Advanced Micro Devices Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2023

There are 15 speakers on the call.

Operator

As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Ruth Cotter. Please go ahead,

Speaker 1

Ruth. Thank you, and welcome to AMD's Q1 2023 financial results conference call. By now, you should have had the opportunity to review a copy of our earnings press release and accompanying slideware. If you've not reviewed these documents, they can be found on the Investor Relations page of amd.com. We will refer primarily to non GAAP financial measures during this call.

Speaker 1

The full non GAAP To GAAP reconciliations are available in today's press release and slides posted on our website. Participants on today's conference call are Doctor. Lisa Sue, our Chair and Chief Executive Officer and Jean Hu, our Executive Vice President, Chief Financial Officer and Treasurer. This is a live call and will be replayed via webcast on our website. Before we begin today's call, we would like to note that Jean Hu Dan McNamara, Senior Vice President and General Manager, Server Business Unit, will attend the Bank of America Global Technology Conference On Tuesday, June 6.

Speaker 1

And our Q2 2023 quiet time is expected to begin at the close of business On Friday, June 16th. Today's discussion contains forward looking statements based on current beliefs, assumptions and expectations, Speak only as of today and as such involve risks and uncertainties that could cause actual results to differ materially from our current expectations. Please refer to the cautionary statement in our press release for more information on factors that could cause actual results to differ materially. Now with that, I'll hand the call over to Lisa. Lisa?

Speaker 2

Thank you, Ruth, and good afternoon to all those listening in today. We executed very well in the Q1 as we delivered better than expected revenue and earnings in a mixed demand environment, launched Multiple leadership products across our businesses and made significant progress accelerating our AI roadmap and customer engagements across our portfolio. 1st quarter revenue was $5,400,000,000 a decrease of 9% year over year. Sales of our data center and embedded products contributed more than 50% of overall revenue in the quarter as cloud and embedded revenue grew significantly year over year. Looking at the Q1 business results, Data Center segment revenue of $1,300,000,000 was flat year over year with higher cloud sales offset by lower enterprise sales.

Speaker 2

In cloud, the quarter played out largely as we expected. EPYC CPU sales grew by a strong double digit percentage year over year, But declined sequentially as elevated inventory levels with some MDC customers resulted in a lower sell in TAM for the quarter. Against this backdrop, we were pleased that the largest cloud providers further expanded their AMD deployments in the quarter to power a larger portion of their internal workloads and public 28 new AMD instances launched in the Q1, including multiple confidential computing offerings from Microsoft Azure, Google Cloud and Oracle Cloud that take advantage of the unique security features of our EPYC Processors. In total, we now have more than 640 AMD powered public instances available. Enterprise sales declined year over year and sequentially as end customer demand softened due to near term macroeconomic uncertainty.

Speaker 2

We continued growing our enterprise pipeline and closed multiple wins with Fortune 500 Automotive, Technology and financial companies in the quarter. We made strong progress in the quarter ramping our Zen 4 EPYC CPU portfolio. All of our large cloud customers have Genoa running in their data centers and are on track to begin broad deployments to power their internal workloads and public instances For the enterprise, Dell, HPE, Lenovo, Supermicro and other leading providers entered production on new Genoa Server platforms that complement their existing 3rd gen EPYC platforms. We are on track to launch Bergamo, our first cloud native server CPU And Genoa X, our 4th gen EPYC processor with 3 d chiplets for leadership in technical computing workloads later this quarter. Although we expect server demand to remain mixed in the Q2, we are well positioned to grow our cloud and enterprise footprint in the second half of the year based on the strong customer response to the performance and TCO advantages of Genoa, Bergamo and Genoa X.

Speaker 2

Now looking at our broader data center business. In networking, Microsoft Azure launched their first instance powered by our Pensando DPU and software stack that can significantly increase application performance For networking intensive workloads by enabling 10x more connections per second compared to non accelerated instances. We expanded our data center product portfolio with the launch of our first ASIC based alveo data center media accelerator that supports 4 times the number of simultaneous Video streams compared to our prior generation. In supercomputing, the Max Planck Society announced plans to build the 1st supercomputer in the EU Powered by 4th Gen EPYC CPUs and Instinct Mi 300 Accelerators that is expected to deliver a 3 times increase We expanded the software ecosystem support for our Instinct GPUs in the Q1, highlighted by the launch of the widely used PyTorch 2.0 framework, Which now offers native support for our Rockom software. In early April, researchers announced they used the Lumi supercomputer powered by 3rd gen EPYC GPUs and Instinct Mi 250 Accelerators to train the largest Finnish language model to date.

Speaker 2

Customer interest has increased significantly for our next Generation Instinct MI300 GPUs for both AI training and inference of large language models. We made excellent progress achieving key Mi300 silicon and software readiness milestones in the quarter, and we're on track to launch Mi300 later this year to support the El Capitan ex Scale supercomputer win at Lawrence Livermore National Laboratory and Large Cloud AI Customers. To execute our broad AI strategy and significantly accelerate this key part of our business, we brought together multiple AI teams Hardware strategy and driving development of a complete software ecosystem, including optimized libraries, models and frameworks spanning our full product portfolio. Now turning to our client segment. Revenue declined 65% year over year to $739,000,000 as we shipped Significantly below consumption to reduce downstream inventory.

Speaker 2

As we stated on our last earnings call, we believe the Q1 was the bottom for our client processor business. We expanded our leadership desktop and notebook processor portfolio significantly in the quarter. In desktops, we launched the industry's fastest Just gaming processors with our Ryzen 7000X3D Series CPUs that combine our Zen 4 core with industry leading 3 d chiplet packaging technology. In mobile, the first notebooks powered by our Dragon Range CPUs launched a strong demand with multiple third party reviews highlighting how our 16 core Ryzen 9 7945 HX CPU is now the fastest mobile processor available. We also ramped production of our Zen 4 based Phoenix Ryzen 7,040 Series CPUs in the Q1 for ultrathin and gaming notebooks To support the more than 250 ultrathin gaming and commercial notebook design wins on track to launch this year from Acer, Asus, Dell, HP and Lenovo.

Speaker 2

Looking at the year, we continue to expect the PC TAM to be down approximately 10% for 2023 To approximately 260,000,000 units. Based on the strength of our product portfolio, we expect our client CPU sales to grow in the second quarter Percent year over year to $1,800,000,000 as higher semi custom revenue was offset by lower gaming graphics sales. Semi custom SoC revenue grew year over year as demand for premium consoles remained strong following the holiday cycle. In gaming graphics, channel sell through of our Radeon 6000 and Radeon 7000 Series GPUs increased sequentially. We saw strong sales of our high end Radeon 7,900XTX GPUs in the Q1, and we're on track to expand our RDNA3 GPU portfolio with the launch of new mainstream Radeon 7000 Series GPUs this quarter.

Speaker 2

Looking at our Embedded segment, revenue increased significantly year over year to a record 1,600,000,000 We saw strength across the majority of our embedded markets led by increased demand from industrial, vision and healthcare, Test and Emulation, Communications, Aerospace and Defense and Automotive customers. Demand for our adaptive computing Solutions continues to grow as industrial, vision and healthcare customers actively work to add more advanced compute capabilities across their product lines. We also released new VITAS AI software libraries to enable advanced visualization and AI capabilities for our medical customers And launched our next generation Creo platform that provides a turnkey solution to deploy our leadership adaptive computing capabilities Structured design wins ramped into production. We also launched Zynq RF SoC products to accelerate 4 gs and 5 gs radio deployments In cost sensitive markets and formed our 1st telco solutions lab to validate end to end solutions based on AMD CPUs, Adaptive SoCs, FPGAs, DPUs and software. In automotive, deployments of our adaptive silicon solutions for high end ADAS and AI features grew in the quarter, highlighted by Subaru rolling out its AMD based EyeSight 4 platform across their full range of vehicles.

Speaker 2

In addition, we expanded our embedded processor portfolio with the launches of Ryzen 5000 and EPYC 9000 Embedded Series Processors With leadership performance and efficiency as we focus on growing share in the security, storage, edge server and networking markets. Looking more broadly across our embedded business, we are making great progress in bringing together our expanded portfolio and scale to drive deeper engagements with our largest embedded customers. In summary, I'm pleased with our operational and financial performance in the Q1. In the near term, we continue to see a mixed demand environment based on the uncertainties in the macro environment. Based on customer demand signals, we 2nd quarter revenue will be flattish sequentially with growth in our client and data center segments offset by modest declines in our gaming and embedded segments.

Speaker 2

We remain confident in our ability to grow in the second half of the year, driven by adoption of our Zen 4 product portfolio, improving demand trends in our client business And the early ramp of our Instinct Mi 300 Accelerators for HPC and AI. Looking longer term, we have significant growth opportunities We are in the very early stages of the AI computing era and the rate of adoption and growth is faster than any other technology in recent history. And as the recent interest in generative AI highlights, bringing the benefits of large language models and other AI capabilities to cloud, edge and endpoints require significant increases in compute performance. AMD is very well positioned to capitalize on this increased demand for compute Based on our broad portfolio of high performance and adaptive compute engines, the deep relationships we have established with customers across a diverse set of large markets And our expanding software capabilities. We are very excited about our opportunity in AI.

Speaker 2

This is our number one strategic priority and we are engaging deeply across our customer set to bring joint solutions to the market led by our upcoming Instinct Mi 300 GPUs, Ryzen 7,040 Series CPUs with Ryzen AI, Zynq Ultrascale Plus MPSOCs, Alveo V70 Data Center Inference Accelerators And Versal AI Adaptive Data Center and Edge SoCs. I look forward to sharing more about our AI progress over the coming quarters as we broaden our portfolio and grow this strategic part of our business. Now I'd like to turn the call over to Jean to provide some additional color on our Q1 results. Jean?

Speaker 3

Thank you, Lisa, and good afternoon, everyone. I'll start with a review of our financial results For the Q1 and then provide our current outlook for the Q2 of fiscal 2023. As a reminder, for comparative purposes, Q1 2022 results included the only partial quarter financial results From the acquisition of Xiaminq, which closed in February 2022. Revenue in the Q4 was 5,400,000,000 A decrease of 9% year over year as embedded segment strength was offset by lower client segment revenue. Gross margin was 50%, down 2.7 percentage point from a year ago, primarily impacted by client segment performance.

Speaker 3

Operating expenses were CNY 1,600,000,000, increasing 18% year over year, primarily due to inclusion of a full quarter of expenses From Xivinc and Pansendal acquisitions. Operating income was $1,100,000,000 down $739,000,000 year over year And the operating margin was 21%. Interest expense, taxes and other was $128,000,000 For the Q1, diluted earnings per share was $0.60 due to better than expected revenue and operating expenses. Now turning to our reportable segment for the Q4. Starting with the data center segment, revenue was $1,300,000,000 flat year over year, Driven primarily by higher sales of EPYC Processors to cloud customers, offset by lower enterprise server processor sales.

Speaker 3

Data Center segment operating income was $148,000,000 or 11% of revenue compared to $427,000,000 or 30 Lower operating income was primarily due to product mix and increased R and D investments to address larger opportunities ahead of Client segment revenue was $739,000,000 down 65% year over year As we shift significantly below consumption to reduce downstream inventory, we expect improvement in second The quarter clientele segment revenue and a seasonally stronger second half. Clientele segment operating loss It was RMB172 1,000,000 compared to operating income of RMB692 1,000,000 a year ago, primarily due to lower revenue. Gaming segment revenue was $1,800,000,000 down 6% year over year. Semi Customer revenue grew double digit percentage year over year, which was more than offset by lower gaming graphics revenue. Gaming segment operating income was $314,000,000 or 18 percent of revenue compared to 3 We paid $58,000,000 or 19 percent a year ago.

Speaker 3

The decrease was primarily due to lower gaming graphics revenue. Embedded segment revenue was $1,600,000,000 up $967,000,000 year over year, primarily due to 4 quarter of Xilinx revenue and the strong performance across multiple end markets. Embedded segment operating income was CNY 798,000,000 or 51 percent of revenue compared to CNY 2.77 million or 46 percent a year ago, Primarily driven by the inclusion of a full quarter of Xilinx. Turning to the balance sheet and the cash flow. During the quarter, we generated $486,000,000 in cash from operations, reflecting our strong financial model despite We increased inventory by $464,000,000 primarily in anticipation of the ramp of new data center and the client's product In advance to process note, at the end of the quarter, cash, cash equivalents and short term investment were CNY 5,900,000,000 And we returned $241,000,000 to shareholders through share repurchases.

Speaker 3

We have a $6,300,000,000 in remaining authorization for share In summary, in an uncertain macroeconomic environment, the AMD team executed very well, Delivering better than expected top line revenue and earnings. Now turning to our Q2 2023 outlook. We expect revenue to be approximately $5,300,000,000 plus or minus $300,000,000 a decrease of approximately 19% year Year and approximately flat sequentially. Year over year, we expect the client, gaming and the data center segments to decline, Partially offset by embedded segment growth. Sequentially, we expect client and data center segment growth We expect non GAAP gross margin to be approximately 50%, non GAAP operating expenses to be approximately RMB 1,600,000,000 Effective tax rate to be 13% and the diluted share count is expected to be approximately 1,620,000,000 shares.

Speaker 3

In closing, I'm pleased with our strong top line and the bottom line execution. We have a very strong financial model and will continue to invest in Our long term strategic priorities, including accelerating our AI offerings to drive sustainable value creation over the long term. With that, I'll turn it back to Ruth for Q and A session.

Speaker 1

Thank you, Jean. And Kevin, we're happy to pull the audience for questions.

Operator

Thank you. We'll now be conducting a question and answer session. We ask you please ask one question and one follow-up, then return to the Our first question today is coming from Vivek Arya from Bank of America. Your line is now live.

Speaker 4

Thanks for the question. For my first one, Lisa, when I look at your full year data center outlook for some growth that implicitly suggests data center, right, could be up 30% in the second half versus the first half, right? And I'm curious, what is your confidence and visibility and some of the assumptions that go into that view, is it you think there is a much bigger ramp in the new products? Is it enterprise recovery? Is it pricing?

Speaker 4

So just Give us a sense for how we should think about the confidence and visibility of the strong ramp that is implied in your second half data center outlook.

Speaker 2

Right. So, in fact, thanks for the question. Maybe let me give you some context on what's going on in the data center right now. First of all, we I have said that it's a mixed environment in the data center. So the first half of the year, there are some of the larger cloud customers that are working through some inventory and optimization as well as a weaker enterprise.

Speaker 2

As we go into the second half of the year, we see a couple of things. First, our roadmap is very strong. So the feedback that we're getting, working with our customers on Genoa, it's ramping well. It is very differentiated in terms of TCO and overall performance. So we think it's very well positioned.

Speaker 2

Much of the work that we've done in the first half of the year, in the first quarter and here in the second quarter is to ensure that we complete all of that work such that we can ramp across a broader set of workloads, as we go into the second half of the year. And then I would say, from an overall market standpoint, I think Enterprise will still be mixed with the notion that we expect some improvement, depends a little bit on the macro And then as we go into the second half of the year, in addition to Genoa, we're also ramping Bergamot. So that's on track to launch here in the second quarter and will ramp in the second half of the year. And then as we get towards the end of the year, we also have Our GPU ramp of Mi 300. So with that, we start the ramp in the Q4 of our Supercomputing wins as well as our early cloud AI wins.

Speaker 2

So those are all the factors. Of course, we'll have to see how the year plays out, but we feel very good about how we're positioned from an overall product and roadmap standpoint for data center.

Speaker 4

And for my follow-up, Lisa, how do you see the market share evolve in the data center in the second half? Do you think that the competitive gap between your and your competitors' products, has that narrowed? Or you still think that in the second half, you have a chance to gain market share in the data center.

Speaker 2

Yes, absolutely, Vivek. Well, I mean, we've gained share Over the last 4 years, when you look at our data center progression, it's actually been pretty steady. As we go into the second half Of this year, I think we continue to believe that we have a very strong competitive position. So we do think that positions us well To gain share, in the conversations that we're having with customers, I think they're enthusiastic about Zen 4 and what it can bring into cloud workloads as well as enterprise workloads. I think actually Geno is extremely well positioned for enterprise, where we have been Underrepresented.

Speaker 2

So we feel good about the roadmap. I mean, obviously, it's competitive, but we feel very good about our ability to continue to gain share.

Speaker 4

Thank you, Lisa.

Operator

Thank you. Next question is coming from Toshiya Hari from Goldman Sachs. Your line is now live.

Speaker 5

Hi, good afternoon. Thank you so much for taking the question. Lisa, I wanted to ask about the embedded business. It's been a really strong business for you since The acquisition of Xilinx, you're guiding the business down sequentially in Q2. Is this sort of the macrocycle kicking in or is it Something supply related, if you can kind of expand on the Q2 outlook there and your expectations for the second half, that would be helpful.

Speaker 5

Thanks.

Speaker 2

Yes, absolutely, Toshiya. So first, thanks for the question. I mean, I think the embedded business has performed extremely well over the last 4 or 5 quarters. Q1 was another record for the embedded business. When we look underneath it, there is a broad set of Market segments that we have exposure to and the majority of them are actually doing very well.

Speaker 2

Our thought process for sort of Modest decline into Q2 is that we did have a bunch of backlog that we're in the process of clearing and that backlog will clear In Q2 and then we expect that the growth will moderate a bit. We still very much like the positioning Sort of our aerospace and defense, our industrial, our test and emulation business, our automotive business, we expect wireless trends to be a little bit weaker, as well as consumer trends. So those are kind of the puts and takes in the market. But I would say the business has performed well above our expectations.

Speaker 5

That's helpful. Thank you. And then as my follow-up, maybe one for Gene on the gross margin side of things. In your slide deck, I think you're guiding gross margins up half over half in the second half. Can you maybe speak to the puts and takes and the drivers as you think about gross margins over the next 6 to 9 months?

Speaker 5

Thank you.

Speaker 3

Yes. Thank you for the question. Our gross margin is primarily driven by mix. If you look at the first half first Quarter performance and second quarter guide, we are very pleased with the strong gross margin performance in both the data center and the embedded segment. We haven't been seeing headwinds from a client on the segment impacting our gross margin.

Speaker 3

Going to the second half, we do Back to gross margin improvement because the data center is going up and the embedded continue to be relatively strong. The The pace of improvement in the second half actually will be largely dependent on the client segment. We think the client segment Gross margin is also going to improve, but overall it's going to be below corporate average. So the pace of improvement of gross margin Could be dependent on the pace of the client business recovery in second half. But in the longer term, right, when we look at our business The largest incremental revenue opportunities are going to come from data center and the embedded segment.

Speaker 3

So we are Building very good about longer term gross margin going up continuously.

Speaker 5

Very helpful. Thank you.

Operator

Thank you. Next question is coming from Aaron Rakers from Wells Fargo. Your line is now live.

Speaker 6

Yes, thanks for taking the question. I've got 2 as well. I guess the first question going back on just like the cadence of the server CPU cycle with Genoa and Bergamo, and I think It's great to hear that you guys are on track to launch Bergamo here. But there's been some discussion here throughout this last quarter around some DDR5 challenges, I think there's PMEC issues. I'm just curious of how you if those issues have presented themselves or how you would characterize The cadence of the ramp cycle of Genoa at this point.

Speaker 2

Yes, sure, Aaron. So yes, look, I think Genoa, we always Said as we launched it that it would be a little bit more of a longer transition compared to Milan because it is a new platform. So it is the new DDR5, it's PCI Gen 5. And for many of our top customers, they're also doing other things Other than upgrading the CPUs. So from that standpoint, I would say the ramp is going about as we expected.

Speaker 2

We've A lot of interest, a lot of customer engineering work that we're doing together in the data centers with our customers. We feel great about the set of workloads and we see expansion in the workloads going forward. So overall, our Expectation is, particularly as we go into the second half, we'll see Genoa ramp more broadly. But Genoa and Milan are going to coexist throughout the year, Just given sort of the breadth of platforms that we have.

Speaker 6

And anything specific on the DDR5 questions that come up? And then I'm curious with my second question just real Quick is the Mi 300, if we look out beyond just the El Capitan deployment through the course of this year, How do you guys think about success in that data center GPU market? Do we think about beyond just El Capitan?

Speaker 2

Yes, sure, Erin. So back to the DDR5 question, we haven't seen anything specific on DDR5. I mean, it's just normal platform bring up that we're seeing. Now as it relates to your question about Mi 300, look, we're really excited about the AI opportunity. I Think that is success for us, is having a significant part of the AI overall opportunity.

Speaker 2

AI for us is broader than cloud. I mean, it also includes what we're doing in clients and embedded. But specifically as it relates to Mi 300, Mi 300 is actually very well positioned for both HPCs or supercomputing workloads as well as for AI workloads. And with the recent interest in generative AI, I would say the pipeline for Mi 300 has expanded considerably Prepared remarks, the work that we're doing sort of taking our Xilinx and sort of the overall AMD AI efforts in Collapsing them into one organization that's primarily to accelerate our AI software work as well as platform work. So success for Mi 300 is for sure a significant part of sort of the growth in AI in Cloud and I think we feel good about how we're positioned there.

Speaker 6

That's great. Thank you.

Operator

Thank you. Next question is coming from Matt Ramsay from TD Cowen. Your line is now live.

Speaker 7

Yes. Thank you. Good afternoon, everybody. Lisa, my first question, I think just the way the business has trended, right, with enterprise and with China In the data center market being a bit softer recently and it seems like that's kind of continuing into the Q2, it occurs to me that a big percentage Of your data center business, particularly in server in the second half of the year is going to be driven by U. S.

Speaker 7

Hyperscale. And I guess my question is the level of visibility you have to unit volumes, to pricing, to timing of ramps. If you could walk us through that a little bit given it's customer concentrated, I imagine you'd have some level of visibility and you mentioned growth And folks have just pushed me to ask about quantifying the growth for the year. Thanks.

Speaker 2

Sure, Matt. Thanks for the question. So look, I think as we Work with our largest cloud customers in the data center segments, particularly with our EPYC CPUs. We have very Good conversations in terms of what their ramp plans are, what their qualification plans are, which workloads, which instances. So I feel that we have good visibility.

Speaker 2

Obviously, some of this is still dependent on overall macro situation and overall demand. But our view is that there is a lot of good progress in the data center. Now in terms of quantification, as I said, there's a lot of puts and takes. My view is that enterprise will improve As we go into the second half and we're even seeing, I would say some very early signs of some improvement in China as well. So our view is, I think double digit data center growth is what we currently see.

Speaker 2

And certainly, we would like to ramp Genoa and Bergamo as a large piece given the strength of those products. We'd like to see them Grow share here over the next couple of quarters.

Speaker 7

Thank you for that Lisa. That's helpful. For my follow-up question, I think in the prepared scripts, we're obviously under shipping sell through to clear the channel in the client business In the first half of the year and I think the language that was used was seasonal improvements in the second half. So are you guys expecting To come back to shipping in line with sell through, so to stop under shipping demand and then for on top of that Seasonal improvements in the market or and if you could just kind of help me think about the magnitude and the moving pieces in client for the second half? Thanks.

Speaker 2

Yes. So we've been under shipping sort of consumption in the client business for About 3 quarters now and certainly our goal has been to normalize the inventory in the Supply chain so that shipments would be closer to consumption. We expect that that will happen in the second half of the year and that's what the comment meant that And we believe that there will be improvements in the overall inventory positioning. And then we also believe that the client market is stabilizing. So Q1 was the bottom for our business as well as for the overall market, from what we see, although it will be a gradual set of improvements, we do see that the overall market should be better in the second half of the year.

Speaker 2

We like our product portfolio a lot. I'm excited about Having AI enabled on our Ryzen 7,000 series, we have leadership notebook platforms with Dragon Range. Our desktop road map is also quite strong with our new launch of the Ryzen 7000X3D products. And so, I think here in the second quarter, we'll still undership consumption a bit. And by the second half of the year, we should be more normalized between shipments and consumption and we expect some seasonal improvement into the second half.

Speaker 7

Thanks, Lisa.

Operator

Thank you. Next question is coming from Joe Moore from Morgan Stanley. Your line is now live.

Speaker 8

Thank you. Yes, I guess Same question in terms of the cloud business. You mentioned some combination of kind of digestion of spending and inventory reduction, can you give us a sense of how much inventory was there in hyperscale? How much has it come down and how much of how much are you sort of maybe under shipping demand in that segment?

Speaker 2

Yes. I think, Joe, this is a bit harder because every customer is different. What we're seeing is different customers are at A different place in their sort of overall cycle. But let me say it this way though. I think we have Good visibility with all of our large customers in terms of what they're trying to do for the quarter, for the year.

Speaker 2

Obviously, Some of that will depend on how the macro plays out. But from our Viewpoint, I think we're also going through a product transition between Milan in general in some of these workloads. If you put all those things into the conversation, that's why our comment was that We do believe that the Q2 will grow modestly and then there'll be more growth in the second half of the year as it relates to the data center business. So There are lots of puts and takes, every customer is in a bit of a different cycle. But overall, the number of workloads that they're going to be using AMD on, we believe will expand, as we go through the next few quarters.

Speaker 8

Great. And then my follow-up, I mean, you mentioned Interest in Mi 300 around generative AI, can you talk to is that right now kind of a revenue pipeline with major hyperscalers or is that sort of more indication of interest level? Just trying to figure out where you are in terms of establish yourself in that market.

Speaker 2

Yes. I would say, Joe, we've been at this for quite some time. So AI has been very much a strategic priority For AMD for quite some time. With Mi250, we've actually made strong progress. We mentioned in the prepared remarks some of the work that was On the Lumi supercomputer with generative AI models, we continue to do quite a bit of library optimization with Mi 250 and software optimization To really ensure that we could increase the overall performance and capabilities.

Speaker 2

Mi 300 looks really good. I think from everything that we see, the workloads have also changed a bit in terms of Whereas a year ago, much of the conversation was primarily focused on training, today that has migrated to sort of large model inferencing, which is particularly good for GPUs. So, I think from a Mi 300 standpoint, we do believe That way we will start ramping revenue in the Q4 with cloud AI customers and then it will be more meaningful in 2024. Thank

Operator

you. Thank you. Next question is coming from Harlan Sur from JPMorgan. Your line is now live.

Speaker 9

Hi, good afternoon. Thanks for taking my Good to see the strong dynamics in embedded, very diverse end markets. And given their strong market share position here, the Xilinx team is in a really Position to catalyze Epic attach or Ryzen attach to their FPGA and adaptive compute solutions, right. I think embedded X86 It's like a $6,000,000,000 to $8,000,000,000 per year market opportunity. So Lisa, given your year with Xilinx in the portfolio, can you just give us an

Speaker 7

update on the synergy unlock and driving

Speaker 9

higher AMD compute attached to The unlock and driving higher AMD compute attached to Xilinx sockets?

Speaker 2

Yes. Thanks, Harlan. It's Great question. The Xilinx portfolio has done extremely well with us, very strong. I would say, we continue Get more content attached to the FPGAs and the adaptive SOCs.

Speaker 2

We have seen the beginnings of good traction with the cross selling and that is With the cross selling and that is opportunity to take both Ryzen and EPYC CPUs into the broader embedded market, I think the customers are very open to that. I think we have a sales force and a go to market capability across This customer said that is very helpful for that. So I do believe that this is a long term opportunity for us to continue to grow our embedded And we've already seen some design wins as a result of the combination of The Xilinx portfolio and the AMD portfolio and I think we'll see a lot more of that going forward.

Speaker 9

Great. Thanks for that. And in terms of other opportunities, there appears to be this trend towards more of your cloud and hyperscale customers to do their own silicon solutions around accelerated compute or AI offload engines, right? And if I look at it, right, there are less than a handful of the world's semi Speaking of the companies that have the compute, graphics, connectivity, IP portfolio that you guys have as well as the capabilities to Design these very complex offload SoCs, right? Does the team have a strategy to try and go after some of these semi custom or full blown ASIC based type with scale programs?

Speaker 2

We do Harlan and I would put it more broadly. And the more the broader point is I think we have a very complete IP portfolio across CPUs, GPUs, FPGAs, adaptive SoCs, DPUs And a very capable semi custom team. And so beyond hyperscalers, I think when When we look at sort of higher volume opportunities, we think there are higher volume opportunities beyond game consoles that there are custom opportunities available. So I think that combination of IP is very helpful. I think it's a long term opportunity for us and it's one of the areas where we think we can add value to our largest customers.

Speaker 9

Perfect. Thank you, Lisa.

Operator

Thanks. Thank you. Next question is coming from Ross Seymore from Deutsche Bank. Your line is now live.

Speaker 10

Hi, thanks for letting me ask a question. Lisa, I just want to talk about the pricing environment in a general sense. You guys have done a great job of increasing the benefits to your customers and being able to raise prices, pass along cost increases, those sorts of things. But the competitive intensity and the weakness in the market, at least currently, Seems that it could work against that. So in the near term and then perhaps exiting this year into the next couple of years, can you just talk about where you think pricing is going to go across Both your data center market most importantly, but then also in your client market.

Speaker 2

Yes. I think, Ross, what I would say is a A couple of things. I think in the data center market, the pricing is relatively stable. And what that comes from is our goal is to add More capability, right? So it's a TCO equation where as we're going from Milan to Genoa, we are adding more cores, more performance.

Speaker 2

And the performance per dollar that we offer to our customers is one where it's advantageous for them to adopt our technologies and our solutions. So I expect that. I think in the client Business, given some of the inventory conditions in there, I think that there's it's more a competitive environment. We're all from my standpoint, we're focused on normalizing the inventory levels. And with that normalization, The most important thing is to ensure that we get the shipments more in line with consumption because I think that's a healthier business environment overall.

Speaker 2

And then again, it's back to product values, right? So we have to ensure that our products continue to offer Superior performance per dollar, performance per watt, capabilities in the market.

Speaker 10

Thanks for that. And pivoting for my follow-up on to the AI side and Mi 300, I just wanted to know what you would describe as your competitive Advantages, everybody knows that's a market that's exploding right now. There's tons of demand. You guys have all the IP to be able to attack it, But there's a very large incumbent in that space as well. So when you think about what AMD can bring to the market, whether it's hardware, software, heterogeneity of products you can bring, etcetera, what do you think is the core competitive advantage that can allow you to penetrate that market successfully?

Speaker 2

Yes. There's a couple of aspects, Ross. And since we haven't yet announced, Mi 300, all of the specifications will Some of those will come over the coming quarters. Mi 300 is the first Solution that has both the CPU and GPU together and that has been very positive for the supercomputing market. I think as it relates to generative AI, and we think we have a very strong value proposition from both hardware and again it's a performance per dollar conversation, I think there's a lot of demand in the market and there's also, I think given our deep customer relationships On the EPYC side, there's actually a lot of synergy between the customer set between the EPYC CPUs and the Mi Sort of 300 GPU customers.

Speaker 2

So I think when we look at all these together, our view is that Demand is strong for AI and I think our position is also very strong given there are very, very few Sort of products that can really satisfy these large language model sort of needs. And I think we feel confident that we can do that.

Speaker 11

Thank you.

Operator

Thank you. Next question is coming from Timothy Arcuri from UBS. Your line is now live.

Speaker 12

Thanks a lot. Lisa, there was a lot more talk on this call about AI and obviously PyTorch 2.0 now supporting RockM is a great step forward, but how much would you say software is going to dictate how successful you can be for these workloads? You had mentioned that you're forming this new group, this new AI group. Do you have the internal software capabilities to be successful in AI?

Speaker 2

Tim, I think the answer is yes. I think we have made significant progress even over the last year in terms of our software capabilities. And the way You should think about our AI portfolio is, it's really a broad AI portfolio across client sort of edge as well as cloud. And with that, I think the Xilinx team brings a lot of background and capability, especially in inference. We've added significant talent in our AI software as well.

Speaker 2

And the beauty of Particularly the cloud opportunity is it's not that many customers and it's not that many workloads. So when you have sort of very clear Customer targets, we're working very, very closely with our customers on optimizing for a handful of workloads that generate significant volume. That gives us a very clear target for what winning is in the market. So We feel good about our opportunities in AI. And I'd like to say that it's a multiyear journey.

Speaker 2

So this is the beginning of what we think Is a very significant market opportunity for us over the next 3 to 5 years.

Speaker 12

Thanks a lot. And I guess as my So can you just give us a sense of sort of the overall profile that you see for revenue into the back half? I know you said that Data center and embedded will be up this year. It sounds like data center probably up double digits. But I also wanted to confirm that you think that total revenues also will be up this year, year over year?

Speaker 2

Right, Tim. So I think, as we said, we're not guiding the full year just given all the Puts and takes, so we see Q2 is flattish, second half return to growth. We'll have to see exactly how the macro Plays out across PCs and Enterprise. But yes, we feel good about Growth in embedded, growth in data center, on the data center side, double digit growth, sort of half to year over year. And then we'll see how the rest of the segments play out.

Speaker 11

Thank you.

Operator

Thank you. Next question is coming from Amrit Srivastava from BMO Capital Markets. Your line is now live.

Speaker 11

Hi, thank you very much, Lisa. Actually wanted to come back to the Q1 for data center. That's a pretty big, gap between on a Q over Q basis On your business versus Intel and I think almost 2x, this is the first time you would have lost share on a Q over Q basis in a long time. So Could you please address that? And I acknowledge that quarters can be pretty volatile, but it seems to be a pretty large gap.

Speaker 11

And then for my follow-up, Just remind us again, please, for the full year growth for data center, kind of what's embedded in the

Speaker 2

Yes. Let me make sure I get your question, Ambrish. So you're asking about Q1 data center and whether we think we've lost share on a sequential basis?

Speaker 11

Right. If I look at just your report versus what Intel On a Q over Q basis, clearly on a year over year basis, you have gained share, but I'm just comparing down 14 Versus what you reported and so that would imply that you had a share loss versus them unless the data center GPU and the Xilinx business was down significantly also on a Q over Q basis.

Speaker 3

Yes. Anbirish, maybe I'll give you a little bit of color. It's definitely in In Q1, the other networking business, including GPU, have been down. That definitely is the case. But from a share perspective, when we look at overall Q1 reported revenue from both sides And analyze the data, we don't believe we lost a share.

Speaker 3

Yes, that's right, Amber. So I think you just have to go through each of the pieces. But I think from an Epic or a server standpoint, we don't believe we lost share. If anything, we might have gained a little bit.

Speaker 2

But I think overall, I wouldn't look at it so closely on a quarter by quarter basis because there are puts and takes. From what we see overall, we believe that we have a good overall share progression as we go through the year.

Speaker 11

And then the underlying assumptions for full year for data center?

Speaker 2

Underlying assumptions for the full year. I think the key Pieces that I talked about are Q2, let's call it modest growth, still expect some cloud optimization to be happening, as we go into the second half of the year, we'll see a stronger ramp of Genoa, and the beginnings of the ramp Bergamo, we think enterprise is still more dependent on macro, but we do believe that that improves, as we go into the second half of the year. And then we'll have innings of our Mi 300 ramped in the 4th quarter for both supercomputing and some early AI workloads.

Speaker 11

Got it. Thank you very much.

Speaker 12

Sure.

Operator

Thank you. Next question is coming from Stacy Rasgon from Bernstein Research. Your line is now live.

Speaker 12

Hi, guys. Thanks for taking my questions. For my first one, Lisa, can you just like clarify this explicitly for me? So So you said double digit data center. Was that a full year statement or was that a second half year over year statement or was that a

Speaker 4

half over half statement for data center? Yes.

Speaker 2

Let me be clear. That was a year over year statement. So double digit data center growth for the full year of 20 2023 versus 2022.

Speaker 12

Got it. Which just given what you did in Q1 and sort of implying for Q2 needs something like 50% year over year growth in the second half to get there. So you're endorsing those you're endorsing that now?

Speaker 2

I am yes, your math is right. Math is

Speaker 11

right. Okay.

Speaker 12

Thank you. For my second question, Gene, you made a comment on gross margins, Where you said the increase of gross margins in the second half was dependent on gross margins in client getting better. I just want to make sure, did I hear that right? And why should I expect client margins would get better, especially given what Intel has been doing in that space to protect everything, like why is that something that's going to happen?

Speaker 3

Yes, Stacy, that's a good question. The way to think about it is if If you look at our Q1 gross margin and the Q2 guide around 50%, And as you know, both our data center and embedded have a very strong gross margin performance. And so what's the headwind that impact Our gross margin is really PC client on the side, which as we talk about, we are shipping Significantly under the consumption and also to digest inventory in the downstream supply chain. As you know, typically, that's the time you get significant pressure on the ASP side and on the funding side. That's why our gross margin In the client segment has been challenged.

Speaker 3

In second half, we know it's going to be normalized. That's a very important fact When you normalize the demand and the supply, we continue to plan a very competitive environment, so don't get us on that front, but it will be better because you're not digesting inventory, the channel funding, everything, those kind of price reduction will be much less. So we do think second half will fly outside the gross margin will be better than first half.

Speaker 12

Got it. Thank you. And I apologize, I misspoke as well. 50% half over half in data center, not year over year. So we're all doing it.

Speaker 12

Thank you very much. Appreciate it.

Speaker 1

Operator, we'll take 2 more questions, Steve.

Operator

Certainly. Our next question is coming from Blayne Curtis from Barclays. Your line is now live.

Speaker 13

Hey, thanks for taking my question. I had 2. Maybe just to start with following on Stacy's prior question. Could you just comment on what Client ASPs did in the March quarter. I mean, I assume they're down a decent amount, your competitor was down, but any color you could provide on what the environment was in March?

Speaker 2

Yes, sure, Blayne. So the ASPs were down quite a bit on a year over year basis, if you're talking about The overall client business. And what that is, is that's also the client ASPs were higher in the first Half of twenty twenty two, if you just think about what the supply environment was or the demand environment was in that. And given that we're under shipping in In the Q1, the ASPs are lower.

Speaker 4

Got you. And then I

Speaker 12

just wanted to ask you

Speaker 13

on the data center business, the operating profit Down a ton sequentially and you talked about enterprise being down. I think that's part of it, but it's a big drop and it looks like Margin probably is down a bunch too. Can you just comment on why that drop in profitability in data center?

Speaker 3

Yes. Blayne, that's a good question. I think when you look at the year over year, you're absolutely right. Revenue is largely flattish, But operating margin dropped significantly. There are 2 major drivers.

Speaker 3

The first is that we have increased the investment significantly, Especially in networking and AI, as you may recall, we closed the Pansendo last May or June. So This is the full quarter of Pansendo expenses versus last year, plus we also increased GPU investment and the AI investment, that's all under the data center bucket. Secondly, I mentioned about product mix. Lisa said year over year, cloud sales grew double digit significantly And enterprise actually declined. So in Q1, our revenue in data center is heavily indexed to the cloud market versus last year in Q1, typically cloud gross margin is lower than enterprise.

Speaker 3

We do expect that even in Q2, it will be balanced, more balanced and going forward, we do think the enterprise side will come back.

Speaker 13

Thanks. But I guess the big decline was sequential. So I'm assuming cloud was down sequentially. Sequential,

Speaker 3

It's revenue. If you look at the revenue, it was down very significantly, right? And the mix also It's a little bit more indexed to cloud sequentially too.

Speaker 2

Yes. It's the same factors, Blayne.

Speaker 3

Yes.

Speaker 2

So Both the mix to cloud as well as the R and D expense has increased Just given the large opportunities that we have across the data center and especially AI.

Speaker 6

Okay. Thank you.

Operator

Thank you. Our final question today is coming from Harsh Kumar from Piper Sandler. Your line is now live.

Speaker 14

Yes. Hey guys, thank you for squeezing me in. Lisa, I had a question. I wanted to ask you about your views On the inferencing market for generativeai3 plus specifically wanted to ask because I think there's some cross Going on, we're hearing that CPUs are the best way to do inferencing, but then we're hearing the timeliness of CPUs is not there as a function to be able to enable these kind of instances. So I was curious what you guys think?

Speaker 14

And then I had a follow-up.

Speaker 2

Well, I think Harsh, if you were saying, I mean, I think today inference is used a lot. CPUs are used a lot for inference. Now where the demand is highest right now is for generative AI and large language inferencing, you need GPUs to have the horsepower to train sort of the most Sophisticated model. So I think those are the 2, as you say, crosscurrents. I think inference becomes a much A more important workload, just given the adoption rate of AI across the board and I think we'll see that for smaller tasks on CPUs, but for the larger tasks on GPUs.

Speaker 14

Okay. So it still defers back to GPUs for those. And then similar question on the Mi 300 series. I know that you talked a lot about success in the HPC side, But specifically, I was curious if you could talk about any wins or any kind of successes or success stories you might have on the generative AI side with BMI 300 or 250 series.

Speaker 2

Yes. So, as we said earlier, we've done, some really good work on Mi 250 with AI and large language models. The example that is public is what we've done with Lumi And the training of some of the Finnish models. We're doing quite a bit of work with large customers on Mi 300 And what we're seeing is very positive results. So we think Mi-three hundred is very competitive for generative AI.

Speaker 2

And we'll be talking more about sort of Customer and revenue evolution as we go over the next couple of quarters.

Speaker 14

Thank you, Nisha.

Speaker 1

Great. Operator, that concludes today's call. Thank you to everyone for joining us.

Operator

Thank you. You may now disconnect and have a wonderful

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Earnings Conference Call
Advanced Micro Devices Q1 2023
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