AMD’s earnings report this quarter was a win for our deep dive analysis as it confirmed our ongoing thesis from 2020-to date that AMD will continually take market share from Intel.

We discussed this in our original analysis in early 2020, our follow-up analysis in mid-2020, our 1-hour AMD webinar in 2021 and our most recent Kings of Tech special report. Most of this is summarized in the last earnings coverage from Q1 here.

Following Q2 of 2022, AMD’s product dominance over Intel has never been clearer.

AMD reported an 83% YoY increase in revenue in the data center compared to Intel’s 16% decline but under the hood, there is something much bigger going on than one quarter of performance. As an analyst pointed out, AMD appears to have gained 6% market share, which is “the highest share gain in the data center business that [AMD] has reported even going back to 2005.”

We began covering AMD when it had 4% total market share versus 96% Intel and the recent gains places AMD now in the “mid 20%” total market share for the data center against Intel. When asked if this was the correct math, Lisa Su stated: “So, I think your math is in the ZIP code from our point of view. And we are pleased that we are gaining share.”

I want to make sure that this enormous win is well understood because the market certainly didn’t reward AMD following the report. The price action will take care of itself over time.

Is our data center thesis now lagging? No – because we have the 5-nanometer line up being released in Q4 which includes Zen-4 architecture plus the Zen-5 architecture in 2024. The company also stated that the Zen-3 Milan Series is still outstripping supply with visibility six quarters out, implying for full year 2023. As a reminder, Zen-2 was Lisa Su’s comeback and Zen-3 is responsible for the current move in data center market share.

There’s also a lot to look forward to. I owe you a deep dive on AMD’s next 5 year thesis, which will include Xilinx. This acquisition is more offensive for growth rather than defensive (along the lines of how YouTube impacted Google or Instagram impacted Facebook). There is already evidence of the synergies between these two with 20% sequential growth from Xilinx in the most recent quarter.

Lisa Su and her team also quelled fears of a 2023 slowdown in the data center, and similar to Microsoft, was able to provide a “light at the end of the tunnel” type macro discussion as both are bellwethers in their respective sectors.

Brief Overview of Q2 Earnings

AMD reported revenue growth of 70% at $6.55 billion which came in at analyst expectations of $6.53 billion. EPS also came in as expected at $1.05 EPS reported versus $1.04 EPS expected. The market has given a muted tone to the earnings due to guidance provided of $6.7 billion compared to $6.83 billion expected. Meanwhile, full year revenue guidance was reiterated at $26.3 billion for 60% YoY growth.

Gross margin is a bright spot for AMD right now. The company is not only expanding its GM by 640 bps this year to 54% but the company is guiding for an additional 300 bps to 57% for next year. The company’s gross profits grew by 65% YoY to $3.03 billion.

The GAAP gross margin is at 46% and 47% last quarter. It was lower because of the amortization of intangible assets associated with the Xilinx Acquisition. Management also guided for adjusted operating margin of 24.5% for FY2022.

Certainly, the bottom line continues to be exceptional – although this may moderate in 2023 as more supply comes back online. Adjusted operating income of $1.9 billion was up 115% with an adjusted operating margin of 30% compared to 24% in Q2 2021. Adjusted net income of $1.7 billion was up 119% with an adjusted net profit margin of 26% compared to 20% in Q2 2021.

Adjusted EPS came at $1.05 (beat estimates by $0.01) compared to $0.63 for the same period last year. The company reported a total of $1.02 billion in expenses related to the amortization of acquired intangible assets in the recent quarter. The GAAP EPS was a miss due to Xilinx acquisition at $0.22 EPS compared to $0.58 EPS in the year ago quarter.

The company is reporting record operating cash flow of $1.04 billion and free cash flow of $906 million. The company has $6 billion in cash with $2.8 billion in debt. Buybacks are another bright spot for AMD with $920 million in the most recent quarter and $7.4 billion in buybacks remaining.

Overview of Segments:

Data Center:

Data Center revenue of $1.5 billion up 83% YoY was driven by EPYC processors for both cloud and enterprise customers. The company reported operating income of $472 million with AMD’s margin expansion driven primarily by this segment. The impressive growth was driven by 60 new instances across all major cloud providers.

At the time that Intel delayed its Sapphire Rapids release (againagain!), AMD stated they are “on track to launch Genoa and ramp production of Genoa” which will “position our data center business for continued growth and share gains.” The company confirmed that customer pull is very strong for their 5-nanometer CPUs for Q4 and into 2023:

“The visibility with our customers, especially our large cloud customers’ second half of this year into next year is very good. And we’re planning really for the next four to six quarters, and that gives us good visibility.”

Certainly, AMD is not getting off that easy on such a strong statement as most analysts were modeling and (loudly) predicting a slowdown in 2023 off the incredible growth both AMD, Nvidia and a few others have seen in the data center.

One analyst asked the following: “But we see all these media reports about the cloud players wanting to control their spending levels, etcetera. When do you think that shows up in their spending outlook? Or do you think you have enough of a share gain story with Genoa coming out later this year to offset any slowdown from just a broader spending environment perspective?”

Lisa Su’s answer was quite simple – to paraphrase, it’s product:

“But from our current view, I think we have a strong opportunity to continue to grow the Data Center business into 2023. And our view is we have an expanding portfolio as well. In addition to Genoa, we have our Bergamo, which is a cloud optimized capability as well that’s coming online early next year. So there is a lot of new products that are supporting sort of our growth ambitions.”

And this was followed up with a question on how much of AMD’s growth projections for 2023 are in contrast to Intel (if Intel continues to delay releases and/or Sapphire Rapids has perceived issues such as bugs, then this is a natural tailwind for AMD).

“Relative to your overall question, I think we do feel like we’re in a share gain position. I think the product positioning is such that Milan is very, very strong right now. And we think that Genoa as well is very well positioned into next year.I think we do feel like we’re in a share gain position. I think the product positioning is such that Milan is very, very strong right now. And we think that Genoa as well is very well positioned into next year.

So we’ll always spend time with the customer set and see what they’re seeing. But from our current view, I think we have a strong opportunity to continue to grow the Data Center business into 2023. And our view is we have an expanding portfolio as well. In addition to Genoa, we have our Bergamo, which is a cloud optimized capability as well that’s coming online early next year. So there is a lot of new products that are supporting sort of our growth ambitions.”In addition to Genoa, we have our Bergamo, which is a cloud optimized capability as well that’s coming online early next year. So there is a lot of new products that are supporting sort of our growth ambitions.”

Translation: Not only does AMD offer the highest performing general purpose CPUs for servers, which is primarily what is being discussed above, but the company’s lead will be further cemented when the 5nm is released in Q4. In addition, AMD’s strategy to diversify to workload specific CPUs, and also DPUs with the Pensando acquisition, and GPUs, will support continued growth in 2023.

Client Segment:

The Client Segment was up 25% YoY to $2.2 billion with operating income up 32% to $676 million. This is up 31% from $538 million. This was primarily driven by Ryzen mobile processors.

There were so many headlines over past three months about the impending “PC slowdown.” Here is what the boogeyman was:

“We have taken a more conservative outlook on the PC business. So a quarter ago, we would have thought that the PC business would be down, let’s call it, high single digits. And our current view of the PC business is that it will be down, let’s call it, mid-teens. And that’s contemplated into our third quarter guidance. And then as we go into the fourth quarter, what we see is, again, the sequential growth there will be led by the Data Center, as well as our Embedded business, with the same view of the PC business.”So a quarter ago, we would have thought that the PC business would be down, let’s call it, high single digits. And our current view of the PC business is that it will be down, let’s call it, mid-teens. And that’s contemplated into our third quarter guidance. And then as we go into the fourth quarter, what we see is, again, the sequential growth there will be led by the Data Center, as well as our Embedded business, with the same view of the PC business.”

There was additional breakdown regarding the guidance and how it takes into account PCs:

“And we are being more conservative in our PC outlook. Our PC outlook now at mid-teens would kind of put the market at somewhere around, let’s call it, 290 million to 300 million units. So I do think we’ve appropriately de-risked the PC business.”

AMD stated again the company is forecasting the PC supply (for their company) will be balanced by the second half of the year:

“I think there was a bit of buildup in PC inventory, and we’ve taken that into account in the second half. We think the AMD portion of that is modest. And as a result, it will rebalance itself in the second half of the year.”

Gaming Segment:

AMD’s gaming segment was up 32% YoY for $1.7 billion in revenue with operating income of $187 million, or 11% of revenue, compared to $175 million, or 14% a year ago. The lower operating margin was due to lower graphics revenue. The company stated that gaming graphics declined in Q2 and the gaming graphics market is expected to be down in Q3. However, management also stated they are expecting sequential increases in gaming at/around Q4.

“We do expect, as we go into the fourth quarter, though, that we’ll see some sequential increase in that business [gaming] because we’ll have new products that are launching in that timeframe.”

Embedded Segment:

This is the “Xilinx segment” and certainly this earnings report made that evident as Embedded grew 2,228% to $1.3 billion as a result of combining the two companies.

AMD did state that on a pro-forma basis, the Xilinx portfolio grew 20% sequentially. This was accelerated by AMD’s manufacturing scale and other large-scale resources for the supply chain. The company stated that both Data Center and Embedded are expected to grow fast enough to make up for the softer PC market. Embedded also helps strengthen the gross margins and Xilinx was accretive to AMD in that regard.

Although no other specifics were provided, the company pointed out there was “record core market revenue” for Xilinx, including aerospace and defense, industrial vision and health and test and measurement. Xilinx is also strong in 5G and automotive. In automotive alone, AMD believes there is a $10 billion opportunity by combining the two companies.

Macro Outlook:

AMD mentioned many times on the call that they believe supply will more evenly match demand by Q4 and into the early part of next year. This could be AMD-specific due to a strong management team along with Taiwan Semiconductors output resulting in outlier levels of supply, but generally speaking, more supply should result in deflationary pressure. AMD does not see more supply as a headwind to growth, rather the company believes it will result in more sales as demand is better matched with supply.

“And to your question about supply, we have spent basically the last 12 months building our capacity across the world to support the type of growth that we think the product can handle. So there is a large step-up in supply that we expect to see over the next four, five quarters.”there is a large step-up in supply that we expect to see over the next four, five quarters.”

“Certainly, on the Embedded side, we were supply constrained in the second quarter. And even on the Server side, we were tight in the second quarter. We have additional supply that’s coming online, especially as we get towards the end of the year. That will help us really meet more of the demand from customers. So we feel pretty good about all of those puts and takes.”, especially as we get towards the end of the year. That will help us really meet more of the demand from customers. So we feel pretty good about all of those puts and takes.”

“But overall, the 7% increase [in gross margin], I think, is very well supported given all of the new product ramps that we have going on in addition to some additional supply that’s coming in as we get into the fourth quarter.”in addition to some additional supply that’s coming in as we get into the fourth quarter.” 

“As we look into the second half of the year, we are still a bit constrained in certain areas, certain parts of the Xilinx portfolio, although we continue to make good progress. And I expect additional supply to come on, especially towards the latter part of the year, into 2023. Our view of the business, again, I think the quality of the design wins, the quality of the overall – when you look – the diverse market is very strong. And so I think as we are able to continue to relieve some of those supply constraints into the second half of the year, I think see a good growth trajectory for the business.”And I expect additional supply to come on, especially towards the latter part of the year, into 2023. Our view of the business, again, I think the quality of the design wins, the quality of the overall – when you look – the diverse market is very strong. And so I think as we are able to continue to relieve some of those supply constraints into the second half of the year, I think see a good growth trajectory for the business.”

Conclusion:

AMD’s comeback is truly historic and this quarter did not disappoint. Not only did AMD report the highest share gain in the data center business going back to 2005 but Intel’s revenue declined 22% year over year and missed consensus by 14%, which was Intel’s largest top-line disappointment since 1999, according to Refinitiv data. Intel ended the quarter with a $454 million net loss, compared with net income of $5 billion in the year-ago quarter.

This is not a coincidence. It’s due to AMD’s product excellence and gravity-defying management. Maybe the stock didn’t get the attention it deserves following Tuesday’s report, but from my estimation, it’s only a matter of time until price catches up to the market leader that is executing at scale.