Jul 28, 2020

Advanced Micro Devices AMD Q2 2020 Earnings Call Transcript

AMD Q2 2020 Earnings Call
RevBlogTranscriptsEarnings Call TranscriptsAdvanced Micro Devices AMD Q2 2020 Earnings Call Transcript

AMD reported their Q2 2020 earnings on July 28. They report a great quarter, sending their stock up over 10% in after hours trading to record highs. Read the full earnings conference call transcript here.

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Speaker 1: (00:00)
Hello and welcome to the AMD Second Quarter 2020 Conference Call. At this time, all participants are in listen only mode. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Our question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Speaker 1: (00:22)
It’s now my pleasure to turn the call over to Ruth Cotter, senior vice president of marketing, human resources, and investor relations for AMD. Ms. Cotter, please go ahead.

Ruth Cotter: (00:33)
Thank you. And welcome to AMD’s second quarter 2020 financial results conference call. By now, you should have had the opportunity to review a copy of our earnings release and slides. If you’ve not reviewed these documents they can be found on the investor relations page of AMD’s website, amd.com.

Ruth Cotter: (00:52)
Participants on today’s conference call are Dr. Lisa Su, our president and chief executive officer, and Devinder Kumar, our senior vice president, chief financial officer, and treasurer. This is a live call and will be replayed via webcast on our website.

Ruth Cotter: (01:08)
Before we begin today, please note that AMD is scheduled to participate in several Wall Street events during the third quarter. On Tuesday, the 1st of September, Mark Papermaster, chief technology officer and executive vice president, technology and engineering will participate in the Jefferies Virtual Semiconductor IT Hardware and Communications Infrastructure Summit. On Tuesday, September 15th, Forrest Norrod, senior vice president and general manager, data center and embedded business solutions group will participate virtually in the Deutsche Bank Technology Conference. In addition, our third quarter 2020 quiet time is expected to begin at the close of business on Friday, the 11th of September.

Ruth Cotter: (01:53)
Today’s discussion contains forward looking statements based on current beliefs, assumptions and expectations speak only as of the current date 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 and our press release for more information on the risks related to any forward looking statements that we may make. We will refer primarily to non-gap financial metrics. During this call, the non-GAAP financial measures referenced are reconciled to their most directly comparable GAAP financial measure in today’s press release and slides posted on our website, amd.com.

Ruth Cotter: (02:33)
Now, with that, I’d like to hand the call over to Lisa. Lisa?

Lisa Su: (02:38)
Thank you, Ruth, and good afternoon to all those listening in today.

Lisa Su: (02:42)
For the last five years, we have built the technical operational and financial foundation required to drive our longterm growth strategy. We consistently executed on our product roadmaps, established deep partnerships with an expanded set of customers, ramped multiple in leading edge manufacturing technologies, and significantly strengthened our balance sheet. Our strong second quarter results and increased full year revenue guidance demonstrate how we are successfully scaling our business through our consistent execution.

Lisa Su: (03:15)
Looking at the second quarter, revenue grew 26% year over year to 1.93 billion driven by strong demand for our leadership server and client processors. We accelerated our server and mobile processor businesses significantly in the quarter resulting in Ryzen and Epic processor revenue more than doubling year. Over year importantly, we met our double digit server processor market share goal as data center products accounted for more than 20% of our second quarter revenue.

Lisa Su: (03:48)
Turning to our computing and graphics segment, second quarter revenue increased 45% year over year to 1.37 billion as growth in Ryzen processor sales more than offset lower graphic sales. We delivered our highest client processor revenue in more than 12 years. Increased working in schooling from home due to COVID-19 resulted in a strong PC market in the quarter, although we believe our growth was largely driven by our 11th straight quarter of market share gains. Desktop processor sales decreased sequentially as anticipated while revenue and ASP increased year over year as demand for our higher end Ryzen processors drove a richer mix.

Lisa Su: (04:32)
In mobile, we had record quarterly notebook processor unit shipments and revenue. Sales of our latest Ryzen 4000 series processors grew significantly in the quarter, resulting in mobile revenue growing by a strong double digit percentage sequentially and more than doubling from a year ago as both unit shipments and ASP increased significantly. Multiple third party reviewers have consistently highlighted that our latest notebook processors deliver superior performance and longer battery life compared to the competition.

Lisa Su: (05:04)
As a result of this strong performance, I’m pleased to report that Ryzen 4000 processor revenue has ramped faster than any mobile processor in our history. There are now 54 Ryzen 4000 powered notebooks in the market. We expect to continue accelerating our mobile processor business in the second half of the year as HP and Lenovo ramped their first commercial notebooks powered by Ryzen Pro 4000 series processors, and the second wave of more than 30 ultra thin premium and gaming consumer notebooks launched from multiple OEMs.

Lisa Su: (05:42)
In graphics, second quarter revenue declined year over year as strong double digit increase in mobile GPU sales was more than offset by lower desktop channel sales. While desktop GPU shipments were lower year over year, channel sellout accelerated in the quarter. Mobile GPU revenue growth was driven by adoption of our RDNA GPUs, highlighted by the launches of new Apple Professional and Dell Gaming notebooks featuring our Radeon 5000M series mobile GPUs.

Lisa Su: (06:15)
Data center of GPU revenue decreased year over year. We expect revenue to increase in the second half of the year as additional cloud-based visual computing wins ramp and we launch our new CDNA data center GPU architecture optimized for next generation Exoscale and machine learning workloads.

Lisa Su: (06:36)
Turning to our enterprise embedded in semi-custom segment, revenue of 565 million decreased 4% year over year due to lower semi-custom sales. Sequentially, revenue increased 62%, driven by record quarterly server processor sales and increased semi-custom product revenue.

Lisa Su: (06:56)
In semi-custom, we passed an important milestone in the second quarter as we began initial production and shipment of our next generation game console SOCs. We expect strong second half semi-custom growth as we rent production to support the holiday launches of the new PlayStation 5 and X-Box Series X consoles.

Lisa Su: (07:19)
Turning to server, our focus since launching our Epic processors has been on building a solid foundation to drive longterm growth. Our strategy is grounded in driving broad, high volume adoption with widespread support from industry leading cloud and hardware providers. We passed a significant milestone in the quarter as we achieved our double digit server processor unit share goal based on broad adoption across cloud enterprise and HPC customers.

Lisa Su: (07:50)
In cloud, multiple hyperscale customers ramped second generation Epic processors into high volume production in the quarter to power both their internal infrastructure and publicly available instances. Microsoft announced they have added Epic processors to power their Office online applications used by more than 200 million monthly users. Tencent ramped up multiple millions of Epic processor powered virtual machines to support enhanced collaboration services. Google announced that Epic processors were being used exclusively to power their unique, confidential computing VMs that encrypt data while it is being processed. And AWS launched global availability of new compute-optimized Epic-based EC2 instances.

Lisa Su: (08:40)
In enterprise, we have significantly expanded our tem as the number of AMD platforms has increased by more than 40% so far this year. Recent additions include Dell and HPE introducing multiple hyperconverged infrastructure solutions, Lenovo launching dual socket servers for financial retail and manufacturing, and Nvidia selecting AMD Epic processors to power its latest DGX AI platforms. We also secured new HPC wins based on the leadership performance and scalability of second-gen Epic processors.

Lisa Su: (09:17)
Public highlights include new wins with leading research institutions, including Indiana University, Purdue, and CERN, as well as Amazon IBM, Microsoft, and Oracle, all announcing cloud-based HPC offerings powered by Epic processors.

Lisa Su: (09:36)
We are pleased with the momentum in our server business and expect to continue gaining share as additional second-gen Epic platforms and cloud deployments ramp to volume in the second half of the year. We remain on track to begin shipping our next generation Milan server processor featuring Zen 3 late this year.

Lisa Su: (09:56)
In closing, I want to thank our employees and partners for the strong execution during this unprecedented time, as we continue to focus on delivering on our commitments. While there continues to be some macroeconomic uncertainty and pockets of demand softness, our product portfolio is very strong and our markets are resilient. We are on track to deliver strong growth in the second half of the year, driven by our current product portfolio and initial shipments of our next generation Zen 3 CPUs and RDNA 2 GPUs that are on track to launch in late 2020.

Lisa Su: (10:33)
I am very proud of the progress we have made over the last few years, placing AMD on a longterm growth trajectory. I’m even more excited about the opportunities in front of us as we enter our next phase of growth driven by accelerating our business in multiple markets. We remain focused on consistently gaining share across the $79 billion market for our high performance products. We are investing significantly and have added resources to further extend our leadership IP and go-to-market capabilities as we pursue our ambitious goal to make AMD a best-in-class growth franchise.

Lisa Su: (11:10)
Now I’d like to turn the call over to Devinder to provide some additional color on our second quarter financial performance. Devinder?

Devinder Kumar: (11:18)
Thank you, Lisa, and good afternoon, everyone. We executed the second quarter very well amidst the COVID-19 backdrop. We delivered strong financial results, introduced industry leading products, and gained CPU market share. The second quarter results and increased full year revenue guidance highlight our ability to consistently deliver on our commitments as we continued to drive longterm financial growth.

Devinder Kumar: (11:48)
Second quarter revenue was 1.93 billion, up 26% from a year ago and 8% from the prior quarter. Year over year growth was driven by strong Ryzen and Epic processor sales. Gross margin was 44%, up 330 basis points from a year ago, driven by client and server processor sales. Operating expenses were 617 million compared to 512 million a year ago, primarily due to ongoing investments in the business. Operating income more than doubled year over year to 233 million, up 122 million from a year ago, driven primarily by revenue growth. Operating margin increased to 12% as compared to 7% a year ago. Net income was 216 million, up 124 million from a year ago. And diluted earnings per share were 18 cents per share compared to 8 cents per share a year ago.

Devinder Kumar: (12:55)
Now turning to the business segment results. Computing and graphics segment revenue was 1. 37 billion, up 45% year over year, driven by significant growth in Ryzen processor sales. Computing and graphics segment operating income was 200 million or 15% of revenue, compared to 22 million or 2% of revenue a year ago. Enterprise embedded and semi-custom segment revenue was 565 million, down 4% year over year due to lower semi-custom sales, which were largely offset by higher Epic process sales. EESC segment operating income was 33 million or 6% of revenue compared to an operating income of 89 million a year ago.

Devinder Kumar: (13:49)
Turning to the balance sheet. Cash and cash equivalents total 1.8 billion, including 200 million from our revolving line of credit, which was fully repaid in the third quarter. Inventory was 1.3-

Devinder Kumar: (14:03)
In the third quarter, inventory was 1.3 billion, up 25% from the prior quarter in anticipation of the revenue ramp in the second half of 2020 and new product launches. Free cash flow was 152 million in the second quarter. I am very pleased with our cash performance in the quarter, which resulted in the first half of the year being free cash flow positive. Let me now turn to the outlook for the third quarter of 2020. Today’s outlook is based on current expectations and contemplates the current COVID-19 environment, global economic backdrop, and customer demand signals. We expect revenue to be approximately 2.55 billion plus or minus a hundred million, an increase of approximately 42% year over year and approximately 32% sequentially. The year over year and sequential increases, I expect it to be driven by higher Ryzen and Epic processor sales and next generation semi-custom products.

Devinder Kumar: (15:13)
In addition for Q3 2020, we expect non-GAAP gross margin to be approximately 44%, non-GAAP operating expenses to be approximately 660 million, non-GAAP interest, expense, taxes, and other to be approximately 25 million, and the diluted checkout in the third quarter is expected to be approximately 1.23 billion shares.

Devinder Kumar: (15:41)
For the full year 2020, we now expect higher annual revenue growth of approximately 32% driven by the strength of our PC gaming and data center products. We continue to expect gross margin of approximately 45% for the full year, up two points from the prior year.

Devinder Kumar: (16:03)
In closing, while there continues to be global economic uncertainty due to COVID-19, we have significant opportunities ahead of us with strong product demand across multiple markets. We are in a good position to accelerate our financial momentum, expand gross margins, and generate significant cash with that. I’ll turn it back to Ruth for the question and answer session. Ruth?

Ruth Cotter: (16:32)
Thank you, Devinder. Operator, please pull the audience for the question and answer session

Operator: (16:38)
Certainly. We’ll now be conducting a question and answer session. If you’d like to be placed in the question queue, please press star one on your telephone key pad. A confirmation tone will indicate your line is in the question queue. You may press star two if you’d like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment, please, while we poll for questions.

Operator: (17:04)
Our first question today is coming from Mark [LaPaces 00:17:06] from Jefferies. Your line is now live.

Mark: (17:10)
Hi. Thanks for taking my questions. A question for Lisa. You’ve said in the past that your customers, they don’t buy CPUs, but they buy roadmaps. And I was hoping that you can tell us about your roadmap, particularly in servers going forward, how it compares to your competition. And as part of that, does your view of the competitive environment change after your biggest competitor last week noted a push in its seven nanometer process? Thank you.

Lisa Su: (17:40)
Hi, Mark. Yeah, thanks for the question. Look, we’ve been very focused over the last couple of years on our roadmap and our strategy, and for sure when we talk to our customers, it’s about ensuring that they understand we have a consistent roadmap that is pushing the leading edge of performance and ensuring that we deliver the performance improvements that we promise. As you know, with these roadmaps, many of these decisions are made years in advance, and so we look at process technology as well as design and architecture and leading edge packaging. So we feel good about our roadmap. We just updated our roadmaps at our financial analysts day in March. And we continue to be very focused on executing to our roadmaps.

Mark: (18:34)
And when you talk about you’re focus both on your transistor or the process and the architectural lead, can you give us a sense to what extent the share gains that you’re taking right now are driven by one or the other or both, and would you expect to maintain a lead in both as you launch Milan and farther on down in ’21 and ’22?

Lisa Su: (19:02)
Well, I would say that the roadmap is dependent on all of those factors. You have to get the process technology and manufacturing right. We feel good about our roadmap there and our partnership with TSMC. And you also have to make the right design and architectural decisions, and we feel good about our CPU roadmap. So right now we are on Zen 2 with Rome. We saw a very nice acceleration of our data center business due to some of the key customers that have launched. We are on track or we expect to start shipping Milan here late this year. And then we’re also working in development on Zen 4, which is slated for five nanometer.

Mark: (19:49)
Thank you.

Operator: (19:53)
Thank you. Our next question today is coming from [Vivek Arya 00:00:19:55] from Bank of America. Your line is now live.

Vivek: (19:59)
Thanks for taking my question, and congratulations on the strong growth, despite all the headwinds. Lisa, for my first one, when I think back to the last time AMD was really big in the silver rocket was in that 2004 to 2010 timeframe when market share went from 7% to 26% in kind of that three year or so period. How would you contrast the current environment whether it’s from a competitive perspective or just a customer willingness to adopt your platform? What will it take for your market share to kind of approach those peaks? What are the puts and takes and how different or similar is their experience now?

Lisa Su: (20:42)
Yeah, sure, Vivek. Thanks for the question. Look, the server market, we’ve said it’s very strategic for us. We think there’s a high demand for sort of pushing the leading edge of performance. When I look at our roadmap right now, I feel very good about our roadmap. I think we have executed well to our roadmap. I think we are differentiated in terms of the performance that we’re offering in the server market. We’ve always said that the data center market is a bit of a journey, and so this is about putting together multiple generations of strong execution, so we’re pleased with where we are with Rome and the progress that we’ve made this year. I would say we’re still in the early innings of what we believe we can do in the server market. I think Rome is a very, very competitive product. I think as we go into Milan, we see that as also a very competitive product. Our goal is to really satisfy a broad swath of the server workloads, and we think we have the capabilities of doing that.

Vivek: (21:51)
For my followup, Lisa, you raised a full year growth outlook to 32% or so, I believe, from 25%. could you give us some more color on what’s driving that upside? How much of that is coming from BCs, how much from server, how much from semi-custom? And I noticed that you kept the gross margin outlook kind of steady, and I’m wondering how do we think about gross margins going forward? How sensitive is that to your success in the server market? Thank you.

Lisa Su: (22:22)
We did update a full year guidance. When we look at sort of what’s changed over the last 90 days when we were talking to you in April, we were actually expecting that there might be some COVID-19 related weakness in the second half due to macro economic factors or other things like that. What we see now is better visibility into the second half of the year, and so we had originally assumed that the PC market would be down in the second half. We now expect that we will grow in PC processors for the second half compared to the first half. We also see data center growing from the second half to the first half. And then we have our game console ramp that is a strong ramp here in the second half. So I think it’s a number of factors. We do believe that the market is a little bit better than we thought 90 days ago, but we also believe that our product traction is strong and we’re seeing that come through with our customer demand. So that those are the reasons for the guidance.

Vivek: (23:29)
Anything on gross margins.

Lisa Su: (23:31)
Oh, I’m sorry. Yes. On gross margins, I think that depends a lot on mix. Certainly your question was about server. Server is certainly accretive to margin, and I think in the PC business, the second half of the year tends to be a bit more consumer focused and notebook focused. And so that’s some of the mixed relation there. And then we said that the consoles are decretive to margin. We expect that the consoles will be very strong in the third quarter, and although the fourth quarter will be lower for consoles, it’s still going to be a very strong second half of the year. So those are the puts and takes there. But we feel that the mix is about right for the annual guide at 45%.

Vivek: (24:21)
Cut it. Thank you.

Operator: (24:25)
Thank you. Our next question today is coming from Matt Ramsay from Cowen and Company. Your line is now live.

Matt: (24:30)
Yes. Thank you. Good afternoon, everybody. Lisa, I wanted to ask about the PC market, and you just gave some comments about maybe some stronger trends than you might have anticipated 90 days ago in the back half, but pretty remarkable for a notebook business to more of doubled and for the second quarter to be your record client sales. I wonder if you might talk about the momentum, particularly in the notebook market of the 4000, and then how are you feeling the pull of the Enterprise notebook market and what’s the attraction like there so far into the back half? Thank you.

Lisa Su: (25:11)
The PC market was strong for us and the PC business was, was strong for us in the second quarter and as we look into the second half. What we saw was that desktops were down as expected, but the COVID-19-type phenomena has increased overall the PC market and we see a strong shift from desktop to notebooks. At the same time, I think our notebook portfolio, particularly the Ryzen 4000 has done extremely well. We’ve seen strong adoption. We have over 50 platforms in market. We watch the sell through and the consumption of those. And I would say it has been very strong, even exceeded our expectations for the early ramp.

Lisa Su: (26:02)
Our view is that the second half will continue to be good for notebooks and PCs overall. And that’s part of this idea that PCs are now essential. And so we see strength in consumer. We see strength in gaming notebooks, which we had previously been underrepresented. We have a nice commercial ramp and we do see good pipeline around commercial PCs as well as the education market is quite strong as well. So you put that together and I think the PC business has performed well for us.

Matt: (26:42)
Got it. Thanks. As a followup, maybe a piece of the business that’s been asked about a little less frequently over the last few quarters is your gaming GPU business. I’m interested if you could just put into context what the expectations are for improvements and new opportunities for Big Navi as you launch later this year and maybe size those opportunities from a data center perspective versus what you might expect in the gaming channel. Thanks.

Devinder Kumar: (27:12)
Yeah. I think the graphics, as we mentioned in the prepared remarks was down year over year. We saw a nice ramp of mobile as we launched some of the Navi-based mobile products, but the desktop channel was lower. This was somewhat as expected from the standpoint of the second quarter is usually a lower quarter for the desktop channel. What we did see is that sell through was pretty good. So I think gaming overall is good. We are in the process of a product transition. We are on track to launch RDNA 2, or as you call it Big Navi, late this year. We’re excited about the RDNA 2 architecture. I think it’s a full refresh for us from the top of the stack through the rest of the stack, and so I think that will be more of a contributor here as we go into-

Lisa Su: (28:03)
So I think that will be more of a contributor gear as we go into later this year and into next year.

Matt: (28:07)
Thanks, Lisa.

Lisa Su: (28:09)
Thanks, Matt.

Operator: (28:11)
Thanks. Our next question today comes from Harlan Sur from JP Morgan. Your line is now live.

Harlan: (28:17)
Good afternoon and good job on the quarterly execution. Good to see the team hit the double digits percentage market share targets and a broadening out of the end market penetration with Epic. Lisa, just given your customer and design win pipeline and rollout of Milan in the back half of this year, how are you thinking or how should we be thinking about further Epic share gains over the next 12 to 18 months?

Lisa Su: (28:44)
Sure. Harlan. Look, we are optimistic about our product positioning in the server market. Much of what we’ve been doing up through now, frankly, is making sure that our customers were ready to take advantage of Rome and Epic. And so we saw some nice traction here in the first half of the year, particularly in the second quarter around some top cloud accounts that have started to ramp in good volume.

Lisa Su: (29:12)
As we look forward to the second half of the year, there are more platforms coming with Rome. We have a number of OEM platforms that are in the process of being launched and we have additional cloud platforms as well. So I think Rome is going to continue to be a strong driver of our growth into the second half of this year as well as next year.

Lisa Su: (29:32)
We’re excited about Milan. Milan is looking good in the labs. We’re working with our customers on Milan and we expect to start shipping that later this year. So I think the way to think about our server business is again, it’s a journey and we’re pleased with where we are today, but there’s a significant opportunity for us if we continue to execute well over the next, I would say, more than 12 to 18 months, but really we see this as a multi-year opportunity.

Harlan: (30:02)
Yeah, absolutely. And then as a followup, we do an annual CIO survey here at JP Morgan. For the past three years, we’ve been asking global CIOs, are they thinking about or planning to use Epic-based platforms for on-prem? And in the most recent survey that we did in June, we actually saw 60% year over year increase in the number of CIOs that are thinking about using Epic for on-prem. Our interpretation is that interest level and mind share is growing quite rapidly. I guess my question to you, Lisa, is what is the AMD team seeing from an actual adoption perspective and what’s your sense of your enterprise mix sort of two to three years from now?

Lisa Su: (30:46)
Yeah. Actually, Harlan, I saw that data and I thought it was good data. What I would say is that we are making progress in the enterprise business and that comes from a number of different factors, but first is the availability of platforms. We have a very diverse set of platforms from our OEM partners that are now in market. We’ve also done quite a bit on the ecosystem and ensuring that we have the partnerships with the ISVs and then just basically feet on the street where we’re talking directly to some of these enterprise customers. So I feel good about the progress that we’ve made.

Lisa Su: (31:28)
Again, I would refer to the fact that mind share is a leading indicator, but there is a lot for us to do to convert that into market share and revenue growth, but we feel like we’re on a good path and we’re going to continue to focus on both cloud and Enterprise growth. And I’ll also mention HPC is another key vector for us where we’re very focused on showing a strong value proposition for those sort of toughest most scientific work loads.

Harlan: (32:00)
Absolutely. Thank you.

Lisa Su: (32:02)
Thanks, Harlan.

Operator: (32:04)
Thank you. Our next question today is coming from Joe Moore from Morgan Stanley. Your line is now live.

Joe: (32:10)
Great. Thank you. As I stay away from the previous question, can you talk a little bit about your Enterprise prospects on the PC client side? Can you give us a sense for how much at this point your business is skewed to consumer and how much progress are you making there in terms of penetrating Enterprise business?

Lisa Su: (32:26)
Sure, Joe. No question our business is more consumer-weighted today. I will say we’re growing nicely in commercial PCs. I think the strength of the Ryzen 4000 product has been good for us. I think there’s a lot of positivity around the performance, the battery life, the capabilities there. We continue to expand our go-to-market efforts there. We’re partnering very well with our top OEM partners. I would say that we’re still underrepresented in commercial, but no question that commercial notebook is a big focus for us and we’re going to continue to invest in and hopefully make progress in that subsegment.

Joe: (33:15)
Great. And then as a followup, there’s been a bunch of press about console builds getting revised up meaningfully by several million units coming from Nikkei, and yet your upside for the year seems fairly balanced across the segments. Can you give us just color in what’s happening in that console segment? Is there that much upside and could your numbers prove conservative as we move through the back half?

Lisa Su: (33:39)
Yeah. I will say that our upside is balanced across the segments. There’s no question that there’s a strong ramp in the second half of the year for consoles. We’re continuing to increase supply to meet that demand, but overall, I view it as again, consoles are a multi-year cycle and the first year, I mean, there’s a lot of pent up demand for consoles, but we should think about this as really a multiyear cycle and this is just the beginning of the ramp.

Joe: (34:12)
Great. Thank you.

Operator: (34:18)
Thank you. My next question today is coming from Stacy Rasgon from Bernstein Research. Your line is now live.

Stacy: (34:22)
Hi, guys. Thanks for taking my questions. I wanted to follow up on that capacity point. What is your capacity and supply situation look like? And is any of the four-year raise related to capacity freeing up at your foundry partners? And maybe put another way, are you supply rather than demand limited at this point? What does that capacity situation look like?

Lisa Su: (34:42)
Yeah, sure, Stacy. Look, we have a strong supply chain. There’s no question it’s been a very dynamic year if you just think about all the puts and takes over the last four or five months. I’ve said before and I’ll say again, seven nanometer is tight. And we continue to partner closely with TSMC to ensure that we can satisfy our customer demand.

Lisa Su: (35:08)
When you ask about the full year raise, the full year raise is because demand has gone up from our initial expectations, and some of that is due to the market and some of that is due to the strength of our product traction. We are increasing capacity to meet those needs, but it is tight. And I would say that as we continue to increase capacity, we see opportunity there, so from that standpoint, demand is strong.

Stacy: (35:36)
Thank you. So my follow up, your competitor was talking about a data center, potentially the data center digestion into the second half, and I understand you’re coming from a different place with the new [inaudible 00:35:49] and everything, so I understand why you are growing into the second half [inaudible 00:07:54], but what are you seeing just broadly with your customers? Are you seeing signs of the market within hyperscale entering the digestion phase, even if it’s not impacting you for the sort of well understood reasons?

Lisa Su: (36:05)
Yeah, Stacy, I think it’s a bit hard to generalize. From our visibility, what I would say is we have some customers that we see demand increasing in the second half versus the first half. We have some customers who are a little bit lower. The main thing for us, and I think you said it, it’s about the ramping of our platforms. And so I’m not sure I would point to a particular digestion phenomena. I would say it’s very customer dependent and depending on how much they built out in the first half, and some customers will be up and some customers will be a little bit down, but overall, we see an opportunity to grow in the second half.

Stacy: (36:48)
Is that the same across that type of scale in Enterprise or is it mostly hyperscale that’s driving it?

Lisa Su: (36:53)
My comment was a hyperscale comment since that’s what you were asking about. When I look at Enterprise, what I would say about Enterprise is it’s also different things happening. I would say in terms of Enterprise and HPC, we continue to see build out, and as I said, we have new platforms ramping that I mentioned in the prepared remarks. There is a bit of softness in SMB or some of the transactional business, and again, we were not very exposed to that portion of the market, so I don’t see it as it’s going down. It’s just perhaps not increasing as fast as we wanted it to, but overall it really depends on customer specific stuff. And we don’t see sort of this large scale people slowing down., I would say that way. I think there’s a need for infrastructure and we see people continuing to invest in infrastructure.

Stacy: (37:44)
Got it. That’s very helpful. Thank you so much.

Operator: (37:50)
Thank you. Our next question today is coming from Aaron Rakers from Wells Fargo. Your line is now live. Aaron, perhaps your phone is on mute. Please pick up your handset.

Aaron: (38:04)
Yes. Thank you. Can you hear me?

Lisa Su: (38:06)
Yes, we can hear you, Aaron.

Aaron: (38:08)
Okay. Thanks, Lisa. Congratulations on the quarter. I wanted to ask about the data center GPU business. I know you talked about the past for the CDNA product going forward. I’m just curious as you look to your cloud opportunities, how do you gauge or how are you thinking about the ability to kind of participate in some of the AI opportunities in the data center GPU business? Do you have any update on kind of ROCm and how that has opened up opportunities or what we should expect from a software platform perspective?

Lisa Su: (38:43)
Yeah, sure. Aaron, so look, I think that data center GPU business is sort of a midterm growth vector for us this year. I mentioned in the second quarter that the revenue was lower year on year, but the second half we expected to go up modestly. I think the view is we have good design wins in cloud gaming. We have good design wins across sort of cloud VDI-type instances. Very strong in super computing and HPC around Frontier and El Capitan as sort of our anchor, super computing wins.

Lisa Su: (39:21)
As it relates to machine learning and AI, we continue to invest in ROCm. We continue to work. Sort of our strategy around machine learning is partnered deeply with a couple of large cloud vendors who can invest in the software with us. And we see that as a multi-year opportunity, but it’s not a big revenue contributor here in 2020, but we see as a growth opportunity as we go into 2021 and beyond.

Aaron: (39:50)
Okay. And then as a quick followup, we talked a lot about kind of just ramping Epic in the roadmap. I’m just curious of how you’ve invested in the support organization to support this expansion. How has that progressed? Has that been at all a limiting factor to some of your ability in the server CPU market?

Lisa Su: (40:12)
Yeah, I think in server CPUs, it just takes time. There’s a customer qualification process that takes time, but we’ve been very pleased with sort of the efforts on both the part of our customers as well as sort of our own support teams. We’re continuing to invest. If you look at our op ex, we’re continuing to invest. One of the key areas is building out not just that support infrastructure, but just overall sales and go-to-market for the Enterprise business. So I feel good about where we are. Our strategy was always to go through some of the top cloud customers first, and I’m really pleased to see some of those get to high volume production, and we’ll continue to build out that infrastructure in both cloud as well as Enterprise.

Aaron: (41:07)
Thank you.

Operator: (41:07)
Thank you. Our next question today is coming from Timothy Arcuri from UBS. Your line is now live.

Timothy: (41:13)
Hi. Thanks. I guess, Lisa, I wanted to ask maybe in the past month or six weeks or even two months since it’s become probably more apparent to the customers that your competitor’s having some manufacturing issues, can you speak a little bit to the tenor of the customer conversations? Has it changed at all? Have you felt them incrementally more willing to adopt your products? Thanks.

Lisa Su: (41:37)
Yeah, I don’t think I would say, I mean, four to six weeks is kind of a short time. I think I would back up a little bit and say over the past couple of quarters, what have we seen? And I think over the past couple of quarters, what we have seen is they’ve seen our performance capability and we feel very good about where our products are positioned. I think what-

Lisa Su: (42:03)
… are very good about where our products are positioned. I think what we’ve also said is, “Look, you can count on us for consistent roadmap, and we’re going to show you each of those data points.” I think the Milan point is an important point for us, and that’s why we’re very focused on ensuring that that ships here later this year. I think the Zen 4 general point, we’ve already started engaging customers. Customers are very eager to understand what the longterm roadmap is. And so what I would say is it’s not sort of a short term thing. It’s more the notion of… We feel that customers are very open across cloud, OEM, enterprise. It’s on us to execute, and we think about that every day. But in terms of where the roadmap is, what are we trying to accomplish, where the customers are, there’s a pull from customers to engage us across a number of workloads. We feel well-positioned.

Timothy: (43:08)
Got it. And then I guess also in data center, I think you’ve highlighted before that a potential bottleneck might be to build out your software capabilities. Are there any metrics you can give us in terms of your ability to attract talent? Has that improved recently sort of in terms of the number of software engineers you’ve hired, anything like that to help? Thank you.

Lisa Su: (43:28)
Yeah. So I think if you’re talking about software, it’s more of a data center GPU statement versus a CPU statement. We feel actually that our CPU tools, infrastructure, and all that stuff is actually pretty well built out. There is some work that we do with some of the applications and the ISVs to optimize and tune our software, but I think that’s going very well. As it relates to the data center GPU, yes, I think there is more mind share. I think the super computing wins in the data center GPU side have really helped raise the profile of our GPU capabilities and our software capabilities. So I think we are in a good position there. And from our standpoint, again, this is about building out multiple vertical applications and doing that very well, so we continue to invest in the data center. It is a very strategic part of our business, but we’re making good progress.

Timothy: (44:36)
Thanks a lot, Lisa.

Lisa Su: (44:36)
Thank you.

Operator: (44:38)
Thank you. Our next question is coming from Mitch Steves from RBC Capital Markets. Your line is now live.

Mitch Steves: (44:46)
Hey, guys, thanks for taking my question. I wanted to focus on a little bit of a different topic, kind of comparing x86 and ARM. So I’m sure you guys saw they announced that at Apple is displacing Intel with its own ARM based chip, and historically the reason why you couldn’t really use an ARM based chips was because there was no real developers around it. So I guess, is there any risk or how do you guys think about ARM based service becoming a potential competitive threat in the future? How would that impact the x86 market in Intel as well? So do you have any comments on that in terms of Apple’s potential entrance in developing an ARM based ecosystem?

Lisa Su: (45:21)
Yeah. I think what I would say is there are going to be some people who develop their own chips. Apple has announced it in the makerspace. And there are some who are building their own in the data center space. I still believe this is not about ARM versus x86. I think it’s more about what performance do you offer, what capabilities do you offer, where the overall ecosystem is. And in that sense, I think we still feel quite confident that both the PC market, as well as the server processor market are predominantly x86. I think there’s a very good set of offerings out there that are available. And it’s, frankly, on us to make sure that the performance that you get, the power that you get, the performance per dollar, the capabilities are very, very competitive, so that we’re offering sort of the best in class processors in the market.

Mitch Steves: (46:28)
Got it. And then just one small follow up just on the data center comment, 20% of revenues. Is still the data center graphics piece still a small part of the business, or was that better this quarter? Just trying to get a qualitative understanding of what happened there.

Lisa Su: (46:41)
Yeah, Mitch. So we did say that overall data center revenue was over 20% of revenue this quarter, and it was predominantly CPUs. So the GPU portion of that is still relatively small.

Mitch Steves: (46:56)
So just to be clear, GPUs were not or basically flat sequentially, or whether they up?

Lisa Su: (47:00)
They were actually down sequentially.

Mitch Steves: (47:02)
Okay. Helpful. Thank you.

Speaker 2: (47:05)
Operator, we’ll take two more questions, please.

Operator: (47:09)
Certainly. Our next question today is coming from Ross Seymour from Deutsche Bank. Your line is now live.

Ross Seymour: (47:14)
Hi. Thanks for letting me ask you a question, and congrats on the strong results. Lisa, I actually had one short term question and one longterm question for you. And on the short term side of things, you have some significant moving parts with new product launches, et cetera, in both the third and fourth quarter. So I was hoping on the 32% sequential guide if you can give a little color by the two end markets, or the CNG and the ESC side. And then it’s a similar sort of thing when you go into the fourth quarter. You said semi-custom would be down sequentially, which is kind of typical seasonality, but the ability for you guys to still grow sequentially, what’s really driving that? And then I’ll follow up with a longterm question.

Lisa Su: (47:50)
Sure. So let’s see. Let me try to do that. So I think when you talk about the Q3 guides, so 32% sequentially, there is a large component of that which is game consoles. So the game console revenue was relatively modest in the second quarter, and it’s going to become larger here in the third quarter. But we do see PCs growing sequentially as well as server CPUs growing sequentially. And then as we go into the fourth quarter, I mentioned earlier that we expect that semi-custom will be down a bit, probably not as much as it’s historically down, frankly, because it’s the first year of the launch, but it should be down a bit. And then we do have product launches that we’ve stated around sort of the Zen 3 product families as well as the RDNA 2 product families that would drive some of the sequential growth in the fourth quarter. Did I answer that?

Ross Seymour: (48:56)
Yes, that’s exactly what I wanted. Thank you. And then maybe this one will be a little clearer on the longterm side of things. An earlier question was asked about opex and expanding your capabilities, et cetera, and you gave us a thoughtful answer to that. But generally speaking, it seems like your opportunities to take share in aggregate just improved due to your competitors missteps. So when you look at that opportunity, how do you think about organic investment? Would opex staying at, say, 29% of revenues like you’re talking about for this year be a good way to capitalize on that opportunity, as opposed to going down to the 26 or 27% you mentioned that your analyst meeting? Or within that, would you keep that a little bit tighter in line with your analyst meeting and maybe even consider going inorganic and tapping into the M&A market now that you have some cash and a very attractive currency to use as well?

Lisa Su: (49:46)
Yeah. Yes, let me answer it this way. Look, we are very excited about our organic growth opportunities. I think we want to stay sort of at that very significant growth in that over 20% CAGR for the next couple three or four years. I think the way we’ve managed the business is the prudent way to manage the business, and so opex will grow. Opex will grow, and you’ve seen it in the dollar numbers, but it’s going to grow a little bit slower than revenue. And we think that’s the right thing to do just to make sure that we do see some leverage. That being the case, because the business is growing so much, I mean, we are investing quite heavily in opex across the business in both the R&D and go to market. So what was the second part of your question, Ross?

Ross Seymour: (50:40)
It was just the inorganic way, would that be an avenue to broaden your offering to some of your customers?

Lisa Su: (50:47)
Well, yeah, look, I think we have been focused on the organic growth path cause there is so much opportunity there. We’ll always keep an eye open for are there opportunities to enhance the portfolio or do some skills acquisition, if that makes sense. But I think we’re very focused on executing the organic growth path.

Ross Seymour: (51:11)
Perfect. Thank you.

Lisa Su: (51:12)
Thanks, Ross.

Operator: (51:14)
Thank you. Our final question today is coming from John Pitzer from Credit Suisse. Your line is now live.

John Pitzer: (51:19)
Hey, guys. Thanks for squeezing me in, and congratulations on the strong quarter. Lisa, it’s really great to see embedded in the implied fourth quarter guide a gross margin that needs to go up about 200 basis points sequentially to meet your full year guidance. And especially with gaming consoles being down less than seasonal, I’m wondering if you just help me unpack that a little bit. When you think about the gaming console cycle, is their gross margin improvement available to you as that cycle ramps and matures? And I guess more importantly, when you look at both the PC market and the server fleet, where are you relative to optimal product mix, vis-a-vis kind of longer term gross margin aspirations?

Lisa Su: (52:00)
Yeah, sure. So obviously there’s a lot to happen between now and the fourth quarter, but I think from the guide, what you get is we see the server and PC growth generally positive. If you think about what we have planned from now through the rest of the year, we do have some significant new products that we’ll start shipping that will be positive from a gross margin standpoint. On a console basis, it is true that the console margins typically improve over the first sort of four to six quarters because you would expect that, as we ramp into higher volume, that there are improvements in manufacturing costs and so on and so forth.

Lisa Su: (52:52)
So those are the factors that are in there. A lot will depend on mix and the mix of the business being what is a mix of consumer versus commercial on the PC side, and then on the data center side, the mix between cloud and enterprise. And so we have to see how some of those things play out as we go out through the end of the year. But overall I think the trend is such that you should see sequential growth in the gross margins as we go into the fourth quarter for some of the reasons that I mentioned.

John Pitzer: (53:22)
That’s helpful. Then Lisa, as a follow on, you’ve always talked about this being a marathon more than a sprint, and you guys have had a pretty methodical strategy to which you’ve executed to. But given the revelations of Intel’s missteps last week, what might you do differently from here to try to take advantage of it?

Lisa Su: (53:42)
Well, John, I think the most important thing for us is to execute to our commitments to customers. And by the way, that’s been the same focus for us over the last few years, and it’ll continue to be the same focus for the next few years. I think consistency and roadmap, consistency and performance expectations, being capable of ramping across… Basically what we’re asking is for people to trust us with their most important applications. And so our focus is very much execute on the roadmap that we’ve committed to, and that’s key for us. And no question, there’s a lot of things to do in engineering to make that happen, but I think we’re very clear on what we want to deliver. And we’re excited, frankly, about the roadmap we have in front of us.

John Pitzer: (54:32)
Perfect. Thank you.

Operator: (54:35)
Thank you.

Speaker 2: (54:36)
Thank you, everybody, for joining the call today. We appreciate it, and we look forward to seeing many of you virtually throughout the quarter. Operator, if you can close the call, please.

Operator: (54:45)
Certainly. That does conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

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