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

All right. I'm Tom O'Malley, semi and semi-cap equipment analyst here at Barclays. Very pleased to have AMD CFO, Jean Hu here with us. Thank you so much for joining us.

Yes. Thank you for having us.

Yes. Well I want to say congrats on being in the CFO seat for a year now -- almost a year.

I want to just start with what I know everyone kind of wants to talk about and especially after your event yesterday, Maybe you could start with just highlighting what you announced. Clearly, the stock is reacting today. But yes, just some of you highlighted announcements and we can dive into some of those.

Yes, we had a very exciting day yesterday with our customers, partners, ecosystem, it's actually a very important milestone and the inflection point for AMD to be a strong player in AI computer space. We all know the opportunities are tremendous, and that we are really pleased that we get to the point we can be very competitive in this market place. There were so many announcements yesterday. So what I will do today is just highlight some of the key things we announced yesterday, you can absolutely listen to the webcast. And it's super exciting. First and foremost is we formally launched MI300A and MI300X, and highlighted the performance advantage we have, especially when you think about the influence MI300X has the industry-leading memory bandwidth and capacity. So it provides better TCOs for customers. You can either run models or you can use less GPUs. So it's a great product, very competitive. And as we said during our last earnings call, MI300 will be the fastest revenue to $1 billion in our history. And we are very confident about the $2 billion plus revenue number we talked about for 2024. Secondly, software. This is really important we announced the ROCm 6. When you think about the performance improvement that we have made during a very short period of the time between ROCm 6 and MI300X, we actually improved performance by 8 times compared to prior generation. So that's very exciting. I think one of the most important things strategically and the strength of ROCm is, it's really about embracing the open-source ecosystem. It's important because we allow developers to write a portable code to work on NVIDIA machine, AMD machine or other GPUs. So it actually gave tremendous flexibility and it's more cost effective. It's exciting, and we launched -- we're going to launch our ROCm 6 and we expand our open-source ecosystem partnership significantly. I think we announced during yesterday, open AI is going to include MI300X for their Triton 3.0 release very soon. So that's not what happened in Triton 2 release. So this is a very significant announcement. And then third thing on networking side, we had a panel from Arista, Broadcom and Cisco to really talk about the ecosystem, how we work with the Ethernet and actually Ethernet consulting, everybody is working on the ecosystem to make sure the Generative AI adoption, the large clusters we can use to provide the best TCO. So very exciting and you all, some of you probably already saw the customer list we have. We have a very broad customer engagement. Yesterday, we only had the first set of customers showing up, which included Microsoft, Oracle, Meta. On the OEM, ODM side, we have Dell, we have a Supermicro, Lenovo and a lot of mall customers we are engaging with. And one of the example I think is important to know is Meta literally, they bring up MI300X at OCP. They literally commented, it's the fastest bring up from design to deployment in their history. So that's really a strong proof of point of not only the hardware capability, but software maturity. So we're very excited about the opportunities we have, of course, in addition to all the hardware, software, networking, we also talk about the PC side. We have the AIPC. AMD actually was the first to include AI engine in the PC with the Ryzen 7000 series. We actually shipped millions of units and we announced the next-generation product, which will include AI engine. The thing about us is we think about the portfolio, we think about end-to-end AI. And we have a strong portfolio to provide the whole solutions from PC side to the data center side.

Perfect. Thank you for covering all those. I wanted to just dive into your reiterated view of the $2 billion next year. So clearly, there's a handoff between the A and X series, right? You talked on last earnings, you guided December to $400 million and then by 300 sales followed by a flattish March and the rest of the year gets you to $2 billion. You have some HPC and then you move to some hyperscale customers. Is that transition? And how it's so smooth, a function of 1 customer? Or is that all of the customers, maybe all of the ones you had on stage yesterday, all ramping very quickly?

Yes, good question. When we talk about MI300 ramp, we did mention in Q4, predominantly it's from the supercomputer, MI300A, that's 1 customer. The deployment of a supercomputer tend to be lumpy. They deploy everything in 1 quarter, the next quarter in Q1, it's actually very minimum. And then Q1, we also said it's around $400 million, it's from multiple customers, right? Multiple, not only cloud customers, also enterprise customers and the start-ups. So we are very pleased with the customer lineup and the production commitment from customers.

In terms of the open ecosystem that you mentioned and the qualification cycles for those new customers, there's been 1 announced customer for a while and it's official with multiple coming on stage. Can you talk about from the time a customer chooses to use your product, how quickly can they get that deployed in their cloud, particularly you mentioned ROCm, you have software layer and the hardware layer.

Yes, great question. It's very different, different customer engagement on what kind of workload they want to qualify, it takes different time. Some of our large customers, we have been working with them for years. And a lot of you know Microsoft, we have been working with them for a long time. Meta, we also mentioned that we work with them from MI100, 200 to now 300. So those are longer-term commitment and a lot of workload. But some of the enterprise customers because of the nature of ROCm, they actually can port it very quickly months -- and we also talked about significantly yesterday is the out-of-box experience with ROCm. So for a lot of start-up or very simple workload, they literally can take it out of the box to make it happen. So it's a wider range of things, but I think the most important thing is we have made a tremendous progress on the software side to mature it to the point different customers can have different experience and port it very quickly.

Helpful. So I think you're clearly very positive on that $2 billion outlook for next year. But I think something that consistently comes up with your competitor is capacity. And if you look at how much you could exceed that $2 billion, do you run into a wall at any point where capacity becomes an issue. And more particularly, does memory become an issue next year, just as you've heard more and more about constraints in that industry?

Yes. Capacity is absolutely still very tight. What we have done is we have worked with our supply ecosystem significantly for a long time, not just now, but back to 6, 7, 8 months ago, to make sure we can secure capacity. We absolutely have more than $2 billion capacity to support the revenue upside. And our view is we really want to make sure we're positioned for success because we do have a very competitive product portfolio. And if you look at the customer engagement that we have. Yesterday, it's only a very small portion of the customers, it took like 2 hours. It's a long event. It's because we just have so many customers who want to come, who want to be part of this announcement. I think there are a lot of mall engagement beyond yesterday's companies out there. So we do feel pretty good about it.

So NVIDIA has put themselves on a path to release new generations on a yearly cadence. They just recently announced their H200 product, but they're using more HBM to close the gap as well. Can you talk about what your planned cadence is for your platforms? And do you think this will be more HBM, more HBM, more HBM? Or is there a way to increase performance at that rate from the compute perspective that gets you there?

Yes. I think the generative AI market is so different from what we have seen in the past. The cadence from both NVIDIA or AMD, it's really because of the customer demand, right? The customer is driving that significant change and adoption and the need, the requirement for hardware solutions. So for us, I think if you look back, right, is we have been developing GPU for a long time. And even if you look at the MI series of product 2020 when we had our first MI300. So MI100, 200 to 300, we also have 250. We actually -- within 4 years, we did have a multiple generation of MI300 and with the customers pull really, not only on us, on the whole industry, we will accelerate our cadence. I think we have the capability and we are investing in R&D internally, we are reallocating our resource to increase tremendously R&D in data center, especially GPU side. So we feel pretty good about the team, the resource and the capability of the company.

I think a common pushback on any new entrant into a market is particularly there's a software stronghold, how do you get into these customers? I think you mentioned with some of the announcements that you talked about yesterday that you're trying to create an open ecosystem such that your chip can interact with your customers just like world of CUDA and NVIDIA today. When you look at the next year, can you talk about what it would take from your customers to both have success on internal workloads as well as external workloads? And how quickly do you think your software ecosystem takes a hold where it's being used across all the hyperscalers.

Yes, that's a good question. We are the new entrants into a market and the software development maybe has had for like a decade or even longer. I think there are 2 aspects of our strategy. The first is we have been doing this for not just the last 2 years, actually 4 to 5 years. The most important strategic decision for us is actually our ROCm software stack is open source in nature. We plan to work with open-source ecosystem and partner together to address the software issue or challenges. So it's not just us. We have the whole open ecosystem. If you just look at how fast the development of all the framework -- AI framework, the library, the compilers and the models during the last 12 months is tremendous. So I do think by partnering with the open-source ecosystem, and secondly, we also invest aggressively in our own capability and resource. Together, we actually provide our customers a much more cost-effective, flexible solution, right? Because in the end, when you have this kind of large market opportunities, the customer really want to choose the hardware they want. And the ecosystem also want to write the model very quickly. So a lot of people are writing the model on the AI framework. They're using the libraries, the compilers or whatever openly available. So we do think that what we are trying to do on a software side is partner with the system -- with ecosystem and really advance the easy and flexibility for everybody can write their model quickly.

Helpful. So let's pivot to a market where you weren't a new entrant, but a minority entrant then you've really grown your share, which is in the DC CPU side. So you've gotten your share up to the high-20s. Can you talk about the time horizon for you to get to that 50-50 share? Is that a goal of yours? And what do you think the business dynamic would be as an impact of that? Is there a margin differential in getting from this range to the 50% range? Is there a way that you need to interact with customers that's different. Any help -- any details there would be helpful.

Yes. Maybe the first thing is let's take a step back to look at how we get to our market share. So Q3, we announced our earnings. Our revenue market share actually is 29.7%. So it is close to 30%. I think how we get there is some of you probably remember, 2017, that's when AMD had the first server product portfolio, Zen 1. And during the next 4, 5 years, we continued to execute on the very advanced road map to provide the customer the best TCO, best performance pool -- the best performance per dollar. And each generation, we are leading our competition significantly. So getting to the market share we have today is because of the technology and the innovation we had. And then when you look at the market share we have today, in the cloud market, we are actually getting to close to 50% of the market share. But in enterprise, we're still at the mid-teens. From now on going forward, we'll continue to drive the product leadership and make sure we can provide the best TCO. We will continue to gain share in cloud market but most importantly, we have invested significantly in go-to-market during the last several years. And as you probably know, the enterprise market is very different. You have thousands of customers. Each customer, they buy license servers and then you literally needed to work with each customer, give them TCO. And they -- once they learned they can get more performance, they can save power, save space, save operating cost, they are very excited to adopt. But it takes time. So it's a process. When we look at the design wins we have and look at the enterprise customer adoption, we do think going forward, we will continue to gain share in cloud, but enterprise share gain because of our effort and the work we should see that benefit going forward.

So you do have that technology lead, which has led to a lot of these share gains, but let's just create a world in the future, so next year Genoa and Bergamo are using 5-nanometer from TSMC, Intel is still on Intel 7. Let's fast forward, let's say Intel's road map is successful. That has been reaching parity, at least in their eyes fairly soon. If we get into -- we don't need to get into the reason on the competitive side. But in a world in which you are more at technology parity, what does that look like to you from a CFO? And do you see any change in the market in that instance?

Yes. I think -- one thing about AMD's Lisa Su and team, they always made assumption that the market is competitive. The assumption is our competitors will be as competitive as we are on the process technology. But if you look back at the success of the company, one of the things I learned is really -- it's not just about the process technology. It's actually the combination of architecture, 3D packaging, working with the foundry partners, triple at design. And all those things AMD has really worked very hard for the last decade. So the combination of those things to give us like a smaller [indiscernible], right? So it's more cost efficient and power efficient. And all those things that provide the TCO advantage. I think from my perspective, really we needed to stay cutting edge and will introduce Turin, our next-generation Zen 5 next year, which we feel pretty good about the leadership and the performance the TCO we can provide.

And getting to that question of the feedback. Do you have a view of the traditional server market into next year? I think you saw a cannibalization of wallets this year with the boom of AI. I think there's a big disagreement on what the return to gross would look like, if there is any?

Yes. I think in 2023, there's no doubt. It's a challenging time for the traditional server market. I think a lot of you track that market, we all know year-over-year, it actually declined primarily because of the unit volume declined, quite significantly. Our view is there are 2 fundamental reasons. The first one is during the COVID, a lot of companies -- just as all the other semiconductor segment build the inventory. So they were digestion of inventory from the COVID side of the oversupply situation. And then second half and later on, really you're right, is to your point that generative AI, the CapEx need to prioritize AI spending definitely crowding out some of the silver spending. But when we think about it is, if you look at the purpose of the server is to support the transaction processing and the basic workload. When you think about Meta, Instagram, Facebook, WhatsApp, Amazon's shopping, all the fundamental basic workload we do today, it's being done by server. And frankly, those data continue to increase doubling and the need for compute continues. Our view is when you think about how customer deploy hardware, it's all about the best economics. How they can get best the TCO. So all those traditional workload, servers offer the best TCO. We think it is the case of today, and it will be the case in the future. So what we are going through the stage is really the digestion, the prioritization or optimization. But the server depreciation life, everybody extended to 6 years. Beyond the 6 years, what's the challenges we are going to have is with older server, you'll actually need more power. You need more space. Because when you look at the Genoa, 6 Genoa can replace 12 Sapphire Rapids. And when you need a space, you need power, you need the efficiency, you really need to upgrade. So our view is the super market is going to come back, is going to serve the basic traditional workload versus the incremental AI need going forward. It's not going to be like high-growth market. But ASP will continue to increase as the industry continue to drive the core count increase.

Helpful. I want to pivot to the client business. You guided revenue growth into Q4, but have seen some weaker data coming in from ODM. So I guess a multipart question. I know you're on the shipping market for much of the year, but how is visibility today? And are you still seeing the strength that you pointed to at earnings?

Yes. I think it's worth to just do a quick recap about the PC market. It's a very cyclical market. It's one for the semiconductor segment that got into a cyclical downturn first, right? It literally happened a year ago. And this downturn actually was quite severe. It was one of the worst during the last whatever 3 decades. And so the first half of the year, when you look at the 2023, the whole industry was going through the inventory digestion. So we both basically sold in much less versus the sell out, a lot of the downstream inventory continue to digest. That's what the first half. And then second half is another different situation. Because the inventory largely gets consumed. So you do see the industry started to be normalized. And when you look at Q3 and our Q4 guide, it's part of normalization. I think stabilization or what you say is I think right now, if you look at IBC, our third party's forecast for next year is, they do believe next year, the PC market unit volume will come up, but it's like a low single digit. So our view is, it's normalized, it's stabilized. Going forward, you will see the typical seasonality in Q1 and then next year, based on industry. And it's economic-sensitive sector too. So we don't know what the macroeconomic situation will be, but in the end the PC market is stabilized. That's the good news. I will say is, as we announced yesterday, it's exciting in the long run with AI PC, because eventually, a lot of AI work needs to be done at the device level. You cannot do everything in the cloud. I think probably not in 2024, but definitely 2025, we'll see tremendous momentum from AI PC that will help the replacement cycle.

Helpful. I just want to hit on pricing in that market as well. Are you seeing any more aggressiveness from your competitor? I think you guys have done a good job of kind of getting ahead of the trend in that business. But share has come back a bit since the pandemic, but it's kind of stabilized here. What's going on from a pricing perspective?

Yes. I think we gained share in Q3, yes, quite a lot of share actually in Q3. I think on the pricing side, it is a competitive market. I think our view of strategy has always been focusing on the premier side of the market to the commercial market, more of mid-range to high end, because we need to drive a profitable growth, right? If you just grow top line revenue without the profitability, then it does not make economic sense. So I think what you would see us is to continue to really drive the profitable growth and focus on the segment, we believe we have a competitive advantage.

Helpful. I want to shift again to the embedded business. It was down materially in September, you guided down double digit to get into December. The supply chain is mixed. I think you're hearing maybe some recovery next year, just after these low levels. But I just wanted to get your take on that market. And clearly, there are a variety of end-markets within there. If you could spend some time on just what's causing some strength, what's causing some weakness.

Yes. The embedded business starting to the acquisition we did. Suresh actually is here. He should talk about this. But I think the performance after acquisition, it was tremendous. Literally it grow like 17% double-digit last year. I think what happened is if you look at this time, the semiconductor inventory correction, it's actually staged. If you look at embedded inventory correction, it literally is 1 year behind the PC correction. It's great AMD. We have a very diversified portfolio. We have PC gaming, and then we have embedded and data center. So you actually can see the different correction coming at the different time. For embedded literally Q3 and Q4, we just get into this very steep correct. We said it's going to decline double-digit sequentially last earnings call, and we guided that. We think Q1 is going to be very similar, because it typically takes several quarters. I would say by different markets, definitely, you see the industrial, some of the auto have some inventory, they are digesting. When lead time drop from 52 weeks to 14 weeks, what the customers' behavior immediately will be, hey, let me take this opportunity, like digest in my inventory. I used to think I need 1 year because you have 52 weeks lead time. So I think it will take several quarters largely. We do have the segments like aerospace, defense and also emulation. Those are continue to perform. So it's a different picture within the end market. But overall, our belief is the second half, we should see the recovery. And also, when we look at our portfolio, we do have a really strong set of portfolio. We have continued to gain design win market share. Typically, when the market recovery will get a tailwind to help the whole business.

Thinking about all of the markets that you just talked about, you have a very robust ramp in the data center business. You have a robust ramp in AI. PC seems stabilized. The embedded business, which has traditionally been decent margin is down but then up again in the second half or -- hopefully improving in the second half. Why shouldn't all these factors lead to a better gross margin ramp as well?

Yes, as you -- you nailed it. It should, and we definitely will drive that gross margin expansion is important for us to continue to expand our gross margins fundamentally, it's a reflection of the IP, right, the R&D work our team has been doing. So the tailwind of embedded business right now is really headwind. If you look at the embedded business, it was like 24% of our revenue. And now it's like 16%, 17%, that's a huge headwind on gross margin side. And we are managing through it because we do have the PC client side, the gross margin coming back. And by the second half of next year, we do think we'll get more tailwind from embedded and continue to expand the gross margin.

Last one, quickly, as we run out of time. You have this big AI ramp in the future. It sounds like you're quite positive about it. You have still a large amount of cash in your balance sheet. Can you talk about priorities in terms of where you're going to spend that money? If this ramp is really coming, should we be buying back our stock right now?

Yes. Given the significantly larger opportunity and significant ramp of revenue investing, it's absolutely our #1 priority. We'll continue to invest organically and through acquisition. But our business model generates a lot of cash. So we can continue to do buyback. It's very important for us to return cash to shareholders too.

Perfect. Thank you so much for being here. Really appreciate it. Thank you all.

Thank you.