Without the explosive power of NVIDIA, AMD's recovery is too slow.

AMD (AMD.O) released its third-quarter earnings report for 2023 (ending in September 2023) after the US stock market on the morning of November 1, 2023. The key points are as follows:

Overall performance: Improving quarter by quarter. AMD achieved revenue of $5.8 billion in the third quarter of 2023, a year-on-year increase of 4.2%, slightly exceeding market expectations ($5.705 billion). The revenue rebound was mainly driven by the recovery of the client business and data center. AMD achieved a net profit of $299 million in the third quarter of 2023, a year-on-year increase of 353%. The significant recovery of the client business supported the profit growth this quarter.

Business segments: Client business exceeds expectations. In this quarter, the four major businesses of the company accounted for a relatively average proportion, ranging from 20% to 30%. Among the four major businesses, only the client business exceeded expectations this quarter. The client business achieved a year-on-year and quarter-on-quarter growth of over 40% this quarter, showing a clear recovery in business.

AMD's performance guidance: The expected revenue for the fourth quarter of 2023 is $5.8-6.4 billion (market expectation: $6.4 billion), and the non-GAAP gross margin is around 51.5% (market expectation: 52%). The revenue is expected to rebound by 0%-10.3%, mainly driven by the recovery of client and data center businesses. The gross margin has also rebounded, slightly lower than market expectations, as the downstream shipments of client business and other businesses increase, profitability improves.

Dolphin Research's overall view:

AMD's earnings report for this quarter is generally satisfactory. The revenue slightly exceeded market expectations, but the improvement in gross margin fell short of market expectations. The final quarterly profit was slightly lower than market expectations, but the performance trend is still upward and recovering.

Referring to AMD's guidance for the next quarter: The expected revenue for the fourth quarter is $5.8-6.4 billion (market expectation: $6.4 billion), and the non-GAAP gross margin is around 51.5% (market expectation: 52%). The guidance data is slightly lower than market expectations, but the trend of recovery is still present.

Looking at the performance of each business segment, AMD's businesses have shown different performances. The continuous recovery of the client business confirms the recovery trend in the PC industry. The growth of the data center business is relatively weak, but the launch of new products in the next quarter is expected to accelerate growth. The gaming and embedded businesses both declined, indicating a current weak demand.

Overall, Dolphin Research believes that AMD has entered a positive trajectory of performance recovery, and the company will continue to benefit from the growth of its PC and data center businesses. However, this relatively "ordinary" earnings report did not bring many highlights and will have little short-term impact on the stock price. Further upward movement in the stock price still requires the company to deliver more performance that exceeds expectations.

Here is Dolphin Research's specific analysis of AMD's earnings report:

I.Overall Performance: Starting to Improve Quarter by Quarter

1.1 Revenue

AMD achieved a revenue of $5.8 billion in the third quarter of 2023, a year-on-year growth of 4.2%, slightly exceeding market expectations ($5.705 billion). From a quarter-on-quarter perspective, the company's revenue has started to rebound, mainly driven by the recovery in the client and data center businesses.

1.2 Gross Margin

AMD achieved a gross margin of $2.747 billion in the third quarter of 2023, a year-on-year increase of 16.7%. The growth rate of gross margin exceeded that of revenue, mainly due to the improvement in gross margin rate this quarter.

AMD's gross margin rate for this quarter was 47.4%, a year-on-year increase of 5.1 percentage points, slightly lower than market expectations (48.9%). The improvement in gross margin rate is mainly due to the reduction in amortization of intangible assets from acquisitions and the improved profitability of the client and other business segments.

1.3 Operating Expenses

AMD's operating expenses in the third quarter of 2023 were $2.08 billion, a year-on-year increase of 13.5%, mainly due to continued investment in research and development.

Specifically, the breakdown of expenses is as follows:

Research and Development Expenses: The company's research and development expenses for this quarter were $1.507 billion, a year-on-year increase of 17.8%. Research and development expenses have been consistently increasing. As a technology company, AMD continues to prioritize research and development. Even during a period of low performance, the company's investment in research and development continues to increase.

Selling and Administrative Expenses: The company's selling and administrative expenses for this quarter were $576 million, a year-on-year increase of 3.4%. The expenses on the sales side show a clear correlation with revenue growth.

1.4 Net Profit

AMD achieved a net profit of $299 million in the third quarter of 2023, a year-on-year increase of 353.4%. The net profit margin for this quarter was 5.2%, continuing to improve compared to the previous quarter. Due to the significant deferred expenses caused by AMD's ongoing acquisition of Xilinx, it will continue to erode profits in the near future. However, in terms of the actual operating conditions for this quarter, Dolphin Research believes that "core operating profit" is more relevant.

Core operating profit = Gross profit - Total operating expenses

After excluding the impact of acquisition expenses, Dolphin Research estimates that AMD's core operating profit for this quarter is $664 million, an increase of 46.6% MoM. Driven by the client and data center businesses, the company's operating performance has clearly rebounded.

II.Business segmentation: Client business exceeds expectations again

Looking at the company's business segmentation, AMD's four business revenues for this quarter are relatively evenly distributed, ranging from 20% to 30%. Among them, with the recovery of the data center and client businesses this quarter, the combined proportion of the two businesses has increased to over 50%.

2.1 Data center business

AMD's data center business achieved revenue of $1.598 billion in the third quarter of 2023, a YoY decline of 0.7%, slightly lower than market expectations ($1.623 billion). This is mainly due to the growth in sales of the company's fourth-generation EPYCTM (Milan) CPUs being offset by the decline in sales of system-on-chip (SoC) products.

The company's MI300A and MI300X GPU products will start mass production and shipment in the fourth quarter, which is expected to drive further growth in the data center business next quarter.

2.2 Client business

AMD's client business achieved revenue of $1.453 billion in the third quarter of 2023, a YoY growth of 42.2%, surpassing market expectations ($1.233 billion) once again. The client business also saw a significant rebound MoM this quarter, mainly driven by strong demand for Ryzen 7000 series desktop and laptop processors. After destocking in the PC industry chain, the current pace of shipment has accelerated, leading to a substantial improvement in AMD's PC business.

2.3 Gaming Business

AMD's gaming business achieved revenue of $1.506 billion in the third quarter of 2023, a YoY decline of 7.7%, slightly lower than market expectations ($1.532 billion). Although the gaming graphics card business had shown signs of recovery in the previous quarter, it experienced another decline recently. Dolphin Research believes that the previous demand for gaming graphics cards was mainly driven by inventory replenishment, and the weak downstream demand has affected the sustainability of shipments.

2.4 Embedded Business

AMD's embedded business achieved revenue of $1.243 billion in the third quarter of 2023, a YoY decline of 4.6%, slightly lower than market expectations ($1.309 billion). The company's embedded business is mainly driven by the acquisition of Xilinx, and this quarter was mainly affected by the decline in the communication market.

By launching the first AMD Adaptive SoC with HBM memory, the company aims to provide excellent performance and efficiency for data centers, networks, testing, and aerospace applications, and expects to further enhance AMD's position in related fields.