AMD - Q2 2023

Transcript

Operator (participant)

Greetings, and welcome to the AMD 2nd quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce to you Mitch Haws, Head of Investor Relations. Thank you, Mitch. You may begin.

Mitch Haws (Head of Investor Relations)

Thank you, and welcome to AMD's Q2 2023 financial results conference call. By now, you should have had the opportunity to review a copy of our earnings release and accompanying slideware. If you have not reviewed these documents, they can be found on the investor relations page of amd.com. We will refer primarily to non-GAAP financial measures during this call. The full non-GAAP to GAAP reconciliations are available in today's press release and slides posted on our website. Participants on today's conference call are Dr. Lisa Su, our Chair and Chief Executive Officer, and Jean Hu, our Executive Vice President, Chief Financial Officer, and Treasurer. This is a live call and will be replayed via webcast on our website.

Before we begin, I would like to note that Jean Hu will attend the Jefferies Semiconductors, IT Hardware & Communications Technology Summit on Tuesday, August 29th, and the Deutsche Bank Technology Conference on Thursday, August 31st. Dr. Lisa Su will attend the Goldman Sachs Communacopia + Technology Conference on Tuesday, September 5th. Our Q3 2023 quiet period is expected to begin at the close of business on Friday, September 15th. Finally, today's discussion contains forward-looking statements based on current beliefs, assumptions, and expectations, speak only as of today, and as such, involve risks and uncertainties that could cause actual results to differ materially from our current expectations. Please refer to the cautionary statement in our press release for more information on factors that could cause actual results to differ materially. With that, I'll hand the call over to Lisa. Lisa?

Lisa Su (Chair and CEO)

Thank you, Mitch, and good afternoon to all those listening in today. We executed well in the Q2, launching multiple leadership products, significantly expanding our AI engagements, and ramping our latest Zen 4 EPYC and Ryzen product families. Q2 revenue declined 18% year-over-year to $5.4 billion. Sales were flat sequentially as clients and data center segment growth was offset by expected declines in our gaming and embedded segments. AI customer engagements grew by more than 7 times sequentially, as multiple customers initiated or expanded programs supporting future deployments of Instinct MI250 and MI300 hardware and software at scale. Looking at the Q2 business results, data center segment revenue of $1.3 billion was down 11% year-over-year and up 2% sequentially.

Although market demand remains mixed, the 4th-gen EPYC CPU adoption accelerated in the quarter, with revenue nearly doubling sequentially as cloud providers expanded deployments to power their internal infrastructure and public instance offerings. In cloud, 30 new AMD instances launched in the Q2, with multiple Genoa instances announced by AWS, Alibaba, Microsoft, and Oracle. Genoa delivers up to 1.9x more performance in enterprise and cloud applications, and 1.8x more performance per watt than the competition, making it by far the industry's highest performance and most efficient server processor. As an example, AWS announced its M7a Genoa instance, which is the highest performance and best price-performance general purpose x86 instance they offer.

In total, there are now more than 670 AMD-powered cloud instances publicly available. We expect that number to grow 30% to nearly 900 by the end of the year, driven largely by new Genoa deployments. We also expanded our Zen 4 server product portfolio in the quarter with the launches of Bergamo and Genoa-X. Microsoft Azure announced the first Genoa-X HPC instances that offer more than 5 times higher performance in technical computing workloads compared to their prior generation. With Bergamo, we deliver more than double the performance than competitive offerings for cloud-native applications while offering full x86 software compatibility. We were excited to be joined at our launch event by Meta, where they announced plans to deploy Bergamo broadly across their global data center infrastructure to power applications including Facebook, Instagram, and WhatsApp.

Looking ahead, Dell, HPE, Lenovo, Supermicro, and other large server providers are on track to begin launching their new Bergamo platforms in the Q3. In enterprise, while macroeconomic uncertainty resulted in weaker customer demand year-over-year, sales of EPYC processors for enterprise servers grew sequentially as we closed multiple wins with large energy, technology, financial services, and healthcare companies. Overall, pull from large enterprises continued to grow. For example, Banco do Brasil, BNP Paribas, Petronas, Uber, and other large enterprises all adopted EPYC processors in the quarter, and SAP selected EPYC processors to power RISE with SAP applications hosted on Google Cloud. We expect EPYC revenue to grow by a double-digit % sequentially in the Q3, led by the expanding fourth gen EPYC CPU ramp. In addition, Siena, our first EPYC processor, optimized for leadership, edge server, and telco infrastructure, is on track to launch this quarter....

Turning to our broader data center business. In networking, the largest cloud providers expanded their adoption of Pensando DPUs in the quarter, highlighted by new deployments with Alibaba and Oracle Cloud. In supercomputing, EPYC and Instinct processors continued to be the solutions of choice for the most powerful supercomputers in the world, powering 121 of the fastest systems on the latest TOP500 list, and 7 of the 10 most efficient systems on the Green500 list. In AI, we made strong progress in the Q2, as we met key hardware and software milestones to address the growing customer pull for our data center AI solutions. Our AI strategy is focused on three areas. First, deliver a broad portfolio and multigeneration roadmap of leadership GPUs, CPUs, and adaptive computing solutions for AI inferencing and training.

Second, extend the open and proven software platform we have established that enables our AI hardware to be deployed broadly and easily. Third, expand the deep and collaborative partnerships we have established across the ecosystem to accelerate deployments of AMD-based AI solutions at scale. We delivered on all three fronts in the Q2. On the software and partnership side, Hugging Face announced plans to optimize thousands of their models for AMD Instinct, Ryzen, EPYC, Radeon, Versal, and Alveo platforms. To make it easier for developers to tap into the full performance and features of our AI hardware, we delivered a significant performance and feature update in our latest ROCm software, and expanded support for AMD Silicon across the leading frameworks, including PyTorch, TensorFlow, ONNX, and technologies like OpenAI Triton.

We are receiving positive feedback on the improvements and the new capabilities of our latest ROCm software stack from our AI customers and ecosystem partners. As an example, leading AI software company, MosaicML, recently highlighted that our Instinct MI250 accelerator delivers competitive training performance with minimal or no changes to the underlying AI software. On the hardware side, we announced our new Instinct MI300X GPUs, designed to be the world's most advanced accelerators for generative AI. MI300X combines our next gen CDNA 3 architecture with the industry's largest memory footprint and fastest memory bandwidth. These are critical factors in AI inferencing performance. Customer interest in our Instinct MI300A and MI300X GPUs is very high. Engagements with top-tier cloud providers, large enterprises, and numerous leading AI companies significantly expanded in the quarter.

We are providing early system access and sampling both products with our lead AI, HPC, and cloud customers now, and remain on track to launch and ramp production in the Q4. Turning to our client segment, revenue declined 54% year-over-year to $1 billion. Client segment revenue increased 35% sequentially as Ryzen 7000 Series CPU sales grew significantly, led by the launches of new notebooks from the largest OEMs. We also launched new commercial offerings with our first Ryzen PRO notebook and desktop processors, powered by our leadership Zen 4 architecture. More than 100 AMD-powered commercial PC platforms are on track to launch this year from HP, Lenovo, and other leading OEMs as we grow this important part of our client business.

We expect our client segment will grow in the seasonally stronger second half of the year, based on the strength of our product portfolio and increased adoption of our Ryzen 7000 CPUs, including the ramp of our Ryzen 7040 mobile CPUs that deliver leadership, performance, and energy efficiency, and are the industry's first x86 processors with a dedicated AI engine. Going forward, we see AI as a significant PC demand driver as Microsoft and other large software providers incorporate generative AI into their offerings. We are executing a multigenerational Ryzen AI processor roadmap, which, together with our ecosystem partners, will fundamentally change the PC experience. Turning to our gaming segment. Revenue declined 4% year-over-year to $1.6 billion, as higher semi-custom revenue was more than offset by lower gaming graphic sales. Sequentially, segment revenue declined 10%.

Semi-custom SoC sales were strong in the quarter, as Microsoft and Sony had healthy console demand based on improved retail availability globally and the launches of new AAA games. In gaming graphics, we expanded our Radeon 7000 GPU series in the Q2 with the launch of our mainstream RX 7600 cards for 1080p gaming. We are on track to further expand our RDNA 3 GPU offerings with the launch of new enthusiast class Radeon 7000 series cards in the Q3. Turning to our embedded segment, revenue increased 16% year-over-year to $1.5 billion. Sequentially, revenue declined 7%, as solid demand with industrial, vision, and healthcare, automotive, and broadcast customers was offset by softness with communications customers as some operators slowed their infrastructure upgrades.

We expanded our leadership adaptive computing product portfolio in the quarter, launching our new Versal Premium VP1902 adaptive SoC with advanced chiplet packaging, the industry's largest and most performance solution for emulating and verifying next generation ASICs and SoCs. In the low end, we announced our Spartan UltraScale+ FPGA family to address a new range of cost-optimized industrial, computer vision, healthcare, and robotics applications. We also released enhanced versions of our Vivado and Vitis software platforms that make it easier for customers to develop highly performant applications for our versatile adaptive SoCs. Embedded CPU sales grew in the quarter with the launches of new AMD-powered security, storage, and networking solutions from HPE, Fortinet, and other leading vendors.

Looking into the second half of the year, after delivering six quarters of very strong year-over-year growth, we expect Embedded segment revenue to decline in the back half of the year as lead times normalize and some customers reduce their inventory levels. We continue to be very pleased with our Embedded design win momentum, and in particular, the growing revenue synergy opportunities we see based on our combined adaptive and embedded processing product portfolio. In summary, we executed well in the quarter against our strategic priorities. Looking at the second half of the year, we expect the PC market to grow seasonally, with more normalized inventory levels across the supply chain. In the data center market, we see a mixed environment as AI deployments are expanding. Cloud customers continue optimizing their data center compute, and enterprise customers remain cautious with new deployments.

Against this backdrop, we expect strong growth, driven by higher 4th Gen EPYC and Ryzen 7000 processor sales, and initial shipments of our Instinct MI300 accelerators in the Q4. Longer term, while we are still in the very early days of the new era of AI, it is clear that AI represents a multi-billion dollar growth opportunity for AMD across cloud, edge, and an increasingly diverse number of intelligent endpoints. In the data center alone, we expect the market for AI accelerators to reach over $150 billion by 2027. We have increased our AI-related R&D, ecosystem enablement, and go-to-market investments to capture a significant share of this emerging market.

The strong progress we are making executing our AI roadmaps, and the rapid pace at which we are expanding our ecosystem of AI hardware and software partners, makes us very confident we can deliver leadership, training, and inference solutions powered by our Instinct, EPYC, Ryzen AI, Versal, and Alveo platforms for our customers and partners. Now, I'd like to turn the call over to Jean to provide additional color on our Q2 results and our outlook for Q3. Jean?

Jean Hu (EVP, CFO, and Treasurer)

Thank you, Lisa. Good afternoon, everyone. I'll start with a review of our financial results for the Q2, then provide our current outlook for the Q3 of fiscal 2023. We are pleased with our Q2 results, with revenue of $5.4 billion and a diluted earning per share of $0.58. On a year-over-year basis, revenue declined 18%, as growth in the Embedded segment revenue was more than offset primarily by lower Client segment revenue. Revenue was flat compared to the Q1, as growth in both the Client and the Data Center segments was offset by expected declines in the Gaming and the Embedded segments. Gross margin was 50%, down approximately 4 percentage points from a year ago, primarily driven by lower Client segment performance, partially offset by strong Embedded segment performance.

Operating expenses were $1.6 billion, an increase of 3% year-over-year, primarily due to higher R&D investments. Our operating income was $1.1 billion, down $914 million year-over-year, the operating margin was 20%. Interest expense, taxes, and other was $120 million. For the Q2, diluted earning per share was $0.58, compared to $1.05 in the same period last year. EPS declined on a year-over-year basis, primarily due to Client segment performance. Turning to our reportable segments for the Q2. Starting with the Data Center segment, revenue was $1.3 billion, down 11% year-over-year, mainly due to lower third generation EPYC processor sales, as enterprise demand was softer and inventory levels were elevated at certain MDC customers.

Data Center revenue grew sequentially with strong sales of our fourth generation EPYC processors, specifically Genoa, partially offset by decline in Adaptive SoC product sales. Data Center segment operating income was $147 million, or 11% of revenue, compared to $472 million, or 32% a year ago. Lower operating income was primarily due to lower revenue and increased R&D investment to support future growth. Client segment revenue was $998 million, down 54% year-over-year, due to reduced processor shipment, resulting from a weaker PC market and significant inventory correction across the PC supply chain. On a sequential basis, revenue grew 35% as we ramped our Ryzen 7000 Series processors and the PC market conditions improved.

Client segment operating loss was $69 million, compared to operating income of $676 million a year ago, primarily due to lower revenue. We expect the Client segment to return to profitability in the Q3. Gaming segment revenue was $1.6 billion, down 4% year-over-year. Semi-custom revenue grew year-over-year, which was more than offset by lower gaming graphics revenue. On a sequential basis, gaming revenue declined 10%, in line with our expectations. Gaming segment operating income was $225 million or 14% of revenue, compared to $187 million or 11% a year ago, primarily due to higher semi-custom revenue. Embedded segment revenue was $1.5 billion, up 16% year-over-year, primarily driven by strength in the industrial, vision, healthcare, automotive, test, and emulation market.

On a sequential basis, embedded segment revenue declined 7%, primarily due to weaker communication market demand. Embedded segment operating income was $757 million or 52% of revenue, compared to $641 million or 51% a year ago, primarily driven by higher revenue. Turning to the balance sheet and the cash flow. During the quarter, we generated $379 million in cash from operations. Free cash flow was $254 million. Inventory increased by $332 million to support the continued ramp of advanced technology products. We expect inventory to decline as we ship this product to customers in the second half of the year. At the end of the quarter, cash, cash equivalent, and short-term investment was strong at $6.3 billion. Now turning to our Q3 2023 outlook.

We expect revenue to be approximately $5.7 billion, ±$300 million, an increase of approximately 2.5% year-over-year and approximately 6.5% sequentially. Year-over-year, we expect revenue for the client segment to be up, data center segment to be flattish, and the gaming and embedded segments to decline. Sequentially, we expect the client and the data center segment to each grow by a double-digit percentage, and the gaming and embedded segments to decline. Non-GAAP gross margin to be approximately 51%. Non-GAAP operating expenses to be approximately $1.65 billion. Non-GAAP effective tax rate to be 13%, and the diluted share count is expected to be approximately 1.63 billion shares. In closing, I'm pleased with our Q2 top line and bottom-line execution.

We expect our new product ramps across the data center and the client segment to drive sequential growth into the Q3. Importantly, our leadership product portfolio, data center, and AI investment priorities, and financial strength position us well for long-term growth. With that, I'll turn it back to Mitch for Q&A session.

Mitch Haws (Head of Investor Relations)

Thank you, Jean. John, we're happy to poll the audience for questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press Star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow-up. Thank you. One moment, please, while we poll for questions. The first question comes from the line of Matt Ramsay with TD Cowen. Please proceed with your question.

Matt Ramsay (Managing Director and Senior Equity Research Analyst)

Yes, good afternoon, thanks for taking my questions. Congrats on the results. I, I guess, Lisa, my, my first question is, is around the data center business. I think we're all across the industry observing a, a, a shift in workload and spending patterns, like maybe we've arguably never seen. And, and your company is in a great position to participate on, on both sides of, of that, on, on the CPU strength and, and obviously in the AI space.

Last quarter, you had given us some metrics around potentially being able to grow your data center business by 50% in the second half of the year versus the first half. Maybe you could give us a little bit of an update on, on how you're thinking about that milestone and, and the drivers of growth across CPU and accelerator for the back half. Thanks.

Lisa Su (Chair and CEO)

Yeah, sure, Matt. Thanks for the question. You're absolutely right. You know, it's a very dynamic market right now, in the data center. We certainly see. You know, let me go through some of the pieces. On the positive side, we certainly see that acceleration of AI demand. From our standpoint, we see it in a couple of ways. You know, we have a number of design wins in AI deployments as, you know, sort of the, the CPU that goes with GPUs as well as other accelerators. In the head nodes, we've seen that positive on the CPU side.

We've also seen some strong interest in our MI250 accelerator, which is currently shipping right now, and we see very strong pull on the MI300 accelerators that are starting production in the Q4. Those are the positive market dynamics as we go into the second half of the year. You know, we also see some of the softer cloud spend that is happening outside of AI, as some of the cloud vendors are optimizing, you know, sort of their CapEx. Enterprise, I would say, is still on the weaker side. With all of that in place, we are expecting a large ramp in the second half for our data center business and weighted towards the Q4.

We are, still looking at a zip code of, let's call it, 50% ±, second half to first half. It's a big ramp, you know, when we look at all the components, I think the, the customer pull is certainly there, and, and it's exciting to be in this part of the industry.

Matt Ramsay (Managing Director and Senior Equity Research Analyst)

No, thank you for that, Lisa. I, I guess as my follow-up, still sticking with the data center business, the-- your company's aggressively trying to ramp both the hardware and the software side of, of the MI300 programs to support AI. There's been some conflicting reports as to whether all of those deployments are on time. I think you've in the prepared script said what you guys think about that. I guess my question is really around the software work and, and the hardware itself that you're doing with your lead customers.

Maybe you could give a little bit about, I guess, firstly, how the customer feedback has been on the performance of the hardware itself, and secondly, how, how you think the software work you're doing with your lead customers will translate into other customer deployments as we work through next year? Thanks.

Lisa Su (Chair and CEO)

Yeah, sure. Absolutely. You know, if I give you just some color, on, you know, sort of how the customer engagements are going, you know, there's very strong customer interest, across the board in our AI solutions. That includes, let's call it, multiple tier one hyperscalers, that we're engaged with. It includes, some large enterprises, and it also includes sort of this new category of some of these AI-centric companies that are, you know, sort of very forward, looking in, in terms of how they're deploying, and building AI solutions. You know, from that aperture, we've made a lot of progress with our ROCm software stack. You know, I'm actually, you know, there's a lot more to do, but I would say the progress that we've made has been significant.

We're getting lots of feedback from those lead customers. You know, we're seeing, you know, the benefits of the optimization, so, you know, working, you know, also on the higher level, you know, model frameworks, the work that we're doing with the PyTorch Foundation, the work that we're doing with ONNX, with Triton. The key is we're getting, you know, significant real-time feedback from some of these lead customers, so we're learning at a very fast pace. In terms of the feedback on, you know, performance, you know, a number of companies have now been able to look at MI250 across a broad range of workloads, and that's a good translation as you go to MI300, and the feedback's been, you know, quite positive.

We have, you know, customers sampling, either on our, you know, sort of, lab systems. They're accessing the hardware or sampling in their labs, and I would say, you know, so far, very positive. The pull is there. There's a lot of work to be done, but we feel very good about the progress of our overall, you know, AI solutions for the data center.

Matt Ramsay (Managing Director and Senior Equity Research Analyst)

Thanks, Lisa.

Lisa Su (Chair and CEO)

Thanks, Matt.

Operator (participant)

The next question comes from the line of Aaron Rakers with Wells Fargo. Please proceed with your question.

Aaron Rakers (Managing Director and Senior Equity Analyst)

Yeah, thanks for taking the question. Just, just kind of building on Matt's, you know, Matt's comments or, or questions. I just wanna go back to kind of the implied, you know, revenue for the data center business for the back half of the year. Jean, I think last quarter you had alluded to, you know, for the full year, the expectation is still growing 10% or, or double digits, I should say, for the full year in the data center business. Just confirming that, and I, I guess what I'm really trying to ask is, I, I guess, given the guidance of flat year-over-year growth in data center in 3Q, it, it would seem, if my math's correct, you're, you're implying a, a 50% or so increase, you know, sequentially into 4Q.

I'm just trying to frame exactly how you're thinking about the cadence of what, you know, 4 Q looks like, underpinning that, that expectation.

Jean Hu (EVP, CFO, and Treasurer)

Hi, Aaron. Thanks for the question. I think as Lisa just mentioned earlier, it's a very dynamic market. There are puts and the takes. We have a tremendous, strong momentum with our product portfolio, but there's a continued softness in enterprise market and also cloud. The optimization is still ongoing. Overall, on balance, we think year-over-year, it's probably more like a high single-digit. It's a really, you know, strong ramp, not only in Q3, right. Sequentially, it, it means double-digit, strong double-digit, and Q4, of course, we're going to see continued sequential strong ramp.

Aaron Rakers (Managing Director and Senior Equity Analyst)

Yep. That's, that's helpful, Jean. Then just kind of following up on that as well, I mean, how have you guys kind of managed through, with, with that ramp in mind, the supply chain side? I know that, you know, your, your, your manufacturing partners talked about expanding their capacity significantly. Just curious of what you're seeing as far as being able to fulfill that degree of demand as we look into not just this quarter, but into into four Q.

Lisa Su (Chair and CEO)

Yeah, sure, Aaron. You know, we have been really investing in our supply chain. You know, sort of the data center growth is so strategic to us that this has been, you know, part of the, the strategy. If you look at all aspects of the supply chain, from the wafers to the back-end capacity, to some of the, you know, specific components that you need, to do something of the class of MI300, we've worked with, you know, the entire supply chain. We feel that we have, you know, ample supply for an aggressive ramp, in the Q4 and into 2024. This is certainly one of the areas that, you know, we spent quite a bit of time to ensure that we do have that confidence.

Aaron Rakers (Managing Director and Senior Equity Analyst)

Thank you.

Lisa Su (Chair and CEO)

Thanks, Aaron.

Operator (participant)

The next question comes from the line of Toshiya Hari with Goldman Sachs. Please proceed with your question.

Toshiya Hari (Managing Director and Senior Equity Research Analyst)

Hi, thank you so much for taking the question. My first one is on the data center business as well. I just wanted to follow up on sort of the Q3 to Q4 dynamic, and I, I do apologize if I missed this, but in the implied growth rate in data center in Q4, can you speak to, you know, what percentage of that is supercomputing? I think there's a big project that's slated to ship in Q4. And is there any contribution from the Instinct series outside of supercomputing as well, or is it primarily your server CPU franchise?

Lisa Su (Chair and CEO)

Yeah, sure, Toshiya, thanks for the question. You know, as Jean said, into the Q3, we expect double-digit sequential growth in data center. That's primarily EPYC, so that's primarily the Zen 4, let's call it the combination of you know, Genoa and Bergamo, as that continues to ramp. As we go into the Q4, there is an implied, a significant ramp in revenue. I think there are multiple components to that. There is the, the server CPU side will continue to ramp, as we, as we see Zen 4 ramp.

There is a large lumpy supercomputer win, so our El Capitan win will be in the Q4, primarily with a little bit in the Q1. We will have contribution from both MI300X going to large AI customers as they start their initial ramps, as well as MI250s with a number of customers who have now view that as a very very good option for some of the workloads that are not necessarily the largest language models or the largest parameters, but more the other AI workloads.

Those are the components of the, of the Q4, you know, sort of implied, growth. You know, lots of, lots of pieces to it, but, you know, clearly, a big piece of it is the MI300 ramp.

Toshiya Hari (Managing Director and Senior Equity Research Analyst)

That's helpful. Thank you, Lisa. Then shifting gears a little bit, follow-up question on the client side. You talked about the business returning to profitability in Q3, which is, which is great, but you're still well below, where you were in, in 2021 and 2022 from an operating margin perspective. Can you speak to the competitive landscape in the client business? Is, is there a path back to, you know, call it 20%, 30% operating margins there? Do you have any cost initiatives ongoing to, to get you back to, to that level of profitability in client? Thank you.

Lisa Su (Chair and CEO)

Yeah. Yeah, sure. Maybe let me start, and then maybe Jean can add some comments. Look, I think, you know, the PC business has been, you know, sort of fairly volatile over the last number of quarters, from the pandemic highs to some of the inventory digestion that we were all dealing with. I can say that I'm pleased to say that, you know, I think the, the, the growth that we're seeing, that we saw here in the Q2 and that, you know, we see in the second half, is, you know, the strength of our product portfolio. I think the, the Ryzen 7000 Series is doing well. There's good customer pull. I think from a competitive dynamic standpoint, you know, the business is always competitive, but we feel good about...

You know, the most important thing, that was a little bit of a, a drag on operating margins was the, the, the revenue, you know, the revenue being low, as well as, you know, some of the, you know, we had a case where the, the sell-in was below consumption as we were normalizing inventory levels in the supply chain. As we get past that, what we see is, you know, I think the client business, you know, continues to grow. You know, we believe that, you know, client will grow into 2024 as well. In terms of some of the cost initiatives, we have been, let's call it, optimizing, you know, sort of the overall, you know, R&D footprint, but maybe I'll let Jean comment some more.

Jean Hu (EVP, CFO, and Treasurer)

Yeah, on the OpEx side, the team has done a great job during this process to really optimize the investment in client segment to be more efficient and effective. If you look at the overall company level, our OpEx has been largely flattish, but we are investing in AI, data center, and the strategic priorities we have, which generate a much higher return on investment. We have optimized it. We feel pretty good about this level of operating expense to continue to invest in client segment. As Lisa mentioned, it's really about revenue. The model will leverage it to generate profitability. We should be able to get back to 20%.

Toshiya Hari (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

The next question comes from the line of Harlan Sur with JP Morgan. Please proceed with your question.

Harlan Sur (Managing Director and Senior Equity Research Analyst)

Yeah, good afternoon. Thank you for taking my question. Good to see the quarter-over-quarter inflection in your EPYC business targeted at enterprise customers. I think you did mention a continued muted environment in enterprise, you know, but the team continues to drive share gains with global corporations. You're ramping Genoa. Are you anticipating your enterprise segment to contribute to the strong second half growth profile of your data center business?

Lisa Su (Chair and CEO)

Yeah, thanks for the question, Harlan. Look, you know, enterprise business is very strategic to us. We feel that, you know, we're underrepresented. It's a place that we're putting more resources because, you know, again, when we look at the value proposition of Genoa and the entire, you know, sort of Zen 4 portfolio, we think it plays very well into the enterprise. You know, pleased to see the growth in the Q2. We do believe that we're on a path to continue to grow into the second half of the year and beyond. You know, the key here is, you know, also investments in some of the go-to-market activities.

Investing in more sort of business development folks that can call directly on these enterprise customers, together with our OEM partners, and ensure that our value proposition is, you know, very well understood.

Harlan Sur (Managing Director and Senior Equity Research Analyst)

Perfect. Thank you. Then on the accelerated compute side, you know, general purpose compute demand might be muted in China, but there's a significant amount of unmet demand for accelerated compute in this region, and I know there were performance thresholds put in place last year. Maybe U.S. government might lower that performance threshold again soon. I'm not sure, but let's say barring that, right? Has the team looked into developing China-specific SKUs of their MI250 or your new MI300 platforms? It seems like the opportunity here is quite large.

Lisa Su (Chair and CEO)

Harlan, look, China is a very important market for us, you know, certainly across our portfolio. You know, as we think about, you know, certainly the accelerator market, you know, our, our, our plan is to, of course, be fully compliant with U.S. export, you know, controls. We do believe there's an opportunity to develop product, you know, for our customer set in China, that is, you know, looking for, you know, AI solutions, and, and we'll continue to work in that direction.

Harlan Sur (Managing Director and Senior Equity Research Analyst)

Thank you, Lisa.

Lisa Su (Chair and CEO)

Thanks, Harlan.

Operator (participant)

The next question comes from the line of Vivek Arya with Bank of America Securities. Please proceed with your question.

Vivek Arya (Managing Director and Senior Equity Research Analyst)

Thank you for taking my question. The first one, just a clarification. Would it be reasonable to assume that your GPU accelerator sales, right, could be about, say, $500 million this year, so about 7%-8% of data center sales? If that is the right number, does it mean your server CPU sales are effectively flattish, year-on-year this year?

Lisa Su (Chair and CEO)

Yeah. I mean, Vivek, I don't know that I would go into quite that granularity. What, what we will say is, you know, the, the GPU sales in the first half of the year were very low as we were, you know, sort of in a product transition timing. As we go into the second half of the year, in particular, the Q4, we'll have MI300 ramp. I think your number may be a little bit high in terms of the GPU sales. But overall, in general, I think our expectation is that, you know, as Jean said, the data center business, given all of the market dynamics, we see it up high single digits year-on-year.

We see, you know, much, you know, better second half compared to first half, and, I think the, the product portfolio and the ramp of Genoa and Bergamo, as well as, the ramp of MI300, are, are key components of the second half ramp.

Vivek Arya (Managing Director and Senior Equity Research Analyst)

Thank you, Lisa. For my follow-up, just kind of a broader question on AI accelerators in the commercial market, so I'm excluding the supercomputing, the El Capitan projects, et cetera. What is AMD's specific edge in this market? You know, there are already strong and established kind of merchant players. There are a number of ASIC options. You know, a number of your, you know, traditional competitors, Intel and others, and several startups are also ramping. My question is: What is AMD's specific niche in this market? What is your value proposition, and how sustainable is it? Because you're just starting to sample the product now. I'm trying to, you know, get some realistic sense of how big it can be and what the specific kind of niche and differentiation is for AMD in this market.

Lisa Su (Chair and CEO)

Yeah, sure, Vivek. I think, maybe let me take a step back and just talk about, you know, sort of our investments in AI. Our investments in AI are very broad, and, you know, I know there's a lot of interest around data center, but I don't want us to lose track of the investments on the edge, as well as in the client. To your question on, you know, what is our value proposition in the data center? You know, I think what we have shown is that, you know, we have a, you know, very strong capability with supercomputing, as you've mentioned. As you look at AI, there are, you know, many different types of AI.

You know, if you look across training and inference, you know, sort of the largest language models and what drives, some of the, performance in there. When we look at MI300, MI300 is actually designed to be a highly flexible family of products that looks across, you know, all of these different segments. In particular, where we've seen, a lot of interest is in the, you know, sort of large language model inference. MI300X has, you know, the highest, memory bandwidth, has the highest, you know, memory capacity. If you look at that inference workload, it's actually a very, it's very dependent on those things.

That being said, we also believe that we have a very strong value proposition in training as well, when you look across those workloads and the investments that we're making, not just today, but, you know, going forward with our next generation, you know, MI400 series and so on and so forth. We definitely believe that we have a very, you know, competitive and capable, you know, hardware roadmap. I think the, the discussion about AMD, frankly, has always been about the software roadmap, and we do see, you know, a bit of a change here on the software side. You know, number one, we've put a tremendous amount of resource on it.

You know, bringing together our former Xilinx software team together with the AMD, you know, sort of, base software team, we've dramatically increased the resources. Also, the focus has now been on, you know, sort of optimizing at these, higher-level models. If you, you know, think about the, the frameworks around, you know, PyTorch and Triton and ONNX, I think, you know, many of the new AI-centric companies are actually optimizing at a different level, and they're working very closely with us. You know, in this place where AI is tremendously exciting, I think there will be multiple winners, and, you know, we will be first to say that there are multiple winners.

We think our portfolio is actually fairly unique in the sense that we do have CPUs, GPUs, you know, we have the accelerator technology with Ryzen AI on the PC side, as well as in the embedded side with our Xilinx portfolio. I think it's a pretty broad and capable portfolio.

Vivek Arya (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

The next question comes from the line of Stacy Rasgon with Bernstein Research. Please proceed with your question.

Stacy Rasgon (Managing Director and Senior Analyst)

Hi, guys. Thanks for taking my questions. I wanted to first go back to the Q4 data center, right? If I do my math right, it's something like $700 million sequentially in data center from Q3 to Q4. How much of that is, how much of that is MI300 versus CPU? Given the lumpiness of the El Capitan piece, what does that imply for the potential seasonality into Q1 as most of it rolls off?

Lisa Su (Chair and CEO)

Yeah, sure. It is a large ramp, Stacy, into the Q4. I think, you know, the largest piece of that is the MI300 ramp, but there is also a significant component that's, you know, just the EPYC processor ramp with, as I said, the Zen 4 portfolio. In terms of the lumpiness of the revenue and where it goes into 2024, let, let me give you, you know, kind of a few pieces. I think there was a question earlier about, you know, how much of the MI300 revenue was AI-centric versus, you know, let's call it supercomputing-centric. The larger piece is supercomputing, but it's meaningful revenue contribution from AI.

You know, as we go into 2024, our expectation is-- again, let me go back to the customer interest on MI300X is very high. There are a number of customers that are looking to deploy as quickly as possible. We would expect, you know, early deployments as we go into the first half of 2024, and then we would expect more volume in the second half of 2024, as, you know, those things fully qualify.

It is gonna be a little bit lumpy, as we, you know, get through the next few quarters, but our visibility is such that, you know, there are multiple customers, that are looking to deploy as soon as possible, and, and we're working very closely with them to do the co-engineering necessary, to get them ramped.

Stacy Rasgon (Managing Director and Senior Analyst)

I mean, but, like, of the $700 million, it's like $400 million of it, El Capitan, or is it $500 million or $300 million? Like, like, how big is the El Capitan piece?

Lisa Su (Chair and CEO)

You can assume that the El Capitan is, $several hundred million.

Stacy Rasgon (Managing Director and Senior Analyst)

Several hundred, okay. For my follow-up, just, you know, gross margins, you know, coming up in the back in the second. I mean, they still kind of missed in the quarter. I know they rounded up to 50%, but they were 49.7%. I know you're guiding 51% for Q3, but Jean, where do you see gross margins sitting, like, in, in Q4 as we exit the year?

Jean Hu (EVP, CFO, and Treasurer)

I think the gross margin is for us, the primary driver, as we discussed in the past, it's really mix. If you look at our guidance or outlook of Q3 gross margin of 51%, it's more than 1 percentage point improvement sequentially, despite of a very significant headwind from embedded business declining in Q3. The data center and the client business are expected to grow double digits sequentially and provide a positive impact on the gross margin, which actually more than offset the headwind from embedded business. Going into Q4, again, we're not guiding Q4, and it's going to depend on mix. I would say, one thing is you will have a similar dynamics, right? Data centers, we expect to grow very significantly.

At the same time, we're going to have the same headwind from embedded business declining sequentially. Overall, we do expect the gross margin to improve from this level going forward.

Stacy Rasgon (Managing Director and Senior Analyst)

Okay, thank you.

Operator (participant)

The next question comes from the line of Joseph Moore with Morgan Stanley. Please proceed with your question.

Joseph Moore (Managing Director and Head of U.S. Semiconductors Research)

Great, thank you. You've talked about the embedded business declining as you move into the second half. Can you give us a sense for how much, and is that decline a function of the comm infrastructure market, or are you seeing weakness, you know, beyond that part of the market?

Lisa Su (Chair and CEO)

Yeah, sure, Joe. Thanks for the question. So look, you know, when I, when I look at the embedded business, I think we should start by remembering that, I mean, we're coming off of six quarters of very strong growth. I mean, this business has performed extremely well, and, you know, very pleased with the overall momentum in the business. To your exact question of what we're seeing in the markets, we're actually seeing, you know, the core markets hold up pretty well. Let's call it, aerospace and defense, strong, you know, industrial vision and healthcare, strong, you know, test and emulation, strong. We are seeing communications weakness, so, you know, that is, the primary driver of the second half, you know, commentary.

There's also some inventory optimization, as you might expect, since our lead times have, have come down over the last several months. In terms of zip code, I, I would say, think of it as, you know, double-digit down sequentially in the Q3, and, you know, that's the current view that we have. Overall, you know, the business has been extremely strong for us, so I think this is, you know, sort of an expected, you know, decline as we come off the cycle.

Joseph Moore (Managing Director and Head of U.S. Semiconductors Research)

Great. Any sense for beyond this quarter, since we've asked you so many Q4 questions already today, but any sense for, you know, is that kind of the, the bottom level, or, you know, do you expect there to be some continued contraction?

Lisa Su (Chair and CEO)

As, as Jean would say, we're not guiding for the Q4, but I think you should expect embedded sort of in that similar zip code. Yeah, that's, that's what I would say.

Joseph Moore (Managing Director and Head of U.S. Semiconductors Research)

Okay, great. Thank you.

Operator (participant)

The next question comes from the line of Timothy Arcuri with UBS. Please proceed with your question.

Timothy Arcuri (Managing Director)

Thanks a lot. Jean, my first question is on inventory. You said it's gonna come down a bit as you ramp into the Q4. You know, obviously, you have a big Q4. Can you sort of shape that out for us? You know, before this, you know, normalized inventory days were kind of 90 to 100 days. Where do you think you're gonna execute Q4 in terms of inventory days?

Jean Hu (EVP, CFO, and Treasurer)

Yeah, Tim, thanks for the question. I think, as we ramp those, product lines in Q3 and Q4, you will see inventory come down first in Q3 and, in Q4 again. I think, the inventory, days of inventory probably will be around 110 to 120 days. The key thing is, right, is if you look at, a lot of our product, they are like, advanced process technology, 5 nanometer, 4 nanometer, 6. The manufacturing cycle tend to be long, so in the longer term, you should expect us, from a days of inventory, be more around 100 to 120 days versus, you know, traditionally, like 80 days or 75 days. That will be too short for, really most advanced process technologies.

Timothy Arcuri (Managing Director)

Thanks a lot. My follow-up is for, is for you, Lisa. I mean, if you kind of add up the units, the customer interest, I mean, you can easily get to, you know, several hundred thousand units, it seems to me, for the, for the MI300X, you know, next year. The question really is on, you know, on the supply chain and particularly CoWoS. Do you think, do you think that's gonna be a bottleneck for you? I know that, you know, they've been expanding capacity. I know you've been trying to procure more there. Can you sort of talk about that and sort of do you think that supply could become a, you know, limiting factor for you next year? Thanks.

Lisa Su (Chair and CEO)

Yeah, absolutely. I'm not gonna comment on the exact units, but what I will say is that we've, we've been focused on the supply chain for MI300 for quite some time. It is tight. There's no question that it's tight in the industry. However, you know, we have, you know, sort of commitments for significant capacity across the entire supply chain. CoWoS is one piece of it, you know, High Bandwidth Memory is another piece of it, and then just the general, you know, the, the general capacity requirements. Look, our goal is, you know, to make this a significant growth driver for AMD. I think it's a, it's a, it's a great market opportunity.

We love the engagements with customers, and, you know, it's our responsibility to provide the supply, for the demand, and, and so that's what we've been working on.

Timothy Arcuri (Managing Director)

Thanks a lot.

Lisa Su (Chair and CEO)

Thanks, Tim.

Operator (participant)

The next question comes from the line of Christopher Rolland with SIG. Please proceed with your question.

Christopher Rolland (Managing Director and Senior Equity Analyst)

Hey, guys. Thanks for the question, and more on the MI300 opportunity that you guys called out as a multi-billion dollar growth opportunity. I was wondering if perhaps you could put a time frame around that multi-billion dollar opportunity. More specifically, have you guys ported over MI300 LLMs to MI300? Have you looked at the performance? How do they perform? Are you excited about that? In terms of hyperscale uptake, is it the X version, the GPU-only version, that you expect to be the biggest seller here? Have you had any semi-custom kind of configurations here, you know, that potentially might even include an FPGA or other kind of LEGO movements on the MI300? Thank you.

Lisa Su (Chair and CEO)

Sure. There were a lot of aspects to that question, Chris. you know, let me try to give you some framework here. I don't think we're ready to talk about, you know, timing yet of revenue numbers. you know, what we will say is, we do believe it's a, it's a multi-billion dollar opportunity. I think, you know, 2024 is a very important year for us. ramping MI300 in multiple customers is, you know, sort of over the next several quarters is very important. I think I mentioned earlier in the Q&A that the customer interest is actually diverse, which is great. it includes, you know, sort of the, what you would expect in terms of the large tier one hyperscalers.

I think the, you know, sort of these new class of, you know, sort of AI-focused companies have, have been working very closely with us. Some of the large enterprises, you know, are also looking at, you know, ramping up their efforts. The, the performance that we see is strong. I think the, the large language model work that we've done, we've done a lot of it on MI250, and we've seen, you know, very good, you know, sort of very good results. That's on both training, as well as inference. I think as we go through MI300, again, the early results are strong.

The for AI applications, what we're seeing now is MI300X, so let's call it the GPU-only version, is the one that is, you know, sort of most prevalent, in the AI customer engagements. The MI300A, actually, which is, you know, sort of where we have the CPU and the GPU more closely coupled together, is also of, of interest. I think the, the key is, I think we've built a platform that does allow people to, you know, kind of, choose what is best for the models, and for the workloads that they're trying to enable. That's what we're, you know, that's what we're working on.

Christopher Rolland (Managing Director and Senior Equity Analyst)

Great. Just as a quick follow-up then. Siena, you know, Telco is a market kind of owned by your competitor there. They have a lot of software around Telco. What kind of share do you think you can take in the Telco market from them over the next few years?

Lisa Su (Chair and CEO)

Yeah, we're excited about Siena. I think Siena, you know, fits, again, it's as you said, it's a niche that we haven't previously been focused on. I think our interactions with the telco suppliers are, they're, they're anxious to have, you know, Siena be a part of their portfolio. Siena is also one that we'll use for, you know, other edge applications or let's call it lower-end applications that need the performance of Zen 4, but perhaps not the heavy platform that we have on the Genoa and Bergamo. You know, we do think we're starting from a very low point, so there's an opportunity to gain share over the next couple of years, and, you know, we'll, we'll focus on that.

Christopher Rolland (Managing Director and Senior Equity Analyst)

Thanks so much, Lisa.

Lisa Su (Chair and CEO)

Thanks, Chris.

Operator (participant)

The next question comes from the line of Christopher Danely with Citi. Please proceed with your question.

Christopher Danely (Managing Director and Senior Semiconductor Equity Research Analyst)

Hey, team. Thanks for squeezing me in. Lisa, if the MI, you know, 250, 300, et cetera, ramp or the revenue is mostly GPU only, what kind of an impact would that have on the AMD gross margin? Would that still be a gross margin accretive or dilutive or net neutral to your corporate gross margin?

Lisa Su (Chair and CEO)

Yeah. Thanks, Chris. I think for the... Le-let me just make sure I get the statement clear. You know, both MI300A and MI300X will be part of the ramp, particularly in the Q4, and as we go into next year. For the AI-specific applications, we are more heavily weighted towards MI300X, just given, you know, sort of the, where the software is written. To your question about, you know, gross margins at the corporate level, you would, we would expect that our AI business will be accretive to gross margins at the corporate level.

You know, obviously, as you start the ramp, there's a little bit of learning, but, you know, overall, we expect it to be accretive to our, our corporate gross margins.

Christopher Danely (Managing Director and Senior Semiconductor Equity Research Analyst)

Great. Then for my follow-up, I just had, I guess, clarification. It sounds like most of the MI revenue you have in the hopper right now, or at least the committed revenue, is El Cap. Is that true? You know, do you have other, I guess, confirmed or hard orders for that? Or maybe just spend some time, you know, telling us, you know, how you're working with the customers or what it takes for them to go from, "Hey, we're interested," to, "Here's a purchase order.

Lisa Su (Chair and CEO)

Yeah. Maybe if your, your question is, you know, do we have other customers who are committed to MI300 other than El Cap? The answer is yes. You know, we have a number of customers who are actually committed. The way these things go, actually, it's not different, not very different than how a server ramp goes, right? I mean, one starts with an initial deployment, you know, ensures that the software works, ensures that, you know, we have all the reliability and capability in the data center, and then they ramp from that. I will say the difference in AI deployments is, I think customers are willing to go very quickly.

There is, you know, sort of a, a desire and a, agility, because we, we all want to accelerate the amount of AI compute that's out there. You know, the speed in which, you know, customers are engaged and customers are making decisions is actually, you know, at, you know, faster, than they would in sort of a normal, sort of regular environment. That's great. I think that's, that's helping us, as I said earlier, you know, learn, perfect the software, get all the, all of the, capabilities in place, for a, a significant ramp next year.

Christopher Danely (Managing Director and Senior Semiconductor Equity Research Analyst)

Great. Thanks, Lisa.

Lisa Su (Chair and CEO)

Thanks.

Operator (participant)

John, we have time for one more question. Okay, our final question comes from the line of Harsh Kumar with Piper Sandler. Please proceed with your question.

Harsh Kumar (Managing Director and Senior Research Analyst)

Yeah. Hey, guys. Thanks for letting me ask a question. Lisa, we're looking forward to an exciting second half for your company. I had a quick question on the server share. Do you think that there is a theoretical limit to the share that AMD can get? Historically, initially, we heard 80-20 was a prevailing rule, then you busted through that. Now, we're hearing customers say, well, 70-30 is more like it. More importantly, are there any large vendors for your server business where you have significantly more than 30% share, let's say 40% or even 50% share? I have a follow-up.

Lisa Su (Chair and CEO)

Yeah, sure, Harsh. Thanks for the question. Look, I think the, you know, in the server business, I think the most important thing for our customers is that we have a strong roadmap and that it's a roadmap that they can count on. We've been building that, you know, sort of, working model, that roadmap and that trust over the past, four or five years. I don't think there's any theoretical cap on AMD share. I would say, if we look today, there are multiple customers who have us deployed in their data centers at more than 50% share.

From our view, you know, the place where we have perhaps been a bit more underrepresented is in the enterprise, and that's just a matter of, you know, sort of the breadth of enterprise customers and the breadth of enterprise software. We believe that, you know, we have leadership today, and we will very, very focused on ensuring that we continue leadership in the market. With that, you know, there's an opportunity to continue to gain share in the server market.

Harsh Kumar (Managing Director and Senior Research Analyst)

Thank you, Lisa. For my second one, can you help us think a little bit about the generative AI spend? Let's say, you know, if you can cite for us some kind of metric as to how many dollars of spend today are you seeing from your customers on generative AI for, let's say, each dollar of regular, you know, server CPU spend. Is there a metric that we can think of? Is there a trend today, and where do you think it can be in a couple of years?

Lisa Su (Chair and CEO)

Yeah. I think, Harsh, the best way to answer that, and, you know, again, we're all, you know, sort of, you know, it's all a crystal ball as to what's gonna happen over the next 4 or 5 years. There, there's no question that the demand for generative AI solutions is very high, and, you know, there's a lot of compute capacity that needs to put in. The way we've sized the market is, you know, it can perhaps grow at a rate of, let's call it, you know, 50% CAGR, ±, over the next 3 or 4 years. That would take us to, you know, a $150 billion market by the time you get to 2027.

That's all accelerators in the data center, so that includes, you know, you know, GPUs, that includes, you know, other ASICs and other accelerators. But I think we have an opportunity to address a large portion of that market. That makes it, you know, a very, you know, clear priority for us. You know, our- it's our number one strategic priority, and we'll, you know, continue to work closely with our customers as they optimize between CPU and GPU spend.

Harsh Kumar (Managing Director and Senior Research Analyst)

Thank you, Lisa.

Lisa Su (Chair and CEO)

Thank you.

Christopher Danely (Managing Director and Senior Semiconductor Equity Research Analyst)

Great, John. That concludes today's call. Thank you to everyone for joining us today.