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

All right. Welcome back to the Barclays Tech Conference. I'm Tom O'Malley, semiconductor and semi-cap equipment analyst here at Barclays. Pleased to have Jean Hu, CFO and Treasurer of AMD. Thank you for being here. And thank you for being a staple here for the last couple of years as well. We really appreciate it.

Yes. Thank you for having us.

So speaking of last year, we sat here a year ago and chatted on market share and how you have come from a place both on the PC side and the server side, where it was really a second source story coming from the bottom kind of to moving to parity and in some instances, to leadership. So can you talk about that journey? And really from here, where are the aspirations focused on across those businesses?

Yes. Yes, I appreciate the question. We are very pleased with our performance in both the server side and also on the PC side, as you know, in the server CPU market starting from like a very low single-digit market share a few years ago to now last Q3, we reported the earnings, we got to 34% of the market this year. So it has been tremendous. I think when you look at that success first thing is AMD is always focused on product -- innovative product, generation-by-generation. So when you look at the server side from first-generation Naple until each generation now at the Genoa and Bergamo fourth generation family, we got a tremendous TCO performance not only performance per watt, but the performance per dollar. And now we launched Gen 5, which is the Turin family product will continue to drive the leadership performance. So technology-wise, it's about the leadership of not only architecture, process technology, chiplet and also packaging technology. But also if you look at the team's history, it's always about consistent execution. So each generation of road map we delivered on time with the leading performance. Third thing I would say is our team is really good to work with the customer closely. So not only we got feedback from prior generations, but also from customers. So our product is not just about the leadership of performance, but also it's what the exactly customer needs. When you look at that, is that really help us. On the server side, we absolutely -- we are powering the most critical workloads across both enterprise and the cloud, right, from enterprise scale up and cloud scale out everywhere, the major applications across all different markets. So it's very exciting. On the PC side, it's also exciting is we actually made tremendous progress. When we look at the -- currently, our product portfolio line up, we actually have the strongest product portfolio in PC market in both desktop side and also in the mobile side. In desktop side, in Q3, our market share got to 27%. On the client on the mobile side, we got to 19% market this year. Again, it is about technology leadership, how we can provide the customers performance, efficiency across the board. So exciting journey, but the momentum will continue, and we'll continue to drive the leadership technology and product.

Super helpful. And all of these good things are happening, and of course, I'm going to zone in on one area, where you're a little under-indexed, which is on the enterprise side in terms of server. So I guess the question there is, why hasn't the success translated as quickly? I know enterprises are more slow moving? And what kind of steps can you take to further penetrate that market?

Yes. We absolutely in the cloud market, we are fairly represented. And enterprise, we're still very much underrepresented. When you look at the technology wise, the TCO performance from AMD is both in enterprise and in cloud. So we absolutely can not only address cloud-native applications. But in enterprise, they are more diverse applications from virtualization to database to a different kind of ERP, we actually can provide the best performance. However, enterprise side is a little bit different on the go-to-market approach. As you can imagine, in cloud market, it's all about the TCO. And once they switch, it's volume production, that adoption is very quick. But on the enterprise side, you really need to convince each CIO with 1,000 enterprise customers that they have the TCO performance. So you do need to have a lot of feet on the street to address each CIO to give them proof of concept. So they can see the TCO performance. What we have seen is over the last couple of years, we made a tremendous effort to increase our FAE to support each enterprise customers. Now we are seeing the benefit of that. I think the last 5 quarters. Each quarter, our enterprise business has grown double digit. And that accumulation of effort, you're going to see more momentum going forward. So the combination of focusing on the go-to market, at the same time, continue to provide best TCOs. We are also seeing enterprise customers started to upgrade because in today's data center, we all know power space, both are very limited. So modernized data center, upgrade data center, AMD solution can actually provide the best TCO from power perspective and from a performance per dollar perspective. So it is why we feel pretty good about continued progress, especially with the Turin launching in Q4 right now, we're going to see momentum into next year.

And a question that I think I've heard a lot this week, and I had the co-CEOs of Intel here this morning is. Obviously, you don't wish ill upon your customers. But when there are changes, customers are going to change their preferences and profiles and conversations. So you mentioned like the enterprise game is really a ground game. Like you go CIO, CIO, CIO those conversations that win you market share over time. Have you seen any change in the very recent history as in 2 weeks in those conversations? And how would you think about your business there given the change?

I think what AMD has always been doing is assuming our competition is going to do very well. So our job is to make sure that's the assumption, and we stay competitive and drive the leadership performance and also make sure our customers get the best economics. I think to a certain degree, when you look at the enterprise market, the porting process actually is not that difficult because x86 for both of the companies, it's the same instruction set. And it's really about convincing people we can provide a better TCO, which we do.

So I guess broadly speaking about the market versus the competitive dynamic, there's this view that dollars are being sucked out of the traditional server market and into the AI ecosystem, which you had benefit, and we'll move to AI after. But just on the traditional server market, when you look out at next year, is this a year where you see some recovery? Or is it similar to what we've seen over the past couple of years with maintained muted spend?

Yes. Yes. Great question. Maybe let's take a step back. Our view has been if we are in a super compute investment cycle. And of course, Gen AI has been driving quite significant investment and also adoption of Gen AI, you can see a significant increase of accelerated market, very fast expansion. At the same time, when you really think about general compute, what CPU is really powering is actually foundational critical workloads, right, from enterprise virtualization, your database, your ERP system, even including your storage, it's powered by general CPUs. And then in the cloud, the same thing, when you look at the cloud native workload from Shopee, Amazon, social media, Facebook, WhatsApp to video streaming Netflix or Zoom. All those things are powered by general compute. That's the CPU. So we do see like, okay, AI is going to growing much faster, but the demand for fundamental applications when everybody increasing engagement in their platform is going to be continue to grow. And of course, the innovation we have been pushing out is we can have more core count. We can provide more performance. So we have been supporting the continued demand increase but overall, it is a very large market. We continue to see strong demand in cloud. We see modernization, we see the limitation on space and the power. So customers actually needed to upgrade. They also see their platform engagement is increasing. They need more CPUs in enterprise, we also start to see the early signs of refreshing cycle. It's the same logic. It's -- you need more compute to support your applications, but you have a data center and the power limitation. So you want to get the best TCO from your suppliers. That's why we do think this CPU market and not only it's going to grow, but also we're going to continue to be able to gain share because of the performance.

Okay. Regardless of how that traditional market continues to grow or at the rate of which it grows, you have seen some really impressive growth in the MI series this year. I think if we sat here a year ago, you had confirmed to the ground that you do more than $5 billion this year people would have been shocked. It's a really, really strong ramp. So can you talk about how that is going in terms of the total ramp today, you're going to see a transition in product for the really the first time in that series. So when is that transition occurring? And then just any kind of change in your outlook versus the last time we kind of spoke.

Yes. Yes. Thank you. Last year, I was here our MI 300x revenue was 0. And so it's amazing during this 2024 what we have done as a company from 0 to like going about $5 billion for this 2024. That's a great success. I think when you look ahead 2025. First, at a high level, the backdrop is we continue to see the continued investment in AI infrastructure build-out that has been ongoing with all our customers, and you guys can see the third-party data also. Secondly, user case have been increasing dramatically, right? Every week, we see some new use cases in AI, which definitely when you do the influencing, when you have those use cases, you drive return on investment. So the backdrop of the market continued to be very strong. And for us, the team has been executing extremely well. MI300 ramping successfully and now MI325, we launched literally this quarter, we'll start to see revenue in first quarter next year and then MI350 second half next year. So when you look into 2025, we actually have a much stronger product portfolio versus the 2024. And at the same time, the market backdrop continues to be really good. More importantly, when you look at the 2025, it's just a multiyear journey we are on. The way we think about each product we are addressing. It's always market generational not only deliver the product execution each -- by each generation, but also engage customers. In AI case, right, we also continue to invest in software. We are acquiring ZT Systems to also build our system expertise time to market. So overall, 2025, we feel really good about the opportunities ahead of us. And more importantly, we'll be able to continue to drive the trajectory and the momentum of our business.

So first, I want to talk about the cadence of product transitions and then about customer diversity. But in terms of upgrade cycles with different chip families. Generally, there's digestion and then there's a ramp-up period of time. And you guys have done a really good job of kind of amassing that even with your first transition last -- at the end of last year in December. Can you talk about how you manage that? How do you manage through that? Is that a conversation with customers? Do you naturally see a wind down quicker than you see on wind up? Anything that you can give just to talk about the cadence of those ramps?

So what we're seeing in the AI market is you are seeing many different models and different diversified needs. So it's not like, okay, the most advanced model, they are large clusters training, inferencing, you need more advanced technology and GPUs. But at the same time, increasingly, we see so many models across different inferencing. So different customers actually have different needs. And our engagement with our customers, existing customers have always been market generational. So you don't just sell them one product. The engagement tend to be really deep. It's not only MI300 we're selling, but MI325 and MI350 even MI400. And then we have been broadening our customer base. We talk about over 100 customer engagements and then different customers really have a different need. So we do think you will see MI300, MI325, MI350, they may coexist for a while because it's just a different customer, you are meeting different customers' needs.

And then there's the aspect of customer diversification as well. Obviously, re:Invent was very recently. You have one large customer that's well known today. But in terms of customer diversification, could you talk to where you're seeing green shoots maybe with other large customers and your ability to kind of expand? Is that a function of just seeing more inferencing in the market? Or is that just really customers taking more time to come to your platform?

Yes. Of course, we talk about our large customers, like Microsoft, Meta, Oracle and not only MI300 and our software ROCm are powering the most demanding workload and the model with our key customers but also, we are engaging with other customers. AWS, we have been engaging with AWS. And of course, for third-party workload, you have to work with the enterprise customers also. So that engagement continues. We are also engaging with other hyperscale customers. So you should expect us not only with existing customers, we're going to broadening applications both inferencing. In Meta's case, we're also doing training with Meta. The model application are going to broadening, but we're also engaging with new customers addressing new applications. That is how we think about building a business for the long term.

So customer diversification is going well. It seems that's checkmark number one. Two is, I think that increasingly, you've seen the diversification and the differentiation in the market between NVIDIA and other players is their ability to scale to system-based solutions, right? They have their own protocol. They're scaling up and scaling out they're clustering. I think what's been more difficult for non NVIDIA players just broadly has been the fact that you need a bunch of different players to come together in order to get that scaling architecture to work. So you obviously acquired ZT that's part one. But how is it going in terms of your ability to replicate that sort of systems-based architecture? Are you running into kind of any walls in terms of that process? And how are you thinking about scaling that architecture over time.

Yes, yes, that's a great question. You're absolutely right, when we think about Gen AI market, when we look at the opportunities, the $500 billion, Lisa talked about it, we strongly believe the majority of the market is going to be addressed by general purpose GPU, including system level software solution, the rack, the cluster level. You really needed to have a system expertise, have a strong software base to support that future market because that's what provides the best TCOs. So if you look at our journey, not only we have the annual cadence on the GPU side, we are increasingly investing in networking, in buying ZT System, that will give us system expertise to build a rack level and class level solutions and also our team continue to push forward about software investment. So that is what we think the majority of the market will be there are some ASIC opportunity ASIC market also. But for us to build that overall solution to be a major player in this market ZT Systems is one of the example. We expect to close the transaction early next year. And our MI350 will get some benefit, but MI400 which is 2026, we'll get a full benefit of ZT System. So it's exciting time.

Okay. And then I think that you've been very prescriptive, which has been helpful on the gross margin ramp of the MI series. And then there will also be the layer on of a more systems-based architecture. So you said over time, moving more towards corporate average than perhaps surpassing that. Could you give us an update on how that margin structure is progressing? When you see that crossover point? Anything that varies in terms of your initial expectations?

Yes. I think first thing is the gross margin is very important metrics to AMD. With all the R&D investments we are making, the gross margin really is a reflection of your IP and your engineering excellence. So when you look at the 2024 versus '23, I think the '23 the fiscal year, our gross margin was 50%. And 2024, we really have been improving gross margin. We are expecting 2024 is a 53%, quite a significant expansion. Going forward, that continues to be our objective to expand gross margin. On the data center GPU side, we did talk about that it's below corporate average. I think given the larger opportunities, in front of us and especially how fast this market is expanding. Of course, our priority #1 is to meet the customers' need to address the large market opportunity. So as a CFO, you always think about the gross margin dollars, right? Percentage is super important. But while market is expanding so quickly, you can get more gross margin dollars. That is our priority. But over time, when we look at how complicated the technology for data center GPU, it's absolutely the segment that you should expect us to continue to improve gross margin over time. It will be accretive to corporate average.

Helpful. Using gross margin as a bridge here, I want to go to the PC side and talk about AI PC. So we've heard a whole bunch of different things about what the AI PC market is it's updated pretty frequently. What is your view of the AI PC market moving into '25? And we've heard it's a gross margin headwind. Is it gross margin tailwind, it's been all over the place. What is it for AMD? Is this something that should help ASPs?

Yes, our view has not changed. We always -- Lisa always said even at the very beginning, we think AI PC adoption in 2024 is going to be moderate. It's really in 2025 because you do need all the AI PC applications for a customer want to buy AI PC. And when you look into 2025, we do think there are going to be more applications. We do think with the Window 10 end of life, you will see refreshing cycle when people upgrade their PCs, if you have AI PC, if you have applications, you would expect people will upgrade to new AI PCs. And also, you are going to see more offering of AI PC. So we do think 2025, of course, the overall PC market, in our view, is going to grow, maybe low to mid-single digit. The seasonality always the first half is lower and the second half is higher. That is going to be the case. But AI PC, we do think the momentum will be much more significant in 2025.

And then obviously, the gross margin side of that, I know that you've done a very good job with ASPs driving some growth on the PC side. But does AI PC lend to ASP increases? Or is that more of a competitive dynamic?

Yes. I think AMD actually has -- if you look at our Ryzen AI 300, we probably have the best CPU inside and the best GPU inside and also the NPU, which is the AI accelerator. We do think when you offer more features, you should get higher ASP. That's our view is because you're providing customer much more. So typically, that is how it's focused on higher ASP gross margin should it be at least the similar or better.

And then I just wanted to kind of conclude the topic on competition. You're hearing more about ARM. There was exclusivity going into the end of this year. You're going to see more engagement with the ARM ecosystem into the beginning of next year. What's your view on what the right level of penetration will ultimately be from an ARM perspective? Is that something that you factor in when you look at the growth of your business in the '25?

Yes. I think the first thing is, I don't know about you guys, I never look at what in my PCs like ARM or x86. I think for most of customers what they care about is battery life, performance, efficiency. So what you are seeing is AMD now has one of the strongest product portfolio in history. We are offering not only performance, we're continuing to extend the battery life to really make sure we can offer customers both power efficiency and also performance. That's what we're striving for. And of course, ARM PC this year, the share is low. The ecosystem is especially on the commercial side, you do need to be backward compatible with all your applications. Over time, the way we look at this market is we're trying to innovate and provide the customer best product. And AMD, we actually really view ourselves as a high-performance computing company. Some of part of our business actually work with ARM. Xilinx, they have always been partnering with ARM. So for us, it's not about x86 ARM. It is like high-performance compute, how we can provide the customers the best performance. And of course, we have the capabilities. If a customer wants us to do ARM-based PCs, we absolutely have the capability.

Perfect segue into your embedded business. That's been going through a bit of a longer recovery than I think most would have expected. And you kind of talked about some growth into the 2025 period has not been super prescriptive there. But 2 questions. One, are you starting to see some green shoots in that business? I know that one of the takeaways from the conference for us thus far has been, you've seen a little bit better telco. So that's obviously not their wireless business as much, but maybe a little on the wireline side. And then two, you're hearing about a potential spinout of the main competitor to Xilinx, do you think that changes the competitive dynamic in any way?

First, our embedded business have been doing really well on design win perspective. If you look at -- despite of a very deep inventory correction cycle, our design wins to continue to be quite significant year-over-year. And then when you look at the business side, is it actually bottom and Q3 sequentially, we actually see increase in the Q4, it's more stabilized. When we look at the end market we cover, we actually cover a very broad end market. When you look at the AMD's embedded business, we actually tend to be on the mid and high end of the FPGA business. So aerospace defense is actually doing reasonably okay. And then testing emulation, actually doing good. I think consistent with what you are saying is industrial has continued to be quite challenging, mixed demand environment and communication, it stabilized, but it is the headwind in 2024 communication definitely was one of the sector was challenged and of course, automotive is small for us, but it seems like it's still struggling. So it's a mixed environment, but we do think going into 2025, overall, you should expect a gradual recovery.

So I want to just ask on the broader model in '25 really quickly. So it sounds as though the server, core server business is doing well, PC, more second half weighted and you talked about the last earnings call, a little bit stronger end of this year, maybe a little softer first half of next year. But in terms of like the total growth of the business, things sound good. In terms of the operating leverage that you can get, how do you think about spend? And if I look at -- you've grown quite robustly over the past couple of years. If spend is not as -- if revenue was not as aggressive as those big growth years of the bottom, how do you think that you can move that OpEx lever to get more drop down to the bottom of the model?

Yes. You're right, when we look back in 2024 our data center business and our client business performance have been tremendous. Data center is like literally with the data center GPU come to more than $5 billion. We almost doubled our data center business. The headwind is really on the gaming and embedded business, which they are behind us when we look ahead of 2025. On the operating model perspective, you should expect us to continue to invest in R&D aggressively because that is how we drive the multiyear generation road map to really continue to drive the leadership. But overall, the OpEx increase should be less than top line revenue growth. And then that's how we drive the operating model leverage. If you look at the 2024, it was similar. We want to make sure earnings expansion is much faster than top line revenue growth. That's how we think about it, and that's how we are going to drive it.

All right. Well, I really appreciate the time. Thank you for being here. It's a pleasure as always.

Yes. Thank you for having us. Thank you, everyone.