AMD Overview
Advanced Micro Devices (AMD) has strengthened its position in the semiconductor market on the back of its evolution as an enterprise-focus company.
AMD has emerged as a strong challenger to NVIDIA’s dominance in the GPU market based on its Radeon technology.
Launch of 7 nanometer (nm)-based AMD Radeon RX 5700-series gaming graphics card family featuring RDNA architecture, high-speed GDDR6 (Graphics Double Data Rate type 6) memory and support for the PCIe 4.0 interface, has helped the company increase presence among gamers.
Moreover, AMD’s Radeon Pro graphics cards and Radeon VR Creator cards support game developers, and virtual reality (VR) and augmented reality (AR) technologies, respectively.
Further, AMD Radeon Instinct family of GPU products are gaining traction in data centre applications, including deep learning training and traditional high-performance computing (HPC) workloads.
Additionally, AMD EPYC 7001 Series of high-performance processors is helping AMD gain share in the server market. Further, AMD EPYC Embedded 3000 Series of processors addresses new markets including, networking, storage and edge computing devices.
In the consumer-PC market, AMD has become a key challenger to Intel courtesy AMD Ryzen desktop processor family. The company’s desktop-based processor offerings include Ryzen and high-end Ryzen Threadripper processors, among others. AMD Athlon and AMD PRO series of processors cater to commercial and consumer desktop PC market.
AMD’s processors are primarily powered by the company’s proprietary “Zen” CPU and “Vega” GPU architectures.
AMD generated revenues of $6.731 billion in 2019. The company reports operations under two segments — Computing and Graphics, and Enterprise, Embedded and Semi-Custom.
Computing and Graphics segment includes desktop and notebook processors and chipsets, discrete GPUs and professional graphics. This segment generated revenues of $4.709 billion in 2019.
Enterprise, Embedded and Semi-Custom segment include server and embedded processors, dense servers, semi-custom SoC products, engineering services and royalties. This segment generated $2.02 billion in 2019.
Reasons To Buy AMD
AMD is well-poised to benefit from strong demand for its x86-based microprocessors, semi-custom chips, embedded processors, and GPUs driven by increasing adoption of AI and ML techniques.
- Evolving Business Strategy. To diversify its business beyond the slowing, transitioning PC market, AMD is enhancing its semi-custom chip business, which has been performing well till date. AMD plans to expand its semi-custom business into other high-growth markets such as the semi-custom ultra-low-power client, embedded, dense server and professional graphics markets, where it can offer differentiated products that use its APU and graphics IP. The company’s release of Vega-based GPUs and increasing demand for in both gaming and blockchain industries are key catalysts. The number of Ryzen notebook models set to be launched in 2020 is 50% higher than the ones launched in 2019. These systems are mostly from the likes of Acer, Asus, Dell, HP, Lenovo and other OEMs.
- A Fast Growing Player In The Microprocessor/Graphics Processing Market. Despite its late entry, AMD has attained the position of a major player in the microprocessor and graphics processing markets. The company started small, targeting the low-end segment and gradually built a position for itself. AMD has had a very rough time because of the strength and market position of its two primary competitors Intel and NVIDIA. While Intel remains supreme in the microprocessor segment and has also notably strengthened its graphics capabilities, NVIDIA remains strong in the graphics market. AMD combined its engineering talent with that of ATI to develop capabilities in both these areas. Considering the might of its competitors, AMD has done well to hold its own in the face of significant changes in the markets it serves. Moreover, increasing demand for cryptocurrency mining has been a key catalyst for AMD’s GPU sales in recent times.
- Strength in 7 nanometer-based processors. 7nm processors are expected to strengthen the company’s competitive position in the commercial and server market against Intel. Notably, Intel’s chips utilize process technologies that are designed in-house. Meanwhile, AMD is currently leveraging Taiwan Semiconductor Manufacturing Company’s 7 nm process technology, which is enabling it to deliver its advanced 7 nm chips faster to market. Further, AMD aims to deliver “Zen 4” core architecture, which is “currently in design” utilizing advanced 5 nm process technology. This is a major concern for Intel, which is yet to deliver 7 nm chips. Markedly, Intel noted the delay in 7nm process-based chips in its second-quarter earnings conference. The company has detected a defect mode in 7 nm process, which caused yield degradation. This is expected to favour AMD capture market share and challenge Intel’s dominance in the semiconductor market.
- Increased Investment In The Embedded Business. Given the persistent weakness in the core PC business, AMD like Intel has started investing in its embedded business. Strength in this segment should continue in the future too as the company scores more wins. Given continued product enhancements and design wins with strategic players in key verticals such as digital signage and medical equipment, I expect the momentum to continue through 2020. The company is currently targeting the communications, industrial, and gaming segments of the market and there appears to be suitable design wins to generate substantial revenue growth over the next few years. AMD expects the total addressable market for its high-performance embedded SOCs and processors to be $9 billion and therefore the company is trying to increase its share in this market by delivering competitive products.
5. An Improving Trend in PC Shipments is Anticipated. Per Gartner’s preliminary data, PC shipments in second-quarter 2020 improved 2.8% year over year to 64.8 million units. Going by the IDC report, shipments grew 11.2% on a year-over-year basis and totalled 72.3 million in the period under review. Moreover, an improving trend in PC shipments driven by work-from-home and online learning wave is likely to positively impact PC-makers, which bodes well for AMD’s growth prospects.
6. Management Execution has been Fantastic amid testing times in the wake of the Coronavirus Pandemic. AMD has a solid net-cash balance of $1.09 billion as of Jun 27, 2020, up from $902 million as of Mar 28, 2020. During the second quarter, the company generated $243 million in cash from operations, against operating cash outflow of $65 million in the first quarter. Free cash flow was $152 million in the second quarter against free cash flow outflow of $120 million in the prior quarter. The increasing liquidity and cash flow trend reflect that the company is making investments in the right direction. The strong cash balance can aid the company to pursue strategic acquisitions and other investments in growth initiatives. Notably, total debt to total capital of 12.9% is lower than the prior quarter’s figure of 13.8%.
Reasons To Sell AMD
Intensifying competition in the traditional PC market and GPU segment, and customer concentration remain headwinds.
- Intensifying competition in the PC Market and the Transition to ARM. In the traditional computing market, which generates 70.8% of AMD’s revenues, AMD is up against Intel’s strong market position. With Intel systems so well entrenched, there is an obvious preference for system integrators to choose Intel processors over AMD. This is changing with regards to the announcement made by Apple. So far, Intel processors have also afforded superior functionality, enabling it to exercise pricing power. In the past, AMD was forced to resort to penetration pricing, which severely impacted its profitability. Now that it is getting into the higher-range segment, it is facing very stiff competition from Intel. Moreover, AMD faces significant competition from NVIDIA in the GPU market. AMD had greater success in the mobile segment and its current product lineup indicates that this focus will continue. However, competition in the mobile segment is likely to accelerate, with more ARM-based devices coming on the market. This transition to ARM could shake the PC market as a whole.
- AMD faces significant customer concentration from Sony and Microsoft. Consequently, the loss of any one of these customers is anticipated to massively hurt the top line. Notably, Sony accounted for more than 10% of the company’s total revenues in 2019. Note: This is changing, as AMD builds partnerships with the likes of Google and Amazon. Recently, Google announced the exclusive use of EPYC processors to power Google Confidential Computing VMs, AWS launched global availability of EC2 C5a instances powered by EPYC processors and notably Dell, HPE and Lenovo expanded their AMD-based offerings with additional 2nd Gen EPYC processor platforms.
AMD’s Earnings and Revenue
AMD Q2 Earnings Match Estimates, Revenues Up Y/Y
Advanced Micro Devices (AMD) reported second-quarter 2020 non-GAAP earnings of 18 cents per share. Notably, the bottom line soared 125% year over year but remained flat sequentially.
Revenues of $1.93 billion surged 26% year over year. On a quarter-over-quarter basis, the top line improved 8%.
Strength in Computing and Graphics segment drove year-over-year improvement. Markedly, Datacenter products contributed more than 20% to total second-quarter revenues.
Segment Revenue Details
Computing and Graphics segment’s (70.8% of total revenues) revenues of $1.37 billion, improved 45% year over year. This can be attributed to robust adoption of Ryzen processors. The figure declined 5% sequentially thanks to sluggish graphics processor sales.
Client processor average selling price (ASP) improved year over year on higher Ryzen processor sales. Client processor ASP declined sequentially owing to higher Ryzen mobile processor sales.
Coronavirus crisis-induced work-from-home and online learning wave drove PC market strength, which led to robust growth in client processor revenues. Management noted that growth was also backed by “11th straight quarter of market share gains.”
Nevertheless, desktop processor sales fell on a quarter-over-quarter basis, as was anticipated. Meanwhile, revenues in ASP improved year over year, driven by higher mix and solid demand for high-end Ryzen processors.
In the mobile domain, growth in notebook processor unit shipments and revenues was driven by increasing traction of Ryzen 4000 mobile processors.
Management also remains optimistic regarding growing clout of Ryzen 4000 mobile processors families across leading OEMs. Markedly, Ryzen PRO 4000 Series processors are powering “more than 30 ultrathin premium and gaming consumer notebooks launch for multiple OEMs.”
AMD’s latest series of notebook processors — Ryzen 4000 — offer superior performance and longer battery life. This has been enabling the company to strengthen mobile processor business.
Markedly, latest Ryzen 4,000 Series processors sales surged significantly in the second quarter, which led to strong double-digit percentage growth in mobile revenues. Besides on a year-over-year basis, revenues more than doubled courtesy of a significant increase in unit shipments and ASP.
The latest AMD Ryzen PRO 4000 Series mobile processors are witnessing traction across leading commercial OEMs. Lenovo is leveraging the processors in its ThinkPad T series, X series and L series of business notebooks, while HP has rolled out new “enterprise-ready” ProBooks. ASUS and Acer have already launched notebooks based on the AMD Ryzen 4000 Series mobile processors.
In the graphics domain, revenues fell year over year as a decline in desktop channel sales offset the robust double-digit growth in mobile GPU sales.
Desktop GPU shipments declined on a year-over-year basis, while channel sellout improved in the second quarter. Higher sales of Radeon RX 5000 M series mobile GPUs based on RDNA architecture on deal wins from Apple and Dell, remained noteworthy. However, GPU ASP declined on a year-over-year basis and sequentially owing to lower channel sales.
The company noted that the Data Center GPU business decreased on a year-over-year basis. Management is optimistic on new deal wins in cloud gaming and VDI verticals.
Enterprise, Embedded and Semi-Custom segment’s (29.2% of total revenues) revenues of $565 million were down 4% year over year but up 62% sequentially.
The year-over-year decline can primarily be attributed to lower semi-custom product revenues, partially offset by higher EPYC server processor sales. Improvement on a quarter-over-quarter basis was led by robust uptake of EPYC processors and growth in semi-custom product sales.
For the semi-custom space, AMD commenced initial production and shipments of next-generation game console SOCs during the second quarter.
In the server domain, strength in AMD’ latest EPYC processors is enabling the company to win new deals from major enterprise, cloud, and HPC companies.
With regards to the cloud vertical, AMD’s second-gen EYPC processors witnessed traction across Amazon Web Services, Tencent, and Microsoft Azure. Moreover, major cloud players utilized server processors to meet accelerated demand for collaboration services induced by the coronavirus-led work-from-home wave and increased use of online schooling solutions.
AMD’s focus on introducing new high-performance processors to support complex applications, advanced modeling, database and hyper-converged workloads is driving growth. In enterprise domain, Dell, Lenovo and HPE have selected EPYC processors to power their respective next gen platforms.
Considering HPC vertical, AMD’s second Gen EPYC processors wins across Indiana University, Purdue and CERN, remain noteworthy.
Moreover, the processors have been selected by Amazon, Oracle, Microsoft and IBM to power their respective cloud based HPC offerings.
Further, management is optimistic on increasing utilization of AMD CPUs and GPUs across supercomputing systems.
Margins (Non-GAAP)
Gross margin in the reported quarter was 54.8%, which contracted 6.8% on a YoY basis. Increase in product costs and unfavourable sales mix such as the rapid adoption of margin dilutive 5G ASIC products led to the decline.
Research & development (R&D) expenses and Marketing, General & Administrative (MG&A) expenses decreased 5% year over year to $4.751 billion.
Operating income surged to $6.058 billion, 18% on a year over year basis.
Operating margin contracted to 30.7%. The negative impact of lower gross margin offset gains from lower spending.
Operating Details (Non-GAAP)
Gross margin expanded by 3% on a year-over-year basis to 44%, driven by strong adoption of client and server processors.
Operating expenses increased 20.5% year over year to $617 million, due to higher investments in Research & development (R&D) and go-to-market initiatives.
R&D expenses rose 23.3% year over year to $460 million. Marketing, general and administrative expenses climbed 13.8% year over year to $215 million.
As a percentage of revenues, non-GAAP operating expenses were 32%, contracting by 1% from the year-ago quarter.
Adjusted EBITDA soared 87.1% year over year to $305 million. The increase can be attributed to earnings growth.
Operating income came in at $233 million, up 109.9% year over year. Growth in revenue base drove year-over-year improvement.
Operating margin of 12% expanded 500 bps year over year.
Segment-wise, Computing and Graphics operating income were $200 million, compared with $22 million reported in the year-ago quarter courtesy of higher revenues. Enterprise, Embedded and Semi-Custom operating income were $33 million compared with $89 million reported in the year-ago quarter. The decline can be attributed to higher operating expenses and lower revenue base.
Balance Sheet
As of Jun 27, 2020, AMD had cash and cash equivalents (including marketable securities) of $1.78 billion compared with $1.39 billion as of Mar 28, 2020. As of Jun 27, 2020, total debt (long-term plus short-term) was $690 million, up from $488 million as of Mar 28, 2020.
Operating cash flow was reported at $243 million, against operating cash outflow of $65 million in the first quarter. Free cash flow was $152 million in the second quarter against free cash flow outflow of $120 million in the prior quarter.
Guidance
AMD expects third-quarter 2020 revenues of $2.55 billion (+/-$100 million), indicating year-over-year and quarter-over-quarter growth of 42% and 32%, respectively.
For third-quarter 2020, AMD expects robust sales from Ryzen, EPYC processors and next-gen semi-custom products to drive year-over-year and sequential increase in revenues.
Semi-custom revenues are projected for strong growth, driven by gains from production increase to support the launch of the latest Xbox Series X and PlayStation 5 gaming consoles scheduled for holiday season of 2020.
Non-GAAP gross margin is anticipated to be 44%.
For 2020, AMD now projects revenues to grow 32% over 2019 backed by momentum in PC, gaming and data centre products. Previously, AMD had projected growth of 32% over 2019.
The company expects to “deliver strong growth in the second half” backed by strength in current product portfolio. Also, initial shipments of latest next generation ZEN 3 CPUs and RDNA GPUs, set to launch in late 2020, are projected to drive growth.
For 2020, management continues to expect non-GAAP gross margin of 45%.
Long Term Outlook
AMD, since the appointment of their CEO — DR. Lisa Su, have built the technical, operational and financial foundation required to drive their long-term growth strategy. They’ve consistently executed on their product road maps, established deep partnerships with an expanded set of customers, ramped multiple products in leading edge manufacturing technologies and significantly strengthened their balance sheet.
The launching of their EPYC processors has been building a solid foundation to drive long-term growth. Their strategy is grounded in driving widespread support and adoption from industry-leading cloud and hardware providers.
Summary
AMD is benefiting from robust adoption of Ryzen, Radeon and latest second-generation EPYC server processors, courtesy of increasing proliferation of AI and ML in industries like cloud gaming and supercomputing domain. However, broad-based macroeconomic weakness owing to coronavirus-induced lockdowns are likely to put pressure on desktop processor-related sales. Also, increasing expenses on account of product development amid stiff competition from NVIDIA and Intel are likely to dent margins at least in the near term. Nevertheless, accelerated adoption of AMD’s products in the data centre vertical, driven by work-from-home and online learning trends, remains a key catalyst. Also, partnerships with Amazon, Microsoft, Baidu and JD.com are opening newer business avenues. Notably, shares of AMD have outperformed the industry on a year-to-date basis.
Referred Sources:
Intel Q2 2020 Results, Intel 2019 10-K, Zacks.com and predictions made by the Author’s understanding of the company.
Disclosures:
This report contains independent commentary to be used for informational purposes only. The analyst/author contributing to this report does not hold any shares of this stock at the time of writing. The analyst/author contributing to this report does not serve on the board of the company that issued this stock. Additionally, the analyst/author contributing to this report certify that the views expressed herein accurately reflect the analyst’s/author’s personal views as to the subject securities and issuers.
