AMD: Major manufacturers hoarding goods, AI guidance to move up again

AMD (AMD.O) released its second-quarter financial report for 2024 on the morning of July 31, 2024, after the U.S. stock market closed. The key points are as follows:

1. Overall Performance: Revenue and Profit Showing Improvement. In the second quarter of 2024, AMD achieved revenue of $5.835 billion, an 8.9% year-on-year increase, slightly better than market expectations ($5.72 billion). The growth in quarterly revenue was mainly driven by the data center business. AMD recorded a net profit of $265 million in the second quarter of 2024, with profit margins showing improvement compared to the previous period, but falling short of market expectations ($503 million). Despite the recovery in company performance, weakness in gaming and other businesses led to a relatively weak increase in the company's gross profit margin.

2. Business Segments: Data Center Remains the Main Growth Driver. Looking at the breakdown of the company's business segments, with the growth of the data center business, it now accounts for close to 50% of the total. The client business accounts for a quarter of the total, while the remaining two business segments have seen a further decline in their share. In this quarter, both the data center and client businesses saw growth, mainly benefiting from the recovery in downstream industry demand. However, the gaming business experienced a significant decline this quarter, primarily due to a downturn in custom gaming graphics card business.

3. AMD Performance Guidance: $AMD(AMD.US). For the third quarter of 2024, AMD expects revenue to be between $6.4 billion and $7 billion (market expectation $6.62 billion) and a non-GAAP gross margin of around 53.5% (market expectation 53.82%). Revenue is expected to increase quarter-on-quarter (9.7%-20%), mainly driven by growth in the data center segment.

Dolphin's Overall View: The company's financial report for this quarter is average. Revenue slightly exceeded market expectations, while the gross profit margin was below market expectations. The data center business continues to grow, but the gaming business saw a significant decline this quarter, resulting in only a slight increase in the company's profit for the quarter.

Considering the company's guidance, the expected revenue for the third quarter is between $6.4 billion and $7 billion, close to market expectations ($6.62 billion); the non-GAAP gross margin for the third quarter (53.5%) is in line with market expectations (53.82%). Both key data points show significant improvement, without any signs of exceeding expectations.

Looking at the financial report alone, the data provided by AMD is not impressive. However, Dolphin noted two important pieces of information: 1) The company has raised its full-year sales guidance for data center GPUs from $4 billion to $4.5 billion; 2) Microsoft's capital expenditure for this quarter has increased to $19 billion, a 36% increase compared to the previous period

Summary of Information: Driven by the growth in capital expenditures by downstream customers in the data center and AI markets, the company has increased shipments of products such as MI300, leading to an increase in the company's full-year sales expectations. It is evident that the company will continue to benefit from the increasing demand in the data center and AI markets.

Benefiting from the traction of data center and other businesses, the company's performance is expected to continue to grow. Due to the previous acquisition of Xilinx, the company's profit margin will still be under pressure. From the perspective of core operating profit, the company achieved a core operating profit of $630 million this quarter. After experiencing a temporary decline, the PE ratio corresponding to the core operating performance of the company in 2025 has also fallen to around 30 times. After the valuation bubble dissipates, industry and company-specific positives will increase market confidence.

Here is a detailed analysis of AMD's financial report by Dolphin:

1. Overall Performance: Revenue and Profit, Showing Improvement

1.1 Revenue:

In the second quarter of 2024, AMD achieved revenue of $5.835 billion, an 8.9% year-on-year increase, slightly better than market expectations ($5.72 billion). On a quarter-on-quarter basis, the company's revenue has rebounded, mainly driven by the growth in the data center business.

1.2 Gross Profit:

In the second quarter of 2024, AMD achieved a gross profit of $2.864 billion, a 17.2% year-on-year increase. The growth rate of gross profit exceeded that of revenue, mainly due to an increase in gross profit margin.

The gross profit margin for AMD in this quarter was 49.1%, a 3.5 percentage point year-on-year increase, lower than market expectations (51.4%). The increase in gross profit margin was mainly driven by the growth in the data center business.

1.3 Operating Expenses:

In the second quarter of 2024, AMD's operating expenses were $2.233 billion, a 12.2% year-on-year increase, with an increase in expenses on a quarter-on-quarter basis.

Breaking down the specific expenses:

1) Research and Development Expenses:

The company's research and development expenses for this quarter were $1.583 billion, a 9.7% year-on-year increase. Research and development expenses have consistently shown an increasing trend. As a technology company, the company continues to prioritize research and development. Even during periods of poor performance, the company's research and development expenses have continued to grow.

2) Sales and Administrative Expenses:

The company's sales and administrative expenses for this quarter were $650 million, an 18.8% year-on-year increase. The expenses on the sales side are closely related to the revenue growth rate, both of which increased this quarter

1.4 Net Profit

AMD achieved a net profit of USD 265 million in the second quarter of 2024, with a net profit margin of 4.5% for the quarter, showing a quarter-on-quarter increase.

Due to the significant deferred expenses arising from AMD's continued acquisition of Xilinx, it will continue to erode profits for some time in the future. Therefore, Dolphin believes that "core operating profit" is more relevant for the actual operating performance of this quarter.

Core Operating Profit = Gross Profit - Total Operating Expenses

After excluding the impact of acquisition expenses, Dolphin calculated AMD's core operating profit for this quarter to be USD 631 million, a 52% increase compared to the previous quarter. Despite another decline in the gaming business this quarter, the company's performance in this quarter was still driven by the data center business.

II. Business Segmentation: Data Center Remains the Main Growth Source

Looking at the company's segmented business situation, with the growth of the data center business, it now accounts for close to 50%. The client business accounts for a quarter, while the remaining two business segments have declined in proportion.

2.1 Data Center Business

AMD's data center business achieved revenue of USD 2.834 billion in the second quarter of 2024, a year-on-year increase of 114.5%, surpassing market expectations (USD 2.752 billion), mainly due to strong growth in sales of the company's AMD Instinct GPUs and the fourth-generation EPYC (Xiaolong) CPUs.

In the data center business, sales of the MI300 in the second quarter have exceeded USD 1 billion. Additionally, the company's fifth-generation EPYC (Xiaolong) CPUs will begin shipping in the second half of the year.

As downstream major factories further increase capital expenditures, the company's data center business will continue to benefit. This quarter, Microsoft and Google's capital expenditures continued to grow, especially with Microsoft's capital expenditures increasing by 36% compared to the previous quarter. At the same time, the company has raised its data center GPU sales target for this year to USD 4.5 billion.

2.2 Client Business

AMD's client business achieved revenue of USD 1.492 billion in the second quarter of 2024, a year-on-year growth of 49.5%, surpassing market expectations (USD 1.447 billion). The growth in the client business was mainly driven by the sales of Ryzen CPUs launched this quarter.

Looking at industry data, global PC shipments in the second quarter reached 64.9 million units, a year-on-year growth of 5.4%, surpassing 60 million units once again. The company's client business this quarter mainly benefited from the continued recovery in the industry In addition, the company has released the AMD Ryzen AI 300 series processor, which is the 3rd generation AMD processor for AI PCs, with industry-leading 50 TOPs AI processing power, suitable for Windows Copilot+ PCs. The company is also expected to benefit from the growing demand for AI PCs.

2.3 Gaming Business

AMD's gaming business achieved revenue of $648 million in the second quarter of 2024, a year-on-year decrease of 59%, in line with market expectations ($647 million). The decline in the gaming business is mainly due to the decline in semi-custom business revenue. Dolphin believes that while the PC market is showing signs of recovery, the demand for gaming graphics cards has not significantly improved, continuing to put pressure on the company's gaming business.

2.4 Embedded Business

AMD's embedded business achieved revenue of $861 million in the second quarter of 2024, a year-on-year decrease of 41%, basically in line with market expectations ($850 million). The company's embedded business is mainly based on the previously acquired Xilinx, and this quarter was mainly affected by customer inventory adjustments, with the company's shipment situation remaining at a relatively low level.

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