Advanced Micro Devices, Inc. (AMD) Earnings Call Transcript & Summary

Hello, everyone. This is Vivek Arya, senior semiconductor and semi cap equipment analyst at Bank of America Securities. Delighted and honored to have Devinder Kumar, Senior Vice President and Chief Financial Officer of AMD; and Jason Schmidt from the IR team join us this afternoon. Welcome to both. What we will do is maybe start with some opening comments from Devinder and then just get into Q&A after that. With that, Devinder, welcome.

Thank you, Vivek. It's a pleasure to begin the call with you, and good afternoon to everybody else who is on the call. I hope all of you are staying safe and healthy given the current environment, especially with COVID-19. And from an AMD standpoint, we have driven significant annual growth over the last few years. This has come from growth in our PC business, the discrete graphic business as well as the data center business, and really the strength of our new products, Ryzen, EPYC and Radeon. We are on track to deliver a 21% year-on-year revenue growth with our Q2 execution, which is again growing increased number of Ryzen and EPYC platforms. On a quarterly basis, we expect to see solid growth from EPYC as well as the initial ramp of our 2020 semi-custom revenue on 7 nanometers. We have expanded our margins on the strength of the new products by more than 10 points in the last few years. And this product portfolio is addressing profitable markets, including the commercial and data center space. We're building what we believe is a best-in-class growth franchise with increasing profitability, diverse set of end markets and revenue streams. On the balance sheet, we expect to be free cash flow positive in 2020. And over the next few years, generate significant amount of cash. We have reduced debt by more than $1 billion over the last couple of years and have been net cash positive over the last 3 quarters with gross leverage now sitting at 0.5x. On the product front, Ryzen and EPYC process already lead the industry in terms of high-performance capability and price performance. We expect this year, 135 new Ryzen consumer and commercial OEM platforms in the market, including 70-plus commercial SKUs overall. The second-generation EPYC processor family now includes both the highest performance per core and performance per socket process in the industry. We are building new Radeon GPUs featuring domain-specific gaming and data center architecture and expect strong semi-custom revenue in the second half of the year as we ramp production to support the holiday launches of the new PlayStation 5 and Xbox Series X consoles. We remain on track to launch our next-generation Zen 3 CPUs and RDNA 2 GPUs in late 2020 and believe we can deliver another year of strong revenue growth and margin expansion in 2020 based on the strength of the product portfolio and the diversity of the markets we serve. So with that, Vivek, let me turn it back to you for the Q&A session. Vivek?

Great. So maybe let's start with the very near term. Could you give us a sense for what impact the COVID-19 headwinds have had on AMD's business? Any changes that you might have seen since the Q1 results? And just structurally, how should we think about kind of the longer-term disruptions, kind of the positive and negative in terms of impact on AMD?

Yes. No, that's good, Vivek. I mean COVID-19, no doubt, has changed the world at a staggering rate. And technology is at the forefront of how we can solve many of the things that are going on with the COVID-19 environment around the world. Here, we feel good that AMD is providing many of the components, powering essential technologies in business, medical and education communities today. In Q1, talking about Q1 for a moment. We put a lot of focus on the supply chain, in particular, beyond the wafers that we get from global foundries and TSMC, the supply chain in China and Asia, and actually work through those issues relatively quickly. And in Q2, I'm very pleased with the continued focus, execution from an overall supply chain standpoint. Some of our customers are working through some component issues. But overall, I would say the supply chain has been relatively resilient in the COVID-19 situation. From a demand perspective, in Q1, we did see some weakness in brick-and-mortar retail, particularly in China. In our client business, online vendors are doing well, benefiting from increased working and learning from home. And the brick-and-mortar retail outlets have been more impacted and are just beginning to reopen. We expect COVID-19 and the resulting economic uncertainty may lead to some weakness in the consumer PC demand, in particular, in the second half of the year, and we are watching that very carefully. While the COVID environment will impact us in the short term, our long-term share gains will be driven by the consumer and commercial platform wins with the OEMs. We have gained client share for the last 10 straight quarters and expect to continue based on the number and strength of our platforms. In server, we continue to gain momentum across HPC enterprise and cloud providers as they introduce new instances and accelerate deployments in some cases. We have seen several cloud providers accelerate infrastructure deployment to address rising demand from the growing number of users working and schooling from home. In fact, one of our large cloud customers even deployed 10,000 second-generation EPYC servers in less than 10 days to support the surge in demand for their collaboration services. So while we expect COVID-19 and the resulting economic uncertainty may lead to some weaker consumer demand in the second half of the year, we're still expecting annual revenue growth of approximately 25% at midpoint on a year-on-year basis. Vivek?

Great. Devinder, on the longer-term trends, the one trend that we have seen over the last year is that for the first time in AMD's history, you now have a lead over Intel in terms of process technology. So of course, process technologies is one of the more important things. It's not the only thing, but it's a very important aspect of system performance. But just how important has this performance technology advantage in terms of the overall system performance compared to what you saw in the past?

Yes. Process technology is important. Architecture and the product improvements are important. We have really pushed the envelope for innovative, high-performance computing design. The Zen products, Zen 2 and Zen 3 all deliver significant architectural enhancements. Core density has been a driving force behind the processor improvements over the last decade. And we have delivered higher core counts, more power efficiency with each generation. And then the chiplet architecture, design and Infinity Architecture have provided us with a distinct advantage in performance. That said, process leadership is very important. TSMC has been an excellent partner. We have a great relationship with them. We've been working with them over the last several years, and they've been very supportive of our road map at 7 nanometers and beyond. We always anticipate competitors being strong and 10 nanometers would be competitive, but our road map is also strong as well, hitting our technology milestones on the process side, the product road map commitments we have made to our customers is the most important thing, and we feel will be critical to our future success. So I think so far, we've done a very good job meeting and beating the promises we've made, both publicly and to our customers. We do have a large addressable market to the tune of $79 billion. And as you know, but just to remind everybody, AMD is the only company in the world that has high-performance compute and graphic technology on leading-edge manufacturing process, which results in true competitive differentiation with the competitive landscape that you just referenced, Vivek. Back to you, Vivek.

Got it. And then, Devinder, maybe digging into the server CPU part and especially the impact of Milan. So far, we have only thought of AMD in the context of cloud and enterprise, but it was interesting that in recent calls, you have also started to mention those magic words around 5G. And I think you highlighted a partnership with Nokia with your next-gen Milan processor. So talk to us about what is different about Milan versus Rome that can help AMD address a wider part of the market. And then how just should we conceptually think about the trajectory of your share in this market as a result?

Yes. Let me just step back. I'll talk about Milan in a second, but let me just step back. We have been in market share growth mode in the server CPU space and have steadily built our business quarter in, quarter out in what we believe is a $19 billion total addressable market. With the first generation of EPYC that we introduced a couple of years ago, we reestablished our ecosystem within the data center space. And second-generation EPYC, Rome, as we call it, we're seeing the momentum kick in given that Rome has twice the performance of the competitive x86 processor. We're very pleased with how Rome is ramping. We've been in the market now for about 9 months and good visibility into public-facing cloud instances and internal workloads. So for the remainder of the year, we are expecting a significant ramp of the server business, given that our second-generation EPYC processor family now includes the highest performance per core and performance per socket process in the industry. And then you get to our third-generation server CPU product, Milan, which is launching at the end of the year as we continue to execute as committed on our technology and product road map commitments to our customers and shareholders. Milan is doing well in the labs, and we should start shipping in Q4. And as far as the server business is concerned and future share gains, I truly believe that with Milan coming to the fall, 2020 is an inflection year for the server business. Milan allows us to go into the bulk and almost all of the server space. And that is going to be important because as you look at the sizing of the future server business, as we laid out in our Financial Analyst Day a couple of months ago, we did say that the server -- that the data center business will grow to upwards of 30% of overall AMD, which we also have projected to grow at a 20% compound annual growth rate over the next 3 to 4 years. So while the data center business today is in the mid-teens, overall, but with Milan and then the follow-on products that we have, we think we can get that to about 30% of AMD's revenue over the next 3 to 4 years. Back to you, Vivek.

Got it. So on the data center, I think the one unique aspect of AMD is that you were able to address it with both the CPU side and the GPU side. And as we have seen from your main competitor in GPUs, how they have expanded the growth opportunity in the data center. So talk to us about how you are viewing this unique capability at AMD where you can address the workloads in the data center from both a CPU and the GPU perspective, along with a very interesting interconnect, the Infinity Fabric technology that you have. So how is this expanding your addressable market in the data center as well as I think you outlined a number of wins in the HPC area also recently?

Yes. No, that's very good. And I think you hit the nail on the head, Vivek. When you combine our CPU and GPU IP together with the critical Infinity Architecture, the resulting solution is very strong and a very critical differentiation for us. This combination is actually what directly led to our most recent 2 supercomputer wins that you referenced, we call it Frontier and El Capitan, and that is using AMD CPU and GPU, in combination with the Infinity Architecture and really allows us to bridge a historical bottleneck of interconnect and PCIe lanes. I think the third-generation Infinity Architecture features -- to be featured in the El Capitan product will enable coherent memory, which will transform data processing. Both the supercomputers are a CPU and GPU win, and both will utilize AMD's Infinity Architecture in addition to the CPUs and GPUs that come from AMD. The Frontier supercomputer, as you referenced, will be the world's fastest exascale supercomputer when -- delivered in 2021 with 1.5 exaflops. And then the El Capitan system is expected to be more than 2 exaflops in the 2023 time frame and for us, majority of the revenue coming in 2022. Our CPUS, GPUs and Infinity Architecture will help propel computational research into the exascale area and enable dramatically improved CPU, GPU and memory connectivity. These wins are strategically very important to us. Our competitors and actually, our customers see a true advantage and capability with AMD because the technology was architected by the same company to work better together, than you would see if there are different companies providing the same solutions. So this is something that allows us to be very competitive in what we are seeing as a $35 billion data center market over the longer term.

Got it. And then Devinder, it's interesting, when I look at the PC market, I think AMD has got to be the only company that thinks of the PC market as a growth market because for you, it's more a share gain opportunity with some of the newer products like the new Ryzen 4000 products that you have been putting out. I just wanted to get your sense on the overall PC market. Because on the one hand, you have the benefit of the new product pipeline. You're doing very well in desktop CPUs. On the other hand, we also hear about your competitor wanting to expand their production. And then people worried about just the deceleration in Windows 10 demand as we get towards the end of that cycle. So just talk to us about your specific positioning in PC and PC market and just the strength of your pipeline, how you can help offset some of those other headwinds perhaps.

Yes. I think, Vivek, you said it right. I mean we have always viewed the PC market to be a very important segment of AMD's business. We've delivered, as you know, 9 straight quarters of double-digit percentage year-on-year notebook revenue growth as we've expanded the number of AMD powered laptops available from major OEMs. Earlier this year, we had our 7-nanometer Ryzen 4000 notebook offering launches. And we've had a number of systems come into the market over the last several months. And the reviews have been very, very strong, and we are very pleased with the momentum so far. The Ryzen 4000 laptop processor, as an example, is the best mobile CPU we've ever built with high-performance 7-nanometer Zen 2 CPU cost in a laptop form factor. And as you know very well, winning in the ultra-thin notebook space is key, and we have the world's fastest processor for that space today, including security, all-day battery life, which are very critical requirements; and we are very competitive in that space. We are on track to accelerate our mobile growth this year with customers like Acer and ASUS and Dell, HP, Lenovo and other OEMs as we expect to launch more than 135 new Ryzen-powered consumer and commercial notebooks over the coming quarters. You will see more premium products coming from AMD together with our OEM partners, along with a significant amount of marketing and co-marketing with our retail partners to ensure that our products are well positioned and as well as on-shelf with additional marketing programs in retail. Notebooks is a very strong growth factor for us as we go through 2020, and we expect to gain additional market share in 2020. In the client PC space overall, we have received -- we are now at high-teens from a market share standpoint. And if you look back just about 10 quarters ago, the market share for the company was in the 8% range. And today, it's double that. A little bit higher in desktop than notebook, but both of them are in the high-teens. And we really don't see a cap on our share potential. The share gain in the [ PC 10 ] while moving up the stack from top to bottom is really very good, and our PC products are very good, best-in-class in many aspects. And our customer relationships based on the commitment that we have met over the last few years are very, very good, and we want to continue to gain share in this particular area. And like I said, the PC market is important. We want to continue to build the AMD brand in the PC market on top of the strength of the products that we have, making the right investments. And overall, the market may or may not grow, but we think our revenue can grow from the teens that it is today over the next 3 to 4 years, which implies continued market share gains in the PC market.

Very good. And then when we stay on this topic of just competition, recently, we heard from NVIDIA, they are moving -- also now moving to 7-nanometer and Ampere products first on the data center side and at some point, I imagine, on the gaming side as well. How should we think about AMD's GPU road map and the market opportunity across these different end-market verticals?

Yes. On the GPU side, we are really taking the same approach to developing, deploying and delivering a multi-generation road map for GPUs that we took on the CPU side. We have the world's first 7-nanometer GPUs for the data center. One of the things on the gaming side is there's a lot of excitement for Navi 2 or what our fans have dubbed as the Big Navi. This would be our first RDNA 2-based product. Big Navi is a halo product. Enthusiasts love to buy the best, and we are certainly working on giving them the best. With the RDNA 2 architecture goes through the entire stack, it will go from mainstream GPUs all the way up to the enthusiast. And then the architecture also goes into the game console products, which I'm sure we'll talk about in a few minutes as well as our integrated APU products. This allows us to leverage a larger ecosystem, accelerate the development of exciting features like retracing and more. And then as far as the data center is concerned, on the GPU side, CDNA is our data center-optimized architecture which we talked about a little bit at our Financial Analyst Day. There are some gaming features that are not needed in compute, and then there are some compute features that are not needed in gaming. So to gain efficiency and performance, we have decided to bifurcate the architecture. We see this area as a tremendous growth opportunity for both gaming and data center GPUs over the next 5 years. And the bifurcation of our road map will allow us to optimize for the workload and for the use cases that we see so that we can grow revenue in the GPU space and in addition, the data center GPU space over the next few years.

Got it. One question, Devinder, I got from an investor was that beyond just process, what are the other aspects that AMD is focusing on to help you maintain this trajectory of share gains? Because at some point, inevitably, Intel is going to close the gap on 10 nanometer, and NVIDIA has now closed the gap on 7 nanometer. But as I flagged before, processor is not the only thing that matters. So what are the areas that you think AMD can focus on and lead in so it's more than just process that can help you stay on your share gain trajectory in the CPU and the GPU markets?

Yes. I think the key is, it's being innovative and creative. I mean AMD from an overall standpoint, and I'm sure many investors and even, Vivek, we've had the conversation over the years, about investing in the business, do you have the dollars to invest against competitors that are larger. The key is, yes, process technology is important. We are now ahead on the process technology side. But even when we didn't have the lead on the process technology, there were things that we did from an architecture standpoint. You've heard about the chiplet architecture where we've deployed from an overall standpoint, and that has served us well. I think the key is to continue to be innovative, continue to see the trends in the market and to deliver, in a creative way, the performance that's needed by the market as opposed to dictating to the market exactly what you build and then expecting the market to accept that or accept that readily from an overall standpoint, and that's what AMD is all about.

Got it. Moving, Devinder, to the semi-custom and the gaming cycle. So we are at the start of multiyear gaming cycle. So your products are prominently featured in the new game consoles from Sony and Microsoft. If I go back in time, I think over the last 7 to 8 years of the last cycle, I believe the company made, I think, 7 billion to 10 billion orders, if I'm not mistaken over that. So I'm not going to ask you for a 10-year forecast, but just talk to us about how we should think about your growth opportunity in the game console cycle that we are just in front of in the back half of the year.

Yes. There are certain characteristics of the console business. And you are right, Vivek, in 2013, is when we introduced and launched with our partners, Sony and Microsoft, using AMD's products within the game console. We are very excited about the console business this year and beyond. And honored actually to be chosen by both Sony and Microsoft, again, for the next-generation systems. And that is something that's going to serve us well because the game console revenue, given the fact that it's a mutually exclusive -- it's an exclusive relationship with Sony and Microsoft, and that is something that we can count on for many, many years to come with the game -- new game console cycle playing out over the next few years. If you talk about revenue, I'm not going to give you exact numbers, but it's substantial revenue on an annual basis with the initial ramp happening in a significant manner in the second half of 2020. And from a unit standpoint, we see it as similar to the last generation where the peak years actually happened in year 3 or year 4. So it's really a good long-term growth business for us from 2021 into the 2023, 2024 time frame, and that is something that we look forward to. And then as far as ASPs and margins, which is a question that comes up a lot, there's a lot of technology going into these machines. The ASPs and margins will be a bit higher than prior generations. But these are still semi-custom products, where a portion of the R&D based on the NRE model we have with these customers, is paid by the customer. So as is typical, semi-custom products, we expect margins to improve over the life cycle of the console post launch. And ASPs will see some incremental reductions over time. But from a revenue standpoint, starting in Q2, where we are starting to ramp the product. And then it is very heavily weighted in the second half of 2020 as our customers are getting ready to ramp production in support of holiday launches of both the PlayStation 5 and the Xbox Series X consoles, and then we take into 2021 and beyond with significant revenue contribution to AMD's overall revenue.

Got it. And on the topic of gaming, you're also partnered with Google with their Stadia game streaming platform. Talk to us about what the growth opportunity is there. If you were in our shoes, how would you size that long-term opportunity in cloud gaming for AMD?

Yes. Google has been a great partner, and we are very excited for the cloud gaming opportunity with them. We believe cloud gaming will become more and more popular over time, just like video streaming because you can play any game at any time, in any place on any hardware. I think it's a little bit early to quantify the potential of cloud gaming market, but we are ready to take advantage of this opportunity as it materialize out into the future. It's also important to remember that cloud gaming is just one opportunity we have in the data center GPU market. And with the products that we have and the investments we have made, VDI, machine learning, HPC, are all areas that benefit from the technology investment and we also see significant opportunities in these areas over time.

Got it. And then maybe, Devinder, going to the financial side, you mentioned the 20% long-term revenue growth opportunity for AMD. And I think this year, you said could be the 25%. How should we think about that 20% kind of segmented along the different markets that you serve, so data center, PC, gaming?

Yes. Our long-term model, as you already mentioned, has a few important components, and that is what we believe will accelerate the long-term growth. And that is what's the basis of what we provided on a 20% long-term revenue growth guidance that we provided in our long-term model at our Financial Analyst Day. Based on where the products are positioned, I think it is across the business. Our data center market is obviously the most exciting. It has the potential to grow from mid-teens percentage of revenue to greater than 30% of total AMD revenue, which itself, over time, we are projecting to grow at a 20% compound annual growth rate. PC and gaming will also grow, and that should grow in the mid-teens percentage. Growth in data center and commercial PCs is important because that is what helps us expand our margins and profitability. And that is where we have projected that from where we were in 2019 at the 43% gross margin, which is where 2019 ended to get to greater than 50%. So data center, CPU and GPUS, PCs and gaming, in particular, on the commercial side of the house and the data center GPU side of the house, helps us get to that margin trajectory. So it's really -- those businesses are all growing. And then we also talked about the semi-custom game console revenue starting from 2020 and then having the growth into the year 2 and year 3 after the launch.

Got it. One other question that I got from an investor was just the visibility of growth in the data center in the back half. Just because I think there have been some concerns about maybe a pull-in of CapEx into the first half, with all the work from home and gaming and online streaming that we saw in the first half. Just how do you think about AMD's opportunity in the data center in the back half?

Yes. I think, first of all, let's talk about Q2. I think Q2 is coming in where we expected. And from a market share standpoint, I know we talked about the target we laid out about 1 year or plus ago in terms of getting to the 10% double-digit market share, and we are on track to go ahead and do that. Data center market, in particular with the 7-nanometer product, given the lead times that we have for the wafers, in particular, it is not like within 1 or 2 months, you can suddenly ask for more product and get it. We see a good visibility from our data center customers, in particular, the cloud service providers for the second half. And based on that, we feel the momentum can be sustained from Q2 into Q3 and Q4. It is true that some customers would like the product sooner and more of it, if it can get there. But we need to work with our foundry partner to go ahead and get the wafers and then provide the supply. In the second half, we have given overall revenue target for the company on a growth basis. And data center is a key component that is driving the 25% growth at midpoint on a year-on-year basis.

Got it. On the gross margin side, Devinder, so you have expanded gross margins on a very consistent basis. This year, you have guided to about 45% gross margin, but the long-term model is over 50%. Give us a sense of how you go from 45% to over 50% over time.

Yes. I think in short, the answer is mix of revenue from an overall standpoint and then having more competitive and better products from an overall standpoint that move up the stack from an ASP and margin standpoint. We are building a best-in-class growth company, but we also want to be increasingly profitable with a diverse set of end markets and revenue streams. We expect to see benefit from both ASP expansion and mix improvements and this mix will likely be a more significant driver, including the products that we just talked about, in particular, in the data center space that have higher ASPs than average and also higher ASPs than our historical revenue. If you look at it from a cost standpoint, we're always looking to improve efficiency from a cost standpoint. But as you know, we're already fabless semiconductor company and one of our fab partners' largest customers. So that is not the larger driver. The larger driver is higher mix and better mix of revenue overall, in particular data center but also ASP expansion that drives the gross margin to get us to the greater than 50% out in time. What's important to keep in time is, even -- keep in mind is, even with the increase in semi-custom revenue this year, we continue to drive growth in gross profit dollars, operating margin and profitability. And I think the growing diversity in our revenue mix does help us from where we stood just a few years ago are in time to get to that greater than 50% gross margin overall as a company.

Got it. And then in the last minute or so that we have, the one underappreciated part of AMD has been the improvement on the balance sheet side on a net cash position, right, which would have been a very hard thing to even imagine a few years ago. So talk to us about just the company's ability to generate cash. And then how do you think about deploying that cash in terms of whether it's M&A or whether it's other types of cash returns to shareholders?

Yes, good question. As you know, Vivek, you and I, over the years, have been talking about the balance sheet, and I am very pleased with the improvement of our balance sheet. The efforts over the last few years reducing the debt by more than $1 billion, as I said earlier, and improving the net cash balances close to $900 million at the end of last quarter, felt good about it. And that allows us to invest in our priorities. The fundamental area from an overall standpoint in terms of the use of cash is to prioritize the investments in the business as our first priority, in particular, investing in R&D and then go-to-market to drive revenue growth. Capital allocation strategy, I talked a little bit about that at the Financial Analyst Day, and we've just transitioned over the last 2 or 3 quarters of net cash-positive. #1 priority is to invest in the business, invest in growth. And then obviously, over time, drive strong shareholder returns, including some of the things that you just talked about. But that's our goal right now, is to really invest in the business and accelerate the trajectory of the business, both from a revenue standpoint, but also better products to drive better margin.

Excellent. I think with that, we are at the end of our time. Thank you so much, Devinder, for taking the time to share your insights. Really appreciate it. And thank the investors for joining this call. And with that, we will close the call. Thanks again, Devinder and Jason.

Thank you, Vivek, and thanks to everybody that listened on the call. Stay safe and stay healthy. Bye.

Bye.