Advanced Micro Devices, Inc. (NASDAQ:AMD) Q4 2023 Earnings Call Transcript

Advanced Micro Devices, Inc. (NASDAQ:AMD) Q4 2023 Earnings Call Transcript January 30, 2024

Advanced Micro Devices, Inc. reports earnings inline with expectations. Reported EPS is $0.77 EPS, expectations were $0.77.

Operator: Greetings and welcome to the AMD Fourth Quarter and Full Year 2023 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you, Mitch Haws, Vice President, Investor Relations. Thank you, Mitch. You may begin.

Mitch Haws: Thank you, John, and welcome to AMD’s Fourth Quarter and Full Year 2023 Financial Results Conference Call. By now you should have had the opportunity to review a copy of our earnings press release and the accompanying slides. If you’ve not had the chance to review these materials, they can be found on the Investor Relations page of amd.com. We will refer primarily to non-GAAP financial measures during today’s call. The full non-GAAP to GAAP reconciliations are available in today’s press release and the slides posted on our website. Participants on today’s call are Dr. Lisa Su, 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, I would like to note that Mark Papermaster, Executive Vice President and Chief Technology Officer will attend the Bernstein Tech, Media, Telecom & Consumer One-on-One Forum on Tuesday, February 28th; and Jean Hu, Executive Vice President, Chief Financial Officer and Treasurer will attend the Wolfe Research Semiconductor Conference on Tuesday, February 15th and the Morgan Stanley Technology, Media & Telecom Conference on March 5th. 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.

With that, I’ll hand the call over to Lisa. Lisa?

Lisa Su: Thank you, Mitch, and good afternoon to all those listening in today. We finished 2023 strong as Data Center sales accelerated significantly throughout the year, despite the mixed demand environment. As a result, we delivered record Data Center segment annual revenue and strong top-line and bottom-line growth in the fourth quarter, driven by the ramp of Instinct AI accelerators and robust demand for EPYC server CPUs across cloud, enterprise and AI customers. Looking at our financial results. Fourth quarter revenue increased 10% year-over-year to $6.2 billion, driven by a significant double-digit percentage growth in our Data Center and Client segments. On a full year basis, annual revenue declined 4% to $22.7 billion as record Data Center and Embedded segment annual revenue was offset by lower Client and Gaming segment revenue.

Importantly, Data Center and Embedded segment annual revenue grew by $1.2 billion and accounted for more than 50% of revenue in 2023 as we gained server share, launched our next-generation Instinct AI accelerators and maintained our position as the industry’s largest provider of adaptive computing solutions. Turning to the fourth quarter business results. Data Center segment revenue grew 38% year-over-year and 43% sequentially to a record $2.3 billion. Server CPU and Data Center GPU sales both set quarterly and annual revenue records as sales of our Data Center products accelerated throughout the year. We gained server CPU revenue share in the quarter, driven by significant double-digit percentage growth in 4th Gen EPYC Processor revenue and demand for our 3rd Gen EPYC Processor portfolio.

In Cloud, while the overall demand environment remained soft, server CPU revenue increased year-over-year and sequentially as North American hyperscalers expanded 4th Gen EPYC Processor deployments to power their internal workloads and public instances. Amazon, Alibaba, Google, Microsoft and Oracle brought more than 55 AMD-powered AI, HPC and general-purpose cloud instances into preview or general availability in the fourth quarter. Exiting 2023, there were more than 800 EPYC CPU based public cloud instances available. We expect this number to grow in 2024 based on the leadership performance, efficiency and features of our EPYC CPU portfolio. In Enterprise, sales accelerated by a significant double-digit percentage in the quarter as we built momentum with Forbes 2000 customers.

We closed multiple wins with large financial, energy, automotive, retail, technology and pharmaceutical companies, positioning us well for continued growth, based on expanded production deployments planned for 2024. A growing number of customers are adopting EPYC CPUs for inferencing workloads, where our leadership throughput performance deliver significant advantages on smaller models like Llama 7B, as well as the power head nodes in large training and inference clusters. Looking ahead, customer excitement for our upcoming Turin family of EPYC Processors is very strong. Turin is a drop-in replacement for existing 4th Gen EPYC platforms that extends our performance, efficiency and TCO leadership with the addition of our next-gen Zen 5 core, new memory expansion capabilities and higher core counts.

Internal and end customer validation work is progressing to plan with Turin on track to deliver overall performance leadership, as well as leadership on a per core or per watt basis across a wide range of workloads when it launches later this year. Turning to our Broader Data Center portfolio. Our Data Center GPU business accelerated significantly in the quarter, with revenue exceeding our $400 million expectations, driven by a faster ramp for MI300X with AI customers. We launched our MI300 accelerator family in December with strong partner and ecosystem support from multiple large cloud providers, all the major OEMs and many leading AI developers. MI300X GPUs deliver leadership generated AI performance by combining our high-performance CDNA 3 architecture with industry-leading memory bandwidth and capacity.

Customer response to MI300 has been overwhelmingly positive. And we are aggressively ramping production to support the dozens of cloud, enterprise and supercomputing customers deploying Instinct accelerators. In Cloud, we are working closely with Microsoft, Oracle, Meta and other large cloud customers on Instinct GPU deployments, powering both their internal AI workloads and external offerings. For Enterprise customers, HPE, Dell, Lenovo, Supermicro and other server vendors are on track to launch differentiated MI300 platforms later this quarter with strong demand from multiple enterprise customers. In HPC Supercomputing, we shipped the majority of AMD Instinct MI300A accelerators for the El Capitan supercomputer in the fourth quarter and expect to complete shipments this quarter for what is expected to be the world’s fastest supercomputer when it comes online later this year.

We also closed new Instinct GPU wins in the quarter, including the flagship system at the German High Performance Computing Center, HLRS, as well as what is expected to be one of the world’s most powerful enterprise supercomputers for energy company Eni. On AI software development, we made significant progress expanding the ecosystem of AI developers working on AMD platforms with the release of our ROCm 6 software suite. The ROCm 6 stack significantly increases performance and key generative AI workloads, adds expanded support and optimizations for additional frameworks and libraries and simplifies the overall developer experience. The additional functionality and optimizations of ROCm 6 and the growing volume of contributions from the Open Source AI Software community are enabling multiple large hyperscale and enterprise customers to rapidly bring up their most advanced large language models on AMD Instinct accelerators.

For example, we are very pleased to see how quickly Microsoft was able to bring up GPT-4 on MI300X in their production environment and rollout Azure private previews of new MI300 instances aligned with the MI300X launch. At the same time, our partnership with Hugging Face, the leading open platform for the AI community, now enables hundreds of thousands of AI models to run out of the box on AMD GPUs and we are extending that collaboration to our other platforms. Looking ahead, our prior guidance was for Data Center GPU revenue to be flattish from Q4 to Q1 and exceed $2 billion for 2024. Based on the strong customer pool and expanded engagements, we now expect Data Center GPU revenue to grow sequentially in the first quarter and exceed $3.5 billion in 2024.

We have also made significant progress with our supply chain partners and have secured additional capacity to support upside demand. Turning to our Client segment. Revenue was $1.5 billion, an increase of 62% year-over-year and flat sequentially. We launched our latest generation Ryzen 8000 series notebooks and desktop processors in January, including our Ryzen 8040 Mobile series that combined leadership compute performance and energy efficiency with an updated MPU that delivers up to 60% more AI performance compared to our prior generation that was already industry-leading. Acer, ASUS, HP, Lenovo, MSI and other large PC OEMs will all offer notebooks powered by our Ryzen 8000 series processors with the first systems expected to go on sale in February.

To further our leadership in AI PCs, we launched our Ryzen 8000 G-series processors earlier this month, which are the industry’s first desktop CPUs with an integrated AI engine. Millions of AI PCs powered by Ryzen processors have shipped to date and Ryzen CPUs power more than 90% of AI-enabled PCs currently in market. Our work with Microsoft and our PC ecosystem partners to enable the next-generation of AI PCs expanded significantly in the quarter. We are aggressively driving our Ryzen AI CPU roadmap to extend our AI leadership, including our next-gen Strix processors that are expected to deliver more than three times the AI performance of our Ryzen 7040 series processors. Strix combines our next-gen, Zen 5 core with enhanced RDNA graphics and an updated Ryzen AI engine to significantly increase the performance, energy efficiency and AI capabilities of PCs. Customer momentum for Strix is strong with the first notebooks on track to launch later this year.

Looking at 2024, we are planning for the PC TAM to grow modestly year-on-year, weighted towards the second half as AI PCs ramp. We continue to see strong growth opportunities for our client business as we ramp our current products, extend our AIPC leadership and launch our next wave of Zen 5 CPUs. Now turning to our Gaming segment. Revenue declined 17% year-over-year and 9% sequentially to $1.4 billion as lower semi-custom revenue was partially offset by increased sales of Radeon GPUs. Semi-custom SoC sales declined in line with our projections in the quarter. Going forward, we now expect annual revenue to decline by a significant double-digit percentage year-over-year as supply caught up with demand in 2023, and we entered the fifth year of what has been a very strong console cycle.

In Gaming Graphics, revenue grew both year-over-year and sequentially, driven by strong demand in the channel for both our Radeon 6000 and Radeon 7000 series GPUs. We expanded our Radeon 7000 GPU series with the launch of new RX 7600 XT Series enthusiast desktop GPUs earlier this month that offer leadership price performance for 1080p gaming. We also launched new open source FidelityFX Super Resolution 3 software that can deliver significantly higher gaming frame rates on both GPUs and APUs. Turning to our Embedded segment. Revenue decreased 24% year-over-year and 15% sequentially to $1.1 billion as customers focused on reducing their inventory levels. We expanded our embedded portfolio in the quarter with new leadership solutions for key markets.

We launched new Versal Prime adaptive SoCs for the aerospace, test and measurement, health care and communications markets that deliver industry-first support for DDR5 memory and increased DSP capability compared to our prior generation. In automotive, we launched new Versal SoC solutions that bring industry-leading AI compute capabilities and advanced safety and security features to next-generation vehicles. We also launched Ryzen embedded processors with unmatched performance and features for industrial automation, machine vision, robotics and edge server applications. Looking at 2024, we expect overall embedded demand will remain soft through the first half of the year as customers continue to focus on normalizing their inventory levels.

Longer term, we’re very confident in the growth trajectory of our Embedded business as our expanded product portfolio drove more than $10 billion of design wins in 2023, an increase of more than 25% compared to 2022. In summary, I’m very pleased with our fourth quarter and full year results. For 2024, we expect the demand environment to remain mixed, with strong growth in our Data Center and Client segments, offset by declines in our Embedded and Gaming segments. Against this backdrop, we believe we will deliver strong annual revenue growth and expand gross margin, driven by the strength of our Instinct EPYC and Ryzen product portfolios. Taking a step back, we believe AI is a once-in-a-generation transition that will reshape virtually every portion of the computing market, starting in the Data Center and then expanding into PCs and across multiple embedded markets.

We have built excellent customer traction based on the strength of our multiyear AI hardware and software road maps, and we see clear opportunities to drive our next wave of growth as we deliver leadership AI solutions across our portfolio. In the Data Center, we see 2024 as a start of a multiyear AI adoption cycle with the market for Data Center AI accelerators growing to approximately $400 billion in 2027. Customer deployments of our Instinct GPUs continues accelerating, with MI300 now tracking to be the fastest revenue ramp of any product in our history, and positioning us well to capture significant share over the coming years based on the strength of our multi-generation Instinct GPU road map and open source ROCm software strategy. In PCs, we are focused on delivering our long-term road maps with leadership Ryzen AI NPU capabilities to enable differentiated experiences as Microsoft and our other software partners bring new AI capabilities to PC starting later this year.

At the same time, we are rapidly driving leadership AI compute capabilities across the full breadth of our embedded product portfolio. This is an incredibly exciting time for the industry and even more exciting time for AMD as our leadership IP, broad product portfolio and deep customer relationships position us well to deliver significant revenue growth and earnings expansion over the next several years. Now I’d like to turn the call over to Jean to provide some additional color on our fourth quarter and full year financial results. Jean?

Jean Hu: Thank you, Lisa, and good afternoon, everyone. I’ll start with a review of our financial results and then provide our current outlook for the first quarter of fiscal 2024. AMD executed well in 2023 despite of a mixed market demand environment, delivering revenue of $22.7 billion and earnings per share of $2.65. We drove year-over-year revenue growth in our Embedded and Data Center segments. In addition, we successfully launched our AMD Instinct MI300 GPUs, positioning us for a strong ramp in 2024 in the AI market. For the fourth quarter of 2023, revenue was $6.2 billion, growing 10% year-over-year as revenue growth in the Data Center and the Client segments was partially offset by the lower revenue in our Embedded and Gaming segment.

Revenue was up 6% sequentially, primarily driven by the ramp of AMD Instinct GPUs across several leading customers and higher revenue from EPYC server processors, partially offset by the decline in Embedded and Gaming segment revenues. Gross margin was 51%, flat year-over-year, with higher revenue contribution from the Data Center and the Client segments offset by lower Embedded segment revenue. Operating expenses were $1.7 billion, an increase of 8% year-over-year as we invest in R&D and marketing activities to support our significant AI growth opportunities. Operating income was $1.4 billion, representing a 23% operating margin. Taxes, interest expense and other was $163 million. For the fourth quarter of 2023, diluted earnings per share was $0.77, an increase of 12% year-over-year.

Now turning to our reportable segments. Starting with the Data Center segment, revenue was $2.3 billion, up 38% year-over-year and 43% sequentially driven by strong growth of both AMD Instinct GPU and the Fourth Generation AMD EPYC CPU sales. Data Center segment operating income was $666 million or 29% of revenue compared to $444 million or 27% a year ago. Higher operating income was primarily due to operating liability driven by higher revenue. Client segment revenue was $1.5 billion, up 62% year-over-year, driven by Ryzen 7000 Series CPU sales. Client segment operating income was $55 million or 4% of revenue compared to an operating loss of $152 million a year ago driven by higher revenue. Gaming segment revenue was $1.4 billion, down 17% year-over-year and 9% sequentially due to a decrease in semi customer revenue, partially offset by increase in Radeon GPU sales.

Gaming segment operating income was $224 million or 16% of revenue compared to $266 million or 16% a year ago. Embedded segment revenue was $1.1 billion, down 24% year-over-year and 15% sequentially as customers continue to work down their inventory levels. Embedded segment operating income was $461 million or 44% of revenue compared to $699 million or 50% a year ago. Turning to the balance sheet and cash flow. During the quarter, we generated $381 million in cash from operations and the free cash flow was $242 million. Inventory decreased sequentially by $94 million to $4.4 billion. At the end of the quarter, cash, cash equivalents and short-term investment was strong at $5.8 billion. In the fourth quarter, we repurchased 2 million shares and returned $233 million to shareholders.

For the year, we repurchased 10 million shares and returned $985 million to shareholders. We have $5.6 billion in remaining share repurchase authorization. Now turning to our first quarter of 2024 outlook. We expect revenue to be approximately $5.4 billion plus or minus $300 million. Sequentially, we expect Data Center segment revenue to be flat, with the seasonal decline in server sales offset by strong Data Center GPU ramp. Embedded revenue to decline as customers continue to work down their inventory levels. Client segment revenue to decline seasonally. And in the Gaming segment as we enter the fifth year of what has been a very strong gaming cycle and given current customer inventory levels, we expect revenue to decline by significant double-digit percentage.

Year-over-year, we expect Data Center and Client segment revenues to increase by strong double-digit percentage given the strength of our product portfolio and the share gain opportunities. Embedded Segment to decline and the Gaming segment revenue to decline by significant double-digit percentage. In addition, we expect first quarter non-GAAP gross margin to be approximately 52%. Non-GAAP operating expenses to be approximately $1.73 billion. Non-GAAP effective tax rate to be 13% and the diluted share count is expected to be approximately 1.63 billion shares. While we are not providing specific full year guidance for 2024, let me provide some color. Directionally, for the year, we expect 2024 Data Center and the Client segment revenue to increase driven by the strengths of our product portfolio and the share gain opportunities.

Embedded segment revenue to decline and the Gaming segment revenue to decline by significant double-digit percentage. We expect to expand gross margin in 2024 and continue to invest to address the large AI opportunities while driving operating model leverage to deliver earnings per share growth faster than top line revenue growth. In closing, we delivered solid financial results in 2023. We further strengthening our product portfolio and establishing ourselves as a leading provider of Data Center GPUs for AI. We are very well positioned to build on this momentum and deliver strong financial performance in 2024 and beyond. With that, I’ll turn it back to Mitch for the Q&A session.

Mitch Haws: Thank you, Jean. John, we’re happy to poll the audience for questions.

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Q&A Session

Operator: Thank you, Mitch. We will now be conducting a question-and-answer session. [Operator Instructions] And the first question comes from the line of Aaron Rakers from Wells Fargo. Please proceed with your question.

Aaron Rakers: Yeah. Thanks for taking the question. Just kind of framing the outlook and the guidance for this calendar first quarter. I guess the first question is, can you help us on a relative basis the $400 million of Data Center GPU revenue that you expected in Q4. What did that ultimately kind of fell off to be? And then, on the guidance into 1Q, can you help us appreciate what seasonal is defined as, as we think about the server business into the 1Q guide?

Lisa Su: Sure, Aaron. Let me start and then see if Jean has something to add. So, relative to the Data Center GPU business, we were very pleased with performance that we saw in the fourth quarter. It was always going to be a very sort of back-end quarter weighted as we were ramping the product and we saw MI300A, our HPC product actually ramped very well. And then we saw MI300X. The AI product actually exceed our expectations based on strong customer demand, the way the qualifications went and then the ramp — manufacturing ramp. So, we were over $400 million for that business in the fourth quarter. And then, going into the first quarter, as we look at the business, server seasonality, call it, something around, let’s call it, high-single-digit, low-double-digit.

There are also some other pieces of the Data Center business. I think, the key piece of it is we had originally expected the ramp to be a little bit more shallow of our MI300X and what we’re seeing now is the supply chain is operating really well, and the customer demand is strong. And so, we will see MI300X increase as we go into the first quarter, and things are going relatively well so.

Jean Hu: Yeah, Aaron, I’ll give you some color about Client seasonality and others. So, Client is very similar to server, typically Q1 is high-single-digit to low-double-digit. That’s consistent with past. On the Embedded side, it’s very consistent with what we said in the past and the consistent with what you see in the industry’s Embedded business is going through a bottoming process, and we think Q1, it will have a low-double-digit sequential decline. That’s Embedded. On the Gaming side, Lisa mentioned during his — her prepared remarks is we have the latest stage of product cycle in the year five of gaming console. But at the same time, we also have inventory at the customers. So, the combination of those impact, we expect the Q1 Gaming sequential declines probably more than 30%, so hopefully that help you a little bit.

Aaron Rakers: Yeah. Very helpful, Jean. And as a quick follow-up, I’m just curious. The traditional server demand that you see, I know when we looked at server CPU, shipments are down north of 20% year-over-year. Are you seeing any signals or how are you thinking about a recovery in that traditional, call it, non-AI general-purpose server market as we move through ’24?

Lisa Su: Sure, Aaron. So look, I think, I agree with your characterization of the 2023 demand, although we did see some strong progress in the second half of the year, especially as customers in Cloud and Enterprise adopted our Genoa and our Zen 4 family. So going into 2024, I would say the traditional server market is probably still mixed, especially into the first half of the year. There’s still some cloud optimization going on, as well as sort of enterprise being a little bit cautious. That being the case though, we also see opportunities for us to continue to grow share in the traditional server business. I think our portfolio is extremely strong. The adoption of Genoa and Bergamo, as well as our new Siena product lines are getting a lot of traction. And then, we also see Turin, our Zen 5 product coming in the second half of the year. So, even in a mixed demand environment, I think we’re bullish on what traditional server CPUs can do in 2024.

Operator: And the next question comes from the line of Timothy Arcuri with UBS. Please proceed with your question.

Timothy Arcuri: Thanks a lot. Lisa, I’m wondering if you can give us a little bit of sense in terms of the milepost that you’re kind of marching toward on this $400 billion TAM that you have for 2027. For example, do you think you can gain share at a rate that’s kind of similar to the rate that you gained share for server CPU or I guess maybe asked a different way, is it reasonable to kind of look at your consumer GPU share of 20 plus percent, is that a reasonable bogey, or do you have aspirations higher than that, perhaps?

Lisa Su: Yeah. Thanks, Tim, for the question. I would say a couple of things. First of all, we’re really pleased with the progress that we’ve made in our Data Center GPU business. I think the ramp that we’ve seen, the customer traction that we’ve seen even in the last few months, I think has been great. And that gives us a lot of confidence in the ramp of this business. I think the beauty of the AI market here is, it’s growing so quickly that I think we have both the market dynamic as well as our ability to gain share in that framework. The point I will make is our customer engagements right now are all quite strategic, dozens of customers with multi-generational conversations. So, as excited as we are about the ramp of MI300 and, frankly, there’s a lot to do in 2024.

We are also very excited about the opportunities to extend that into the next couple of years out into that ’25, ’26, ’27 timeframe. So, I think, we see a lot of growth. I think it’s a little early to make market share projections, but I would say it’s a significant growth driver given the market demand, as well as our own product capabilities.

Timothy Arcuri: Thanks a lot. Jean, I guess as a follow-up. I know that you don’t want to guide the full year. But I’m wondering if I can pin you down just to touch on maybe a milepost that you’re kind of marching to for 2024 growth is up 20% for the whole company. Is that a reasonable target? And then I guess within Data Center, if you just add the incremental Data Center GPU revenue and you assume that the server business grows a little bit, it seems like that should maybe double year-over-year, but I’m kind of wondering if you can give us any ranges on those numbers? Thanks.

Jean Hu: Hi, Tim. Thank you for the question. Yeah, we’re not guiding a year. It’s very early of the year, literally, January. I think the way to think about it is, Lisa mentioned during her prepared remarks we feel pretty good about both our Data Center and the Client business to grow in 2024. Of course, the largest incremental revenue opportunities are going to come from Data Center between both the server side gaining more share, and Data Center GPU side with the significant ramp up of our MI300. I think that’s how we think about it. We do have a headwind from Gaming segment. We do think year-over-year, we’ll see very significant double-digit decline on the Gaming segment. And at the same time Embedded is going through the bottoming process. We do think the second-half we will see the recovery. So those are the puts and takes. I can talk about it.