How Strong Product Execution Could Keep Driving AMD's Earnings

How Strong Product Execution Could Keep Driving AMD’s
Earnings

By Paige Tanner
Aug 27, 2018. 12:09 PM

Computing and Graphics Segment Is Key Earnings Driver for AMD

AMD’s business segments

Advanced Micro Devices (AMD) came into the limelight after it reported its fiscal Q2 2019
earnings on July 25, 2018. The stock made a new 52-week high of $22.32 and shows no signs of a
slowdown. Investor optimism has resulted from the company’s execution of its product roadmap
for high-performance P C and server processors, while Intel (INTC ) delayed its next-generation 10-
nm (nanometer) products until the holiday season of 2019.

AMD is the only company with both C P U (central processing unit) and GP U (graphics processing
unit) products that it leverages across P C , servers, game consoles, and embedded devices.

Computing and graphics earnings

https://marketrealist.com/2018/08/computing-and-graphics-segment-is-key-earnings-driver-for-amd

In fiscal Q2 2018, AMD’s C G (computing and graphics) revenue rose 64% YoY (year-over-year) to
$1.1 billion, accounting for 61% of the company’s revenue. The growth was driven by strong
adoption of Radeon GP Us and Ryzen C P Us.

AMD earned ~60% of its client revenue from Ryzen products, Ryzen mobile processors in
particular. Even Intel reported strong demand for notebook processors with unit shipments rising
9% sequentially in fiscal Q2 2018.

AMD saw strong adoption of its Radeon GP Us in the data center market, which partially offset the
declines from crypto miners, who use AMD’s GP Us to mine cryptocurrency. NVIDIA (NVDA) took
a bigger hit from the decline in crypto-related GP U demand.

Operating income

C G’s operating income rose from just $7 million in fiscal Q2 2017 to $117 million in fiscal Q2 2018
driven by a better mix of high-margin products. Its operating margin stood at 10.8%. However,
operating income declined 15% on a sequential basis due to weakness in crypto-related revenue
and the declining ASP (average selling price) of desktop C P Us.

C omputing and graphics revenue is expected to rise by double digits sequentially in H2 2018 as
back-to-school and holiday season sales pick up. This growth could be partially offset by weakness
in crypto-related sales, which are expected to become almost negligible in H2 2018. Next, we’ll
look at the products that could drive computing revenues in H2 2018.

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AMD’s Computing Earnings Could See Strong Growth Thanks to
Ryzen

Computing

Advanced Micro Devices’ (AMD) fiscal Q2 2018 revenue rose 53% YoY (year-over-year) and 7%
sequentially largely due to strong demand in the C G (computing and graphics) segment. C G
revenue rose from less than $2 billion in 2016 to over $3 billion in 2017 and could head above $4
billion in 2018. Even within the C omputing and Graphics segment, strong growth was seen in the
C omputing subsegment, which saw growing adoption of Ryzen processors.

https://marketrealist.com/2018/08/computing-and-graphics-segment-is-key-earnings-driver-for-amd

Product launches in H1 2018

In fiscal Q2 2018, AMD saw its Ryzen shipments grow by double digits sequentially. Ryzen mobile
processor shipments more than doubled sequentially as major P C OEMs (original equipment
manufacturers) like Acer, Asus, Dell, HP (HP Q), Huawei, Lenovo, and Samsung (SSNLF) launched
several Ryzen-powered notebooks.

During the quarter, AMD also launched its Ryzen P RO commercial mobile AP Us (accelerated
processing units), which were adopted by the top three commercial OEMs: Dell, HP , and Lenovo.
The three OEMs have launched Ryzen-powered enterprise class notebooks and desktops, and
these devices are receiving strong interest from customers. The growing adoption of Ryzen mobile
processors boosted AMD’s mobile ASP (average selling price) in fiscal Q2 2018.

In the desktop space, AMD launched the second generation 12-nm (nanometer) Ryzen desktop
C P Us (central processing unit) in April 2018. Its desktop ASP fell in fiscal Q2 2018 as the move to
second-generation Ryzen C P Us led the company to reduce prices of its first-generation Ryzen
C P Us.

Future product launches

In August 2018, AMD launched its second-generation high-performance Ryzen Threadripper C P U
for enthusiasts and developers. In H1 2018, the company launched 44 Ryzen-based consumer
and commercial desktops and notebooks, and this number is expected to rise to 60 by the end of
2018 as Acer, Asus, Dell, and other OEMs launch more P C s and notebooks for the back-to-school
and holiday season. Next, we’ll look at AMD’s Graphics business.

C heck out all the data we have added to our quote pages. Now you can get a valuation snapshot,
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What's AMD’s Strategy to Expand Its Graphics Business?

AMD’s graphics business

https://marketrealist.com/2018/08/computing-and-graphics-segment-is-key-earnings-driver-for-amd

Advanced Micro Devices (AMD) is seeing strong growth in the P C processor market. It’s also
seeing growing adoption of its Radeon GP Us (graphics processing units), which it developed to
compete with NVIDIA’s (NVDA) gaming GP Us. However, AMD’s GP U growth has been slower
than NVIDIA’s, as the former lags behind the latter in terms of technology.

In fiscal Q2 2018, AMD’s graphics revenue rose YoY as lower sales from blockchain were more
than offset by strong demand from gaming and data center customers. The end of the crypto
boom has led to a fall in AMD’s blockchain sales, making them almost negligible in H2 2018.

Gaming

Over the last 12 months, AMD saw strong adoption of its P olaris-based Radeon RX 500 and Vega-
series GP Us among gamers. It has expanded its Radeon family by bringing Vega to laptops.

AMD is also focusing on software by launching drivers for every major game to optimize it on
Radeon GP U. The company is optimizing next-generation games on Radeon GP U by expanding
its partnership with major video game publishers like Ubisoft, C apcom, and Rebellion.

Big screens are a major component for a solid gaming experience. AMD has expanded its
FreeSync ecosystem with more than 400 FreeSync-enabled monitors and TVs available in the
market. The latest addition to this is Samsung (SSNLF), which added AMD’s FreeSync technology
to its high-end TVs.

Data center

AMD is seeing increasing adoption of its Vega-based Radeon Instinct MI25 GP Us for data centers.
NVIDIA dominates the data center GP U market, as its GP Us are easy to deploy thanks to its
C UDA software platform. AMD is stepping on NVIDIA’s toes by investing in open software
solutions. It is engaging with large cloud customers to develop software that meets their
requirements.

On the hardware front, AMD has developed the world’s first 7-nm (nanometer) GP U, which it is

https://marketrealist.com/2018/08/computing-and-graphics-segment-is-key-earnings-driver-for-amd

currently sampling and plans to launch by the end of 2018. The new 7-nm Radeon Vega GP U will
be optimized for AI (artificial intelligence) and machine learning.

Next, we will look at AMD’s Enterprise, Embedded, and Semi-C ustom segment.

C heck out all the data we have added to our quote pages. Now you can get a valuation snapshot,
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How AMD’s Enterprise, Embedded and Semi-Custom Business Has
Fared

AMD’s Enterprise, Embedded and Semi-Custom segment

Advanced Micro Devices’ (AMD) 2018 earnings are largely being driven by its C G (C omputing and
Graphics) segment due to the growing adoption of Radeon and Ryzen. However, AMD’s EESC
(Enterprise, Embedded, and Semi-C ustom) earnings are also picking up with the growing adoption
of its EP YC server C P Us (central processing unit).

In fact, AMD expects to take some of the server processor market share from Intel (INTC ) in the
coming two years. This expectation is driving AMD’s stock to record highs and leading to a slide in
Intel stock.

EESC revenue

https://marketrealist.com/2018/08/computing-and-graphics-segment-is-key-earnings-driver-for-amd

In fiscal Q2 2018, EESC revenue rose 37% YoY (year-over-year) and 26% sequentially to $670
million driven by strength in the Semi-C ustom and Enterprise segment. AMD’s EP YC server C P U
sales rose 50% sequentially due to orders from large data centers that buy in bulk.

AMD also realized sales of non-cancelable orders for semi-custom chips to Sony (SNE) and
Microsoft (MSFT) in the quarter as per the new accounting standards it adopted in fiscal 2018.
Embedded sales rose by double digits YoY driven by strong demand for embedded gaming,
industrial, and medical imaging.

Operating income

The growing mix of high-margin EP YC server C P Us and the realization of semi-custom sales this
quarter boosted EESC ’s operating income by 331% YoY to $69 million in fiscal Q2 2018. Its
operating margin stood at 10.3% in fiscal Q2 2018 as compared to 2.8% in fiscal Q2 2017.

AMD expects to secure a 5% share in the server processor market by the end of 2018, which
means its EP YC revenue growth rate might triple by fiscal Q4 2018. Next, we’ll look deeper into
AMD’s enterprise market and understand the factors that could drive its future growth.

C heck out all the data we have added to our quote pages. Now you can get a valuation snapshot,
earnings and revenue estimates, and historical data as well as dividend info. Take a look!

How AMD Is Expanding in the Data Center Market

AMD expands in the data center market

Advanced Micro Devices (AMD) entered the high-performance server C P U (central processing
unit) market with the launch of its EP YC server C P Us in 2017. In a span of one year, AMD’s EP YC
server C P U is being used in over 50 customer platforms including platforms from server OEMs
(original equipment manufacturers) and ODMs (original design manufacturers), platforms from
the cloud, and specific platforms. These platforms help EP YC reach out to multiple customers.

However, the shipment of EP YC depends on customer demand. While some customers like
enterprises demand hundreds of units, large cloud customers demand tens of thousands of units.

https://marketrealist.com/2018/08/computing-and-graphics-segment-is-key-earnings-driver-for-amd

Growing adoption of EPYC

AMD secured orders for its EP YC server C P Us from several large enterprises in fiscal Q2
2018. Enterprises are adopting EP YC server C P Us for HP C (high-performance computing), data
analytics, and general-purpose virtualized enterprise environments.

Data center

In fiscal Q2 2018, AMD’s EP YC C P U shipments to mega data centers more than doubled as it
accelerated product qualification over the anticipation of large deployments planned in H2 2018.
One of its mega data center customers is Tencent C loud, which has launched its SA1 C loud
Service that pledges to reduce the per virtual machine cost by 30%. AMD is also seeing growing
adoption from Tier 2 next wave cloud service providers that have the capability to grow quickly.

The rising adoption has accelerated the growth of EP YC ’s revenue and shipments to 50%
sequentially in fiscal Q2 2018. This growth rate is likely to accelerate further as the company
prepares to secure a 5% share in the server C P U market, which is dominated by Intel (INTC ) with
a 99% share. AMD aims to gain mid-single-digit server C P U market share by the end of 2018 and
increase it to double-digit market share in the mid-term.

While adoption is important to gain market share, competitive technology is also important. We will
look into this next.

C heck out all the data we have added to our quote pages. Now you can get a valuation snapshot,
earnings and revenue estimates, and historical data as well as dividend info. Take a look!

AMD Aims to Gain Double-Digit Server CPU Market Share

AMD’s server CPU market share

Advanced Micro Devices (AMD) aims to gain mid-single-digit server C P U (central processing unit)

https://marketrealist.com/2018/08/computing-and-graphics-segment-is-key-earnings-driver-for-amd

market share from Intel (INTC ) by the end of 2018. AMD’s EP YC server C P U shipments depend
on when its cloud customers expand their data centers. Its shipment of EP YC C P Us to mega data
centers more than doubled in fiscal Q2 2018 and it expects these shipments to grow faster in
fiscal Q3 and Q4 2018.

At the fiscal Q2 2018 earnings call, AMD’s chief executive, Lisa Su, stated that the company
expects to increase its server C P U market share to double digits in the mid-term. She stated that
AMD will need its second and third generation EP YC processors “Rome” and “Milan” to achieve
that level of market share.

AMD’s Rome server CPU

Lisa Su stated that AMD has developed its next-generation 7-nm (nanometer) EP YC processor
“Rome,” which is being manufactured by TSMC (TSM). AMD has started sampling this new
processor and plans to launch it in 2019.

The introduction of 7-nm products could make AMD competitive with Intel, which has delayed the
launch of its 10-nm products until the end of 2019. Lisa Su believes that the adoption of Rome will
be faster than its predecessor Naples, because with Naples, AMD had to prove to customers
the ability of these processors. After using Naples, customers adopted the EP YC architecture and
gained confidence in the processor. She also stated that customers are interested in Rome.

However, AMD plans focus on the first-generation Naples server C P Us in 2018 and the second-
generation Rome server C P Us in 2019.

In a nutshell, AMD seems on track to gain some of the server C P U market share from Intel in the
coming years.

C heck out all the data we have added to our quote pages. Now you can get a valuation snapshot,
earnings and revenue estimates, and historical data as well as dividend info. Take a look!

https://marketrealist.com/2018/08/computing-and-graphics-segment-is-key-earnings-driver-for-amd