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AMD Q3 2023 Earnings Signal PC Segment Recovery, Broadening AI Reach

AMD Q3 2023 Earnings Signal PC Segment Recovery, Broadening AI Reach

The News: AMD announced revenue for third quarter (Q3) 2023 of $5.8 billion, gross margin of 47%, operating income of $224 million, net income of $299 million, and diluted earnings per share (EPS) of $0.18. On a non-generally accepted accounting principles (non-GAAP) basis, gross margin was 51%, operating income was $1.3 billion, net income was $1.1 billion, and diluted EPS was $0.70.

Although AMD beat expectations for Q3, its $6.1 billion forecast for Q4 fell short of analysts’ expectations of $6.4 billion. However, AMD’s new MI300 chip, which is poised to significantly expand the company’s data center footprint starting in Q4, could offset this gap. Read the full earnings press release on the AMD investor relations website.

AMD Q3 2023 Earnings Signal PC Segment Recovery, Broadening AI Reach

Analyst Take: As expected, the PC market is starting to show improving signs of recovery after a difficult post-pandemic slump characterized by inventory bloat and depressed demand. Highlighting an industry-wide trend toward recovery, AMD delivered strong revenue in Q3 ($5.8 billion), in part due to strong demand for the Ryzen 7000 series (which powers PCs) and what AMD Chair and CEO Dr. Lisa Su qualified as “record server processor sales.

AMD’s data center business also looks to be on a steady growth trajectory, and the company’s 4.22% year-over-year (YoY) revenue growth, 51% gross margin, and $0.18 EPS speak to AMD’s ability to execute well even in difficult macroeconomic conditions. Q3’s positive trend also reaffirms AMD’s continued market relevance at a time when the last of the inventory bloat that acted as a brake on chip demand for the past several quarters appears to finally be burning off.

AMD Revenue by Business Segment

Client: Client segment revenue in Q3 was $1.5 billion, up 42% YoY, primarily driven by strong Ryzen mobile processor sales. Sequentially, revenue jumped 46%, Ryzen 7000 Series CPU sales being the primary uplift driver. AMD ramped up its H2 2023 momentum with a Ryzen processor lineup expansion: the Ryzen Threadripper PRO 7000 WX-Series processors (available later this year through OEM partners including Dell Technologies, HP, and Lenovo, and to DIY customers and SI partners), and the Ryzen Threadripper 7000 processor.

Graphics processing unit (GPU)-wise, AMD’s flagship Radeon RX 7900M is the fastest AMD Radeon GPU ever developed for laptops, essentially delivering desktop-class performance for high-end gaming and content creation use cases. AMD also launched the Radeon PRO W7600 and Radeon PRO W7500 workstation graphics cards, which are designed to handle demanding workloads across a broad range of professional industries.

Data Center: Data center segment revenue held steady YoY at a flat $1.6 billion. Sequentially, however, revenue increased 21% thanks mostly to accelerating adoption of AMD’s 4th Gen EPYC CPUs. That sequential revenue growth was offset by a decline in adaptive System-on-Chip (SoC) data center products, however. Broadly, cloud adoption of AMD’s EPYC processors continues to enjoy strong growth with nearly a hundred new instances including from Amazon Web Services (AWS), Microsoft Azure, and Oracle. AMD also expanded its 4th Gen EPYC CPU portfolio with the launch of the energy-efficient EPYC 8004 Series processors built for the cloud services, intelligent edge, and telco segments.

Focusing on AMD’s AI moves for a moment, the company completed its acquisition of Nod.ai and Mipsology. The former adds to the company’s open AI software capabilities (like accelerating the deployment of AI solutions optimized for Ryzen AI processors, EPYC processors, Versal SoCs, AMD Instinct data center accelerators, and Radeon GPUs). The latter delivers AI software and solutions that run on top of AMD adaptive computing silicon. With the Mipsology acquisition, AMD hopes to be able to develop its full AI software stack and expand its open ecosystem of software tools, libraries, and models.

AMD’s strategy to expand its slice of the data center business pie as tech firms look to train their AI models at scale rests heavily on its powerful new MI300 chip, which it positions as the only legitimate competitor to NVIDIA and Google hardware for large language model (LLM) inference. AMD CEO Su put the importance and momentum of the MI300’s on-ramp in perspective:

“Based on the rapid progress we are making with our AI road map execution and purchase commitments from cloud customers, we now expect Datacenter GPU revenue to be approximately $400 million in the fourth quarter and exceed $2 billion in 2024 as revenue ramps throughout the year. This growth would make MI300 the fastest product to ramp to $1 billion in sales in AMD history.”

This insight into AMD’s data center strategy (and perhaps more importantly real-world pace of execution) helps put color on why Q4 guidance might not have reflected the reality of the chip market, including in the data center segment, and why analysts should not read too much into the slightly scaled back guidance. (In fact, I suspect that Su’s $2 billion prediction for MI300 sales in 2024 is a very conservative estimate.) On the whole, AMD looks well poised for revenue growth acceleration in 2024 and into 2025, in great part thanks to the expansion of its demand-driven AI-centric strategy.

Gaming: Despite an uplift in AMD Radeon GPU sales in Q3, AMD’s gaming segment revenue slipped 8% YoY to $1.5 billion, mostly because of a softening of semi-custom revenue. Sequentially, revenue declined 5% because of soft semi-custom sales.

AMD’s launch of the Radeon RX 7800 XT and Radeon RX 7700 XT graphics cards, optimized for high-refresh 1440p gaming specs for AAA and e-sports titles, and FidelityFX Super Resolution 3, featuring new frame generation technology, which delivers significant performance improvements over native resolution and temporal upscaling, could help mitigate the demand slump. Adrenalin Edition software, which features AMD HYPR-RX technology and allows AMD Radeon Super Resolution and AMD Radeon Boost technologies to work together to deliver greater performance, could also help with demand uplift, but AMD’s new Ryzen 7045HX3D Series, the first mobile processor with AMD’s 3D V-Cache technology (and reportedly the world’s fastest mobile gaming performance) might be AMD’s more intriguing gaming-focused product offering going into 2024. Overall, I do not expect gaming to have a spectacular year despite the vast improvements in AI-powered chipset performance that we are seeing across the industry. But AMD and other top chipmakers driving ecosystem design forward at breakneck pace to deliver AI-powered next-gen gaming experiences should not take long to inject more excitement for the category.

Embedded: Embedded segment revenue slipped 5% YoY to $1.2 billion due to a softer than expected communications market. Sequentially, revenue decreased 15%, reportedly because of inventory correction in several end markets.

AMD’s adaptive and embedded computing products are bringing new market opportunities in key markets, though, so the softening in performance we saw in Q3 might be offset by this time next year by these new on-ramps for segment growth: In no particular order, we have AMD’s new Alveo UL3524 accelerator card, a fintech-specific accelerator designed for electronic trading applications and AI-enabled trading strategies; AMD’s IoT-friendly Kria K24 System-on-Module (SOM) and KD240 Drives Starter Kit, which offer power-efficient compute in small form factors for cost-sensitive industrial and commercial edge applications; and AMD’s radiation-tolerant Versal AI Edge XQRVE2302 space-grade compute solution, AMD’s second device in the Versal SoC portfolio to be qualified for space flight, and it looks to capitalize on the growth of non-terrestrial networks (NTNs) and other satellite applications.

AMD Revenue Guidance for Q4 2023

AMD expects Q4 2023 revenue to total roughly $6.1 billion, plus or minus $300 million (reflecting 9% YoY growth and sequential growth of roughly 5%). Non-GAAP gross margin is expected to be about 51.5%. Although this falls slightly short of initial expectations ($6.4 billion), I feel that AMD leaning toward a slightly more conservative number in Q4 is a safe bet given the current pace of recovery and short-term supply chain constraints. Nonetheless, given the accelerating demand pipeline for Ryzen and MI300 products, I will not be surprised if AMD’s Q4 revenue lands closer to the initial target than current guidance would suggest.

Conclusions and Key Takeaways

Broadly, for Q4 2023, I expect continued growth and momentum in the data center and client segments against a partial offset in the softening gaming and embedded segments. AMD’s gaming, fintech, IoT, and space-ready product releases should help mitigate the current demand slump but a turnaround might not be in the cards until Q2 2024.

On the positive side, the Ryzen portfolio’s outstanding performance in Q3 reflects both the positive trend in PC demand that we were hoping to land on this past quarter and continued OEM trust in AMD’s ability to execute at scale.

AMD’s acquisitions of Nod.ai and Mipsology point to an inflection point for AMD’s AI strategy, which should enable AMD to both develop its full AI software stack and vastly accelerate the deployment of AI solutions across all of its core products and segments. Additionally, AMD’s Instinct MI300A and MI300X GPUs are reportedly on track for volume production in Q4 to support deployments with key leading high-performance computing (HPC), cloud, and AI customers.

AMD’s 5-year, $400 million research, development, and engineering operations expansion in India, which includes creating 3,000 new engineering jobs, is also a positive signal of the company’s growth path.

Based on the strong performance trajectory of the EPYC CPU portfolio and the growth in Instinct MI300 accelerator shipments in support of hyperscale, enterprise, and AI deployments, Q4 looks to be off to a solid start.

Daniel Newman and his co-host of The Six Five Webcast, Patrick Moorhead of Moor Insights and Strategy discussed AMD’s earnings in their latest episode. Check it out here and be sure to subscribe to The Six Five Webcast so you never miss an episode.

Disclosure: The Futurum Group is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.

Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of The Futurum Group as a whole.

Other insights from The Futurum Group:

AMD Revenue Hits $5.4 Billion in Q2, Down 18% YoY, But Beats Estimates

AMD Datacenter & AI Conference Recap: All Eyes on AI and Cost Optimization

AMD and Hugging Face Team Up to Democratize AI Compute – Shrewd Alliance Could Lead to AI Compute Competition, Lower AI Costs

Author Information

Olivier Blanchard has extensive experience managing product innovation, technology adoption, digital integration, and change management for industry leaders in the B2B, B2C, B2G sectors, and the IT channel. His passion is helping decision-makers and their organizations understand the many risks and opportunities of technology-driven disruption, and leverage innovation to build stronger, better, more competitive companies.  Read Full Bio.

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