ADVANCED-MICRO-DEVICES Earningcall Transcript Of Q2 of 2024
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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 Dr. Lisa Su will attend the Goldman Sachs Technology Communacopia and Technology Conference on Monday, September 9; and Mark Papermaster, executive vice president and chief technology officer, will attend the Deutsche Bank Technology Conference on Wednesday, August 28. 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 T. Su -- President and Chief Executive Officer Thank you, Mitch, and good afternoon to all those listening today. We delivered strong second-quarter financial results, with revenue coming in above the midpoint of guidance and profitability increasing by a double-digit percentage driven by higher-than-expected sales of our Instinct, Ryzen, and EPYC processors. We continued accelerating our AI traction as leading cloud and enterprise providers expanded availability of Instinct MI300X solutions, and we also saw positive demand signals for general-purpose compute in both our client and server processor businesses. As a result, second-quarter revenue increased 9% year over year to $5.8 billion as significantly higher sales of our data center and client processors more than offset declines in gaming and embedded product sales. We also expanded gross margin by more than three percentage points and grew EPS 19% as data center product sales accounted for nearly 50% of overall sales in the quarter. Turning to the segments. Data center segment revenue increased 115% year over year to a record $2.8 billion, driven by the steep ramp of Instinct MI300 GPU shipments and a strong double-digit percentage increase in EPYC CPU sales. Cloud adoption remains strong as hyperscalers deploy fourth-gen EPYC CPUs to power more of their internal workloads and public instances. We are seeing hyperscalers select EPYC processors to power a larger portion of their applications and workloads, displacing incumbent offerings across their infrastructure with AMD solutions that offer clear performance and efficiency advantages. The number of AMD-powered cloud instances available from the largest providers has increased 34% from a year ago to more than 900. We are seeing strong pull for these instances with both enterprise and cloud-first businesses. As an example, Netflix and Uber both recently selected fourth-gen EPYC public cloud instances as one of the key solutions to power their mission-critical customer-facing workloads. In the enterprise, sell-through increased by a strong double-digit percentage sequentially. We closed multiple large wins in the quarter with financial services, technology, healthcare, retail, manufacturing, and transportation customers, including Adobe, Boeing, Industrial Light & Magic, Optiver, and Siemens. Importantly, more than one-third of our enterprise server wins in the first half of the year were with businesses deploying EPYC in their data centers for the first time, highlighting our success attracting new customers while also continuing to expand our footprint with existing customers. Looking ahead, our next-generation Turin family featuring our new Zen 5 core is looking very strong. Zen 5 is a grounds-up new core design optimized for leadership performance and efficiency. Turin will extend our TCO leadership by offering up to 192 cores and 384 threads, support for the latest memory and I/O technologies, and the ability to drop into existing fourth-gen EPYC platforms. We publicly previewed Turin for the first time in June, demonstrating our significant performance advantages in multiple compute-intensive workloads. We also passed a major milestone in the second quarter as we started Turin production shipments to lead cloud customers. Production is ramping now ahead of launch, and we expect broad OEM and cloud availability later this year. Turning to our data center AI business. We delivered our third straight quarter of record data center GPU revenue with MI300 quarterly revenue exceeding $1 billion for the first time. Microsoft expanded their use of MI300X accelerators to power GPT-4 Turbo and multiple copilot services, including Microsoft 365 Chat, Word, and Teams. Microsoft also became the first large hyperscaler to announce general availability of public MI300X instances in the quarter. The new Azure VMs leverage the industry-leading compute performance and memory capacity of MI300X in conjunction with the latest ROCm software to deliver leadership inferencing price performance when running the latest frontier models, including GPT-4. Hugging Face was one of the first customers to adopt the new Azure instances, enabling enterprise and AI customers to deploy hundreds of thousands of models on MI300X GPUs with one click. Our enterprise and cloud AI customer pipeline grew in the quarter, and we are working very closely with our system and cloud partners to ramp availability of MI300 solutions to address growing customer demand. Dell, HP, Lenovo, and Super Micro all have Instinct platforms in production, and multiple hyperscale and Tier 2 cloud providers are on track to launch MI300 instances this quarter. On the AI software front, we made significant progress enhancing support and features across our software stack, making it easier to deploy high-performance AI solutions on our platforms. We also continued to work with the open-source community to enable customers to implement the latest AI algorithms. As an example, AMD support for Flash Attention 2 algorithm was upstreamed, providing out-of-the-box support for AMD hardware in the popular library that can increase training and inference performance on large transformer models. Our work with the model community also continued accelerating, highlighted by the launches of new models and frameworks with Day 1 support for AMD hardware. At Computex, I was joined by the co-CEO of Stable Diffusion to announce that MI300 is the first GPU to support their latest SD 3.0 Image Generation LLM. Last week, we were proud to note that multiple partners use ROCm and MI300X to announce support for the latest Llama 3.1 models, including their 405 billion parameter version that is the industry's first frontier-level open-source AI model. Llama 3.1 runs seamlessly on MI300 accelerators. And because of our leadership memory capacity, we're also able to run the FP16 version of the Llama 3.1 405B model in a single server, simplifying deployment and fine-tuning of the industry-leading model and providing significant TCO advantages. Earlier this month, we announced our agreement to acquire Silo AI, Europe's largest private AI lab with extensive experience developing tailored AI solutions for multiple enterprise and embedded customers, including Allianz, Ericsson, Finnair, Karber, Nokia, Philips, T-Mobile, and Unilever. The Silo team significantly expands our capability to service large enterprise customers looking to optimize their AI solutions for AMD hardware. Silo also brings deep expertise in large language model development, which will help accelerate optimization of AMD inference and training solutions. In addition to our acquisitions of Silo AI, Mipsology, and Nod.ai, we have invested over $125 million across a dozen AI companies in the last 12 months to expand the AMD AI ecosystem, support partners, and advance leadership AMD computing platforms. Looking ahead, from a road map perspective, we are accelerating and expanding our Instinct road map to deliver an annual cadence of AI accelerators, starting with the launch of MI325X later this year. MI325X leverages the same infrastructure as MI300 and extends our generative AI performance leadership by offering twice the memory capacity and 1.3 times more peak compute performance than competitive offerings. We plan to follow MI325X with the MI350 series in 2025 based on the new CDNA 4 architecture, which is on track to deliver a 35x increase in performance compared to CDNA 3. And our MI400 series powered by the CDNA Next architecture is making great progress in development and is scheduled to launch in 2026. Turning to our AI solutions work. Broadcom, Cisco, HP Enterprise, Intel, Google, Meta, and Microsoft, all joined us to announce Ultra Accelerator Link, an industry-standard technology to connect hundreds of AI accelerators that is based on AMD's proven Infinity Fabric technology. By combining UALink with the widely supported Ultra Ethernet consortium specification, the industry is coming together to establish a standardized approach for building the next generation of high-performance data center AI solutions at scale. In summary, customer response to our multiyear Instinct and ROCm road maps is overwhelmingly positive and we're very pleased with the momentum we are building. As a result, we now expect data center GPU revenue to exceed $4.5 billion in 2024, up from the $4 billion we guided in April. Turning to our client segment. Revenue was $1.5 billion, an increase of 49% year over year, driven by strong demand for our prior-generation Ryzen processors and initial shipments of our next-generation Zen 5 processors. In PC applications, Zen 5 delivers an average of 16% more instructions per clock than our industry-leading previous generation of Ryzen processors. For desktops, our upcoming Ryzen 9000 series processors dropped into existing AM5 motherboards and extends our performance and energy efficiency leadership across productivity, gaming, and content creation workloads. For notebooks, we announced our Ryzen AI 300 series that extends our industry-leading CPU and GPU performance and introduces the industry's fastest NPU with 50 tops of AI compute performance for Copilot+ PCs. The first Ryzen AI 300 Series notebooks went on sale over the weekend to strong reviews, and more than 100 Ryzen AI 300 Series premium, gaming, and commercial platforms are on track to launch from Acer, ASUS, HP, Lenovo, and others over the coming quarters. Customer excitement for our new Ryzen processors is very strong, and we are well positioned for ongoing revenue share gains based on the strength of our leadership portfolio and design win momentum. Now, turning to our gaming segment. Revenue declined 59% year over year to $648 million as semi-custom SoC sales declined in line with our projections. Semi-custom demand remains soft as we are now in the fifth year of the console cycle, and we expect sales to be lower in the second half of the year compared to the first half. In gaming graphics, revenue increased year over year, driven by improved sales of our Radeon 6000 and 7000 Series GPUs in the channel. Turning to our embedded segment. Revenue decreased 41% year over year to $861 million. The first quarter marked the bottom for our embedded segment revenue. Although second-quarter revenue was flattish sequentially, we saw early signs of order patterns improving and expect embedded revenue to gradually recover in the second half of the year. Longer term, we are building strong design win momentum for our expanded embedded portfolio. Design wins in the first half of the year increased by more than 40% from the prior year to greater than $7 billion, including multiple triple-digit million-dollar wins, combining our Adaptive and x86 compute products. We announced our Alveo V80 accelerators that deliver leadership capabilities in memory-intensive workloads and entered early access on next-generation edge AI solutions with more than 30 key partners on our upcoming second-gen Versal Adaptive SoCs. Last week, we also announced Victor Peng, President of AMD, would retire at the end of August. Victor has made significant contributions to Xilinx and AMD, including helping scale our embedded business and leading our cross-company AI strategy. On a personal note, Victor has been a great partner to me, ensuring the success of our Xilinx acquisition and integration. On behalf of all of the AMD employees and board, I want to thank Victor for all of his contributions to AMD's success and wish him all the best in his retirement. In summary, we delivered strong second-quarter results and are well-positioned to grow revenue significantly in the second half of the year, driven by our data center and client segments. Our data center GPU business is on a steep growth trajectory as shipments ramp across an expanding set of customers. We're also seeing strong demand for our next-generation Zen 5, EPYC, and Ryzen processors that deliver leadership performance and efficiency in both data center and client workloads. Looking ahead, the rapid advances in generative AI and development of more capable models are driving demand for more compute across all markets. Under this backdrop, we see strong growth opportunities over the coming years and are significantly increasing hardware, software, and solutions investments with a laser focus on delivering an annual cadence of leadership data center GPU hardware, integrating industry-leading AI capabilities across our entire product portfolio, enabling full-stack software capabilities, amplifying our ROCm development with the scale and speed of the open source community, and providing customers with turnkey solutions that accelerate the time to market for AMD-based AI systems. We are excited about the unprecedented opportunities in front of us and are well-positioned to drive our next phase of significant growth. Now, I'd like to turn the call over to Jean to provide some additional color on our second-quarter results. Jean? Jean Hu -- Executive Vice President, Chief Financial Officer 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 third quarter. We are very pleased with our overall second quarter financial results that came in above expectations. On a year-over-year basis, data center segment revenue more than doubled, client segment revenue grew significantly, and we expanded the gross margin by 340 basis points. For the second quarter of 2024, revenue was $5.8 billion, up 9% year over year as revenue growth in the data center and the client segments was partially offset by lower revenue in our gaming and embedded segment. Revenue increased 7% sequentially, primarily driven by growth in the data center and client segments revenue. Gross margin was 53%, up 340 basis points year over year, primarily driven by higher data center revenue. Operating expenses were $1.8 billion, an increase of 15% year over year as we continue to invest in R&D to address the significant AI growth opportunities ahead of us and enhanced go-to-market activities. Operating income was $1.3 billion, representing a 22% operating margin. Taxes, interest expense, and other was $138 million. Diluted earnings per share was $0.69, an increase of 19% year over year. Now, turning to our reportable segments. Starting with data center, data center delivered record quarterly segment revenue of $2.8 billion, up 115%, a $1.5 billion increase year over year. The data center segment accounted for nearly 50% of total revenue, led primarily by the steep ramp of AMD Instinct GPUs and a strong double-digit percentage EPYC server revenue growth. On a sequential basis, revenue increased 21%, driven primarily by strong momentum in AMD Instinct GPUs. Data center segment operating income was $743 million or 26% of revenue compared to $147 million or 11% a year ago. Operating income was up more than five times from the prior year, driven by higher revenue and operating leverage even as we significantly increased our investment in R&D. Client segment revenue was $1.5 billion, up 49% year over year and 9% sequentially, driven primarily by AMD Ryzen processor sales. Client segment operating income was $89 million or 6% of revenue compared to an operating loss of $69 million a year ago. Gaming segment revenue was $648 million, down 59% year over year and 30% sequentially. The decrease in revenue was primarily due to semi-custom inventory digestion and the lower-end market demand. Gaming segment operating income was $77 million or 12% of revenue compared to $225 million or 14% a year ago. Embedded segment revenue was $861 million, down 41% year over year as customers continued to normalize their inventory levels. On a sequential basis, embedded segment revenue was up 2%. Embedded segment operating income was $345 million or 40% of revenue compared to $757 million or 52% a year ago. Turning to the balance sheet and cash flow. During the quarter, we generated $593 million in cash from operations, and free cash flow was $439 million. Inventory increased sequentially by $339 million to $5 billion, primarily to support the continued ramp of data center GPU products. At the end of the quarter, cash, cash equivalents, and short-term investments were $5.3 billion. In the second quarter, we returned $352 million to shareholders, repurchasing 2.3 million shares, and we have $5.2 billion of authorization remaining. During the quarter, we retired $750 million of debt that matured this past June, utilizing existing cash. Now, turning to our third quarter 2024 outlook. We expect revenue to be approximately $6.7 billion, plus or minus $300 million. Sequentially, we expect revenue to grow approximately 15%, primarily driven by strong growth in the data center and client segment. We expect embedded segment revenue to be up and the gaming segment to decline by double-digit percentage. Year over year, we expect revenue to grow approximately 16%, driven by the steep ramp of our AMD Instinct processors and strong server and client revenue growth to more than offset the declines in the gaming and the embedded segment. In addition, we expect third quarter non-GAAP gross margin to be approximately 53.5%, non-GAAP operating expenses to be approximately $1.9 billion, non-GAAP effective tax rate to be 13%, and the diluted share count is expected to be approximately 1.64 billion shares. Also during the third quarter, we expect to close the acquisition of Silo AI for approximately $665 million in cash. In closing, we made significant progress during the quarter toward achieving our financial goals. We delivered record MI300 revenue that exceeded $1 billion and demonstrated solid traction with our next-gen Ryzen and EPYC product. We expanded gross margin significantly and drove earnings growth while increasing investment in AI. Looking forward, the opportunities ahead of us are unprecedented. We'll remain focused on executing to our long-term growth strategy while driving financial discipline and operational excellence. With that, I'll turn it back to Mitch for the Q&A session. Mitch Haws -- Vice President, Investor Relations Thank you, Jane. John, we're happy to poll the audience for questions. Operator Questions & Answers: |
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