AMD reported its 2019 fiscal year-end earnings yesterday; the stock dropped over 10% intraday before closing down 5.98%. Was AMD's Q4 report really that bad?
AMD Q4 revenue was $2.127B, up 49.9% year over year, above expectations, a record high.
AMD Q4 operating income was $348M, up 1,142.9% year over year. GAAP net income was $170M, up 347.4% year over year, stunning the market.
AMD Q4 GAAP gross margin was 46%, continuing to set a new high since 2012.
Yet the market remained unsatisfied with AMD's report, as it has been all year. Reviewing AMD's four 2019 reports, the market never showed excitement. The only post-earnings gain came after Q3, when the stock jumped 8% after hours. Of course, none of this prevented AMD's subsequent meteoric rise.
So, will this become a turning point for AMD's stock?
Revenue and profit hit records
Deleveraging far exceeded expectations
AMD's Q4 report opened with uplifting news: quarterly revenue of $2.127B, a record; gross margin at a 2012 high; GAAP net income $170M, non-GAAP net income $383M.
AMD quarterly revenue, source: Bloomberg
Source: Bloomberg
As AMD's product-line refresh nears completion, gross margin has improved further. Looking ahead to 2020, semi-custom should fully rebound in the second half with PS5 and Xbox Scarlett launches, and gross margin could break above 46% after 2020 Q1. Rising non-semi-custom revenue share will also lift overall gross margin.
AMD also improved on cash flow; 2019 operating cash flow and free cash flow both hit highs since 2007.
In the previous piece 'After-Hours Surge of 8%, How Solid Was AMD Q3?' we noted that massive interest-bearing debt, causing net interest expense multiples of peers, was a heavy burden. After cash, equivalents, and financial assets first exceeded total interest-bearing debt principal in Q3, AMD delivered another surprise in Q4.
AMD Q4 interest-bearing debt principal fell by over $500M; net cash hit a high since 2006 Q3. Quarterly net interest expense dropped to $18M.
Data source: Company Filing
Ryzen repels Intel Core
Mobile performance worth anticipating
By segment, Computing and Graphics led by Ryzen remained strong: Q4 revenue $1.662B, up 69% year over year, up 30% sequentially! Operating income $360M, up 213% year over year, up 101% sequentially.
Computing and Graphics Q4 also benefited from 7nm Radeon RX 5000 series GPU shipments. The star performer, Ryzen CPU, saw its ASP rise all year; by contrast, Intel's desktop CPU ASP fell year over year for the first time in eight quarters.
However, Enterprise, Embedded and Semi-Custom Q4 revenue was $465M, up 7% year over year, down 11% sequentially; operating income $45M, up 850% year over year, down 26% sequentially.
The weakness in Enterprise, Embedded and Semi-Custom was expected; AMD had repeatedly flagged soft game console business in Q3. Lisa Su disclosed on the Q4 call that AMD Q4 game console revenue fell nearly 50% sequentially, and 2020 Q1 will bottom out, becoming 'negligible.' Given Samsung booked about $50M in Q4, one can imagine 2020 Q1.
But total Enterprise, Embedded and Semi-Custom revenue still rose year over year in Q4, entirely thanks to EPYC.
Overall, Q4 was a quarter where AMD's CPU and GPU product lines were very complete; 7nm RDNA GPU RX 5000 series shipped in volume in Q4, and gaming GPU revenue growth was in line. Ryzen desktop CPU sales were red-hot; even the high-end HEDT Ryzen 9 3990X comprehensively beat the not-yet-widely-shipped Intel i9-10980XE. Ryzen's overtaking forced Intel to cut prices for the first time in a long while.
The increasingly important notebook Ryzen finally moved to 7nm; Ryzen 4000 series notebook CPUs are expected to ship in 2020 Q1. Thereafter, AMD's mainstream products will fully enter the 7nm era.
We believe AMD's CPU has now gained a firm foothold in consumer desktop; given Intel's strategic focus has shifted away from traditional PC, AMD still has room to grow in the PC market.
Data source: PassMark
Data center all on EPYC
GPU presence too low
On the most-watched data center business, AMD maintained Q3's tale of two cities in Q4: EPYC led the charge, while Radeon struggled.
EPYC delivered: after setting a record for AMD server CPU revenue since 2006 in Q3, Q4 revenue rose further sequentially. We previously highlighted the importance of second-gen EPYC Rome in 'AMD's Second Half Just Began.' Its strong performance this quarter also helped lift overall gross margin. Lisa Su said the 10% x86 server share target is expected by mid-2020.
Source: Mercury
On data center GPU, management thought Q4 would see a recovery. Results show Q4 data center GPU grew slightly sequentially. Cloud grew on cloud gaming; enterprise dipped slightly; the two were roughly equal in revenue.
Meanwhile, Intel's data center business returned as king in Q4: quarterly revenue $7.213B, a new record. ASP up 5% year over year, up 15% sequentially. Intel data center shipments ended three quarters of declines, up 12% year over year. The market sweated for AMD.
Although in absolute terms, our estimates put AMD data center Q4 revenue around $400M — a fraction of Intel's and only about half of NVIDIA's.
But we believe AMD's data center revenue will rely on EPYC for the foreseeable future; i.e., AMD data center should be benchmarked against Intel, not NVIDIA. NVIDIA's GPU ecosystem is hard for AMD to surpass in the short term.
As 5G rolls out further in 2020, the data center TAM should keep growing. As the primary data center compute engine, both Intel and AMD will benefit — not a zero-sum game but likely a dual win. And versus Intel, AMD can also play the CPU+GPU combo card.
AMD data is estimated
Source: Liftr
Conclusion
Every AMD earnings call sparks intense debate. This time analysts fixated on the 2020 gross margin guide. The real focus is next-gen console semi-custom. AMD guided Q1 2020 gross margin at 46%, but full-year 2020 at 45%.
AMD's message: even with PS5 and Xbox Scarlett, semi-custom margins are below the corporate average, a larger gap than the market expected. Also, 80% of that revenue comes in H2 2020. Some analysts thought the 2020 Q1 $1.8B revenue guide was low; we disagree.
We believe AMD's 2020 growth story remains EPYC + Ryzen; pinning hopes on next-gen consoles is unrealistic.
Overall, this report largely met expectations with a few small surprises. But AMD's stock had prepaid future expectations, and Intel's monster report fueled concern.
AMD's 2020 full-year revenue guidance actually far exceeded consensus, calling for 28%-30% year-over-year growth! But as we've said, the market's expectations for AMD are too high; any slight 'flutter' in the report makes the stock twitch. We still see 2020 as full of opportunity for AMD.
