It's been a while since I updated on AMD—the last piece was the 2021 Q3 earnings. The reason: after the Xilinx acquisition, fundamentals showed little positive change, propped up entirely by Xilinx. Now with the AI tailwind, AMD gets a piece of the pie.
AMD Q2 Earnings:
Revenue was $5.359B, down 18% year over year, essentially flat sequentially, versus prior guidance of $5.3B; Q3 guidance is $5.7B, up 2% year over year and 8% sequentially.
GAAP gross margin was 46%, versus prior guidance of 45%; non-GAAP gross margin was 50%, in line with prior guidance.
GAAP operating loss of $20M, the fourth consecutive quarterly loss, versus prior guidance of a $100M loss; non-GAAP operating income of $1.068B, down 46% year over year and 3% sequentially; Q3 GAAP operating income expected to turn positive, non-GAAP operating income guided to $1.094B, flat year over year.
GAAP net income of $27M, down 94% year over year, swinging to profit sequentially, versus prior guidance of a $100M loss; non-GAAP net income of $948M, down 44% year over year and 2% sequentially, versus prior guidance of $939M; Q3 non-GAAP net income guided to $1.094B, down 2% year over year.
Operating cash flow was $379M, down 68% year over year and down 22% sequentially, a new low since Q3 2020.
Business Segments:
Q2 data center revenue was $1.321B, down 11% year over year, representing 25% of revenue; operating income was $147M, down 69% year over year; the revenue decline was mainly due to 3rd-gen EPYC weakness; 4th-gen EPYC adoption is rising, revenue nearly doubled sequentially, with notable cloud growth, while enterprise remains weak overall, though EPYC enterprise still grew sequentially; overall x86 server CPU share rose to 25%+.
EPYC revenue is expected to grow double digits sequentially in Q3, driven by 4th-gen EPYC ramp. Customer interest in MI300A/MI300X is strong; Q4 ramp. Full-year data center GPU revenue under $500M, less than 7% of total, with supercomputing share relatively high. Of the $700M sequential data center growth in Q4, supercomputer El Capitan accounts for several hundred million; the rest is mainly MI300 series. Next year is mainly MI300X continuing to ramp; its margin profile is consistent with the corporate average (not as high as the Xilinx business). Networking: Pensando DPU adoption improving.
Q2 embedded revenue was $1.459B, up 16.1% year over year, representing 27% of revenue; operating income was $757M, up 18% year over year, AMD's highest-margin business, mostly from Xilinx; industrial, vision, medical, automotive, test & simulation, communications, and defense demand strong; embedded CPU revenue grew; however, due to lead-time normalization and downstream inventory correction, H2 embedded revenue is expected to decline year over year.
Q2 client revenue was $998M, down 53.6% year over year, up 35% sequentially, representing 19% of revenue; operating loss of $69M, fourth consecutive quarterly loss; Ryzen 7000 series grew notably sequentially, primarily in notebooks; H2 client business expected to be stronger than H1; management expects long-term operating margin to return to 20%.
Q2 gaming revenue was $1.581B, down 4.5% year over year, third consecutive quarterly decline, representing 30% of revenue; operating income was $225M, up 20% year over year; game console business grew year over year, while graphics cards continued to decline.
Q3 guidance: client up year over year, up double-digits sequentially; data center flat year over year, up double-digits sequentially; gaming and embedded down both year over year and sequentially; full-year data center and embedded revenue expected to grow year over year; gross margin up in H2, H2 opex up slightly; data center H2 vs H1 up 50% sequentially, concentrated in Q4, implying Q4 data center revenue up 40%+ sequentially to around $2.3B.
Overall, AMD's earnings were poor, especially the weak Q3 guidance, but the optimistic Q4 guide renews hopes for 2024. AMD previously accomplished its historic mission of overtaking Intel in a tailwind; now in a headwind it leans on acquired Xilinx to prop up results, though 10%+ amortization will weigh on GAAP earnings for a while.
Early last year I predicted AMD 2022 non-GAAP net income of $6B; actual was $5.5B. The semiconductor cycle has now bottomed. Both AMD and Intel PC are recovering. AMD's Q4 revenue guidance is near the 2022Q2 historical peak. 2024 non-GAAP net income above $7B should be achievable, implying a market cap of $200B+. AMD will certainly benefit from AI, but the sell-side hype a few months ago was overdone. AMD's own guidance of full-year data center GPU revenue under $500M was a reality check.
My main concerns for AMD: 1) whether Arm server CPUs led by NVIDIA can disrupt the x86 server CPU franchise; 2) a sharp Xilinx slowdown; 3) process technology bottlenecks, with Intel outsourcing to TSMC.
All of these remain to be monitored.