk. However, longer term Susquehanna loves the server gain and MI300 opportunities.
07/26 Citi sees "bad news" for Intel (INTC) and AMD (AMD) in the earnings reports from three of the largest cloud service providers – Alphabet (GOOG, GOOGL), Meta (META), and Microsoft (MSFT). Meta lowered 2023 capex 10% and Alphabet's Q2 capex was lower than anticipated, the analyst tells investors in a research note. Microsoft's fiscal Q4 capex of $8.9B beat the consensus of $8.1B, but the company didn't provide a full year capex guide for fiscal 2024, adds the firm. It believes the Street was expecting a raise in capex given the strength at Nvidia was expected to broaden out to other artificial intelligence chip suppliers. Citi is below consensus on AMD as it expects the company to lower Q3 guidance given weakness in the data center market. It has a "negative catalyst watch" on AMD and remains Neutral rated on both AMD and Intel.
07/26 Jefferies analyst Mark Lipacis said that Microsoft's (MSFT) and Alphabet's (GOOGL) comments regarding capex and AI spending on their earnings calls lead the firm to believe that its "above-consensus" Nvidia (NVDA) estimates "may prove conservative." The firm, which notes that "AI" was mentioned 170 times on the calls, which is twice the rate in the companies' Q4 reports, views Microsoft's and Alphabet's commentary as positive for Nvidia as well as AMD, Intel, Marvell and Broadcom.
Note: Read our takeaway that is similar to Jefferies’ Mark Lipacis that capex comments were positive on Google’s call here and Microsoft’s call here.
07/11 KeyBanc analyst John Vinh raised the firm's price target on AMD to $160 from $150 and keeps an Overweight rating on the shares. While near-term challenges associated with delays of its MI300 AI server and stability issues with its PC NB Ryzen Phoenix could result in near-term risk to estimates, AI server wins give KeyBanc high conviction that AMD could see well over $2B in AI revenues in 2024.
07/12 TD Cowen analyst Matthew Ramsay raised the firm's price target on AMD to $135 from $115 and keeps an Outperform rating on the shares. The firm believes investors are prepared for a mixed Q2/Q3 on revenue and margins as the macro remains challenging. The firm adjusted 2H estimates to be more 4Q-weighted. and they believe investor focus post earnings will again turn longer-term to AMD's strong Datacenter prospects, including a crystallizing AI strategy supported by stronger HW/SW roadmaps.
(06/14) Goldman Sachs raised the firm's price target on AMD (AMD) to $137 from $97 and keeps a Buy rating on the shares after the company's Data Center & AI Technology Premiere event. The analyst states that the firm was encouraged by AMD customers' endorsements and continues to model share gains for AMD in server CPUs primarily at the expense of Intel (INTC), adding that AMD should grow into a credible second supplier over the medium- to long-run.
How we plan to handle our position will be posted in real-time on I/O Fund Advanced Market Signals
The I/O Fund Analyst Team contributed to this analysis