AMD - Q2 2024

Transcript

John Taylor (CMO)

Greetings, and welcome to the AMD Second Quarter 2024 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 zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce to you Mitch Haws, Vice President, Investor Relations. Thank you, Mitch. You may begin.

Mitch Haws (VP of Investor Relations)

Thank you, and welcome to AMD's second quarter 2024 financial results conference call. By now, you should have had the opportunity to review a copy of our earnings press release and the accompanying slides. If you have not had the chance to review these materials, they can be found on the Investor Relations page of amd.com. We will refer primarily to non-GAAP financial measures during today's call. The full non-GAAP to GAAP reconciliations are available in today's press release and the 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 Dr.

Aaron Rakers (Managing Director and Technology Analyst)

Lisa Su will attend the Goldman Sachs Technology Communacopia + Technology Conference on Monday, September 9th, and Mark Papermaster, Executive Vice President and Chief Technology Officer, will attend the Deutsche Bank Technology Conference on Wednesday, August 28th. 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 Su (Chair and CEO)

Thank you, Mitch, and good afternoon to all those listening today.

Aaron Rakers (Managing Director and Technology Analyst)

We delivered strong second quarter financial results, with revenue coming in above the midpoint of guidance and profitability increasing by a double-digit percentage, driven by higher than expected sales of our Instinct, Ryzen, and EPYC processors. We continued accelerating our AI traction as leading cloud and enterprise providers expanded availability of Instinct MI300X solutions, and we also saw positive demand signals for general purpose compute in both our client and server processor businesses. As a result, second quarter revenue increased 9% year-over-year to $5.8 billion, as significantly higher sales of our data center and client processors more than offset declines in gaming and embedded product sales. We also expanded gross margin by more than three percentage points and grew EPS 19%, as data center product sales accounted for nearly 50% of overall sales in the quarter.

Turning to the segments, data center segment revenue increased 115% year-over-year to a record $2.8 billion, driven by the steep ramp of Instinct MI300 GPU shipments and a strong double-digit percentage increase in EPYC CPU sales. Cloud adoption remains strong as hyperscalers deploy fourth-gen EPYC CPUs to power more of their internal workloads and public instances. We are seeing hyperscalers select EPYC processors to power a larger portion of their applications and workloads, displacing incumbent offerings across their infrastructure with AMD solutions that offer clear performance and efficiency advantages. The number of AMD-powered cloud instances available from the largest providers has increased 34% from a year ago to more than 900. We are seeing strong pull for these instances with both enterprise and cloud-first businesses.

As an example, Netflix and Uber both recently selected fourth-gen EPYC public cloud instances as one of the key solutions to power their mission-critical, customer-facing workloads. In the enterprise, sales were increased by a strong double-digit percentage sequentially. We closed multiple large wins in the quarter with financial services, technology, healthcare, retail, manufacturing, and transportation customers, including Adobe, Boeing, Industrial Light & Magic, Optiver, and Siemens. Importantly, more than one-third of our enterprise server wins in the first half of the year were with businesses deploying EPYC in their data centers for the first time, highlighting our success attracting new customers while also continuing to expand our footprint with existing customers. Looking ahead, our next-generation Turin family, featuring our new Zen 5 core, is looking very strong. Zen 5 is a ground-up new core design optimized for leadership, performance, and efficiency.

Turin will extend our TCO leadership by offering up to 192 cores and 384 threads, support for the latest memory and I/O technologies, and the ability to drop into existing fourth gen EPYC platforms. We publicly previewed Turin for the first time in June, demonstrating our significant performance advantages in multiple compute-intensive workloads. We also passed a major milestone in the second quarter as we started Turin production shipments to leading cloud customers. Production is ramping now ahead of launch, and we expect broad OEM and cloud availability later this year. Turning to our data center AI business, we delivered our third straight quarter of record data center GPU revenue, with MI300 quarterly revenue exceeding $1 billion for the first time. Microsoft expanded their use of MI300X accelerators to power GPT-4 Turbo and multiple Copilot services, including Microsoft 365 Chat, Word, and Teams...

Microsoft also became the first large hyperscaler to announce general availability of public MI300X instances in the quarter. The new Azure VMs leverage the industry-leading compute performance and memory capacity of MI300X, in conjunction with the latest ROCm software, to deliver leadership inferencing price performance when running the latest frontier models, including GPT-4. Hugging Face was one of the first customers to adopt the new Azure instances, enabling enterprise and AI customers to deploy hundreds of thousands of models on MI300X GPUs with one click. Our enterprise and cloud AI customer pipeline grew in the quarter, and we are working very closely with our system and cloud partners to ramp availability of MI300 solutions to address growing customer demand. Dell, HPE, Lenovo, and Supermicro all have Instinct platforms in production, and multiple hyperscale and tier two cloud providers are on track to launch MI300 instances this quarter.

On the AI software front, we made significant progress enhancing support and features across our software stack, making it easier to deploy high-performance AI solutions on our platforms. We also continued to work with the open source community to enable customers to implement the latest AI algorithms. As an example, AMD support for FlashAttention-2 algorithm upstreamed, providing out-of-the-box support for AMD hardware in the popular library that can increase training and inference performance on large transformer models. Our work with the model community also continued accelerating, highlighted by the launches of new models and frameworks with day one support for AMD hardware. At Computex, I was joined by the co-CEO of Stable Diffusion to announce that MI300 is the first GPU to support their latest SD 3.0 image generation LLM.

Last week, we were proud to note that multiple partners used ROCm and MI300X to announce support for the latest Llama 3.1 models, including their 405 billion parameter version, that is the industry's first frontier-level open source AI model. Llama 3.1 runs seamlessly on MI300 accelerators, and because of our leadership memory capacity, we're also able to run the FP16 version of the Llama 3.1 405B model in a single server, simplifying deployment and fine-tuning of the industry-leading model and providing significant TCO advantages. Earlier this month, we announced our agreement to acquire Silo AI, Europe's largest private AI lab, with extensive experience developing tailored AI solutions for multiple enterprise and embedded customers, including Allianz, Ericsson, Finnair, Körber, Nokia, Philips, T-Mobile, and Unilever. The Silo team significantly expands our capability to service large enterprise customers looking to optimize their AI solutions for AMD hardware.

Silo also brings deep expertise in large language model development, which will help accelerate optimization of AMD inference and training solutions. In addition to our acquisitions of Silo AI, Mipsology, and Nod.ai, we have invested over $125 million across a dozen AI companies in the last 12 months to expand the AMD AI ecosystem, support partners, and advance leadership AMD computing platforms. Looking ahead, from a roadmap perspective, we are accelerating and expanding our Instinct roadmap to deliver an annual cadence of AI accelerators, starting with the launch of MI325X later this year. MI325X leverages the same infrastructure as MI300 and extends our generative AI performance leadership by offering twice the memory capacity and 1.3x more peak compute performance than competitive offerings.

We plan to follow MI325X with the MI350 series in 2025 based on the new CDNA 4 architecture, which is on track to deliver a 35x increase in performance compared to CDNA 3. Our MI400 series, powered by the CDNA Next architecture, is making great progress in development and is scheduled to launch in 2026. Turning to our AI solutions work, Broadcom, Cisco, HPE, Intel, Google, Meta, and Microsoft all joined us to announce Ultra Accelerator Link, an industry-standard technology to connect hundreds of AI accelerators that is based on AMD's proven Infinity Fabric technology. By combining UALink with the widely supported Ultra Ethernet Consortium specification, the industry is coming together to establish a standardized approach for building the next generation of high-performance data centers AI solutions at scale.

In summary, customer response to our multi-year Instinct and ROCm roadmaps is overwhelmingly positive, and we're very pleased with the momentum we are building. As a result, we now expect data center GPU revenue to exceed $4.5 billion in 2024, up from the $4 billion we guided in April. Turning to our client segment, revenue was $1.5 billion, an increase of 49% year-over-year, driven by strong demand for our prior generation Ryzen processors and initial shipments of our next generation Zen 5 processors. In PC applications, Zen 5 delivers an average of 16% more instructions per clock than our industry-leading previous generation of Ryzen processors. For desktops, our upcoming Ryzen 9000 series processors drop into existing AM5 motherboards and extends our performance and energy efficiency leadership across productivity, gaming, and content creation workloads....

For notebooks, we announced our Ryzen AI 300 Series that extends our industry-leading CPU and GPU performance, and introduces the industry's fastest NPU with 50 TOPS of AI compute performance for Copilot+ PCs. The first Ryzen AI 300 Series notebooks went on sale over the weekend to strong reviews, and more than 100 Ryzen AI 300 Series premium, gaming, and commercial platforms are on track to launch from Acer, Asus, HP, Lenovo, and others over the coming quarters. Customer excitement for our new Ryzen processors is very strong, and we are well-positioned for ongoing revenue share gains based on the strength of our leadership portfolio and design win momentum. Now turning to our gaming segment. Revenue declined 59% year-over-year to $648 million, as semi-custom SOC sales declined in line with our projections.

Semi-custom demand remains soft as we are now in the fifth year of the console cycle, and we expect sales to be lower in the second half of the year compared to the first half. In gaming graphics, revenue increased year-over-year, driven by improved sales of our Radeon 6000 and 7000 Series GPUs in the channel. Turning to our embedded segment, revenue decreased 41% year-over-year to $861 million. The first quarter marked the bottom for our embedded segment revenue. Although second quarter revenue was flattish sequentially, we saw early signs of order patterns improving and expect embedded revenue to gradually recover in the second half of the year. Longer term, we are building strong design win momentum for our expanded embedded portfolio.

Design wins in the first half of the year increased by more than 40% from the prior year to greater than $7 billion, including multiple triple-digit million-dollar wins, combining our adaptive and x86 compute products. We announced our Alveo V80 accelerators that deliver leadership capabilities in memory-intensive workloads and entered early access on next-generation edge AI solutions, with more than 30 key partners on our upcoming second-gen versatile adaptive SoCs. Last week, we also announced Victor Peng, president of AMD, would retire at the end of August. Victor has made significant contributions to Xilinx and AMD, including helping scale our embedded business and leading our cross-company AI strategy. On a personal note, Victor has been a great partner to me, ensuring the success of our Xilinx acquisition and integration.

On behalf of all of the AMD employees and board, I want to thank Victor for all of his contributions to AMD's success, and wish him all the best in his retirement. In summary, we delivered strong second quarter results and are well-positioned to grow revenue significantly in the second half of the year, driven by our data center and client segments. Our data center GPU business is on a steep growth trajectory as shipments ramp across an expanding set of customers. We're also seeing strong demand for our next generation Zen 5 EPYC and Ryzen processors that deliver leadership, performance, and efficiency in both data center and client workloads. Looking ahead, the rapid advances in generative AI and development of more capable models are driving demand for more compute across all markets.

Under this backdrop, we see strong growth opportunities over the coming years and are significantly increasing hardware, software, and solutions investments with a laser focus on delivering an annual cadence of leadership data center GPU hardware, integrating industry-leading AI capabilities across our entire product portfolio, enabling full stack software capabilities, amplifying our ROCm development with the scale and speed of the open source community, and providing customers with turnkey solutions that accelerate the time to market for AMD-based AI systems. We are excited about the unprecedented opportunities in front of us and are well-positioned to drive our next phase of significant growth. Now, I'd like to turn the call over to Jean to provide some additional color on our second quarter results. Jean?

Jean Hu (EVP, CFO and Treasurer)

Thank you, Lisa, and good afternoon, everyone. I'll start with a review of our financial results and then provide our current outlook for the third quarter. We're very pleased with our overall second quarter financial results that came in above expectations. On a year-over-year basis, data center segment revenue more than doubled. Client segment revenue grew significantly, and we expanded the gross margin by 340 basis points. For the second quarter of 2024, revenue was $5.8 billion, up 9% year-over-year. As revenue growth in the data center and the client segments was partially offset by lower revenue in our gaming and embedded segment. Revenue increased 7% sequentially, primarily driven by growth in the data center and the client segment's revenue.

Aaron Rakers (Managing Director and Technology Analyst)

Gross margin was 53%, up 340 basis points year-over-year, primarily driven by higher data center revenue. Operating expenses were $1.8 billion, an increase of 15% year-over-year, as we continue to invest in R&D to address the significant AI growth opportunities ahead of us and enhance the go-to-market activities. Operating income was $1.3 billion, representing a 22% operating margin. Taxes, interest expense, and other was $138 million. Diluted earnings per share was $0.69, an increase of 19% year-over-year. Now, turning to our reportable segments. Starting with the data center. Data center delivered record quarterly segment revenue of $2.8 billion, up 115%.... a $1.5 billion increase year-over-year.

The data center segment accounted for nearly 50% of total revenue, led primarily by the steep ramp of AMD Instinct GPUs and a strong double-digit percentage EPYC server revenue growth. On a sequential basis, revenue increased 21%, driven primarily by strong momentum in AMD Instinct GPUs. Data center segment operating income was $743 million, or 26% of revenue, compared to $147 million, or 11% a year ago. Operating income was up more than five times from the prior year, driven by higher revenue and operating leverage, even as we significantly increased our investment in R&D. Client segment revenue was $1.5 billion, up 49% year-over-year, and 9% sequentially, driven primarily by AMD Ryzen processor sales.

Client segment operating income was $89 million, or 6% of revenue, compared to our operating loss of $69 million a year ago. Gaming segment revenue was $648 million, down 59% year-over-year and 30% sequentially. The decrease in revenue was primarily due to semi-customer inventory digestion and the lower end market demand. Gaming segment operating income was $77 million, or 12% of revenue, compared to $225 million or 14% a year ago. Embedded segment revenue was $861 million, down 41% year-over-year as customers continue to normalize their inventory levels. On a sequential basis, embedded segment revenue was up 2%. Embedded segment operating income was $345 million, or 40% of revenue, compared to $757 million, or 52% a year ago.

Turning to the balance sheet and the cash flow. During the quarter, we generated $593 million in cash from operations, and the free cash flow was $439 million. Inventory increased sequentially by $339 million to $5 billion, primarily to support the continued ramp of data center GPU products. At the end of the quarter, cash, cash equivalents, and short-term investments were $5.3 billion. In the second quarter, we returned $352 million to shareholders, repurchasing 2.3 million shares, and we have $5.2 billion of authorization remaining. During the quarter, we retired $750 million of debt that matured this past June, utilizing existing cash. Now, turning to our third quarter 2024 outlook. We expect revenue to be approximately $6.7 billion, ±$300 million.

Sequentially, we expect revenue to grow approximately 15%, primarily driven by strong growth in the data center and the client segment. We expect embedded segment revenue to be up and the gaming segment to decline by double-digit percentage. Year-over-year, we expect revenue to grow approximately 16%, driven by the steep ramp of our AMD Instinct processors and a strong server and client revenue growth to more than offset the declines in the gaming and the embedded segments. In addition, we expect third quarter non-GAAP gross margin to be approximately 53.5%. Non-GAAP operating expenses to be approximately $1.9 billion. Non-GAAP effective tax rate to be 13%. The diluted share count is expected to be approximately 1.64 billion shares.

Also, during the third quarter, we expect to close the acquisition of Silo AI for approximately $665 million in cash. In closing, we made significant progress during the quarter toward achieving our financial goals. We delivered record MI300 revenue that exceeded $1 billion and demonstrated solid traction with our next-gen Ryzen and EPYC products. We expanded the gross margin significantly and drove earnings growth while increasing investment in AI. Looking forward, the opportunities ahead of us are unprecedented. We'll remain focused on executing to our long-term growth strategy while driving financial discipline and operational excellence. With that, I'll turn it back to Mitch for the Q&A session.

Mitch Haws (VP of Investor Relations)

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

John Taylor (CMO)

Thank you, Mitch. We will now be conducting the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press Star two to remove any question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. The first question comes from the line of Ben Reitzes with Melius Research. Please proceed with your question.

Ben Reitzes (Managing Director and Head of Technology Research)

Hey, thanks a lot, and congratulations on these results. Lisa, I wanted to ask you about MI300, how you see it playing out sequentially for the rest of the year. I guess there's about $2.8 billion left to hit your annual target. So, wondering if you see things picking up in the fourth quarter and how that's going sequentially. And if you don't mind, I wanted to also ask about next year, if you see potential for, you know, rapid growth. You're probably aware of, you know, some of the chatter out there, and I just was wondering if you're already seeing signs that you can grow significantly given your roadmap for next year. Thank you so much.

Lisa Su (Chair and CEO)

Yeah, great, Ben. Thanks for the question. So first of all, on, you know, sort of MI300 and the, the customer evolution, we're very happy with how MI300 has progressed. You know, when we started the year, I think the, the key point, for us was to get our products into our customers' data centers, to have them qualify their workloads, to really ramp in production, and then see what, you know, the production, capabilities are, and especially performance and all of those things. And I can say, you know, now being, you know, sort of more than halfway through the year, we've seen great progress, across the board.

Aaron Rakers (Managing Director and Technology Analyst)

As we look into the second half of the year, I think we would expect that MI300 revenue would continue to ramp in the third quarter and the fourth quarter. We're continuing to expand both, you know, current deployments with our existing customers, as well as, you know, we have, you know, a large pipeline of customers that we're working through that are, you know, getting familiar with our architecture and, you know, software and all that stuff. So I would say overall, very pleased with the progress and really continuing right on track to what we expected from the capabilities of the product. You know, as we go into next year, I mean, one of the important things that we announced at Computex was, you know, increasing and expanding our roadmap.

I think we feel really good about our roadmap. You know, we're on track to launch MI325 later this year, and then next year, our MI350 series, which will be very competitive with Blackwell Solutions, and then you know, we're well on our way to our CDNA Next as well. So I think overall, you know, we remain quite bullish on the overall AI market. I think the market continues to need more compute, and we also feel very good that our hardware and software solutions are getting good traction, and we're continuing to expand that pipeline.

Ben Reitzes (Managing Director and Head of Technology Research)

Thank you.

John Taylor (CMO)

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

Aaron Rakers (Managing Director and Technology Analyst)

Yeah, thanks for taking the question, and congrats on the quarter as well. I guess sticking on the data center side, you know, as we look forward and you think about the full year, I'm curious of how you're currently thinking about the EPYC server CPU growth expectation, you know, as we go forward, and any kind of updated thoughts on your ability to kind of continue to gain share in the server market. Just update us on how you see the server market playing out over the next couple quarters.

Lisa Su (Chair and CEO)

Yeah, sure, Aaron, thanks for the question. So, you know, we're very pleased with the progress that we've made with EPYC. I think a couple things. First of all, in terms of, you know, competitive positioning and, you know, just the traction in the market, our fourth-gen EPYC between Genoa and Bergamo is really doing very well. We've seen a broad adoption across cloud. And then, you know, we've been very focused on enterprise as well as third-party cloud instances. And, you know, as I said in the prepared remarks, we're starting to see very nice traction in enterprise with both new customers as well as existing customers. And then for third-party cloud adoption, also, you know, a good pickup, you know, there as well.

Aaron Rakers (Managing Director and Technology Analyst)

So I think overall, I think our EPYC portfolio has done well. Going into the second half of the year, I think we also feel good about it. You know, there are a couple of positives there. We see first of all, you know, the market looks like it's improving, so we have seen some, you know, return to spending in you know, both enterprise and cloud, and so I think those are positive market trends. And then in addition to that, we are in the process of launching Turin. So we started production here in the second quarter, and we're on track to launch broadly in the second half of the year. We'll see some revenue of Turin in the second half of the year, contributing as well.

So overall, I think the server market and our ability to continue to grow a share in the server market is one of the things that we see in the second half of the year.

John Taylor (CMO)

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

Timothy Arcuri (Managing Director)

Thanks a lot. Lisa, I wanted to ask about the data center GPU roadmap. As you said, the MI325X, you know, launching later this year. So I guess I had two questions: Does the, you know, greater than $4.5 billion, does that include any revenue from MI325X? And can you talk a little bit more about MI350? Obviously, we're seeing a big, you know, rack scale, or, you know, shift toward rack scale systems for the competition's product. And I'm wondering if that's what MI350 is gonna look like. Is it, is it gonna have liquid cooling, and is it gonna have a rack scale aspect to it? Thanks.

Lisa Su (Chair and CEO)

... Yeah, absolutely. So, you know, let me, you know, start with your, you know, original question. I mean, I think looking at 325X, we are on track to launch later this year. From a revenue standpoint, there will be a small contribution in the fourth quarter, but it really is still, you know, mostly the MI300 capabilities. And, you know, 325 will start in the fourth quarter and then ramp more in the first half of next year. And then as we look at the 350 series, you know, what we're seeing and the reason we call it a series is 'cause there will be multiple SKUs in that series that will go, you know, through the range of, let's call it, air-cooled to liquid-cooled.

Aaron Rakers (Managing Director and Technology Analyst)

In spending time with our customers, I think there are, you know, people who certainly want more rack-level solutions, and, you know, we're certainly doing much more in terms of system-level integration for our products. You'll see us invest more in system-level integration. But we also have, you know, many, you know, customers who want to use their current infrastructure. I think the beauty of the MI350 series is it actually, you know, fits into the same infrastructure as the MI300 series, and so it would lend itself to, let's call it a pretty fast ramp, you know, if you've already invested in 300 or 325. So we see the range of options, and, that's part of the expansion of the roadmap that we're planning.

John Taylor (CMO)

The next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed with your question.

Ross Seymore (Managing Director and Senior Equity Analyst)

Hi, thanks for letting me ask a question, and congrats on the strong results. Well, data center is obviously very important. I just want to pivot to the client side. Lisa, can you talk about the AI PC side of things, how you believe AMD is positioned? Are you seeing any competitive intensity changing with the emergence of Arm-based systems? Just wanted to see how you're expecting that to roll out and what it means to second half seasonality.

Lisa Su (Chair and CEO)

Yeah, sure, Ross. So first, you know, we're very pleased with our client business results. I think we have a very strong roadmap, so I'm very pleased with the roadmap. The Zen 5 based products, you know, we're launching, you know, both notebook and desktop in this, you know, in the middle of this year. What we've seen is actually, you know, very positive, you know, feedback on the product. So we just actually launched the first Strix-based notebooks over the weekend. They went on sale. You may have seen some of the reviews. The reviews are very positive. You know, our view of this is the AI, you know, PC is a important add to the overall PC category.

Aaron Rakers (Managing Director and Technology Analyst)

As, you know, we go into the second half of the year, I think we have better seasonality in general, and we think we can do, you know, let's call it, above typical seasonality, given the strength of our product launches and, and when we're launching. Then into 2025, you're gonna see AI PCs across, you know, sort of a larger set of price points, which will also, you know, open up more opportunities. So, you know, overall, I would say the PC market is a good revenue growth opportunity for us. The business is performing well, the products are strong, and we're working very closely with, you know, both the ecosystem partners as well as our OEM partners to have, you know, strong launches here into the second half of the year.

Ross Seymore (Managing Director and Senior Equity Analyst)

Is the Arm side changing anything or not really?

Lisa Su (Chair and CEO)

You know, look, I think at this point, the PC market's a big market, and we are underrepresented in the market. You know, I would say that, you know, we take all of our competition, you know, very seriously. That being the case, I think our products are very well positioned.

John Taylor (CMO)

The next question comes from the line of Matt Ramsey with TD Cowen. Please proceed with your question.

Matt Ramsey (Managing Director and Senior Research Analyst)

Thank you very much. Good afternoon. Lisa, I wanted to maybe draw a parallel between the Instinct portfolio that your company's rolling out now and what you guys did five or six years ago with EPYC. And I remember when the Naples product launched, there was a lot of, I would say, reaction, positively and negatively, and sort of sentiment around where your roadmap might go to relatively small perturbations in what the volumes were super early. But if I remember back to that, what was the most important was that was the toe hold into the market for long-term engagement, both on the software side and the hardware side, with your customers two, three, four generations forward. So, is that an accurate parallel to where you guys are with MI300?

Aaron Rakers (Managing Director and Technology Analyst)

Maybe you could talk about the level of engagement, the intensity of engagement, the breadth of it across the customer base with 350 and 400. Thanks.

Lisa Su (Chair and CEO)

Yeah, absolutely, Matt. So look, you know, as I said earlier, we're very pleased with the progress that we're making on the Instinct roadmap. This is absolutely a long-term play, so, you know, absolutely, you're correct. It has a lot of parallels to the EPYC journey, where, you know, you really have to... You gain, you know, more opportunities, broader workloads, larger deployments as you go from generation to generation. So we are playing the long game here. Our conversations with our customers.

Aaron Rakers (Managing Director and Technology Analyst)

So I would start with, first, in the near term, we had some very key milestones that we wanted to, you know, pass this year, and as I said, they related to getting hardware in volume in multiple hyperscalers as well as, you know, large tier two customers. We've done that. We've now seen our software in a lot of different environments, and it's matured substantially. You know, ROCm is in, you know, very, from a standpoint of features, functions, out-of-box performance, getting to performance with customers, we've gained a lot of confidence and learned a lot in that whole process.

The networking aspects of building out, you know, the rack scale and the system-level items are areas that we're continuing to invest in. And then the point of having, you know, long-term, you know, conversations across multiple generations is also really important. So I think all of those things have progressed well. We, you know, we view this as, you know, very good progress for MI300, but we have a lot more to do, and I think the various, you know, roadmap will help us open up those opportunities over the next couple of years.

Matt Ramsey (Managing Director and Senior Research Analyst)

Appreciate it. Thank you.

Lisa Su (Chair and CEO)

Thanks, Matt.

John Taylor (CMO)

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)

Thanks for taking my question. Lisa, there seems to be this ongoing industry debate about the AI monetization and whether your customers are getting the right ROI on their CapEx. And, you know, today they have these three options, right? They can buy GPUs from your largest competitor with all the software bells and whistles and incumbency, or they can do custom chips, or they can buy from AMD. So how do you think this plays out next year? Do you think your customers, given all this, concern around monetization, does it make them consolidate their CapEx around just, you know, the other two suppliers? Just how is your visibility going into next year, given this industry debate?

Aaron Rakers (Managing Director and Technology Analyst)

How will AMD continue to kind of carve a position between these two other competitive choices that are out there? Thank you.

Lisa Su (Chair and CEO)

Yeah, sure, Vivek. Well, I mean, I think you, you talk to a lot of the same people that we talk to. I think the overall view on AI investment is we have to invest. I mean, the industry has to invest. The potential of AI is so large, you know, to, you know, to impact the way, you know, enterprises operate and, and all that stuff. So I think the investment, cycle, will continue, to be strong. And then relative to, you know, the various choices, you know, for the size of the market, you know, I firmly believe that there will be multiple solutions, whether you're talking about, you know, GPUs or you're talking about, you know, custom chips or ASICs, there will be multiple solutions.

You know, in our case, I think we've demonstrated a really strong roadmap and the ability to partner well with our customers. You know, from the standpoint of, you know, that deep engagement, hardware, software, co-optimization is so important in that. And for large language models, GPUs are still the architecture of choice. So I think the opportunity is very large, and I think our piece of that is, you know, really strong technology with, you know, strong partnerships with, you know, the key, you know, AI market makers.

Vivek Arya (Managing Director and Senior Equity Research Analyst)

Thank you, Lisa.

Lisa Su (Chair and CEO)

Thanks, Vivek.

John Taylor (CMO)

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

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

Great, thank you. I also wanted to ask about MI300. I wonder if you could talk about training versus inference. You know, do you have a sense—I know that a lot of the initial focus was inference, but, you know, do you have traction on the training side? And, you know, any sense of what that split may look like over time?

Lisa Su (Chair and CEO)

Yeah, sure. Thanks for the question, Joe. So, you know, as as we said on MI300, you know, there are lots of you know, great characteristics about it. One of it, one of them is our, you know, memory bandwidth and memory capacity is leading the industry. From that standpoint, the early deployments have largely been inference in most cases, and we've seen fantastic performance, you know, from an inference standpoint. We also have customers that are doing training. We've also seen that from a training standpoint, you know, we've optimized you know, quite a bit our ROCm software stack to make it easier for people to train on AMD, and I do expect that, you know, we'll continue to ramp training you know, over time.

Aaron Rakers (Managing Director and Technology Analyst)

As we go forward, I think you'll see, you know, the belief is that inference will be larger than training from a market standpoint. But from an AMD standpoint, I would expect, you know, both inference and training to be growth opportunities for us.

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

Great. Thank you.

John Taylor (CMO)

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. I had a question on the MI300 as well. Curious, Lisa, if you're currently shipping to demand or if the updated annual forecast of $4.5 billion is in some shape or form, supply constrained. I think last quarter you gave some comments on HBM and CoWoS. Curious if you could provide an update there. And then my part B to my question is on profitability for MI300. I think in the past, you've talked about the business being accretive and improving further over time as you sort of work through the kinks, if you will.

Aaron Rakers (Managing Director and Technology Analyst)

Has that view evolved or changed at all, given sort of the competitive intensity and, you know, your need to invest, whether it be through organic R&D or some of the acquisitions you've made? Or, you know, are you still confident that profit margins in the business continue to expand? Thank you.

Lisa Su (Chair and CEO)

Yeah, sure, Toshiya, thanks for the question. So, on the supply side, let me make a couple comments, and then maybe I'll let Jean comment on, you know, sort of the trajectory, for the business. So on the supply side, we made great progress in the second quarter. We ramped up supply significantly, you know, exceeding $1 billion in the quarter. I think the team has executed really well. You know, we continue to see line of sight to continue increasing supply as we go through the second half of the year. But I will say that the overall supply chain is tight and will remain tight through 2025. So under that backdrop, we have great partnerships across the supply chain.

Aaron Rakers (Managing Director and Technology Analyst)

We've been building, additional, you know, capacity and capability there, and so, you know, we expect to continue to ramp, as we go through the year. And, you know, we'll continue to work, you know, both supply as well as demand, opportunities, and really, that's accelerating, our, you know, customer adoption, overall, and we'll see how things play out, as we go into, you know, the second half of this year.

Jean Hu (EVP, CFO and Treasurer)

... Yeah. On your second question about the profitability, first, Jason, our team has done a tremendous job to ramp the product, MI300. It's a very complex product, so we ramped it successfully. At the same time, the team also start to implement operational optimization to continue to improve gross margin. So we continue to see the gross margin improvement. Over time, in the longer term, we do believe gross margin will be accretive to corporate average. From a profitability perspective, you know, AMD always invest in platforms. If you look at our data center platform, especially both the server and the data center GPU side, we are ramping the revenue. The business model can leverage very significantly, even from GPU side, because the revenue ramp has been quite significant, the operating margin continue to expand.

Aaron Rakers (Managing Director and Technology Analyst)

We definitely want to continue to invest as the opportunity is huge. At the same time, it is a profitable business already.

Toshiya Hari (Managing Director and Senior Equity Research Analyst)

Thank you very much.

John Taylor (CMO)

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 question. I wanted to dig into the guidance a little bit, if I could. So with gaming down double digits, it probably means you've got close to $1 billion of growth revenue across Data Center, Client, and Embedded. I was wondering if you'd give us some color on how that $1 billion-ish splits out across those three businesses. Like, if I had, you know, 70% of it going to Data Center and 20% going to Client and 10% going to Embedded, like, would that be, like, way off? Or how should I think about that apportioning out across the segments?

Lisa Su (Chair and CEO)

Yeah, maybe, Stacy, let me give you, you know, the following color. So, you know, the gaming business is down double digit, as you state. You know, think of it as, you know, the data center is the largest piece of it, you know, client next, and then on the embedded side, think of it as, you know, single digit, you know, sequential growth.

Stacy Rasgon (Managing Director and Senior Analyst)

Got it. So, I mean, within that data center piece, then, how does that split out? I mean, is the bulk of it Instinct, or is it sort of equally weighted between Instinct and EPYC? Or, like, again, how does it... Again, if you got, I don't know, $400 million-$600 million of sequential data center growth, something like that, how does it split up?

Lisa Su (Chair and CEO)

Yeah. So again, without being that granular, we will see both. Certainly, the Instinct, you know, GPUs will grow, and we'll see also very nice growth on the server side.

John Taylor (CMO)

The next 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, Lisa. From my rudimentary understanding, the large difference between your Instinct products and the adoption versus your nearest competitor is kind of rack-level performance, and that rack-level infrastructure that you're maybe lacking. You talked a little bit about UALink. I was wondering if you could expand on that and give us some more color on when that gap might be closed, or is this a major step for the industry to close that gap? Just any color would be appreciated.

Lisa Su (Chair and CEO)

Yeah. So Harsh, overall, maybe if I take a step back and just talk about, you know, how the systems are evolving. There's no question that, you know, the systems are getting more complex as, especially as you go into, you know, large trading clusters, and, you know, our customers need help to put those together. And that includes, you know, the, you know, sort of Infinity Fabric-type solutions that are the basis for the UALink things, as well as, you know, just, you know, general rack-level, you know, system integration. I think what you should expect, Harsh, is, you know, first of all, we're very pleased with all of the partners that have come together for UALink.

Aaron Rakers (Managing Director and Technology Analyst)

We think that's an important capability, but we have all of the pieces of this already, you know, within, you know, sort of the AMD umbrella with our Infinity Fabric, with our networking capability, through the acquisition of Pensando. And then you'll see us invest more in this area. So, you know, this is, you know, part of, you know, how we help customers get to market faster, is by, you know, investing in, you know, all of the components. So the CPUs, the GPUs, the networking capability, as well as, you know, system-level solutions.

Harsh Kumar (Managing Director and Senior Research Analyst)

Thank you, Lisa.

Lisa Su (Chair and CEO)

Thanks, Harsh.

John Taylor (CMO)

The next question comes from the line of Blayne Curtis with Jefferies. Please proceed with your question.

Blayne Curtis (Managing Director and Senior Equity Analyst)

Hey, good afternoon. Thanks. Same question. I just want to ask another question on MI300. Just curious if you can kind of characterize the makeup of the customers in the first half. I know you had, you know, end of last year, a government customer. Is there still a government contingency? And, you know, and kind of the second part of it is really you've invested in all this software assets. Kind of curious, you know, the challenge of ramping the next wave of customers. I know there's been a lot of talk on some hardware challenges, you know, memory issues and such, but then you're investing in software. I'm sure that's a big challenge, too. Just kind of curious what the biggest hurdle is for you to kind of get that next wave of customers ramped.

Lisa Su (Chair and CEO)

Yeah. So, Blayne, a lot of pieces to that question, so, let me try to address them. First, on your question about... I think you're basically asking about the supercomputing, you know, piece. That was mainly Q4 and a bit in Q1. So if you think about our Q2 revenue, think about it as, you know, almost all AI. So it's MI300X, it's for, you know, large AI hyperscalers as well as, you know, OEM OEM customers going to, you know, enterprise and tier two data centers. So that's the makeup of the customer set.

Aaron Rakers (Managing Director and Technology Analyst)

And then in terms of, you know, the various pieces of, you know, what we're doing, you know, I think, you know, first on your question about memory, I think there's a lot of noise in the system. I wouldn't really pay attention to all that noise in the system. I mean, this has been an incredible ramp, and, I'm actually really proud of what the team has done, in terms of, you know, just, you know, definitely, fastest product ramp that we've ever done, you know, to, you know, $1 billion, you know, over $1 billion in the second quarter. And then, you know, ramping, each quarter in Q3 and Q4. In terms of memory, you know, we have multiple suppliers that we've qualified on HBM3.

And, you know, it's a tricky, you know, memory is a tricky business, but I think we've done it very well, and, you know, that's there. And then we're also qualifying HBM3E, you know, for future products with multiple memory suppliers as well. So to your overarching question of, you know, what are the things that we're doing? You know, the exciting part of this is that, you know, the ROCm capability has really, you know, gotten substantially better because so many customers have been using it. And, you know, with that, what we look at is out-of-box performance. How long does it take a customer to get up and running on MI300?

And we've seen, you know, depending on the software that, you know, companies are using, particularly if you're based on some of the higher-level frameworks like PyTorch, et cetera, you know, we can be out of the box running very well in a very short amount of time, like, let's call it, you know, very small number of weeks. And that's great, 'cause that's expanding the overall portfolio. We are gonna continue to invest in software, and that was, you know, one of the reasons that we did the Silo AI acquisition. You know, it's a great acquisition for us. You know, 300 scientists and engineers. These are engineers that have experience with AMD hardware and are very, very good at helping customers get up and running on AMD hardware. And that's...

So we view this as the opportunity to expand the customer base, with, you know, talent like Silo AI, you know, like Nod.ai, which brought a lot of compiler talent, and then we continue to hire quite a bit organically. So I think, you know, Jean said earlier that, you know, we see leverage in the model, but we're gonna continue to invest because, you know, this opportunity is huge, and we have all of the pieces. This is just about, you know, building out scale.

Blayne Curtis (Managing Director and Senior Equity Analyst)

Thanks so much.

Lisa Su (Chair and CEO)

Thanks.

John Taylor (CMO)

The next question comes from the line of Tom O'Malley with Barclays. Please proceed with your question.

Tom O'Malley (Director and Equity Research Analyst)

Hey, Lisa. Thanks for taking my question. I'll give you a breather from the MI300 for a second, but just to-

Lisa Su (Chair and CEO)

Thanks.

Tom O'Malley (Director and Equity Research Analyst)

Focus on client in the second half. Yeah, no problem. Focus on client in the second half. You kind of said above seasonal for, for September, December. You're obviously launching a new notebook desktop product, but you're also talking about AI PC. Could you just break down where you're seeing those above seasonal trends? Is it the ASP uplift you're getting from the new products? Is it a unit assumption that's coming with AI PC? Just any kind of breakdown between those two and why you're seeing it a little bit better. Thank you.

Lisa Su (Chair and CEO)

Sure, Tom. So I think you actually said it well. We are launching, you know, Zen 5 desktops and notebooks, you know, with volume ramping in the third quarter, and that's the primary reason that we see above seasonal. You know, the AI PC element is certainly one element of that, but there is just the overall, you know, refresh. Usually desktop launches going into a third quarter are good, you know, for us, and, you know, we feel that the products are very well positioned. So those are the primary reasons.

John Taylor (CMO)

Our final question comes from the line of Chris Danley with Citi. Please proceed with your question.

Chris Danley (Managing Director and Senior Semiconductor Equity Research Analyst)

Hey, gang. Thanks for sneaking me in. Just a question on gross margin. So, if we look at your guidance, it seems like the incremental gross margin is dropping a little bit for Q3. Why is that happening? And then just to follow up on another part of the gross margin angle, have you changed your gross margin expectations for the MI300 as the accretion point moved out a little bit?

Jean Hu (EVP, CFO and Treasurer)

Yeah, Chris, thanks for the question. I think, first, we have made a lot of progress, as you mentioned, this, this year, to expand our gross margin from 2023 at 50 percentage points to, you know, we actually guided 53.5% for Q3. The primary driver is really the fast data center business growth. If you look at the data center business as the percentage of revenue from 37% in Q4 last year to now close to 50%, that fast expansion really help us with the gross margin. When you look at the second half, we'll continue to see data center to be the major driver of our top-line revenue growth, will help with the margin expansion. But, there are some other puts and takes.

Aaron Rakers (Managing Director and Technology Analyst)

I think, Lisa mentioned the, the PC business actually is going to do better in second half, especially, typically seasonally, it tend to be more consumer focused, so that, really, is a little bit of different dynamics there. Secondly, I would say embedded business, we are going to see embedded business to be up sequentially each quarter, but the recovery, as we mentioned earlier, is more gradual. So when you look at the balance of the picture, you know, that's why we see the gross margin, the pace of gross margin, change a little bit, but we do see continued gross margin expansion. As far as the MI300, we are quite confident over long term it will be accretive to our corporate average.

We feel pretty good about overall data center business continue to be absolutely the driver of gross margin expansion.

Chris Danley (Managing Director and Senior Semiconductor Equity Research Analyst)

Thank you.

Jean Hu (EVP, CFO and Treasurer)

Okay.

John Taylor (CMO)

Thank you. I would like to turn the floor back over to Mitch for any closing comments.

Mitch Haws (VP of Investor Relations)

Great. That concludes today's call. Thanks to all of you for joining us today.

John Taylor (CMO)

Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your-