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

Welcome to day 1 of Citi Global TMT Conference. My name is Atif Malik. I cover U.S. semiconductors and semiconductor equipment stocks. It's my pleasure to welcome Jean Hu, EVP, CFO and Treasurer; Matt Ramsay, SVP, Financial Strategy, Friendly Neighborhood IR from A&D. I'll kick it off with my questions first. If you have a question, save it towards the end, we'll have the mic come to you and you can ask your question. Welcome, guys. Jean, if you can take us through the lay of the land. It's been an exciting year. What has changed from January till now, you guys had your big AI Day as well. You raised your TAM forecast. So just kind of walk us through how the demand picture has evolved from January onwards.

Yes. First, thank you for having us, and it's great to be here. Thank you, everyone, for joining us. It has been a really exciting year. They have so many different changes in our industry, and it's really about AI. And we do believe this is the most consequential technology transformation. When you think about the pace, the scale, and the price of the AI, it's unprecedented, right? When you look at this year, not only the model capabilities continue to advancing very quickly. We also see influencing outpace training from AI compute demand perspective and agenetic AI, that's another thing which really have another step change in demand, not only just for GPUs, but for CPUs. So during our advanced AI day, we did update our market opportunities from the past a small number to now $2 trillion in 2030 we do see the demand for our product and not on major CPUs, but the CPUs and IPC and in the future, fiscal AI for our adaptive compute across all different areas and the most exciting thing is we just reported the Q2 results, and we talk about our data center business are expected to double the year. Our GPU business continued to ramp MI450, we're going to launch this quarter at the very beginning of the ramp, then we are going to see a very significant ramp in Q4 and into next year, and on the CPU side, it was a supply constrained, but we have been increasing supply. So we do expect the second half, the CPU business is going to expand more than 80% year-over-year and into next year, continue to expand more than 70%, which should continue to be supply constrained. So it's a very exciting time for AMD. When you think about it, the company has been very aggressively investing in high-performance compute for more than a decade. As you know, we have been building methodically the computer platform from CPU, GPU to adaptive compute across all different end markets. We think the most different things, this is AI, super investment cycle is at the very beginning, and over time, we're going to continue to see strong demand for AMD's product and the portfolio we have built will benefit from this AI super investment cycle.

Great. Matt, Jean talked about inference being a big driver of demand, and we've been hearing about this aggregate compute kind of the shift in the market, the hot chips conference. And you guys and struck a partnership with Celebros. More recently, you've acquired Thales. Can you kind of talk us through what your strategy is on the infant side and how you're thinking about these different pieces of the different type of infants units. .

Sure. And thank you all for -- and Adi, thank you and the folks at Citi for hosting us and for everyone to come and see us. And then maybe this ties a little bit into some of the stuff that Jean talked about in your prior question about what's changed in the market in the last 12 months. It seems like a lot we were waiting for inference to become the majority driver of AI computing. And I think that's happened. And at the same time that, that's happened we've seen this radical change from what I could call chatbot inference to agenetic inference. And that's really created big opportunities for both inferencing silicon and for the CPUs to run the agents. We've talked about in a number of forms. Obviously, the breadth of the inference market will be -- the majority of it driven by GPU-led computing and our MI-455 product is going to be ramping now with Helios and we have a road map to continue to innovate there. There's obviously different ASICs and XPUs in the market that are going to do some of the inferencing work. And there's this new sort of market for disaggregated inference and ultrafast response time tokens that's a relatively small piece of the market today, but I think depending on economics going to a larger piece over time. So -- we've taken a multi sort of pronged approach to the problem. One is a partnership that we have announced with Cerebos, where our Helios systems will be in their cloud and compute alongside their way per scale engine racks to expand the utility, not just of ultrafast inference, but take it to a broader range of more general purpose inference in their cloud for their customers. And then longer term, we do have -- we haven't given a ton of details yet, but we do have some of our own internal silicon ambitions for ultra-low latency inference that would fit into our architecture via chiplets and the Talos team brings a lot of really good talent. We know the folks well, some of them are former AMD, ATI folks back in the day and are going to integrate really quickly into the team. And add a lot of technology and horsepower behind the internal silicon work we're doing in that area.

Let's talk about Helios. I believe you guys already had very high expectations on Helios exiting last year. But just in terms of your shipments and where you stand on Helios, how should we think about the ramp of Helios in Q4 and then into Q1 next year, how is that ramp going? I do hear from clients around questions and our execution. If you can just help us understand

Yes. I would say the Helios ramp, 450 ramp is going very well. Q3 will be the -- at the very beginning of our production shipment we expect revenue in Q3, but Q4, we'll see a very significant step up and then another step up in Q1 2027 and ramp through 2027. It is a scale level rack-scale level, right? It's very different, very complex. So we have been very methodical and deliberate or we designed the ramp process. Start to ramp in the end of Q3 and a step up in Q1, Q4, Q1 into 2027. We are working with all our partners, ODM partners and our overall supply chain to ensure we have all the components. So it's not about the GPU, CPU, HBM memory. There are also a lot of other small components we need to ensure we have. And with the ODM partners, it had been a long really, really durable work with them to make sure the manufacturing process can execute. That's why it's a methodical process. It's -- our team have been working with the ODM partners. We also have been working with all the customers, we're going to have a production shipment to ensure not only all the component works or the mechanical, all the software stack, everything works. So that has been ongoing. It's a weekly execution process. We actually feel pretty good about the ramp. -- both on the supply side. The demand and volume for 2027 has certainly go above our original initial expectation. We need to continue to expand the supply we figure about the financial plan we have talked about it, but it's absolutely the case. We can use more supplies to make sure we meet the customers' demand.

Just sort of the customer profile, you guys had Meta and Microsoft as 2 customers last year, you're growing that demand further this year and then you added and topic as a customer. So can you just talk about that customer funnel, particularly touch on the neo cloud opportunity, if that's an emerging area for you. And and also touch on the dollar per gigawatt across that range of customers. .

Yes. So we are really pleased with our strategic long-term partnership with topic we announced when you have Anthroipic, basically, we have 3 major anchor customers, metal and open AI and[indiscernible] -- and all 3 of them, the deployment are going to be multiple gigawatts scale deployment and the multigenerational engagement with all of them. When you think about our customer pipeline, not only all 3 of them give us the forecast more than what we expected in the beginning of the strategic partnership, of course, we need to make sure we have suppliers to support them. But more importantly, MI 350, we have seen a tremendous demand from all the other third-party customers, the model builders, the new AI companies, even the enterprise customers. So we do think the neocloud continue to be the area we're going to work with to make sure we meet all the other and the customers need, the pipeline is quite significant. For us, we really need to prioritize. We want to make sure we support the 3 major unter customers large-scale deployment, but at the same time, you should expect us to work with the neo cloud to make sure we support all the other customers in the market.

One thing I would add to what Jean mentioned is it's not -- when we think about these programs, we don't just think about it as what's going to happen with Helios and MI-455 over the next 12, 15, 18 months. it's the engineering level and technical engagement that's influencing what the MI 500 programs look like, the M600 program will look like. what the design of the future racks will look like. The amount of technical engagement across these -- the 3 leading model companies that we've announced as customers so far. That's -- it's really heartening to see that influence the road map over a multigenerational period and I think that gives us confidence into not just where our road map is going, but what that engagement level is going to look like over the -- through the end of the decade, right, over multiple generations. And we saw the same thing happen. It's a very different time in a different market, but the same thing happened on the CPU side, 6 or 7 years ago, right, where people were announcing partnerships with AMD on the ROM generation, but it was really influenced by what they saw in their level of influence in the road map of multiple generations going forward from there. And I think that's kind of where we are now with the AI business.

Great. Jean, the MI series is below corporate average on gross margin side. And how should we think about the ramp and the move to MI35toMI500 in the future and the impact your gross margin expectations next year? .

Yes. Thank you for the question. I think data center AI MI450 and the future generation -- it's 1 of the most significant growth drivers in our data center business. What it's going to help us is to drive very significant incremental revenue and gross profit growth in next year and beyond. And even though the gross margin percentage right now is still a bit below corporate average. But the way to think about it is we actually have a broad portfolio at the company level. So we always talk about the gross margin is being driven by the mix of our different product portfolio. And one of the things is going into Q4 and 2027, even though we're ramping MI450 significantly, but we do have some tailwinds on the gross margin side to help us I think the first one is the server CPU business. When you think about the server CPU business right now, within our data center, it's still a larger portion of our business and it's actually going to continue to grow. We expect second half to be more than 80% year-over-year increase in the next year, more than 70%. So from that perspective, that the business is gross margin accretive to corporate average. So, we do see that is going to help to offset some of the dilution from data center AI business. Secondly, our embedded business after 3 years of the inventory digestion -- we have seen a significant double-digit year-over-year increase, not only in Q2. We also guided in Q3 and going forward. So the business recovery is very broad-based embedded business. And we are also winning a lot of design wins with our embedded X86 business in data center in networking and all those businesses are margin accretive to us. Third thing is probably small, but our gaming business, which tends to be the lower gross margin, which is at a later stage of product cycle. And the memory cost is pretty high right now, which also impacted the demand side. So the mix from a gross margin perspective, actually, we do have all those tailwinds. In general, the way to think about it is when we ramp MI450 in Q4 the gross margin will be slightly lower than what we guided Q3. Q3, we actually guided our gross margin at 56%. You have seen we are expanding gross margin since last year when we actually are ramping MI350. So going forward, the gross margin in 2027 quarter-over-quarter will be different. But the most important thing is the way to think about our business model is we are driving very significant data center revenue expansion and the gross margin dollar expansion, which our investment and OpEx increase is lower than revenue and gross profit increase, which is driving very significant operating leverage and earnings per share expansion.

Very clear. Let's talk about the server CPUs. When I visited you guys in, I believe it was January, something for us or some but turned on in terms of the CPU demand this year. And you guys are talking about not finding enough CPUs internally to do agentic AI yourself. So kind of walk us through -- and now the TAM is like $220 billion by 2030. And -- can you just talk about your aspirations around market share in the server CPU market? What have you seen so far x86 versus ARM -- and just your aspirations or market share. .

Yes. I'll start, and Matt can add. It's actually astonishing when you think about the software CPU market expansion. I think when we had our last Financial Analyst Day in November 2025, we talk about service PO market TAM to be at $6 billion in 2030. At that time, agentic AI was at the very early beginning and really agentic AI adoption the diffusion into the business enterprise has been -- the curve has been tremendous. So we see the agentic AI adoption very significantly starting in January and just continue to be like almost like a vertical in enterprise market, which -- that's when the demand for continue to increase because as Matt mentioned earlier, when you think about agentic AI, it's about workflow execution. -- in enterprise that really requires retrieving data, execute, oxtration, all those are being done on the CPU. So not only you needed to go back to your additional CPUs to run all the tasks you actually have increased the layer agentic AI sandbox, we think it's a new segment which is to executing all the agencies past because they make sure it coordinated with every other compute. That market has been -- just continue to increase we can see the demand continue to go up. That's why we're -- we have just updated our TAM opportunities to more than CNY 220 billion from CNY 25 billion in 2025. That is how significant the expansion has been -- we see more than 50% CAGR in the next several years. Largely driven by agenetic AI. They are different segments. The way to think about this, you do have the foundational segment, which handles all your enterprise applications, your SAP, your database, that continue to grow, but the growth is probably not as big as the other segment. Then there's the head node part coordinated with the GPUs that continue to grow. But the largest is agentic AI sandbox which is very small today, but it's going to be more than 50% of that JPY 220 billion market. And we do think it's not only about ASP increase, the unit will increase significantly, too. So the market opportunity is tremendous. And we are very well positioned as the company from an investment perspective.

Yes. Just to add a couple of points, Dean. We feel like the road map is in about the best place that it's ever been in the server business. I think Atif, you asked a question around instruction set, so x86 versus ARM. Just to be clear, I mean, there are areas in -- particularly in the enterprise server applications where x86 legacy is very important. There are broad applicability, not really of instruction set, but of experience in security features, reliability, serviceability like really enterprise and cloud grade features that we have in the 6 or 7 generation on the road map that are quite important. But we also feel like our own differentiation and our competitive lead in the server business will expand with pretty significantly. It's a very, very compelling program and the amount of demand and visibility that we have in the server business is very significant from what it's been historically. And I think that I think we get asked about competition a lot. And I think our approach to this is not an X86 thing or an ARM thing. It's a build the best server parts period. I mean that's the priority of the business. And I think if we do that, we can give differentiation in the agentic world of threads per rack or threads or megawatt, we can give over 5 gigahertz products that go into head nodes, we can have broad applicability across the enterprise stack, whether that's on-prem or in the cloud. One of the fascinating you mentioned some of the growth rates, but one of the fascinating stats to me, having been in the server industry since 2000 is I mean our enterprise server business grew more than 70% in the second quarter. I mean it used to be heroic, if you had double-digit growth in enterprise server and now we're talking about 70% growth. So it's a really broad-based portfolio. And I think the going from the Venice generation into Florence and Ravenna beyond that. I think the intend to the much larger TAM that Jean described, we do intend to grow to 50% of that dollar TAM inclusive of all instruction sets of competition. And when you do the math and you talk about building a $100 billion server business, and that's what we're intending to do.

Great. Jean, let's talk about supply. This topic never dies. You -- you guys have talked about $70 billion India center sales next year and maybe low 40 billion GPU and the remaining CPU. You saw purchase commitments, $29 billion, $30 billion. Just -- and then we can all track and hear about TSMC's allocation and you guys are seeing the biggest jump next year. But just help us understand what are the limitations around supply and your ability to upside next year. .

I think overall, supply is very tight. There are multiple areas, not only wafers advanced process node -- HBM tight packaging. -- substrate on some of the components are very tight. We do have an excellent supply chain team. Operationally, we have been working with the whole supply chain to ensure we can support our top line revenue growth. On the data center AI side, MI 450, we have been preparing for the ramp for a long time. So the way to think about it is we have been working with the whole ecosystem to ensure not only we have wafers, HBM and also advanced packaging capacity as well as all the different components to support the Helios rack level solutions. That has been ongoing and now the demand continued to go up. So we absolutely needed to get more supplies. On the server CPU side, as Matt and I talk about this, it's actually the demand start to accelerate this year. So we didn't need the catch up. During the process for the first half, we have continued to increase the supply from wafers perspective from advanced packaging capacity perspective, and we continue to invest aggressively. We talk about our CapEx increase. The primary increase of CapEx is to build the capacity to support the recipe ramp like especially mines as Matt talked about, we do see very significant ramp next year, and we are actually -- our capacity is not enough. We need to build ourselves to buy the equipment, do the consignment to support the ramp. So right now, we actually feel really good about all the supply chain work we have done to ensure we can support the data center revenue to double next year and also to ensure the embedded is to get the supplies to still to be very significant growth in 2027, PC and gaming we prioritize, but we absolutely want to make sure we continue to gain share in the PC market, too. So we feel pretty good. But I would say we can have more supplies, demand continue to increase.