AMD - Q4 2022

Transcript

Operator (participant)

Welcome to the AMD fiscal fourth quarter and full year 2022 financial results conference calling webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Ruth Cotter. Please go ahead, Ruth.

Ruth Cotter (Senior VP and Chief Administrative Officer)

Thank you. Welcome to AMD's fourth quarter and fiscal year-end 2022 financial results conference call. By now, you should have had the opportunity to review a copy of our earnings press release and accompanying slideware. If you've 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 in today's conference call are Dr. Lisa Su, our Chair and Chief Executive Officer, Jean Hu, our Executive Vice President, Chief Financial Officer, and Treasurer, and Devinder Kumar, our Executive Vice President. This is a live call and will be replayed via webcast on our website.

Before we begin, I would like to note that Mark Papermaster, Chief Technology Officer and Executive Vice President of Technology and Engineering, will attend the Morgan Stanley Technology, Media, and Telecom Conference on Monday, March 6th, and our first quarter 2023 quiet time is expected to begin at the close of business on Friday, March 17th. 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 actually cause 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, Ruth, and good afternoon to all those listening in today. Before discussing our financial results, I wanted to make a few comments about our CFO transition. I'd like to start by thanking Devinder for all of his contributions to AMD over the last 39 years. During his tenure as CFO, we built a strong financial foundation that has enabled AMD's significant growth and success. On a personal note, his partnership and expertise have been invaluable to me. I know I speak for all of AMD when I say we appreciate all he has done for the company and wish him the best in his upcoming retirement. I also want to welcome our new EVP and CFO, Jean Hu, to her first AMD earnings call since joining us earlier this month.

Jean's more than 14 years of public company CFO experience and proven track record of financial leadership make her an excellent addition to our team. I look forward to working closely with her as we continue to transform and scale our business. Turning to the business results. 2022 was a strong year for AMD as we navigated the challenging macro environment to deliver best-in-class growth and record profitability driven by our embedded and data center segments. We also transformed the company. We accelerated our data center business and closed our strategic acquisitions of Xilinx and Pensando, significantly diversifying our business and strengthening our financial model as our data center embedded product sales grew from $3.9 billion in 2021 to $10.6 billion in 2022.

Looking at our financial results, fourth quarter revenue increased 16% year-over-year to $5.6 billion, driven by significant growth in our embedded and data center segments, which accounted for more than 50% of overall revenue in the quarter. On a full year basis, we grew annual revenue 44% to $23.6 billion. We set annual records for revenue, gross margin, and profitability, driven largely by a 64% increase in our data center segment revenue and the strong performance of our embedded segment following our Xilinx acquisition. Turning to the fourth quarter business results, starting with our data center segment, revenue increased 42% year-over-year to $1.7 billion, led by increased adoption of our EPYC processors by cloud providers.

In cloud, sales to North American hyperscalers more than doubled year-over-year as hyperscale customers continued moving more of their internal workloads and external instances to EPYC processors. EPYC processors now power more than 600 publicly available instances globally following the launches of new AMD-based instances from AWS, Microsoft, and others in the quarter. In enterprise, revenue declined year-over-year as demand slowed based on the macro environment. Against this backdrop, we continue expanding our pipeline and closed a number of new wins in the fourth quarter with Fortune 500 financial services, automotive, technology, energy, and aerospace companies. In HPC, growing EPYC processor adoption was highlighted by the number of AMD-powered supercomputers on the latest TOP500 list increasing by 38% year-over-year.

AMD now powers more than 100 of the world's fastest supercomputers and 15 of the top 20 most energy-efficient supercomputers in the world. To build our data center leadership, we launched our 4th Gen EPYC processors this past November that deliver up to two times faster performance in cloud, enterprise, and HPC applications and are up to 80% more energy efficient than the competition's most recently announced offerings. We are seeing very strong customer pull for 4th Gen EPYC CPUs, which complement our 3rd Gen offerings with additional performance and capabilities. Initial cloud deployments are going very well, and we expect to ramp both internal workloads and public instances throughout 2023. For enterprise, there are more than 140 4th Gen EPYC platforms in development from HPE, Dell, Lenovo, Supermicro, and others, an increase of 40% compared to the prior generation.

Looking at our broader data center portfolio, we had record sales of our Xilinx data center and networking products in the quarter, led by strong demand from financial services companies for our newly launched Alveo X3 series boards optimized for low latency trading. Sales of our Pensando DPUs also ramped significantly from the prior quarter, driven by supply chain improvements and continued demand. We are very pleased with the customer reception of the Pensando technology with good long-term growth opportunities as DPUs become a standard component in the next generation of cloud and enterprise data centers. Data center GPU sales were down significantly from a year ago when we had shipments supporting the build-out of multiple Instinct MI250 accelerator supercomputer wins.

In January, we previewed our next generation MI300 accelerator that will be used for large model AI applications in cloud data centers and has been selected to power the 2+ exaflop El Capitan Exascale supercomputer at Lawrence Livermore National Laboratory. MI300 will be the industry's first data center chip that combines a CPU, GPU, and memory into a single integrated design, delivering eight times more performance and five times better efficiency for HPC and AI workloads compared to our MI250 accelerator currently powering the world's fastest supercomputer. MI300 is on track to begin sampling to lead customers later this quarter and launch in the H2 of 2023. Turning to our client segment, revenue declined 51% year-over-year to $903 million. We continued to ship below PC consumption in the fourth quarter as we focused on further reducing downstream inventory.

While overall PC demand remains soft, desktop channel sell-through increased sequentially during the holiday season. We launched our latest generation Ryzen 7000 Series notebook processors earlier in January, including our Ryzen 7040 CPU series that deliver leadership performance and battery life and are our first processors to feature Ryzen AI, the industry's only dedicated on-chip AI inference engine in an x86 processor. Ryzen AI is powered by the highly scalable XDNA architecture, which is the first integration of AMD and Xilinx IP, less than a year after closing the acquisition. We also launched our Ryzen 7045 series CPUs, our first mobile processors based on a chiplet design that delivers significantly higher performance than the competition in gaming and content creation applications.

We have more than 250 ultra-thin gaming and commercial notebook design wins spanning our full family of Ryzen 7000 Series processors on track to launch this year, an increase of 25% year-over-year, with the first notebooks planned to go on sale in February. Turning to our gaming segment. Revenue declined 7% year-over-year to $1.6 billion as lower gaming graphic sales more than offset higher semi-custom revenue. Semi-custom SOC revenue grew year-over-year as demand for game consoles remained strong during the holidays. Gaming graphics revenue declined year-over-year as we further reduced desktop GPU downstream channel inventory. Channel sell-through of our Radeon RX GPUs increased sequentially and we launched our high-end Radeon 7900 series GPUs to strong demand based on the performance of our new RDNA 3 architecture and 5nm chiplet design.

In January, we announced our first RDNA 3 mobile GPUs that have been selected to power new gaming notebooks from Dell, Alienware, ASUS, and others that are on track to begin shipping in the H1 of 2023. Looking at our embedded segment, revenue increased significantly year-over-year to a record $1.4 billion. We had record sales across a number of our embedded markets, including communications, automotive, industrial and healthcare, aerospace and defense, and test and emulation. In communications, we saw particular strength with expanded 5G wireless installations in India and ongoing wired infrastructure deployments with tier one communications providers. Automotive growth was driven by the ramps of new forward camera, 4D radar, and infotainment wins across multiple customers.

We recently announced multiple new wins for our automotive-grade Zynq UltraScale+ platforms with some of the largest vehicle equipment suppliers, including Aisin's next-generation automated parking assist system and DENSO's next-generation LiDAR platform that can improve the resolution required for autonomous driving and other industrial machine vision applications by 20x. We also continued to see strong growth with industrial and healthcare, aerospace and defense, and test and emulation customers in the quarter, driven by SAM expansion for our leadership adaptive SoCs, new design win ramps, and increased supply across multiple nodes. Taking a step back, as we approach the one-year anniversary of the closing of our Xilinx acquisition next month, the integration has gone extremely well and our embedded business has become a major growth driver for AMD, strengthening our financial model and significantly diversifying our business.

In addition, we are seeing substantial new revenue synergy opportunities as we combine Xilinx's industry-leading adaptive products and 6,000+ customers with AMD's expanded breadth of compute products and scale. In summary, overall, 2022 was a strong year for AMD despite the weak PC market. We significantly grew our data center embedded in gaming businesses and executed well across our product portfolio. We enter 2023, we expect the overall demand environment to remain mixed with the second half stronger than the first half. In the PC market, we are planning for the PC TAM to be down approximately 10% for 2023. We expect to continue to ship below consumption in the first quarter to reduce downstream inventory, which is reflected in our guidance.

In our embedded and data center segments, we believe we are well-positioned to grow revenue and gain share in 2023 based on the strength of our competitive positioning and leadership high performance and adaptive product portfolio. We do see elevated levels of inventory with some cloud customers, which will lead to a softer H1 and a stronger H2 of the year. We continue working very closely with our customers to navigate the dynamic market conditions while also making the right strategic investments to exit the current cycle with an even stronger and more differentiated set of products to drive future growth. Over the next several years, one of our largest growth opportunities is in AI, which is in the early stages of transforming virtually every industry, service, and product.

We expect AI adoption will accelerate significantly over the coming years and are incredibly excited about leveraging our broad portfolio of CPUs, GPUs, and adaptive accelerators in combination with our software expertise to deliver differentiated solutions that can address the full spectrum of AI needs in training and inference across cloud, edge, and client. I'd like to turn the call over to Jean to provide some additional color on our fourth quarter and full year financial results. Jean.

Jean Hu (EVP, CFO, and Treasurer)

Thank you, Lisa. Good afternoon, everyone. 2022 was a very strong year for AMD. We had a record revenue, gross margin, profitability, and we generated a significant free cash flow. The year was also highlighted by our strategic acquisitions of Xilinx and Pensando, expanding and diversifying our business portfolio. Fourth quarter 2022 revenue for $5.6 billion was up 16% from a year-ago, driven by higher revenue in the embedded and data center segment, partially offset by lower client and the gaming segment revenue. Gross margin was 51%, up 70 basis points from a year-ago, primarily driven by richer product mix with higher revenue in the embedded and data center segment, partially offset by lower client segment revenue.

Operating expenses were $1.6 billion compared to $1.1 billion a year ago, driven by the inclusion of Xilinx OpEx and additional R&D and go-to-market investments to support the next phase of our revenue growth. Operating income declined $66 million from a year ago to $1.3 billion, and the operating margin was 23%, down from 27% a year ago. Net income was $1.1 billion flat year-over-year. Diluted earning per share was $0.69 compared to $0.92 per share a year ago, primarily due to lower client operating income. Now turning to our reportable segment for the fourth quarter. Starting with the data center segment, revenue was $1.7 billion, up 42% year-over-year, primarily driven by strong growth in 3rd Generation EPYC server processor revenue and the early ramp of 4th Generation EPYC processors.

Data center operating income was $444 million, or 27% of revenue, compared to $369 million, or 32% a year ago. Higher operating income was driven primarily by stronger revenue, partially offset by higher R&D investment to support the top line revenue growth. Client segment revenue was $903 million, down 51% year-over-year due to reduced processor shipments resulting from a weak PC market and significant inventory correction across the PC supply chain. Client operating loss was $152 million compared to operating income of $530 million a year ago, or 29% of revenue, primarily due to lower revenue. Gaming segment revenue was $1.6 billion, down 7% year-over-year due to lower gaming graphics revenue, partially offset by higher semi-custom product sales.

Gaming operating income was $266 million, or 16% of revenue, compared to $407 million, or 23% a year ago. The decrease was primarily due to lower graphics revenue. Embedded segment revenue was $1.4 billion, up $1.3 billion from a year ago, primarily due to the inclusion of Xilinx embedded revenue. Embedded operating income was $699 million, or 50% of revenue, compared to $80 million, or 25% a year ago, primarily driven by the inclusion of Xilinx. Turning to the balance sheet. We have a strong balance sheet with cash equivalents, and short-term investment of $5.9 billion at the end of the fourth quarter. During the quarter, we returned $250 million to shareholders through share repurchases.

In 2022, we returned a total of $3.7 billion to shareholders, which was 119% of free cash flow. We have $6.5 billion in remaining authorization to share repurchases. Free cash flow was $443 million compared to $736 million in the same quarter last year. Free cash flow decreased primarily due to higher inventory. Inventory was $3.8 billion, up approximately $402 million from the prior quarter, primarily driven by the inventory increase in advanced process nodes to support the ramp of new products. Let me turn to our full-year financial result. 2022 revenue was $23.6 billion, up 44% year-over-year, driven by increased Embedded, Data Center and the Gaming segment revenue, partially offset by lower Client segment revenue.

On a combined AMD and Xilinx company basis, 2022 pro forma revenue was $24.1 billion, up 20% compared to $20.1 billion in 2021. Gross margin was 52%, up 370 basis point from the prior year, primarily driven by richer product mix with higher revenue from Embedded and Data Center segment, partially offset by lower Client segment revenue. Operating expenses were 26% of revenue compared to 24% in 2021. 2022 operating income was $6.3 billion, up $2.3 billion, an increase over 56% from a year ago, resulting in operating margin of 27% compared to 25% in 2021, primarily driven by higher revenue and the growth margin expansion.

Net income was $5.5 billion compared to $3.4 billion, up 60% from the prior year. Earning per share was $3.50 compared to $2.79 for the prior year, primarily due to Data Center growth and addition of Xilinx. Full year free cash flow was $3.1 billion, resulting free cash flow margin of 13% for the year. We invested approximately $1 billion in long-term supply chain capacity in 2022 to support our expectations for future revenue growth and increase the market share. Let me now turn to our financial outlook. Today's outlook is based on current expectations and contemplates the current macro environment.

For the first quarter of 2023, we expect revenue to be approximately $5.3 billion, ±$300 million, a decrease of approximately 10% year-over-year, and 5% sequentially. Year-over-year, Data Center and the Embedded segment revenue are expected to grow, offset by lower Client and the Gaming segment revenue. Sequentially, Embedded segment revenue is expected to increase. Client and the Gaming segment revenue are expected to decline, largely consistent with seasonality. Data Center segment revenue is expected to decline due to elevated levels of inventory with some cloud customers. In addition, for Q1 2023, we expect non-GAAP growth margin to be approximately 50%. Non-GAAP operating expenses to be approximately $1.6 billion. Non-GAAP interest expense, taxes and other to be approximately $146 million based on 13% effective tax rate.

The diluted share count is expected to be approximately 1.62 billion shares. For the full year of 2023, we're not providing specific guidance due to the uncertainty in the macro environment. However, let me provide some color. Directionally, we expect Embedded and Data Center annual revenue to grow from 2022 based on the strength of our product portfolio and the expected share gains. In addition, we expect Client and the Gaming segment revenue to decline based on the current demand environment. We expect non-GAAP growth margin to be approximately flattish in the H1 and the expansion in the H2 of the year. We expect to manage quarterly non-GAAP operating expenses flat with the first quarter until we see the demand environment improves.

For modeling purpose, we expect non-GAAP effective tax rate for the year to be 13% and the diluted share count to be approximately 1.62 billion shares. In closing, we had a strong year with record revenue and profitability, driven by our leadership of product portfolio and the diversification of our business. Looking forward to 2023, as Lisa mentioned earlier, we'll continue to focus on executing our long-term growth strategy while driving financial discipline and operational excellence. We believe our leadership of products, growing customer momentum and strong financial foundation position us well for long-term profitable growth. With that, I'll turn it back to Ruth for Q&A session.

Ruth Cotter (Senior VP and Chief Administrative Officer)

Thank you, Jean. Operator, if you could poll the audience for questions now, please.

Operator (participant)

Certainly. If you'd like to be placed in the question queue, please press star one on your telephone keypad. We ask you please ask one question, one follow-up, then return to the queue. Once again, that's star one to be placed into question queue. If you'd like to remove your question from the queue, please press star two. Once again, that's star one to be placed in the question queue. We ask you please ask one question and one follow-up, then return to the queue. Our first question today is coming from Matt Ramsay from Cowen. Your line is now live.

Matt Ramsay (Managing Director and Senior Semiconductor Analyst)

Yes. Thank you very much. Good afternoon. First of all, congratulations, Jean Hu. Congrats as well to Devinder Kumar. I mean, the last five years of the company have been remarkable, but I remember all the work you and your finance team did six or seven years ago to keep the foundation stable for what's happened since. Enjoy the retirement. My first question, Lisa Su, is just about the drivers of 2023. You guys talked in the prepared script about all the different crosscurrents that are kind of going on right now versus the strength of your portfolio versus some inventory digestion in the data center space, and obviously what's going on in the PC market.

I've gotten about a zillion versions of the same question tonight, which was do you think the company can grow for the year 2023 overall? If you could just kinda walk us through the drivers of the business as we work through the year. Thanks.

Lisa Su (Chair and CEO)

Yeah, absolutely, Matt. Thanks for the question. There are lots of puts and takes in 2023, and we wanna give you know, kind of some of the drivers. Our, you know, largest growth driver is certainly the data center. We are, you know, very positioned well with our product portfolio. We just launched our Genoa 4th Gen EPYC. We also have Bergamo coming, you know, this year as well. You know, when we talk to our cloud customers, what they're telling us is, you know, they appreciate the execution of our roadmap, and we have an opportunity to move more workloads to AMD as we go through the year. We feel very good about our product positioning.

You know, as we mentioned in the prepared remarks, you know, coming off of a very strong 2022, there is some inventory at some of the cloud customers. We are expecting a softer first half and then a stronger second half. We feel very good about our market share position and opportunity to grow with data center. Also on the embedded side, I would say we have a very strong portfolio there. The Xilinx business has done very well in 2022. It's a diversified set of markets. You know, we see strength in a number of the end markets, and so we think that's also a grower for AMD. On the other side, our, you know, client and gaming businesses, we believe will decline.

You know, we have made good progress. When we look at the PC market, you know, in the H2 of the year, of 2022, we were, you know, really trying to rebalance inventory, and I think we made progress exiting Q4. You know, we're still expecting to ship below consumption in the first quarter, and then, you know, sort of go from there. You know, our product portfolio is strong. We think there's an opportunity for growth as we go into the H2 of the year. We think overall for the year, client, will decline just given the TAM. On the gaming segment, you know, again, we're coming off of a very strong 2022. You know, console demand has been actually quite strong.

You know, given where we are in the cycle, we would expect, you know, gaming to be down on a year-over-year basis. You know, overall, I think, lots of puts and takes, but, you know, we're, you know, positive on, you know, what we can do in terms of the data center and the embedded segments, given our product portfolio. You know, we'll watch the macro on, you know, the client and gaming and see how that plays out.

Matt Ramsay (Managing Director and Senior Semiconductor Analyst)

Thank you very much, Lisa, for all the details there. I guess as my follow-up, I wanted to ask a question about gross margin. The margin, I guess, sequentially down a little bit into March, but I kinda wanted to focus on the drivers of the longer term margin that's down, I guess three or four points from where you were a few quarters ago, despite more mix of the revenue coming from embedded and data center. If there's any way that you guys could try to quantify maybe how much of the margin headwind is from just lower client revenue? How much of it might be from any programs that you're working through to clear the channel?

How might we model what are the drivers that we should think about in terms of the margin recovering? Thank you.

Lisa Su (Chair and CEO)

Yeah. Maybe. On the overall margin, the way to think about our business, Matt, is the margin is primarily driven by product mix. As the embedded and data center businesses are grow, you know, so the margin expansion grows with it. In terms of the sequential, you know, question that you had from Q4 to Q1, that's just a product of the mix. With data center being, you know, lower sequentially, that, you know, that's that. We are also working through our client inventory clearing.

You know, what we're seeing in the PC business is, as we're going through this, you know, sort of normalization of inventory, especially on some of the older products, we do have more marketing programs and, you know, pricing incentives in place. We do expect that to normalize as we go through the H1 of the year. As, you know, Jean said in the prepared remarks, we would expect margin expansion as we go into the second half with the growth in data center embedded and some normalization of the client business as well.

Operator (participant)

Thank you. Next question is coming from Vivek Arya from Bank of America Securities. Your line is now live.

Vivek Arya (Managing Director)

Thanks for taking my question, and thanks and best wishes to Devinder and Jean from my side as well. On the first one, Lisa, I think you mentioned some elevated inventory among your cloud customers. I was hoping you could give us some quantification of how elevated. Is it a one-quarter issue? Is it a two-quarter issue? You know, does it impact the pace of your Genoa ramp? Because I think coming into this year, the expectations were you could grow server sales by over 20%. Do you think that is still, you know, a possibility? Because I imagine you get some benefit from, you know, better Genoa pricing. Just puts and takes of how we should think about your data center business through this year.

Lisa Su (Chair and CEO)

Yeah, sure, Vivek. Look, we remain very bullish about our data center business. I mean, I think the feedback that we've gotten on Genoa from our customer set is very strong. As I said, the important thing is, you know, we are expanding workloads. In terms of, you know, where we believe the, you know, as the inventory normalizes, you know, each customer is different, so they have, you know, what they're trying to achieve in terms of inventory levels. Our expectation is that, you know, sort of first half softness for cloud, and then second half strength as that's worked through. Like I said, it's different for, you know, each customer.

In terms of, you know, overall growth, you know, as I said, we're very, you know, bullish on the overall growth of our data center business and, you know, the opportunity to gain share, as we go through the year and as we go through the ramp in Genoa. You know, we do have more content with the higher core count that should also help ASPs.

Vivek Arya (Managing Director)

Got it. On the PC side, and also kind of, you know, kind of as it relates to the pricing environment, you mentioned the PC TAM is, you know, could be down about 10%. When we look at the shipments, right from you and your competitor, you know, they could be down as much as 40%-50%, right, year-on-year in Q1. Do you think there's a possibility that the TAM assumption of just down 10% could be an optimistic one? Because I would imagine that would suggest the inventory clears out soon. You're suggesting that it may not clear out 'til Q2. I was just hoping you could give us some better sense for, you know, when the PC market starts recovering.

Do you think it could become more price competitive before it recovers?

Lisa Su (Chair and CEO)

Yeah. Maybe just to make sure that we're just correlating the numbers. You know, my comment about PC TAM being down 10% was assuming if you take a look at sort of what IDC just published for, you know, 2022 at about 290 million units, and that's more of a sell-through TAM versus a sell-in TAM. We have been under shipping sort of the sell-through or consumption for the last two quarters in an attempt to re-normalize that as soon as possible. In terms of, you know, do I think it's conservative? I think it's in the zip code. I think it's in the zip code.

If you imagine 2023 sell-through TAM of about, you know, 260± million units, seems to be about the right number. We have made good progress in inventory normalization. You know, we want to be cautious, obviously, heading into the year just given the macro environment. You know, first quarter we said would be roughly seasonal, you know, for PCs. You know, first quarter should be the bottom for us in PCs. We grow from there into the second quarter and then into the second half.

I should note also, Vivek, I mean, we just launched our Ryzen 7000 Series with, you know, sort of our AI capabilities, both from, you know, from a notebook and desktop standpoint. We feel good about the product roadmap in PCs. You know, obviously we have to get through this normalization. You know, most of the, you know, the focus is on continuing to differentiate our products and working with our customers to, you know, to offer, you know, sort of very strong platforms.

Operator (participant)

Thank you. Next question is coming from Stacy Rasgon from Bernstein Research. Your line is now live.

Stacy Rasgon (Managing Director and Senior Analyst)

Hi, guys. Thanks for taking my questions. I noted that you said that gross margins would expand in the second half. You didn't give us any color on how much they might expand. Can you give us any idea of like first half to second half? Or I mean, just for the full year, do you think gross margins grow year-over-year from the 52% that you printed in 2022?

Jean Hu (EVP, CFO, and Treasurer)

Yeah. Hi, Stacy, this is Jean. Let me take this question. Lisa can add. As we talk about it, both our embedded and data center segment have strong gross margin. Feel pretty good about second half, we continue to have the growth of both embedded and data center segment. The major headwind we are facing is really client side, which if you think about gross margin, the H1 of 2022 versus the H1 of 2023, the major impact is from the client revenue inventory correction, which impact the gross margin in the client segment. Going into second half, the normalization of client segment will help us to expand the gross margin. I think it really depends on how the client segment will recover.

That will drive the gross margin if it's going to go back to the H1 of 2022 or expand beyond that level. Overall, we feel pretty good once we normalize the client segment, our gross margin will continue to expand.

Stacy Rasgon (Managing Director and Senior Analyst)

I guess to ask the question again, for 2023, do you think gross margins can expand over 2022?

Lisa Su (Chair and CEO)

Maybe, what I would say, Stacy, is I think we've given you the puts and takes for where the margin goes. I think it depends a bit on what happens in the macro environment. You know, we do feel, you know, good about second half expansion and, you know, we'll see sort of the relative recovery in macro as it relates to, you know, all of our segments.

Stacy Rasgon (Managing Director and Senior Analyst)

Got it. Thank you. I guess for my follow-up, maybe it follows up on that a little bit more just around the mix. I get how data center and embedded should be growing in the second half versus the first half, but presumably client will too, first half to second half, given that you are, you know, under shipping, sounds like by a pretty wide margin right now. How do you feel about your mix just across the four businesses of the second half versus the first half? Do you think your data center plus embedded mix as a percentage total revenue in the second half is materially higher?

Than it is in the first half? I mean, could it even be, you know, not that different at all given the potential growth that you might see just from the channel normalization in client?

Lisa Su (Chair and CEO)

Yeah. I think the way to think about it is I think our data center growth in, you know, the second half versus first half, we expect that to be significantly stronger. As it relates to clients, we would also expect it to be stronger. Again, depending a bit on macro and sort of how the TAM actually evolves. I think for the embedded businesses, I would say that we expect to grow over the full year 2023 versus 2022. What we see right now is a fairly, you know, strong backlog and good visibility into the H1 of the year. I'm not ready to say that embedded will grow in the second half versus the first half, though, because we're coming off very strong growth already.

I think those are the puts and takes.

Operator (participant)

Thank you. Next question is coming from Toshiya Hari from Goldman Sachs. Your line is now live.

Toshiya Hari (Managing Director)

Hi, good afternoon. Thank you so much for taking the question. Lisa, the pushback that we often get is, you know, AMD is doing really well gaining share, but you're gaining share in relatively mature markets. You know, when it comes to AI, you do have a strategy, but you really haven't shown, you know, the products yet, if you will. You talked about, you know, how you have CPU, GPU, FPGA and Pensando, and, you know, you're shipping samples of MI300, I guess, later this quarter and potentially launching in the second half. You know, at what point do we, as analysts and investors, start to see, you know, your AI strategy materialize in the P&L and your profitability, if you will?

Lisa Su (Chair and CEO)

Yeah. Thanks for the question. You know, we believe that AI is a huge driver of, you know, compute growth. Given our portfolio, it should be a driver of, you know, our growth as well. I think if you think about the product sets, that we are, you know, putting, you know, sort of AI content in, you should expect, you know, MI300, of course, on the GPU training side. We just launched Ryzen AI in our PC portfolio. You can expect additional, you know, AI acceleration coming in our server portfolio as well. You're gonna see AI broadly across our roadmaps.

In terms of, you know, when, you know, we've talked before about sort of our data center GPU ambitions and the opportunity there, we see it as a large opportunity. As we go into the H2 of the year and launch MI300, you know, sort of the first user of MI300 will be the supercomputers or El Capitan. We're working closely with some large cloud vendors as well to qualify MI300 in AI workloads, and we should expect that to be more of a meaningful contributor in 2024. Lots of focus on, you know, just huge opportunity, lots of investments in software as well to, you know, bring the ecosystem with us.

Toshiya Hari (Managing Director)

That's very helpful. Lisa, as my follow-up, had a question on profitability in your client business, or your PC business. I think a year ago, you know, margins were really high. You know, supply was relatively tight. Since then, with the inventory correction and perhaps a little bit more competition, your profit margins are down. You talked about the H1 of this year still being sort of in digestion mode, and then in the second half, things normalizing. Would it be realistic to assume your gross margins in the client business return to H1 2022 levels? In hindsight, you know, margins back then were perhaps, you know, you were overearning in that business given the environment? Thank you.

Lisa Su (Chair and CEO)

Yeah. Sure. I think on the client, you know, segment, it's fair to say that, you know, we believe given where we are with, you know, the client, you know, inventory levels, the first half will certainly be lower. We expect some improvement in the second half. In terms of, you know, overall, you know, margin, we expect that, you know, the client business will be below the corporate average and, you know, that's how we're modeling the client business.

Operator (participant)

Thank you. Next question is coming from Aaron Rakers from Wells Fargo. Your line is now live. Aaron, perhaps your phone is on mute. Please pick up your handset.

Aaron Rakers (Managing Director)

Yes. Thank you for taking the question. Yeah, I guess the first question is, you know, going back to the data center piece of the business, and specifically around the ramp of Genoa. I'm curious if, you know, is there any help that you can provide us as thinking about the ASP uplift you expect to see with the Genoa product cycle? I guess at some point through 2023, how do we start to think about the Bergamo product cycle as well impacting the server CPU business?

Lisa Su (Chair and CEO)

Sure. Aaron, you know, we started shipping, you know, Genoa in the third quarter, that ramped into the fourth quarter and will continue to ramp through 2024. The way I think about or, you know, the way you should think about the Genoa ramp is that it is a new platform for our customers, so they'll be introducing it, you know, introducing, you know, first in cloud, sort of internal workloads and then, going to external workloads and then, you know, enterprise. I think it'll be, you know, throughout 2024. I'm sorry, throughout 2023.

You know, we do have higher core counts on Genoa, you would expect that, you know, that will give us some ASP uplift, as we, you know, go through to some of those higher core count products. Bergamo will launch in the H1 of the year. We are on track for the Bergamo launch, you'll see that become a larger contributor in the second half. As we think about the Zen 4 ramp and the crossover to our Zen 3 ramp, it should be, you know, towards the end of the year, sort of in the fourth quarter that you would see a crossover of sort of Zen 4 versus Zen 3, if that helps you.

Aaron Rakers (Managing Director)

Yeah. Yeah, that's very helpful. As a quick follow-up, you know, the business didn't really ask that much about, but it's been doing phenomenally well here these last couple of quarters, is actually the Xilinx business. I know it's within the embedded largely. But, you know, yourself reporting, I think if I read the filings correctly, growing 40%+ on a, you know, like-to-like basis for Xilinx. I think your competitor also growing a solid pace. How do you think about the sustainability or durability of that demand in that embedded or Xilinx business as we move through 2023?

Lisa Su (Chair and CEO)

Sure. Aaron, that business has done very well. You know, the Xilinx business, I think our overall embedded business continues to do well. You know, when we look across the subsegments, there are puts and takes in the subsegments, but what we see is content is going up. We had records in communications, industrial and healthcare, aerospace and defense, automotive. You know, we have the embedded processor content that's also going into automotive. We feel, you know, very good about that business. I think as we look into 2023, I mentioned this in the question with Stacy, you know, we have a very good visibility to the first half, just given the lead times and the backlog, and the first half looks strong.

You know, we expect to grow sequentially in the first quarter. You know, as we go into the H2 of the year, we're monitoring the, you know, the overall demand environment. Just given how strong it's been, you know, we are looking at, you know, whether it'll be some puts and takes in some of the end market segments there. Overall, I think the key point is the content and our design win momentum is good, and we continue to ramp new design wins in the Xilinx business.

Operator (participant)

Thank you. Next question is coming from Joe Moore from Morgan Stanley. Your line is now live.

Joe Moore (Managing Director)

Great. Thank you. I wonder if you could talk to us about the puts and takes of PC market share in a downtime % environment. You know, I would assume it helps you if consumer is better than commercial, but, you know, what is your progress in terms of penetrating the notebook market and penetrating the commercial market where you could continue to gain share?

Lisa Su (Chair and CEO)

Yeah. Joe, we, you know, we view that the PC market share numbers are probably a bit noisy right now, just given, you know, all of the sell-in, sell-through and the inventory dynamics that are being worked through. Actually in the fourth quarter, we believe we gained a little bit of share in the PC market. As we go forward into 2023, we think our product portfolio is very strong, you know, as we look at Ryzen 7000 and where it goes and where we are positioned in the commercial, as well as the high-end consumer segments. We're not changing our strategy on PCs.

You know, quite, you know, a few years ago, we really focused on sort of the more premium segments. We have, you know, less penetration in the low end, which, I think is helpful. As we go forward, you know, we're continuing to focus on commercial PCs and, you know, getting a larger footprint in there. I will say the enterprise work that we're doing on the server side, I think links very well to the commercial PC work. You know, we're continuing to invest in sort of the sales and marketing resources to ramp that side of the business.

Joe Moore (Managing Director)

Great. Going back to the Genoa question that was asked a second ago. You know, as you are in this kind of budget-conscious environment, you're introducing a chip and a system that has pretty high platform costs. You know, does that slow the adoption at all? Seems like people, you know, and your competitors dealing with some of the same issues. You know, just how does the current environment affect the rate at which Genoa will ramp?

Lisa Su (Chair and CEO)

Yeah. I would say, Joe, the total cost of ownership benefit of Genoa, particularly in some of the larger cloud workloads is very, very significant. I wouldn't say that that's necessarily slowing the pace of adoption. It is a new platform, though. If you think about, you know, when we went from Rome to Milan, it was, you know, basically similar platforms. I would say that that ramp was a bit faster. As it relates to Genoa, we had always expected that Milan and Genoa would coexist through 2023, and that we would have, you know, we still have Milan instances that are just ramping now, and we expect that will continue through 2023.

You know, I really view this as the natural thing when we introduce Genoa at, you know, sort of the higher core count, that both will coexist. You know, as some of the platform costs come down, you'll see, you know, the Genoa cut over, and that's what I mentioned towards the fourth quarter of 2023.

Operator (participant)

Thank you. Next question is coming from Ross Seymore from Deutsche Bank. Your line is now live.

Ross Seymore (Managing Director)

Hi, everybody. Thanks. Let me ask a question. Jean, congrats on the new job. Lisa, I was hoping you could give a little bit of sequential color to just size the magnitudes of the three segments that are going down in the first quarter and then embedded going up. Really what I'm getting at there is, in an answer to a prior question, you talked about the mix being a headwind to gross margin. I think, Jean, you cited data center dropping as a percent of the mix. Just trying to get the magnitudes of just how much data center has to drop to make that outcome on the mix side be true.

Lisa Su (Chair and CEO)

Sure, Ross. Let's see. We said the client and gaming segments would be, you know, seasonal. You would expect that the data center would be more than seasonal. Maybe to help you size that, you know, think about the data center sequential drop as double digit, whereas the client and the gaming segments are more like single digit, if that helps.

Ross Seymore (Managing Director)

Yes, it does. Anything similarly on embedded, is that kind of a single digits?

Lisa Su (Chair and CEO)

Oh, yes.

Yeah. Embedded will grow sequentially single digit. Yeah.

Ross Seymore (Managing Director)

Got it. Sorry for the nitpicky question. A bigger picture one for you then, Lisa, on competitive intensity. On one hand, I could see that the total cost of ownership benefits of these products, multi-core, better performance, et cetera, could lead to higher ASPs, whether you're talking about the data center side or your client business. On the other side, competitive intensity and overall demand is weaker, and at some point, you might even get deflationary costs on the foundry side of things. Can you talk a little about the pricing environment given those somewhat contradictory pressures?

Lisa Su (Chair and CEO)

Sure. Maybe let me separate data center and client, 'cause they're a little bit different. I think on the data center side, we do see that in general, the performance, the power performance, the total cost of ownership, you know, selling the solution, is the most important piece of it because the solutions are actually quite different in terms of what you can do between, you know, sort of 4th Gen EPYC and, you know, sort of other solutions. You know, the environment is always competitive, but we feel, you know, very good about the overall value proposition that we bring to both cloud and enterprise customers.

I think on the client side, you know, we've said for the last couple of quarters that the pricing environment is more aggressive. I think that normally happens when, you know, the industry is working on rebalancing. I think, you know, we're working on rebalancing, our OEM partners are working on rebalancing, the retailers are working on rebalancing. You know, there are more incentives and more a more aggressive pricing environment. You know, I view that that's primarily on, you know, let's call it older products, let's call it previous generation products. As we work through that, there will be some no-normalization as we, you know, think about our newer generation products where, you know, there's, you know, more capability added. Hopefully, that gives you a little bit of the puts and takes.

You know, in terms of the cost environment, I think all of us in the industry have seen some elevated costs, but I think, you know, we also expect that to normalize too as, you know, everyone is, you know, sort of optimizing their CapEx spending.

Ross Seymore (Managing Director)

Thank you.

Operator (participant)

Thank you. Next question today is coming from Mark Lipacis from Jefferies. Your line is now live.

Mark Lipacis (Managing Director)

Hi. Thanks for taking my question. Congrats to Jean on the new seat. Two questions, if I may. First, on the PC side, can you give us a sense of about roughly how far under consumption you believe you're shipping on the PC side either in Q4 and Q1? Lisa, correct me if I'm wrong, I thought I heard you say in an answer to an earlier question that you'd expect the PC client business to grow into second quarter. Is that suggest that one Q you think is the bottom on the PC? Then I had a follow-up. Thank you.

Lisa Su (Chair and CEO)

Sure, Mark. The first, the second question, yes, we do believe the first quarter is the bottom for our PC market, for our PC business. You know, we'll see some growth in the second quarter and then, you know, a seasonally higher second half. In terms of the undershipment, I mean, I think we're, you know, we undershipped in Q3, we undershipped in Q4. We will undership to a lesser extent in Q1. I think you can, you know, infer that from our guidance of, you know, single-digit down, then, you know, we'll be back to a more normal environment.

Just as a reminder, though, you know, the first half is usually a seasonally weak client, you know, time anyways. We would expect more lift in the second half, not so much in the second quarter.

Mark Lipacis (Managing Director)

Gotcha. Okay, that's very helpful. Thank you. A follow-up, if I may, on the, you know, China's lifting, as they're lifting the COVID restrictions, I guess, you know, I would imagine that you would expect that ultimately at some point to translate into higher demand. I'm wondering if you could just kind of share with us your thoughts about how that might play out. Could you remind us, you know, is, you know, to the extent that you can help us understand the risk to the supply side for you in the event that, you know, the COVID spreads rapidly as they lift the restrictions and, you know, impacts, you know, what you have on the supply side there? Thank you.

Lisa Su (Chair and CEO)

Sure, Mark. We've done a very good job in our supply chain in terms of risk mitigation. We have, you know, we don't believe that we have a significant risk as it relates to, you know, COVID future outbreaks, if there are any. As it relates to China recovery, I think we would benefit from a China recovery. It's very difficult to call. I mean, we've seen, you know, certainly in our data center business, you know, we saw in the H2 of the year and last year and the H1 of this year that the China data center business has been weak for us. If there was a recovery, I think we would benefit from that.

Similarly, you know, some of the other, you know, consumer patterns as well, but it's very difficult to call. You know, we put that in the bucket of macro uncertainty, and we'll see how it plays out.

Ruth Cotter (Senior VP and Chief Administrative Officer)

Operator, we'll take two more questions from two callers, please.

Operator (participant)

Certainly. Our next question is coming from Chris Danely from Citi. Your line is now live.

Chris Danely (Managing Director and Senior Semiconductor Analyst)

Great. Thanks, ladies. Congrats on being the first all-female CEO, CFO team in semis. It's a long time coming. Jean, so you're.

Your gross margins held up pretty well, for the Q1 guide, despite, you know, high margin data center business going down. If the data center business remains weak and has a rough quarter in Q2, can we expect a similar, gross margin resiliency?

Jean Hu (EVP, CFO, and Treasurer)

Yeah, definitely. I think, as I said earlier, the major impact on gross margin actually is the PC client side. The stabilization and the bottoming of client business really help us with the gross margin at current level. Second half, we should see the expansion of gross margin.

Chris Danely (Managing Director and Senior Semiconductor Analyst)

Sure. As my follow-up, on your PC client business. It had its correction a little bit later than some of the other folks in the semi industry and was, you know, obviously a little bit steeper. Can you talk about why that happened and, you know, why we should or should not expect that, or could that happen in the data center business as well?

Lisa Su (Chair and CEO)

I guess, Chris, what I would say is, I think the PC market has been volatile, and we did significantly. Coming off the pandemic, there was very high demand during the pandemic. I think we were all adjusting as we're looking at sort of the demand environment post-pandemic and with macro uncertainty. I think the data center business, we have again, we're heavily weighted towards cloud, and we have very good discussions with our overall customer set in terms of what they need. I think what's going in our favor in the data center is our workloads are expanding.

You know, we've heard from all of our cloud customers that, you know, they're adopting both Milan and Genoa in more workloads than, you know, previous. I think that gives us, you know, good confidence. Frankly, the data center customers are also giving us, you know, good visibility into what they need for 2023. You know, there is an adjustment in the first half, and I think that's something that we understand. You know, we also expect that we're going to have to ramp up production in the second half as some of the demand resumes. I think the overall factor of, you know, compute in the cloud being, you know, very important long-term driver is definitely there.

You know, we feel good about, you know, sort of where we're positioned.

Operator (participant)

Thank you. Our final question today is coming from Timothy Arcuri from UBS. Your line is now live.

Timothy Arcuri (Managing Director)

Hi. Thanks a lot. Lisa, I had a question on your client business. I know that your competitor at times uses, you know, rebates and subsidies, but the numbers that are in their filings have gotten pretty big. I take it from your answer to a prior question that you think that's more on legacy parts. I guess I'm just kinda wondering what changes or, you know, impact that's had on your business. You know, I continue to hear these, you know, worries that it's gonna have some lasting effect on your share and, you know, particularly on your margins. Thanks.

Lisa Su (Chair and CEO)

Sure, Tim. Maybe let me, let me make a couple points. I think, you know, all of us as we participate in the PC industry, there are, you know, various, you know, parts of the ecosystem that we work with. We work with our OEMs, we work with our retail partners, we work with our, you know, distribution and channel partners. You know, we're all working together to work through, you know, sort of the elevated inventory levels. As I said, I think we've made good progress on that, and I think we have much better visibility into, you know, the various pieces.

As it relates to, you know, the pricing environment, I do believe that the pricing environment is particularly when you're clearing older inventory or, you know, older generation products, is a bit more competitive and, you know, we see that. As we look forward, the way we're modeling the client business is that we are modeling gross margins to be less than corporate average. That's different than our previous modeling. Previously, you know, client was more like, you know, at corporate average. I think given the, you know, I think the nice thing is our business is quite a bit more diversified now.

With our data center embedded businesses, you know, really being strong growth drivers, I think client continues to be a good market, overall. As we work through this, you know, we will, you know, see some of the normalization that Jean mentioned.

Timothy Arcuri (Managing Director)

Thanks a lot, Lisa. I guess just as the last thing, you went through some puts and takes, on, you know, on the different, you know, pieces for the year. I just, you know, wondered if I could just get you to kind of give a bias for, you know, what you think that, you know, revenue for the year is the bias? It sounds to me like the bias is more up than down, but I just wanted to give you a chance to maybe, you know, confirm that or not. Thanks.

Lisa Su (Chair and CEO)

I think, Tim, the answer is yes. You know, again, let's work through the next couple of quarters and, you know, we feel good about how our products are positioned and we just need to, you know, work through the macro and, you know, see how that plays out.

Ruth Cotter (Senior VP and Chief Administrative Officer)

Great.

Timothy Arcuri (Managing Director)

Great.

Ruth Cotter (Senior VP and Chief Administrative Officer)

Thank you. That concludes today's earnings call. Again, welcome to Jean, and we're delighted to have her on board, and much gratitude to Devinder for his 39 years of service and all his leadership. We'll look forward to touching base with all participants throughout the quarter. Thank you.

Operator (participant)

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation.