What we want to see from AMD this year, and why the company has a solid shot at bringing the heat with Nvidia.
There are also a few major positives that are in AMD’s favor – some of these were listed in our July write-up on AMD’s AI strategy:
- Demand is too high for GPUs with long lead times, this is an excellent window of time for a competitor to enter the picture.
- The MI300s should be able to compete on performance once the GPUs are benchmarked as AMD’s GPUs power the world’s largest supercomputers.
- AMD is exceptional at undercutting on price. This is primarily how AMD overtook Intel coupled with a better design (the Zen 2 architecture)
- AMD’s designs are excellent at improving power efficiency. Power efficiency is important for total cost of ownership. Not only will AMD’s GPUs likely be cheaper (no confirmation on pricing just yet) but they will also cost less to own over a four-year life span.
- Hyperscalers will support competition to Nvidia. You can think of Nvidia as more of a frenemy to Big Tech. This is due to pricing power, CUDA being closed source, and also now Nvidia will be competing with Big Tech in some areas. For example, Omniverse will compete with Meta’s metaverse ambitions. For the MI300 release, AMD is primarily focused on hyperscalers with the CDNA GPUs and not consumer-level RDNA GPUs.
Here are the challenges AMD faces:
- Lacks a popular software platform and CUDA competitor. AMD’s recently released software platform ROCM is promising but is no CUDA.
- AMD is later to market on AI acceleration in terms of GPUs. Although AMD has accomplished what is nearly impossible by being a second-place contender that crushed first-place Intel, the reality is that being in second place is a major obstacle.
- On that note, the company has its hands full competing against Intel on CPUs. It will now go up against Nvidia on GPUs. Lisa Su is one of the best CEOs in the history of the tech industry, but can she and her team take on both at the same time?
Revenue and EPS:
AMD bottomed in June with (-18%) growth for revenue of $5.4 billion. The company reported growth of 4% YoY in the June quarter for revenue of $5.8 billion.
- In the upcoming December quarter, AMD is expected to report $6.14 billion for growth of 9.64%. This is within range of what management guided last quarter:
- “For the fourth quarter of 2023, AMD expects revenue to be approximately $6.1 billion, plus or minus $300 million. At the mid-point of the revenue range, this represents year-over-year growth of 9% and sequential growth of 5.2%.”
- Next quarter, AMD is expected to report revenue of $5.78B for growth of 7.97%.
- Note, revenue has been revised downward recently as we had estimates at 15.65% following the last earnings report. As a reminder, AMD’s stock was rocky last earnings report as it sold off based on the print reflecting a Q4 miss, the stock later recouped when it was clarified the miss was not coming from the data center, rather the gaming sector and the embedded segment are weighing on revenue.
AMD is expected to double adjusted EPS over the next seven quarters with estimates at $0.77 this quarter and $0.68 next quarter.
Margins:
AMD guided for gross margin of 51.5% this quarter for adjusted gross profit of $3.14B. This is in line with previous quarters.
Adjusted operating margin was guided to be 23% with $1.74B in opex, which leaves adjusted operating income of $1.4 billion. This will be higher than the previous three quarters, and flat YoY.
Last quarter, adjusted net margin was 5% for adjusted net income of $1.13B. This has been trending upward and reflects the rebound in revenue.
Cash:
Operating cash flow last quarter was $421 million for a 7% margin. Free cash flow was $297 million for a 5% margin. The company has cash and short term investments of $5.8 billion and debt of $2.47 billion.
Revenue Segments:
Data Center:
Last quarter, data center reported growth of $1.6 billion. From there, management has guided data center and the Client segment to be “up by strong double-digit percentage. Sequentially, expect Data Center segment to grow by strong double-digit percentage.”
As stated in our previous earnings write-up, it was confirmed the Q4 data center will grow 50% QoQ for an estimated $2.4 billion. To jog your memory, for Q4, the $400 million in GPUs are mainly from the El Capitan supercomputer.
Per the opening comments last quarter: “Based on the rapid progress we are making with our AI road map execution and purchase commitments from cloud customers, we now expect Data Center GPU revenue to be approximately $400 million in the fourth quarter and exceed $2 billion in 2024 as revenue ramps throughout the year. This growth would make MI300 the fastest product to ramp to $1 billion in sales in AMD history.”
As you’ll recall, this comment was important because it means commercial customers will contribute in 2024. This is primarily what the market will be watching – not only data center growth but any color provided for GPUs. Right now, $2 billion is the benchmark – let’s see if AMD can give us a higher number for FY2024.
Client Segment:
Last quarter, the Client segment reported revenue of $1.5 billion, which was up 42% YoY and 46% QoQ driven by Ryzen mobile processor sales. Management has stated the Client segment is also expected to fully rebound by a “strong double-digit percentage.” Also, management stated that sequentially, “client segment revenue to increase.”
Gaming Segment:
Last quarter, the gaming segment reported (-8%) YoY and was down (-5%) QoQ due “to a decline in semi-custom revenue partially offset by an increase in Radeon GPU sales.” This quarter, gaming is expected “to decline by double-digit percentage”
Embedded Revenue:
Last quarter, Embedded reported (-5%) YoY and was down (-15%) QoQ. This was due to “an inventory correction at customers in several end markets.” The guide for this quarter is that the Embedded segment will decline “due to additional softening of demand in the embedded market. Sequentially, the embedded segment is expected to decline by double-digit percentage.”
More comments on the $2B
Toshiya Hari:
[…] My first one is on the Data Center GPU business. You talked about '24 revenue potentially exceeding $2 billion. I was hoping you could provide a little bit more color. What percentage of this is AI versus supercomputing or other applications?
Lisa Su:
Your question as to how the revenue evolves, so the way to think about it is, in the fourth quarter, we said revenue would be approximately $400 million, and that's mostly HPC with some — the start of our AI ramp. And then as we go into the first quarter, we actually expect revenue to be approximately similar in that $400 million range. And that will be mostly AI so with a very small piece being HPC. And as we go through 2024, we would expect revenue to continue to ramp quarterly, and again, it will be mostly AI.
The CEO let a comment slip that it would be “greater than $2 billion” for next year, and given how careful this management team is, I do think it’s important to note here:
Lisa Su:
Sure, Aaron. So, we've been planning the supply chain for the last year and we're always planning for success. So, certainly, for the current forecast of greater than $2 billion, we have adequate supply. But we have also planned for a supply chain forecast that could be significantly higher than that, and we would continue to work with customers to build that out.
For our purposes, as far as where this can go, the management team goes back to quoting 50% CAGR in this segment over the next few years: “So, I think we are big believers in the strength of the market. We previously said we believe that the compound annual growth rate could be 50% over the next three or four years.”
Keep an Eye on PCs:
Per the last write-up:
What is a bit unfortunate is that the gaming segment and embedded is weak, and these two segments overshadow AMD continuing to take market share on the CPU data center, and the company’s highly anticipated answer to Nvidia’s H100s.
Per the CFO’s opening remarks: “In the fourth quarter, we expect to benefit from strong Data Center and Client momentum, driven by MI300 AI accelerated ramp and the strength of our high-performance leadership Zen 4 family of products despite lower sales in the Gaming segment and additional softening of demand in the embedded market.”
What is quite fortunate, however, is that some of AMD’s AI story is undercover, which is the PC and mobile market. There’s a bonus waiting for AMD investors as the AI story plays out, and while data center GPUs take up all of the attention, there is another powerful AI trend that is silently building strength in the background. I mentioned this in a previous write-up: “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.” This has already begun with the Ryzen AI on-chip accelerator contributing to the rebound in the client segment this quarter.
From the CEO in the last earnings report: “What I'm most excited about in PCs is actually the AI PC. I think the AI PC opportunity is an opportunity to redefine what PCs are in terms of productivity tool and really sort of operating on sort of user data. And so, I think we're at the beginning of a wave there. We're investing heavily in Ryzen AI and the opportunity to really broaden sort of the AI capabilities of PCs going forward.”
Our post-earnings report will hit your inboxes tomorrow night.
Additional Reading: