AMD: Climbing out of the valley, PC leads the recovery.

AMD (AMD.O) released its Q2 2023 earnings report on the morning of August 2, 2023, after the U.S. stock market closed. The key points are as follows:

1. Overall Performance: Rebound after hitting bottom. AMD.US achieved a revenue of $5.359 billion in Q2 2023, a YoY decrease of 18.2%. The decline in revenue has stopped on a MoM basis, mainly driven by the stabilization and recovery of client and data center businesses. AMD's net profit in Q2 2023 was $0.27 billion, a YoY decrease of 94%. The profit has turned around, mainly due to the improvement in gross margin.

2. Business Segments: Client business exceeds expectations. Data center and embedded businesses remain the two largest sources of revenue for the company, but the client business exceeded expectations this quarter. The client business grew by 35% QoQ, showing a significant recovery from the bottom. However, the gaming business declined again this quarter, still affected by weak downstream demand.

3. AMD's Performance Guidance: The expected revenue for Q3 2023 is around $5.4-6 billion, with a non-GAAP gross margin of approximately 51% (market expectation: 51.15%). The revenue is expected to increase by 1-12% QoQ, mainly driven by the recovery of client and other businesses. The gross margin has also improved, meeting market expectations. Part of the improvement is due to increased shipments in downstream businesses and the improvement in profitability.

Dolphin's overall view:

AMD's earnings report for this quarter is in line with expectations. The revenue slightly exceeded market expectations, while the rebound in gross margin fell short of market expectations. Although the quarterly profit was $100 million less than expected, it still shows a trend of turning losses into profits and moving in a positive direction.

Referring to AMD's guidance for the next quarter: The expected revenue for Q3 is $5.4-6 billion (market expectation: $5.836 billion), with a non-GAAP gross margin of approximately 51% (market expectation: 51.15%). The guidance data is moderate, but the QoQ revenue and gross margin continue to show improvement.

The biggest highlight of AMD this quarter is the client business, mainly the PC CPU business. It has performed significantly better than expected, combined with Intel's performance in the previous week's earnings report. Dolphin believes that after a long period of destocking in the PC industry, the inventory situation in the supply chain has significantly improved, and downstream customers' demand for inventory replenishment has started to increase.Overall, Dolphin believes that AMD has passed the trough of its performance and will continue to benefit from the growth of its PC and data center businesses. However, the current weakness in the gaming graphics card market has somewhat limited the company's potential. Once the gaming business starts to recover significantly, the company's upward potential is expected to further expand.

Here is Dolphin's specific analysis of AMD:

1. Overall Performance: Rebounding after hitting bottom

1.1 Revenue

In the second quarter of 2023, AMD achieved revenue of $5.359 billion, a year-on-year decrease of 18.2%. From a quarter-on-quarter perspective, the company's revenue decline has been halted, mainly due to downstream data center and client inventory replenishment.

1.2 Gross Margin

In the second quarter of 2023, AMD achieved a gross margin of $2.443 billion, a year-on-year decrease of 19.3%. The decline in gross margin exceeded that of revenue, mainly due to a decrease in gross margin percentage.

AMD's gross margin for this quarter was 45.6%, a year-on-year decrease of 0.6 percentage points, lower than market expectations (47.1%). Although there has been some recovery in downstream demand, the rebound in product prices is still below market expectations.

1.3 Operating Expenses

AMD's operating expenses in the second quarter of 2023 were $1.99 billion, a year-on-year increase of 5.2%, 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 $1.443 billion, a year-on-year increase of 11%. Research and development expenses have been consistently increasing. As a technology company, AMD continues to prioritize research and development. Even during the performance trough, the company's investment in research and development has been increasing.
Selling and administrative expenses: The company's selling and administrative expenses for this quarter were $1.443 billion, a year-on-year decrease of 7.6%. The expenses on the sales side are somewhat related to the revenue situation.

1.4 Net Profit

In the second quarter of 2023, AMD achieved a net profit of $0.27 billion, a year-on-year decrease of 94%. The net profit margin for this quarter was 0.5%, achieving a turnaround from loss to profit compared to the previous quarter.Due to the significant deferred expenses resulting from AMD's ongoing acquisition of Xilinx, it will continue to erode profits in the near future. However, 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

2. Business Segments: Client Business Exceeds Expectations

From AMD's business segment perspective, the gaming business remains the company's largest source of revenue, but its proportion has declined to below 30%. The data center business and the embedded business acquired from Xilinx both show an upward trend in their proportions. The client business, mainly CPU-based, has experienced significant declines in cycles, but its proportion has increased significantly this quarter.

2.1 Data Center Business

AMD's data center business achieved revenue of $1.321 billion in the second quarter of 2023, a year-on-year decrease of 11.1%. This is mainly due to the decline in sales of the third-generation EPYC processors to downstream customers. The data center business has stabilized and rebounded on a month-on-month basis, mainly benefiting from the demand for the fourth-generation AMD EPYC CPUs.

In addition, the company's AMD Instinct™ MI300A and MI300X GPUs have started providing samples to leading HPC, cloud, and AI customers.

2.2 Client Business

AMD's client business achieved revenue of $998 million in the second quarter of 2023, a year-on-year decrease of 53.6%. The client business also showed a significant rebound on a month-on-month basis, mainly due to the significant growth in sales of AMD Ryzen™ 7000 series CPUs. .

2.3 Gaming Business

AMD's gaming business achieved revenue of $1.581 billion in the second quarter of 2023, a year-on-year decrease of 4.5%. Although the gaming graphics card business showed a rebound in the previous two quarters, it declined again this quarter. .

2.4 Embedded Business

AMD's embedded business achieved revenue of $1.459 billion in the second quarter of 2023, a YoY growth of 16.1%. The growth of the company's embedded business is mainly driven by the previously acquired Xilinx, particularly in the industrial, vision and healthcare, automotive, and test and simulation markets.

With the new AMD Versal™ Premium VP1902 Adaptive SoC, Spartan™ Ultrascale+™ FPGA, and enhanced versions of Vivado™ and Vitis™ software platforms, the company aims to further enhance AMD's position in the adaptive field.