What we are watching for in the upcoming earnings results …

Mr. Market can be very fickle. Microsoft has been a leader in AI for years, but now suddenly everyone is hot on the story. Same with Nvidia. But what about AMD – when will AMD be called the next big AI stock? On management’s end, that’s likely what this earnings call will be pointed toward.

AMD is releasing a chip that combines a CPU, GPU and memory into a single integrated design called the MI300. The company plans to launch the MI300 in the second half of this year although it’s not expected to contribute to revenue until 2024. The MI250 currently powers the world’s highest performing supercomputer.

Analyst notes on the data center are mixed with some expecting a slowdown for AMD and Intel (see below). For our purposes, AMD’s release of the 5nm Genoa Zen 4 in Q4 along with the strong performance of Milan should help to hedge a broader data center slowdown. Bergamo is also expected this year, which offers cloud optimized capabilities.

Management was quite clear on the last earnings call to expect a double digit decline sequentially for the data center but to also expect YoY growth from 2022 to 2023 with a stronger second half of the year. Embedded is expected to have a positive impact whereas PCs are expected to bottom in the March quarter.

Microsoft came in better-than-expected on PCs, which has some read through for AMD. Per our Microsoft write-up: “More Personal Computing declined by (9%) YoY to $13.3 billion and was better than the mid-point of the management guidance for a decline of (16.7%). The PC segment revenue witnessed better than expected results in all businesses. The guidance for the next quarter represents a YoY decline of (5.6%).”

Per Microsoft’s CFO: “We saw better-than-expected PC demand, as noted earlier, particularly in the commercial segment, which has higher revenue per license, although results continue to be negatively impacted by elevated channel inventory levels.”

Intel’s guidance in the most recent earnings report also reflects the PC downturn being near an end.

Financials:

Estimated Revenue and EPS:

AMD has seen downward revisions on revenue and EPS. At the same time, analysts are increasing their price targets. We’ve been talking a lot about a rebound for semis on our quarterly webinars both in Q1 and Q2. There’s still another weak quarter to go for AMD with Q2 being the anticipated low for the top line.

EPS is similar with growth returning in Q3 into the foreseeable future:

Margins:

Adjusted gross margin guide of 50% for adjusted gross profit of $2.65B, which is in line with previous quarters
Guided for $1.6B in operating expenses for an adjusted operating margin of 19.8%. This is lower than previous quarters due to lower revenue

Cash Flow:

Operating cash flow margin of 10% last quarter was lower than previous quarters when revenue was higher
Free cash flow margin of 7.9% last quarter was lower than previous quarters when revenue was higher
AMD has $5.9B in cash and $2.5B in debt

Noteworthy:

Last quarter, AMD missed with guidance for the March quarter at $5.3B compared to $5.52B expected. In addition to this, analysts were concerned about the lower adjusted operating margin of 23% versus 27% a year ago and lower adjusted net margin of 19.6% versus 23% a year ago.

Regarding margins, these are expected to return to normal once PCs rebound.

Management guided for data center to be down “double digits” sequentially per the last earnings call. Per AMD’s CFO Jean Hu: “Year-over-year Data Center and Embedded segment revenue are expected to grow, offset by lower Client and Gaming segment revenue. Sequentially, Embedded segment revenue is expected to increase. Client and Gaming segment revenue are expected to decline largely consistent with seasonality. Data Center segment revenue is expected to decline due to elevated levels of inventory with some cloud customers.”

Per the AMD’s CEO Lisa Su:

“Sure, Ross. So let's see. We said the 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.”

Also, per last quarter’s call, this quarter is expected to be the bottom for PCs.

Headlines:

AMD introduced the new Ryzen Z1 Series processors for handheld PC gaming consoles. AMD is partnering with Asus to launch the first Ryzen Z1 Series device with the Asus ROG Ally, a premium handheld PC console, featuring up to a Ryzen Z1 Extreme processor.

Analyst Notes:

“March notebook shipments were up 41% month-over-month, 18% above Citi's expectation, driven by new product launches and pull-in demand at quarter end, Citi analyst Christopher Danely the analyst tells investors in a research note. The firm says overall Q1 shipments were down 9% quarter-over-quarter, well above seasonality and Citi's forecast of down 15%. It reiterates Neutral ratings on Intel (INTC) and AMD (AMD), expecting the data center downturn to negatively impact both companies.”

“Morgan Stanley analyst Joseph Moore raised the firm's price target on AMD to $102 from $87 and keeps an Overweight rating on the shares ahead of the company's report scheduled for Tuesday, May 2. The setup for the quarter is "interesting," as the stock has appreciated 40% year-to-date into "an obvious negative event at least as far as data center is concerned" and 90% of the firm's conversations are "appearing to lean negative," the analyst tells investors. However, AMD is pointing to relevant exposure to AI "for really the first time in the company's history around MI300," and "anyone with AI exposure has rallied materially," the analyst added.”

“Cleveland Research is lowering its estimates for AMD below consensus for Q1 and Q2 on further weakness in near-term Server demand and notes that its 2023 forecasts are "moving slightly lower" given its expectations for total server units to be down year-over-year.”

Buy/Sell Plan

Please check the forum tomorrow for the Buy/Sell plan and chart update from Knox.

AMD’s Q1 Pre-Earnings Notes: The Soon-to-Materialize AI Market