AMD: "Timid" guidance, does AI implementation equal AI downhill?

AMD (AMD.O) released its third-quarter financial report for 2024 on the morning of October 30, 2024, after the US stock market closed. The key points are as follows:

1. Overall Performance: Revenue & Gross Margin Both Improved. $AMD(AMD.US) achieved a revenue of $6.819 billion in the third quarter of 2024, a year-on-year increase of 17.6%, slightly better than market expectations ($6.714 billion). The growth in quarterly revenue was mainly driven by the client and data center businesses. AMD achieved a net profit of $771 million in the third quarter of 2024, with profit margin rebounding slightly better than market expectations ($730 million). Both revenue and gross margin improved, while operating expenses remained relatively stable, driving the recovery of profit margin.

2. Business Segments: Client Business Rebounded, Data Center Reached New High. With the growth of the data center and client businesses, the combined revenue of the two businesses accounted for nearly 80% of the total.

1) Client Business Rebounded: Revenue in this quarter rose to $1.881 billion, a year-on-year increase of 29.5%, successfully coming out of the trough, mainly benefiting from the company's increased PC market share.

2) Data Center Reached New High: Revenue in this quarter reached $3.55 billion, hitting a quarterly record high. This was mainly due to the shipment growth of the company's related products (GPU and CPU), stemming from the high capital expenditure of core cloud providers.

3. AMD Performance Guidance: Expected revenue for the fourth quarter of 2024 is $7.2-7.8 billion (market expectation $7.55 billion) and non-GAAP gross margin around 54% (market expectation 54.21%). The two core guidance data points are basically in line with market expectations. The revenue growth is expected to come from the drive of the data center and client businesses.

Dolphin's Overall View: AMD's data for this quarter is decent, but it did not provide guidance above expectations.

AMD's revenue and gross margin both improved this quarter, mainly driven by the recovery of the data center and client businesses. In terms of operating expenses, the company's research and development, sales, and related expenses remained relatively stable. The core operating profit of the company returned to over $1 billion this quarter, indicating an overall improvement in performance.

Specifically for the core business of the company: 1) Client Business: Achieved $1.881 billion this quarter, a growth of 29.5%. Considering the single-digit growth in the PC industry, Dolphin believes that the company further squeezed Intel in the PC market this quarter, gaining a larger CPU market share (AMD's market share increased by 3.8 percentage points year-on-year in the second quarter of 2024, and is expected to gain more share with the drive of new products); 2) Data Center Business: Reaching a new high of $3.55 billion, mainly driven by strong sales of the Instinct series GPUs and EPYC CPUs, indicating that core cloud providers are still maintaining high capital expenditures this quarter; 3) Other Businesses: Demand for gaming graphics cards has not shown significant improvement, while the embedded business is still in a phase of customer inventory adjustment.

Although the revenue and profit data for this quarter are decent, the company did not provide guidance above expectations this time. For the next quarter, the company expects revenue of $7.2-7.8 billion for the fourth quarter of 2024 (market expectation $7.55 billion) and a non-GAAP gross margin of around 54% (market expectation 54.21%). Both guidance figures are not particularly ideal, with the midpoint of the guidance range slightly below market expectations, which has somewhat affected the market's confidence in the company and the AI industry chain.

Originally, AMD was the second supplier in the AI market, and the market itself wanted to see the company catch up with NVIDIA and gain more market share. With signs of easing on the supply side for NVIDIA as the first supplier, the market would prefer to see AMD provide guidance above expectations to demonstrate the strength of MI300 products and market demand. The current guidance is clearly not satisfying the market.

For AMD, Dolphin believes that the main focus of performance is still on the data center business, which now accounts for over 50% of revenue. The data center business not only brings business in the short term but also instills confidence in sustained growth in the market in the medium to long term. As the main end customers in the company's data center business for GPUs and CPUs are still Microsoft, Google, and other manufacturers, Dolphin will continue to monitor the capital expenditure plans of core cloud providers in the future. It is worth paying attention to the company's explanations during the conference call, specific business progress in data centers and clients, views on the gaming graphics card market, as well as detailed business outlook for the next quarter and beyond.

Below is Dolphin's specific analysis of AMD's financial report:

I. Overall Performance: Revenue & Gross Margin, Both Improved

1.1 Revenue End

In the third quarter of 2024, AMD achieved revenue of $6.819 billion, a year-on-year increase of 17.6%, slightly better than market expectations ($6.714 billion). The company's quarterly revenue reached a new high, mainly driven by the data center business and client business .

The company continues to increase its market share in the PC market, driving its client business out of a trough. Due to the impact of related demands such as AI, there is also significant growth in the Instinct series GPUs and EPYC CPUs in the company's data center business.

1.2 Gross Margin End

In the third quarter of 2024, AMD achieved a gross profit of $3.419 billion, an increase of 24.5% year-on-year. The growth rate of gross profit exceeded that of revenue, mainly because the gross margin is also increasing AMD's gross margin in this quarter is 50.1%, a year-on-year increase of 2.7 percentage points, lower than market expectations (52.4%). The rebound in gross margin is mainly due to the increasing proportion of high-margin data center business (currently accounting for over 50%), driving the overall gross margin growth.

1.3 Operating Expenses

AMD's operating expenses in the third quarter of 2024 were $2.357 billion, a year-on-year increase of 13.2%. The operating expenses also increased on a quarter-on-quarter basis, but the growth rate was slightly lower than the revenue growth rate.

Specifically, looking at the breakdown of expenses:

1) Research and Development Expenses: The company's R&D expenses in this quarter were $1.636 billion, an 8.6% increase year-on-year, with R&D expenses showing a consistent growth trend. As a technology company, the company continues to focus on research and development. Due to revenue growth, the company's R&D expense ratio this quarter fell to 24%, within a relatively reasonable range;

2) Selling and Administrative Expenses: The company's selling and administrative expenses in this quarter were $0.721 billion, a 25.2% increase year-on-year. The expense situation on the sales side is closely related to revenue growth, with both showing growth this quarter.

1.4 Net Profit

AMD achieved a net profit of $0.771 billion in the third quarter of 2024, with a net profit margin of 11.3% for this quarter, continuing to increase on a quarter-on-quarter basis.

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

Core operating profit = Gross profit - Total operating expenses

After excluding the impact of acquisition expenses, Dolphin estimates that AMD's core operating profit for this quarter is $1.062 billion, a 68.3% increase quarter-on-quarter. With the impact of both revenue and gross margin growth, the company's overall operating performance has seen a significant improvement. Although the performance of the company's gaming graphics cards remains weak this quarter, both the client-side business and data center business have shown significant improvement.

While the PC market only saw single-digit growth, the company's client-side business revenue increased by 29.5% year-on-year, mainly due to market share gains. In addition, with continuous shipments of GPU and CPU products, the data center business has achieved a new quarterly revenue high.

II. Business Segmentation: Client-side Breakthrough, New Heights in Data Centers

From the company's business segmentation, with the growth of the data center business, its proportion has exceeded 50%. The proportion of client-side business has also rebounded to 27.6%, while the proportions of the other two business segments have once again declined.

2.1 Data Center Business

AMD's data center business achieved revenue of $3.549 billion in the third quarter of 2024, a year-on-year increase of 122.1%, slightly better than market expectations ($3.462 billion), mainly due to the strong growth in sales of AMD's Instinct series GPUs and EPYC processors.

Combining the recent information from the Advancing AI 2024 event, the company will launch: 1) the new AMD EPYC 9005 series processors to meet various data center needs, which can be used on various OEM and ODM platforms; 2) the AMD Instinct MI325X accelerator to provide leading performance and memory features for the most demanding AI workloads, and plans to launch the next generation of AMD Instinct accelerators in 2025 and 2026; 3) announced the acquisition of ZT Systems for $4.9 billion to expand the data center AI system business. The latter is dedicated to providing large-scale server solutions for cloud computing and artificial intelligence, with server shipments reaching tens of thousands annually. Its main customers include Microsoft, Amazon, etc..

Furthermore, the company has further raised its full-year revenue guidance for AI chips from $4.5 billion to $5 billion, indicating continued strong demand in the data center business. As the data center business is mainly affected by the capital expenditures of cloud providers, Dolphin believes that several core cloud providers are still maintaining high capital expenditure levels this quarter.

2.2 Client-side Business

AMD's client-side business achieved revenue of $1.881 billion in the third quarter of 2024, a year-on-year growth of 29.5%, surpassing market expectations ($1.712 billion). The growth in the client-side business is mainly attributed to the increase in sales of the fifth-generation Ryzen CPUs.

Looking at industry data, the global PC shipments in the third quarter of 2024 were 68.8 million units, a year-on-year increase of 0.9%. Meanwhile, AMD's client-side business achieved nearly 30% year-on-year growth, indicating that AMD has gained a larger market share in the PC market this quarter, causing some concerns for Intel's financial report, according to Dolphin In addition, the company has announced the launch of the all-new Ryzen AI PRO 300 series mobile processors, providing 50+ AI TOPs for enterprises for the next generation AI PC; and the company is expected to launch the next generation Ryzen 9000 X3D processor in the fourth quarter of 2024. With the blessing of computing power and the launch of new products, AMD is expected to gain more market share from Intel, leading the way out of the downturn in the PC business.

2.3 Gaming Business

AMD's gaming business achieved revenue of $462 million in the third quarter of 2024, a year-on-year decrease of 69.3%, lower than market expectations ($572 million). The decline in gaming business was mainly affected by the decline in semi-custom business revenue.

Although the company's client business has clearly rebounded, the current gaming business remains weak. Considering the industry situation, Dolphin Research believes that the PC industry as a whole is in a slow recovery state, and the demand for gaming graphics cards has not significantly improved. As for the client business, mainly due to Intel's underperformance, AMD has gained a larger market share. In terms of gaming graphics cards, the company's main competitor is NVIDIA, with no significant gain in market share.

2.4 Embedded Business

AMD's embedded business achieved revenue of $927 million in the third quarter of 2024, a year-on-year decrease of 25.4%, basically meeting market expectations ($913 million). The company's embedded business is mainly based on the previously acquired Xilinx. Although some downstream demand has improved this quarter, the company is still affected by customer inventory adjustments, and the company's shipment situation remains relatively low.