Data center business: fire and ice.
AMD reported 2019 fiscal Q3 after hours; the stock swung over 8% after hours before closing down 1%.
AMD Q3 revenue was $1.8B; Q4 outlook $2.05B-$2.15B, both below analyst estimates.
AMD Q3 operating income was $186M; net income $120M, up 18% year over year, beating estimates.
Early this morning, while everyone here was still asleep, AMD across the ocean went through an 8% swing in after-hours trading, a bull-bear tug-of-war. The market is deeply divided on this report. This mirrors AMD's 'Jekyll and Hyde' first-half vs. second-half stock performance; the market remains uneasy about AMD's outlook.
Revenue and profit in line with expectations
Interest-bearing debt situation improved significantly
In the earnings call, AMD CEO Lisa Su opened with several encouraging pieces of news: quarterly revenue hit a new high since 2005, quarterly gross margin reached a new high since 2012, and net income rose sharply both year over year and sequentially.
Lisa was not wrong. This quarter AMD posted revenue of $1.801B, up 9% year over year and 18% sequentially, setting a multi-year high. Gross margin also hit a seven-year high. However, these results were almost identical to the guidance given in the second quarter and did not exceed expectations.
Source: Bloomberg
AMD's current share price is also near its 2006 all-time high, giving the company a sense of returning to its peak. In our earlier piece "Earnings Interpretation | AMD's Second Half Looks Promising," we noted that as AMD's product-line transition nears completion, gross margin should improve further.
First, the lower-margin semi-custom business will continue to shrink before the launch of next-generation game consoles at the end of 2020, pressured by the PS4 and Xbox One X/S product cycles. The rising share of non-semi-custom revenue will lift AMD's overall gross margin.
Another important point concerns AMD's profitability. Massive interest-bearing debt, which generates net interest expense several times that of its rivals, has been a heavy burden. But the debt situation is improving. This quarter, total interest-bearing debt principal fell by $206M, and cash equivalents plus financial assets exceeded total interest-bearing debt principal for the first time.
Data source: Company Filing
Ryzen Posts Three Straight Sequential Gains
Q4 Will Go Head-to-Head with Intel
By segment, Computing & Graphics and Enterprise, Embedded & Semi-Custom diverged sharply. The former was very strong, with revenue up 36% both year over year and sequentially, in line with expectations.
This quarter marked a very complete product lineup for AMD's CPU and GPU lines. The 7nm GPU newcomer, the RX 5700 series, shipped in volume in Q3, so the sequential growth in gaming GPU revenue was to be expected.
The sharp climb in Ryzen desktop CPU shipments has already shown up in numerous third-party data sets, and its ASP also rose both year over year and sequentially. The increasingly important notebook Ryzen saw its ASP increase sequentially as well, and revenue has maintained double-digit sequential growth for two consecutive quarters. Total consumer CPU revenue is on track to achieve four straight quarters of sequential growth next quarter.
On the earnings call, Lisa Su emphasized that high-end Ryzen products (HEDT enthusiast platform) were especially popular. The 16-core Ryzen 9 3950X is priced at $749, prompting a price cut on the competing Intel i9-10980XE from $1,979 last year to $979. With ample capacity, Intel is attempting to wage a price war against AMD.
Data source: PassMark
Although Ryzen posted the best consumer CPU volumes for AMD since 2011, whether it can sustain its momentum after the window opened by Intel's capacity crunch closes remains to be seen.
Data Center Business Shows Bipolar Performance
CPU and GPU: Ice and Fire
Although Lisa Su had already signaled on the Q2 call that the Enterprise, Embedded & Semi-Custom segment would disappoint in Q3, mainly due to the game console cycle, the market still held high expectations for the EPYC business.
EPYC did not disappoint. This quarter it set a record for AMD server CPU revenue since 2006. In our earlier piece "AMD's Second Half Has Just Begun," we highlighted the importance of the second-generation EPYC Rome. This quarter EPYC shipments and revenue grew over 50% sequentially.
Cloud giants adopting EPYC for their data centers include Google, AWS, Azure, Tencent, IBM, OVH, and Twitter. AMD expects Q4 EPYC revenue to grow high double-digits sequentially. As for the 10% x86 server market share target, AMD anticipates reaching it by mid-next year, ahead of schedule!
Source: Mercury
However, industry leader Intel's data center business has begun to recover. Its Q3 data center revenue hit a record $6.38B, with ASP up 9% year over year and 7% sequentially, which inevitably makes one nervous for AMD.
The data center GPU business suffered a Waterloo this quarter: revenue was flat year over year and fell sharply sequentially, ultimately failing to sustain its growth trend. It even dragged down AMD's overall GPU revenue (data center + gaming), which declined sequentially. Management expects a recovery in data center GPU in Q4.
Conclusion
On the earnings call, analysts focused intensely on the weakest segment: semi-custom. The segment booked about $50M from Samsung in Q3 but still fell nearly 40%. Another $50M from Samsung will hit in Q4, but AMD believes semi-custom weakness will persist through the first half of next year, with a full turnaround in the second half driven by the launches of PS5 and Xbox Scarlett.
Overall, this AMD report was basically in line with expectations. However, AMD's share price performance this year reflects the market front-loading future expectations, while management stayed silent on the 2020 outlook — perhaps out of caution — and slightly lowered Q4 revenue and operating expense guidance.
AMD's current share price is near its 2006 peak.
In the closely watched data center business, even with EPYC's strong growth, the GPU decline can easily unsettle the market, especially since Intel's data center business just posted its best-ever result.
In short, market expectations for AMD are too high; the slightest "rustle" in the earnings sends the stock trembling. But barring surprises, 2019 will still be AMD's best year in recent memory.
Finally, a quote from Lisa Su on the earnings call: "In the long run, AMD does not win on process technology; we believe the company's most important 'lever' is architectural technology."