AMD reported 2020 Q1 earnings yesterday; the stock surged 7% after hours. Today it fell again, looking out of place amid a broad tech rally.
AMD 2020 Q1 Earnings Summary:
Revenue $1.786B, up 40% year over year, down 16% sequentially
Gross margin 46%, up 5 pct year over year, highest in nearly 8 years
Operating income $177M, up 366% year over year
GAAP net income $162M, up 913% year over year
Just like AMD's four earnings reports in 2019, the market never showed excitement; this time was no different. In 2020 the market naturally has higher targets for AMD.
Let's first revisit the three questions we had about the earnings beforehand.
How is deleveraging progressing?
PC + data center high growth a done deal?
How does Q2 guidance look? Will the full-year high guidance be withdrawn?
Deleveraging progress slowed; net interest expense hits new low
AMD made solid progress on cash flow last year; 2019 operating cash flow and free cash flow both hit highs since 2007.
We previously noted that massive interest-bearing debt, causing net interest expense multiples of peers, was a heavy burden for AMD. After cash, equivalents, and financial assets first exceeded total interest-bearing debt principal in 2019 Q3, AMD delivered another surprise in 2019 Q4.
In 2020 Q1 interest-bearing debt principal was unchanged; net cash dipped slightly from 2019 Q4, a minor disappointment. But 2020 Q1 net interest expense hit a new low since 2006, down 52% year over year and 28% sequentially.
Data Sources:
Company Fil
ing
The benefits of lower leverage are becoming increasingly evident; whether AMD's interest-bearing debt principal can continue to decline is worth watching.
Ryzen + EPYC correspond to PC + data center high growth
PC represented by Ryzen and data center represented by EPYC remain AMD's largest and most stable growth drivers. In 2020 Q1 both Ryzen and EPYC continued to grow.
The Computing and Graphics segment, centered on Ryzen, posted a strong Q1: single-quarter revenue of $1.44B, up 73% year over year, down 13% sequentially due to seasonality. Operating income reached $262M, up 15x year over year!
Data source: Company filing
The star performer, Ryzen CPU, saw its ASP continue to rise year over year, further eating into Intel's desktop CPU share. GPU was slightly less impressive: Q1 GPU shipments and revenue grew double-digits year over year, but ASP fell both year over year and sequentially due to product mix. The market is still waiting for new graphics cards based on the second-generation RDNA architecture.
Our view has been that 2020's biggest growth driver for AMD is the notebook business. 2020 Q1 notebook CPU revenue hit a record high! Don't forget Ryzen 4000 series notebook CPUs have not yet ramped in volume!
Data source: PassMark
On the data center side, AMD's growth driver is EPYC CPU; GPU market performance is lackluster.
After EPYC delivered a record server CPU revenue since 2006 in Q3, Q4 revenue rose further sequentially. In 2020 Q1 EPYC business kept growing, with server shipments up double-digits sequentially and more than 3x year over year!
Management attributed the strength to surging cloud customer demand and stable HPC demand. How strong is cloud demand? Management cited a large customer that deployed over 10,000 second-gen EPYC servers in under 10 days.
On game consoles, Lisa Su disclosed on the Q4 call that AMD's call that AMD's Q4 game console revenue fell nearly 50% sequentially, and 2020 Q1 console business indeed bottomed out, with negligible revenue and a significant drag on company profit.
Enterprise, Embedded and Semi-Custom revenue was $348M, down 21% year over year and 25% sequentially; operating loss of $26M, the first loss since 2018! Operating income was $68M in the year-ago quarter. With next-gen console ramp in Q2, console business should improve. Still, the growth driver for this segment remains EPYC data center.
Full-year guidance lowered but confidence remains high
Given the pandemic, few companies in this earnings season have offered Q2 guidance, let alone full-year guidance.
AMD 2020 Q2 Guidance:
Revenue $1.85B, up 21% year over year, up 4% sequentially
Gross margin 44%
2020 full-year revenue up 20%-30% year over year
2020 full-year gross margin 45%
AMD's prior 2020 full-year revenue guidance far exceeded consensus, calling for 28%-30% year-over-year growth! Most companies have withdrawn full-year guidance due to the pandemic. Yet AMD management remained confident, only trimming expected growth to 25%, with a range of 20%-30%.
Overall, this report met prior growth expectations; AMD's Ryzen + EPYC benefit even more from the PC + data center boom. On the call, AMD made an important point: it expects the PC market to decline in the second half but remains confident in the data center market.
Although the PC market is expected to start strong and fade, the notebook segment will remain stable. The strategic focus is now on the data center, and AMD's PC business is encountering its best opportunity yet. Following last year's desktop comeback against Intel, an AMD notebook breakout is imminent.
