AMD2021 Q3 Performance Telephone Conference Executives Interpret Financial Report

$AMD(AMD)$


Thank you, Laura. And good afternoon to all those listening in today. Our business performed extremely well in the third quarter as our leadership product portfolio and strong execution drove record quarterly revenue, operating income, net income, and earnings per share. We delivered our fifth straight quarter of greater than 50% year-over-year revenue growth. With each of our businesses growing significantly year-over-year, and data center sales more than doubling. Third Quarter revenue grew 54% to 4.3 billion.

Gross margin expanded by more than four percentage points and operating income doubled year-over-year. Turning to our computing and graphics segment, Third Quarter revenue increased 44% year-over-year to 2.4 billion driven by our latest-generation rising Radeon and AMD instinct processors. In client computing, sales grew by a strong double-digit percentage year-over-year and declined slightly sequentially. Rise in 5,000 processor shipments increased by a double-digit percentage sequentially, resulting in a richer product mix as we believe we gained revenue share for the 6th straight quarter.

In desktops, we launched our rising 5,000 processors with integrated Lyon graphics for the channel to strong demand as third-party reviews highlighted the leadership computing and graphics capabilities, and energy efficiency of these processors. In notebooks, Acer, Asus, HP and Lenovo, all expanded their mobile offerings powered by rising 5,000 mobile processors, as we continue gaining momentum in the premium consumer, gaming and commercial markets. Commercial client growth year-over-year was based on new deployments across public sector and fortune 1,000 technology, energy and automotive customers as the number of AMD-based commercial notebook designs available from the largest OEMs increased significantly year-over-year.

We're also seeing strong growth in the workstation market. According to IDC, drug repro processors now powered the bestselling workstations in their category in both North America and EMEA as we continue winning high-volume deployments across key verticals including media and entertainment, engineering, architecture, and automotive. In graphics, revenue more than doubled year-over-year and grew by a strong double-digit percentage sequentially driven by shipments of our next-generation AMD CDNA 2 datacenter GPUs, and demand for Radian 6,000 GPUs in the channel.

AMD RDNA 2 GPU sales grew significantly in the quarter as we ramp production and expanded our top to bottom portfolio with the launch of the mid-range Radeon RX 6600 XTCards that delivered leadership 10 ADP gaming performance at their price point. Data center graphics revenue more than doubled year-over-year and quarter-over-quarter led by shipments of our new AMD CDNA 2 GPUs for the Frontier Exascale supercomputer at Oak Ridge National Laboratory.

Laura Graves

Frontier was architected specifically to deliver breakthrough HPC and AI compute performance and provide a blueprint for how super-computing enterprise and cloud customers can enable Exascale level performance over the coming years by combining AMD CPUs, GPUs, and software. We are very pleased with the performance of our AMD's CDNA2 GPUs, and look forward to providing more details on their leadership performance next month. Turning to our enterprise embedded in semi-custom segment, revenue increased 69% year-over-year to 1.9 billion driven by strong growth in epic processor and Semi-Custom sales.

Lisa Su

Semi-Custom revenue grew sequentially and year-over-year as demand for the latest Microsoft and Sony consoles remains very strong. We expect semi-custom revenue to increase sequentially in the Fourth Quarter as we further ramp supply to address the ongoing game console demand. Turning to server, we delivered our sixth straight quarter of record server processor revenue, as sales more than doubled year-over-year and grew by a significant double-digit percentage sequentially.

Third - gen Epic processors continue ramping faster than the prior generation, and contributed the majority of our server CPU revenue in the quarter. In Cloud, multiple hyperscalers expanded their third-gen Epic processor deployments to power their internal workloads. And both Microsoft Azure and Google announced multiple new AMD powered instances. Cloudflare, Vimeo, and Netflix also all recently announced new deployments powered by Epic processors. With Netflix highlighting how they doubled their streaming throughput per server, while also reducing their TCO.

Enterprise growth was particularly strong in the quarter as the more than 100 third-gen Epic processor platforms from Dell, HPE, Lenovo, Supermicro, Cisco, and others ramp into broader end customer deployments. We expanded our wins in the quarter with Fortune 1000 financial services, automotive, and aerospace companies, and see significant ongoing growth opportunities as our enterprise server pipeline has more than doubled year-over-year. In super computing, we won multiple installations in the quarter highlighted by Argonne National Laboratory selecting 3rd gen EPYC processors, to power the new Polaris supercomputer, that will be used to test and optimize software in preparation for future Exascale class systems.

Overall, we're very pleased with the momentum we have built in our data center business. As server, CPU and GPU revenue grew to a mid-20s percent of overall revenue in the quarter. Turning to our Xilinx acquisition, we are making good progress towards securing the required regulatory approvals, and remain on track to close by the end of the year. This Xilinx acquisition provides significant benefits to AMD, including expanding our product portfolio with leadership, adaptive computing, and AI solutions. And further diversifying our customer base into complementary markets, including wired and wireless communications, industrial, and automotive.

In closing, our record third quarter results and the significant acceleration of our business in 2021 demonstrates that we have the right products and strategies to drive best-in-class growth and significant shareholder returns. We continue growing faster than the market, driven by our consistent execution and the investments we have made to build leadership products. Our supply chain team has executed extremely well in a challenging environment, delivering incremental supply throughout the year, supporting our strong revenue growth. We're also investing significantly to secure additional capacity to support our long-term growth.

Our product portfolio and roadmaps have never been stronger, and I look forward to sharing more details about our next-generation servers, CPUs, and GPUs at our accelerated datacenter premier on November 8th. Now, I'd like to turn the call over to Devinder to provide some additional color on our Third Quarter financial performance. Devinder?

Devinder Kumar

Thank you, Lisa, and good afternoon, everyone. AMD had another excellent quarter. Our leadership products and growing datacenter momentum are driving record revenue, record profitability, and significant cash flow generation. Third-quarter revenue was 4.3 billion up 54% from a year-ago, driven by strong revenue increases across all businesses and up 12% from the prior quarter. Gross margin was 48% up 440 basis points from a year ago, driven by strong revenue mix and competitive products. Operating expenses were 1.04 billion compared to 706 million a year ago as we continue to invest in our long-term product road-maps and scaling our business.

Operating income more than double to 1.06 billion up 530 million from a year ago, driven primarily by revenue growth. Operating margin was 24%, up from 19% a year ago. Net income grew to 893 million, up 392 million from a year ago. Diluted earnings per share was $0.73 compared to $0.41 per share a year ago. This includes 15% effective tax rate compared to 3% a year ago. Now turning to the business segment results, computing and graphics segment revenue was 2.4 billion up 44% year-over-year, driven by significantly higher client and graphics processor revenue.

Computing and graphics segment operating income was 513 million or 21% of revenue compared to 384 million or 23% a year ago. The increase in operating income was primarily driven by higher revenue, which more than offset higher operating expenses. Operating margin was slightly lower year-over-year, primarily due to investments in R&D and go-to-market. Enterprise embedded and semi-custom segment revenue was 1.9 billion, up 69% from 1.1 billion the prior year.

The strong revenue increase was primarily driven by significantly higher Epic processor and Semi-Custom sales. EESC operating income was up significantly at 542 million or 28% of revenue, compared to 141 million or 12% a year ago. Operating income growth was primary driven by higher revenue and richer product mix, partially offset by higher R&D and go-to-market expenses. Turning to the Balance Sheet, cash, cash equivalents, and short-term investments were 3.6 billion. We utilized 750 million to repurchase more than 7 million shares of common stock in the third quarter of 2021 as part of our ongoing stock repurchase program. Free cash flow was 764 million compared to 265 million in the same quarter last year. and 888 million in the prior quarter.

On a quarter-over-quarter basis, free cash flow was lower as we made strategic investments in long-term supply chain capacity to support future revenue growth. Inventory was 1.9 billion, up 137 million from the prior quarter in support of continued revenue growth. Let me now turn to the Fourth Quarter Outlook. Today's outlook is based on current expectations and contemplates the current global supply environment and customer demand signals. We expect revenue to be approximately 4.5 billion, plus or minus 100 million, an increase of approximately 39% year-over-year and approximately 4% sequentially. The year-over-year increase expected to be driven by growth across all businesses.

The quarter-over-quarter increase is expected to be driven by higher server and Semi-Custom sales. In addition, for Q4 2021, we expect non-GAAP gross margin to be approximately 49.5%. Non-GAAP operating expenses to be approximately, 1.15 billion. Non-GAAP interest expense, taxes, and other, to be approximately 170 million, and the diluted share count to be approximately 1.22 million shares. For the full-year 2021, we now expect revenue to increase approximately 65% over 2020, driven by growth across all businesses, up from the prior guidance of 60%. In addition, we continue to expect gross margin to be approximately 48% for the full year.

In closing, we delivered another outstanding quarter with very strong year-over-year revenue growth, significant financial momentum, and record profitability. Our leadership products position us well to drive future growth, significant cash generation, and strong shareholder returns. With that, I'll turn it back to Laura for the question-and-answer session. Laura.

Laura Graves

Thank you. Devinder, operator, we're ready for our first question.

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