AMD has been referencing a ramp for the data center in H2. Given that Q3 revenue growth is below expectations, this would imply that Q4 will have to really deliver.
AMD’s management reiterated “we do have that confidence” that there will be an “aggressive ramp in Q4 and 2024.” This was not the only statement on the topic, rather the quote from the last earnings call where management confirmed “50% year-over-year growth in the second half” was by and far the main focus of the call.
Notably, a large portion of the sales in Q4 will come from the El Capitan supercomputer, a highly anticipated launch that we discussed recently in our premium AMD Deep Dive, “This year, AMD will be powering the launch of a new and highly anticipated supercomputer called El Capitan located in Livermore, California. The ambitious goal for El Capitan is to exceed 2 exaFLOPS of “double-precision” processing power. This supercomputer is powered by AMD EPYC Genoa CPUs and AMD’s MI300A GPUs. El Capitan will also feature AMD’s ROCm open compute software platform.”
The analysts that dug into the “50% year-over-year growth in second half” comment were trying to ascertain the following:
· Is the 50% still valid despite the Q3 miss? If so, this implies +$700 million sequential revenue for Q4
· Of this roughly $700 million for Q4, what’s the product mix between EPYC processors and MI300 GPUs
· If El Capitan contributes “several hundred million” for Q4 then when will Tier 1 hyperscalers begin to drive sales for MI300 GPUs
In addition to these questions, which we outline below, the pertinent Q&A was on how much of a slowdown AMD is seeing for general purpose CPUs (Gen 3) as hyperscalers and the enterprise go through an optimization period. Here is what was specifically 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 Bergamo and Genoa-X specifically, management stated that Microsoft Azure is seeing “5X higher performance in technical computing workloads compared to their prior generation” and that Bergamo is delivering “more than double the performance than competitive offerings for cloud-native applications, while offering full x86 software compatibility.” As a reminder, Gen 4 CPUs went into production this quarter.
We had also discussed in our previous article that AMD is expected to increase its CPU market share.
“AMD’s Zen architecture was introduced in 2017. The company proved it wasn’t down for the count by offering a chipset-free design, resulting in energy-efficient processors capable of executing more tasks per cycle and more cores than Intel.
AMD’s first-gen Zen architecture helped prove AMD had a pulse and a heartbeat— however faint it may have been with a tiny 2% CPU market share— but it was circa 2020 when the company found its wings again. In that phase, it grew by 400%, catapulting to 8% of the CPU market. Today, its share stands at an estimated 20%-24% and while the company is unlikely to increase six times over again, with continued excellent management, market dominance of 50% market share or greater is very much in the real realm of possibilities. This is the move we want to capture in 2023/2024.”market dominance of 50% market share or greater is very much in the real realm of possibilities. This is the move we want to capture in 2023/2024.”
The MI300s will ship in Q4 with the competitive edge of more memory bandwidth and memory storage. This is ideal for the inference phase, which is used heavily by large language models. We wrote a premium note about the MI300s:
“The El Capitan Supercomputer is expected to launch this Fall. When it launches, El Capitan is expected to follow a similar system as Frontier which is (1) AMD Epyc CPU with (4) MI300 GPUs with Infinity Fabric. The “A” in the MI300 stands for APU, which refers to a CPU being combined with a GPU. Nvidia has only recently attempted this at the HPC level with the Grace CPU and H100 GPU, but this is technically two discrete devices with separate memories.
By having a fully shared, coherent memory, the MI300A architecture reduces latency while enabling high bandwidth. The high-speed, low-latency unified memory helps improve speed while allowing the CPU and GPU to do what they do best. By allowing both processor types to access shared memory, HPC programming is more efficient.”
“According to AMD, the MI300X will have 2.4X the memory density of the H100 and 1.6X the memory bandwidth. The reason that the MI300X was able to run the popular Falcon-40B large language model (LLM) with 40 parameters is because the neural network was ran entirely in memory without the need to move data back-and-forth with the external memory. AMD also stated the MI300X will be able to run up to 80B parameters on a single chip.”the popular Falcon-40B large language model (LLM) with 40 parameters is because the neural network was ran entirely in memory without the need to move data back-and-forth with the external memory. AMD also stated the MI300X will be able to run up to 80B parameters on a single chip.”
On the Client side, AMD has officially bottomed (barring any new, unforeseen circumstances). Management stated that “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. 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. Hybrid AI architectures are coming (which means AI is going to go beyond the data center and expand toward the edge), and AMD will be at the forefront. As long as dollar content per chip is higher (which it will be), then AMD will benefit nicely in the next replacement cycle (and beyond). That is a record for parentheses in a paragraph!
For gaming, AMD has yet to bottom. The embedded segment will be weaker than usual over the next two quarters. This segment has been unusually strong post-Xilinx acquisition but is coming up on sky-high comps, so will be cooling off in the medium-term. Due to the M&A with Xilinx, AMD was posting 1,000% to 2,000% growth in the 2022 quarters.
Quick Earnings Glimpse
Overall, everything was in line except the forward guide for Q3 was a miss. This is important because it means the pressure is on Q4 to deliver the H2 growth management had referenced in the prior Q1 earnings call.
In addition to this, we want to see margins rebound quickly after Client and Gaming stabilize. In the past, the CFO has stated that the margins will return to normal when these two segments return to normal. The gross margin of 51% is in good shape but the operating margin of 0% is below AMD’s GAAP operating margin of 20% to 25% in the boom years of 2020/2021. Net margin of 0% compares the net margin of 15% to 20% in the boom years.
Although a tad vague, the CFO stated the following when pressed about the margins: “The model we leverage to generate profitability, we should be able to get back to 20%.”
Earnings Q&A
As stated in the intro, there were many questions about the 50% growth in the second half comment from Q1. Here were a few of the more important discussions.
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 again about Q4, and 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.”
As stated in our AMD deep dive, El Capitan launches in November. Per management, this 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 will announce 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.
Conclusion:
AMD has high institutional ownership of +70%, which exceeds many of the FAANGs. The reason is that it’s a tough company to cover and retail investors avoid AMD for this reason. There are many moving pieces with exposure to a handful of major markets, a wide variety of customers, deceivingly lumpy revenue, known to be in second place against 800-pound gorillas, plus trying to figure out where AMD fits requires understanding of both hardware and software.
While some are offput by AMD’s complexity compared to Nvidia’s simple, straightforward thesis, this company has all of the ingredients to be a major AI player. As you’ve probably heard already on the quarterly webinars, my stance is there will be fewer winners in AI compared to other microtrends, and so to find a company like AMD will be quite rare.
Also, as a gentle reminder, Nvidia’s H100 started shipping in Q4 of last year and it took until April for there to be a “wow” moment. I can’t guarantee a “wow” moment will happen (my personal speculation is that it will happen), but this provides investors a minimum time frame of what to expect for Tier 1 hyperscalers to ramp orders after qualifying the two new accelerators.
Rather than pinpoint an exact month or quarter, let’s just say that 2024 should be the year that AMD puts up notable AI revenue. Those are my words. Here is management’s way of saying it: “So, we would expect early deployments as we go into the first-half of 2024, and then we would expect more volume in the second-half of '24 as those things fully qualify.”
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