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

Welcome back, everybody. I'm Joe Moore, Morgan Stanley Semiconductor Research. I'll read this disclosure real quickly. For important disclosures, please see the Morgan Stanley Research Disclosures website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. So with that, very happy to have with us today from Advanced Micro Devices, Jean Hu, EVP, CFO and Treasurer; as well as Matt Ramsey, who newly joined the company. I don't know your title -- Head of IR and other things, right?

That's good. I'll take that.

Anyway, so welcome you guys. Thank you so much for joining us. I think we've got to start on AI. I think it's a rule. But you guys had a great year 1. You did over $5 billion of revenue for a product from a standing start that people got first silicon and used it $5 billion in a year, tremendous. People want more always. But like a very good year 1. Can you talk about what was required to do that? And how much visibility that gives you? It doesn't seem like people buy a point product, they're buying a road map. So obviously, that $5 billion speaks to a certain amount of confidence. Can you talk about that year 1 experience?

Yes, absolutely. First, thank you for having us. This is a great conference. And thank you for the question. 2024, it was truly a transformative year for AMD. As you mentioned, we actually ramped up MI300 really quickly, and it exceeded $5 billion. Both the MI300 and our ROCm software right now are powering some of the most complicated AI models, right, at Microsoft, at Meta, at scale. So it's a lot of progress we made, and the team executed flawlessly actually to ramp the production over MI300. At the same time, we also made tremendous progress in our overall hardware road map and the software stack. If you think about the hardware side, not only we introduced MI325, but we also put in this year, MI350. And next year, we're going to be on track for MI400. On the software side, we made a lot of progress with the ROCm to really support all different applications and the workload. We also acquired ZT Systems to build our system expertise, to build the reg level and class level designs. So overall, progress made and our engagement with the customers also broadened quite significantly. Not only we add new customers and with existing customers the engagement has always been about market generational. It's not just about generating MI300 revenue, it's about the discussions for MI350 and MI400, how we help our customers build clusters to provide better TCOs. So the way to think about it is MI300 is the very, very beginning of our journey and each generation, if you look at our product road map, we get better and stronger, more competitive. And just like how we build our server side of the business. Over time, we want to be a strong player, gaining market share in this market. When you look at the market opportunities, we do expect to be like $0.5 trillion, 500 large market opportunities. And based on the execution we have so far and how we are very well positioned, we do believe we can have a growth trajectory to tens of billion dollars in annual revenue in this market.

I do want to dig into some of the road map stuff, but maybe first, conceptually, if we could talk about AMD versus ASICs principally is my focus. I think NVIDIA is pretty good at this. We all know that. But everybody is looking for an alternative. Nobody wants to be sole-sourced. Everybody is looking for ways that they can generate ROI that NVIDIA can't give them. I think when we were at this conference 12 months ago, AMD was clearly the answer to that question in people's mind. Now people are talking a lot more about custom silicon and ASICs. And I guess, at the same time, you guys have a lot of visibility with customers. You have a lot of customers who are still making investments in AMD. Just how do I think about that trade-off between the visibility that the ASIC vendors have versus the visibility that AMD has?

Yes. This topic is definitely top of mind for many investors. Maybe let us share our perspective. I'll start, Matt, you can add to this. AMD is the high-performance computer company. If you think about our strategy and what Lisa has done is to build the platform, not only we have a CPU/GPU and also FPGA, we also do customer silicons, actually. So our view has always been different workload, different applications require different computer engine to get the best economics. And when you look at the AI models, it has been evolving rapidly and model innovation, literally accelerating every week. At the same time, you can see the AI scaling continues, right? You have like a pretraining. post training to test time compute. All those things require different compute, different compute engine, different compute requirements. GPU is really built for support a wide range of models, right? It's flexible. You can program it and you can tune it for the performance over different model change. So from a TCO perspective, that is how you really think about the total cost of ownership, 1 customer are doing either training influence, about the cost per token and the cost per FLOP. We are working with our customers closely to really build those large infrastructures. That's how they are thinking about. On the other side, ASIC can be efficient if the workload is very specific, very stable. And then you can really design for the specific models and at the same time, there's a very large-scale deployment. And the ASIC also takes time, too. That's why you probably are saying is, oh, there's 18 months' to 24 months' time ASIC has visibility. It's actually very similar for us. The engagement with the customers when you think about those 1 gigawatt data center, you need to build the lead time is really data center space, power and all those things. So we have to work with our customers closely to design the overall infrastructure there. So to a certain degree, what AMD is focusing on is we think this is the vast majority of the market in the longer term, especially when you talk about the $500 billion market opportunity. That's where we see we can get a high return on the investment we are making. Matt, anything?

Yes, Joe, I think I would also add that it's pretty easy to think about one way to generate TCO at the data center scale is to have an algorithm calm down, design specific silicon for that algorithm and an ASIC and have lower cost hardware upfront. Like that's a pretty obvious way to try to generate TCO, put less dollars in upfront for the same computing. Another way to generate TCO is to build programmable GPU-led infrastructure that can rely on the industry's innovations and software over time to drive better TCO and better ROI of the infrastructure that you've already put in the ground because it's programmable. And I think that over the last month or so, we've sort of all witnessed the market's reaction to DeepSeek. But to us, DeepSeek was -- got a lot of attention because it was in China and a couple of things that they claimed on cost. But it's a pretty natural thing for an industry to start as the installed base of hardware grows to start doing really rapid innovation in software to get better TCO of a fixed -- of an infrastructure that's already in place. And if your infrastructure is programmable, you can benefit from that innovation of the software stack of the industry over a long period of time and over the depreciable life of the infrastructure you put in the ground. And I think that's what gives us the conviction that programmable infrastructure is the way to go for the majority of the TAM. There are certain applications that ASICs are very well suited for. And some of the folks in the market talk about those a lot, but I think over the breadth of workloads and over the fullness of time of software innovation. I think there's a lot to be said for programmable infrastructure, and that's where our customers are pulling us and that's where we're pushing to bring increased competition and capabilities over time.

Can you talk about the role of the price of the hardware? Because I think you just mentioned it's -- you can do something cheaper purpose built. But if you're competing for that broader range of programmable workloads, if this were as easy as doing $5,000 cards, a lot of people would be successful at it. You [ enable ] -- have expensive cards. Even within your stacks, it seems like a lot of the business gravitates to the highest performing part. So can you just talk about the role of price in all of this?

I think to compare the price of data center GPU with the ASIC is probably overly simplified. It's probably more nuanced when you think about how customers think about the TCO, right? As Matt mentioned earlier, for the TCO, we measure cost per token, cost per FLOP. And when they think about it, they think about the overall, how many years they are going to use the infrastructure and how many different models, different workloads that they can run on that infrastructure for those years. On the ASIC side, right, if you want to talk about TCO for economics for any ASIC investment, there's very large upfront R&D cost. That's not part of the ASP, but it's part of the investment. And also, if you take time to invest, you also need to consider the risk of obsolete because the model tends to be very fixed. It could be like 1 or 2 years, you have to turn it around. So when you compare at that point, it's really the upfront ASP is not a direct comparison. I think we look at our customers, how they calculate the total cost of ownership, they do consider all the different factors there. And fundamentally, it is about [ when is it ] programmable you [ tune wave ] can get the best performance over time versus the ones that were very specific applications. You get a better efficiency if you know exactly the scale and the application you want to use.

Great. And I guess before I get to the road map, I mean, the ubiquity of AMD, you can be at several different cloud vendors. You can make investments into the software ecosystem that can benefit -- all of your customers can benefit a wide range, people that don't want to be locked into a single cloud vendor for their workloads, AMD is going to have that appeal. How important is that? And how does that inform the acquisitions that you're doing around software acquisitions in ZT?

Thank you for the question. I think that's a very important part of our AMD strategy. If you look at the ROCm software stack, it's open source. We actually not only all the frameworks, the [ Turin, Triton and jacks ] and all different things support it completely. We also work in the overall ecosystem. And you can run either in Microsoft, you can run in other CSPs to really help the customers, no matter which framework you use to write your model. That is the part of our strategy, actually, is to help customers to really for easy over deployment of AMD models. And then you should expect that continue to drive really aggressively, to have that ecosystem build up. The software acquisitions we did is to add more capabilities and broaden our customer engagement so we can support more customers.

I mean the ZT in particular, seems like a lot of work, right? I mean you're buying an ODM, divesting the hardware portion, keeping the engineering resources. What is that getting you that in return for the work that you're doing there?

I'll start, Matt can add. The ZT acquisition actually is a very important step in our -- building our capabilities. It's about adding design capabilities for [ rack ] level, system level to help customers not only just build the small clusters, but very large clusters for both the training and the influence. It is a lot of work. But when you think about it, it's not only we're going to keep the very large design team that will help us with the capabilities. More importantly, we'll have a strategic partnership with the manufacturing operation, which we are seeking strategic partners that will help us to speed time to market, right. We'll work closely help our customers to build the different clusters for systems. That's really very critical in today's market. Matt?

The only thing I would add -- and Jean, you covered it well, but the only thing I would add is as we bring the ZT design team into the company and it has significant influence on our MI400 generation product in 2026. I think you'll -- we've learned a lot of sort of watching what's happened in the industry over the last 12, 15 months in terms of putting together rack scale systems and I think what you'll expect to see from AMD is a very -- a much less prescriptive approach to system design, partnership with our OEM and ODM partners from a reference design perspective. And every large AI company, every hyperscale company, their data center infrastructure is not ubiquitous. It's not the same. What one customer might want for their data center footprint, one might be very different from what another customer wants. And so being able to have rack scale reference design that's not prescriptive, but have some flexibility and customization for individual data center builds by customers is what we're going to be bringing to the table as we move forward with the ZT team, integrating into the current team that we have inside the company.

So maybe we could talk about the road map a little bit, starting with MI350 this year. How game changing is that product? Are you going to get new customers, replacement customers? Or obviously, people are going to migrate to 350, but how important is it from generating new demand?

You want to start?

Sure. It's an important product for the company. There's some significant new capabilities in networking, in memory capacity and addressability across a cabinet around data type utilizations down to FP6 and FP4. A lot of work that's done in the ROCm software stack that will be introduced alongside MI350 to take sort of higher-level models and map them onto the underlying topology of the hardware. I think it expands our performance levels significantly when it comes to large model inference. I think Lisa has been pretty public about 35x or up to 35x performance gains for inference and expand sort of the aperture of the training capability of the instinct road map to sort of tens of thousands of units and training clusters, and then it gives us something significant to build on in the 400 generation for frontier level training models. And so it's a -- we were really, really excited to be able to pull that product into -- be able to launch in the midyear. I think that was a few months earlier than most of this audience might have expected. And I think we're anxious for that to get going. The customers are anxious for it to get going. And yes, we have talked about bringing in additional sort of lighthouse accounts into the instinct portfolio as that product launches and I guess, more to come in the middle of the year as we officially launch the program.

And then with MI400, you alluded to a lot of the rack and cluster level benefits that you bring. Is the frame of reference their MI400 versus Rubin? And obviously hard to talk about future products from different companies. But just -- is this the point where you can kind of take a much bigger role in training, things like that, your confidence level in that based on what you know of your competitors' road map?

Yes, absolutely. I think the way to think about is MI350 is more compatible with the [ Blackwell ]. And MI400 is really to compete with Rubin. So each generation, we are doing much better. And once we get to MI400, we do feel we have a very competitive product portfolio and support at [ rack ] level, system level and the cluster level build up. That is -- we have not shared a lot of details yet, but that's the plan is to really drive more competitive product road map there.

Okay. And I do want to spend some in the other 80% of your business, but I still have to ask a couple of other questions. I guess, tens of billions that forecast that you have more than [ one 10 ], but tens of billions of revenue potential around these products. Presumably, that is something that you're saying based on conversations you're having with customers about the opportunity that you have. What has to happen for you to achieve those kinds of numbers?

Yes. First, we have to execute on our road map, right, not only hardware road map, software and the ZT Systems integration to make sure we continue to drive all the execution flawlessly. Secondly, it is a very strong customer engagement. When we engage with our customers, it's not about just generated revenue currently. It's always about road map discussions, the feedback from customers, how we can provide the best TCO for customers. And as we all know, is the build cycle is quite long for those larger cluster and the data center, you actually need to figure out the power, the space and everything else. So those are the important things we need to work with our customers, partner with them together. ZT Systems is a very important part of this equation, will help us to speed up time to market to be able to support our customers.

Great. And then last AI question for me. The export controls, if we do get -- we have rules that are supposed to go in place mid-May, we don't know if those will be the final say. Just how is AMD positioned to deal with potential government export controls?

Yes, we're monitoring it very carefully. It definitely it has been a topic everybody is really focused on. So for us, that's the #1 objective. We need to meet the export control criteria. We do think there are a lot of opportunities with solvent AI. In China, there's a large market, too. We do think that those are the opportunities we want to address going forward. But of course, complying with the export control.

Great. So I'd like to pivot and talk -- ask you about some of the x86 businesses starting with servers. You guys have done well in the server market in a market that's been tough, right? We've seen a lot of this AI investment has caused people to -- actually go as far as lengthen the depreciable lives of their servers. So when you guys have the highest market share with the people who are doing that, it seems like it's a headwind and yet you've grown pretty nicely. What's your visibility to that? I mean you've talked about the staleness of the data center ecosystem server-wise. When do you think we might start seeing more refresh business?

You want to start?

Yes, sure. I think there's a couple of things, right? When you -- there was a period of time where there's this mass CapEx pendulum swing towards AI, and we all sort of witnessed what that looked like in 2023 for the server market. More recently, some of the limitations of folks that actually want to add AI hardware or data center space. And if you start to look back at -- there's a lot of compute infrastructure in the data center that's still 2 or 3 generations old, maybe 4 generations old, the CPU, that upgrading those into our Turin platform, given -- either Turin Dense or Turin Classic that can get used significantly better data center footprint usage in addition to some of the work that we're doing on head node for GPU clusters. I think we feel really good at where the server business is. Dan's business -- Dan McNamara who runs that business internally for us has really, really good product up and down the stack from Turin Dense that's sort of a direct arm competitor in a lot of instances, that's built on top of the Bergamo platform that's been really successful to us, to the core account lead that the portfolio has across the board. In addition to the fact that when you take all of this AI work that's being done, it actually generates a lot of need for classical computing alongside of it. So you see that, the ability to refresh for space. And I think we're -- we gained sort of 5 or 6 points of server share last year overall. And I think we're pretty confident about the server share gains to come in 2025 as we move forward. And look forward to continuing the leadership position across the whole breadth of the road map as we move beyond the Turin generation.

And in the enterprise side of the server business, meaning both the enterprise OEMs, but also cloud that's servicing enterprise. You guys had a technology lead now for 6 or 7 years. Obviously, there's still an incumbency advantage for Intel in some cases, but are you able to continue to break through that? And if Intel narrows the gap, does that make it harder? I mean how big does the lead have to be for the enterprise market to keep swinging towards AMD?

Yes. We have been investing enterprise go-to-market for the last couple of years. That has helped us to make a significant progress in the enterprise market. If you look at the last 6 consecutive quarters, we have been growing in our enterprise business year-over-year. That is really because not only the TCO benefit, as Matt mentioned, it's the data center space, the power, those are the major constraints even for enterprise. So when we can provide the TCO to help them to save power and the space, we do see -- if we show our customers our TCO performance, they will switch. There's actually a very, very clear choice over there. It is just we needed to get it to different underpriced customers, have the go-to-market engine to help them to do that switch. So overall, we feel pretty good about generation over generation, not only Gen 1, but Turin. We actually have a more platform design wins with Turin because the workload application, we actually brought the support for all different workloads and application with our Turin platform. So we do think that we can continue to gain market share in the enterprise market.

Yes. Joe, the only thing I would add too, is that on the enterprise side, we -- for the first time, I think, despite having -- as you mentioned, product leadership for a number of generations, it's -- the shift of enterprise CIOs moved more towards what the heck am I going to do with AI, right? And that's where the Board pressure came from. That's where -- in the recent months, it's kind of swung back a bit. I mean AMD has progressed not just as a technology leader, but now as the safe vendor of choice. As you look forward to plan your infrastructure over the next 1, 3, 5 years, what vendor do you want to really rely on for your infrastructure that has presence in all the clouds for overflow and a multi-cloud strategy, but also just continuation of road map execution and stabilization of road map. That's become -- it was really top of mind for what, 7-, 8-, 9-year period. And then when AI came, it kind of went down the priority list for CIOs and it's quickly kind of popped back up, both from a space and power constraints perspective, as Jean discussed, but also just from a continuity of execution of road map and supply. I think it's been a -- the environment changed a bit, and I think Dan's business is positioned well for enterprise over the next 18 months.

Great. And then shifting to Client, really impressive performance there also. I think you grew 58% year-on-year last quarter with a seasonal outlook. Now your competitor called out that they thought there might be a tariff pull forward in their numbers. So how good -- how do you feel about sort of market share in that space is? Are those numbers entirely share-driven and your visibility on that continuing to improve through the year?

Yes. We are very pleased with our Client business performance. It has been really primarily driven by strong product portfolio. So if you look at not only desktop but the notebook side, we have the best lineup of product portfolio. Our Ryzen 9000 desktop processors have been a sellout, like really every channel, a lot of our retail channels you actually can see we get to 70% market share. So sell-through has been really strong, not only in Q4, but post the Chinese New Year, we continue to see strong sell-through because the gaming performance and the advantage of the user experience we can provide to customers. On the notebook side, the Ryzen AI 300 processor have been really successful. We have 150 different platform design wins, almost double the Intel's similar design platforms. So that is the one, not only we have the best CPU, best GPU and the best MPU. The combination really help the customers on the gaming experience side, on the productivity side, on the user experience. So that helps a lot. And more importantly, if you look at -- on the OEM customer side, not only we have a strong relationship with Lenovo, HP, we actually added Dell for the first time to be our strategic partner to introduce the overall commercial platforms. That will help us continue to drive the sell-through to really continue to gain market share.

Great. And so I'll have one more segment question, and then I'll open it to the audience. Embedded. It's been a challenging period, but this is the Xilinx FPGA business. It's been a challenging period for kind of all broad-based market companies in the last year or so. Can you talk about the progress there and any visibility that you may have into growth in Embedded?

You're right. It has a prolonged cycle for inventory normalization. We do see some early signs of really gradual recovery. I think the end market that we participate when you think about aerospace and the defense as well as emulation, those do testing, those are actually quite steady and resilient. You see sign of improvement. Industrial continue to be very mixed from a demand perspective. Overall, we do expect this year is the year to recovery, probably slowly. But I will say one thing is during this kind of a down cycle, we actually get tremendous design wins because our team's focus and execution. If you just look at the design wins, we actually -- for 2024, we had 14 billion design wins, which is like 25% increase year-over-year. That will help us in the longer term when the market really fully recovers. Right now, sell-through is improving slightly. We can see that. So that definitely is going to help us.

Yes. Joe, when I think about the overall AMD financial model, we started the conversation with AI and we added more than $5 billion in revenue from our AI programs in a year, which, from a standing start, as you point out, is a heck of an achievement. But at the same time, there were cyclical challenges in a couple of our businesses, right? The Embedded business declined significantly, and we -- I think the industry -- and gaming as well.

Gaming declined very significantly.

And so we had a couple of businesses that were headwinds that mask on the top line, some really exciting progress in sort of our core franchises. And I think we feel pretty confident that those headwinds are behind us. How quickly they turn into tailwinds. I'd rather, for this audience underpromise and overdeliver with respect to turning those businesses around. But we feel really good to Jean's point about design wins in the Xilinx business and -- which has sort of launched a new gaming GPU recently. So there's some momentum that's starting to build. But at a bare minimum, I think you'll see the exciting franchises in client and server and data center GPU drive the P&L without sort of the headwinds that have been there for the last 12, 15 months in the other franchises.

And the gross margins in Embedded, the questions come up in the context of your competitors saying that their gross margins are significantly lower than a few years ago. It seems like there was a discipline of having 2 public companies that you didn't chase market that were converting to ASICs. It seems like your gross margins are still kind of at the level when you acquired Xilinx. Can you talk to that?

Yes, we continue to be very disciplined. When you look at the FPGA franchise, we have not only from market share, it's #1. And we are also very focused on mid- to high-end market with aerospace, defense and also a lot of emulation testing management side. We continue to drive the team to be as disciplined as in the past. They have done a great job, right? It's all about the margin improvement. So for us, we continue to see very strong gross margin from FPGA business.

Great. Do we have any questions from the audience? One in the front?

[indiscernible] Joe I just want to get a sense of -- a lot of investors are looking at ASP per core. Why is that so strong to measure when customers look at ASP per core [indiscernible]

Yes. Question is on ASP per core. Is that the right way to look at the market?

It's a good way to look at it. If you look at our server business over time, we have been increasing our core counts generation-by-generation. So it's a good way to look at it if you can keep your core price largely consistent or constant you actually issue generation, you actually can increase your overall ASP because you actually provide better performance for your customers. So it is a good way to look at it, but it's actually very -- it takes more time to track it for third-party analysts, right? So I think in general, we do look at it that way.

Any other questions from the audience? I guess then I'll close with like how do you think about R&D dollars? When you think about you're characterizing AI as a $500 billion opportunity. You have tens of billions of revenue potential. I know Lisa pretty well, she's not going to be happy with 5% share. She's going to drive for pretty big numbers. Your competitor is spending $16 billion. So how do you think about the need to invest more, to invest ahead of those revenue levels?

Yes, that's a great question. I think the way how AMD thinks about resource allocation is given the very large growth opportunity, the first thing we are leaning in, in investment. Investment, not only on the R&D side but also on the acquisition side. We do have a very strong balance sheet, very much underlevered balance sheet, so we can leverage our balance sheet to invest to do acquisitions on software side or like a ZT Systems. That being said, the company is very disciplined and the overall focus on innovation. When you think about back 10 years ago or 12 years ago when Lisa and Mark Papermaster joined the company and then Forrest, the whole team -- they had a results constrained even back then, right? So the innovation like a triplet design. AMD really leads at that innovation, it's because of the result constraint at that time the company had. But over time, the team is thinking through how we can be disciplined, how we can innovate. We co-innovate with TSMC on packaging technology, on the process technology, so to drive our architecture, our overall product much more competitive. That has been the team's execution model is we're going to lead in investment, but we're going to be very smart [ efficient ] to invest. If you look at our investment right now, R&D investment in 2024, we're doing 3 generation for data center GPU at the same time; MI325, MI350 and MI400. At the same time, we are investing in our server CPU road map and the client CPU road map and the gaming graphics road map. The platform leverage our team think about the investment is really leveraging the CPU platform, a GPU platform and the software platform. So I'm actually really impressed how our team think about that. Therefore, you always want to control the OpEx. But the team has been always very thoughtful to balance driving long-term company's growth versus how we expand the margin. Overall, I would say, it's -- we will always expand revenue faster than operating expense growth. At our scale, that will drive a very significant operating leverage.

Very helpful. Jean, Matt, thank you so much for time. I appreciate it.

Thank you.

Thank you.