Advanced Micro Devices, Inc. (AMD) Presents at Bank of America Securities Global Technology Conference (Transcript)

Advanced Micro Devices, Inc. (NASDAQ:AMD) Bank of America Securities Global Technology Conference Call June 2, 2020 4:00 PM ET

Company Participants

Devinder Kumar - Senior Vice President and Chief Financial Officer

Conference Call Participants

Vivek Arya - Bank of America Securities

Vivek Arya

Hello, everyone. This is Vivek Arya, senior semiconductor and semi cap equipment analyst at Bank of America Securities. Delighted and honored to have Devinder Kumar, Senior Vice President and Chief Financial Officer of AMD; and Jason Schmidt from the IR team join us this afternoon. Welcome to both. What we will do is maybe start with some opening comments from Devinder and then just get into Q&A after that.

With that, Devinder, welcome.

Devinder Kumar

Thank you, Vivek. It's a pleasure to be on the call with you and good afternoon to everybody else who's on the call. I hope all of you are staying safe and healthy given the current environment, especially with COVID-19. From an AMD standpoint, we have driven significant annual growth over the last few years. This has come from growth in our PC business, the discrete graphic business, as well as the data center business, and really the strength of our new products, Ryzen, EPYC and Radeon.

We are on track to deliver 21% year-on-year revenue growth with our Q2 execution, which is again growing increased number of Ryzen and EPYC platforms. On a quarterly basis, we expect to see solid growth from EPYC, as well as the initial ramp of our 2020 semi-custom revenue on 7 nanometers. We have expanded our margins on the strength of the new products by more than 10 points in the last few years. And this product portfolio is addressing profitable markets, including the commercial and data center space.

We're building what we believe is a best-in-class growth franchise with increasing profitability, diverse set of end markets and revenue streams. You know on the balance sheet, we expect to be free cash flow positive in 2020 and over the next few years generate significant amount of cash. We have produced that like more than a billion dollars over the last couple of years, and have been net cash positive over the last three quarters with close leverage now sitting at 0.5 times.

On the product front, Ryzen and EPYC process already lead the industry in terms of high performance, capability, and price performance. We expect this year 135 new Ryzen consumer and commercial OEM platforms in the market, including 70 plus commercial SKUs overall. The second-generation EPYC processor family now includes both the highest performance per call and performance per socket process in the industry.

We are building new Radeon GPUs featuring domain-specific gaming and data center architecture and expect strong semi-custom revenue in the second half of the year as we ramp production to support the holiday launches of the new PlayStation 5 and Xbox Series X consoles. We remain on track to launch our next-generation Zen 3 CPUs and RDNA 2 GPUs in late 2020 and believe we can deliver another year of strong revenue growth and margin expansion in 2020, based on the strength of the product portfolio, and the diversity of the markets we serve.

So with Vivek, let me turn it back to you for the Q&A session. Vivek?

Question-and-Answer Session

Q - Vivek Arya

Great, thank you Devinder. So, maybe let's start with the very near-term. Could you give us a sense for what impact the COVID-19 headwinds have had on AMDs business? Any changes that you might have seen since the Q1 results and just structurally how should we think about kind of the longer-term disruptions kind of the positive and negative in terms of impact on AMD?

Devinder Kumar

No, that's good to me. I mean, COVID-19, no doubt has changed the world at a staggering rate, and technology is at the forefront of how we can solve many of the things that are going on with the COVID-19 environment around the world. You know, we feel good that AMD is providing many of the components, powering essential technologies in business, medical and education communities today.

You know, in Q1, talking about Q1 for a moment, we put a lot of focus on the supply chain, in particular, beyond the wafers that we get from global foundries and TSMC, the supply chain in China and Asia, and actually worked through those issues relatively quickly and in Q2, are very pleased with the continued focus, but execution from an overall supply chain standpoint. Some of our customers are working through some component issues, but overall, I would say the supply chain has been relatively resilient in the COVID-19 situation.

From a demand perspective, in Q1, we did see some weakness in brick-and-mortar retail, particularly in China. In our client business, our online vendors are doing well benefiting from increased working and learning from home and the brick-and-mortar retail outlets have been more impacted and are just beginning to reopen. We expect, you know COVID-19 and the resulting economic uncertainty may lead to some weakness in the consumer PC demand, in particular in the second half of the year, and we are watching that very carefully.

You know, while the COVID environment will impact us in the short-term, our long-term share gains will be driven by the consumer and commercial platform wins with the OEMs. We have gained client share for the last 10 straight quarters and expect to continue based on the number and strength of our platforms. In server, we continue to gain momentum across HPC enterprise and cloud providers as they introduce new instances and accelerate deployments in some cases.

We have seen several cloud providers accelerate infrastructure deployment to address rising demand from the growing number of users working and schooling from home. In fact, one of our large cloud customers even deployed 10,000 second-generation EPYC servers in less than 10 days to support the surge in demand for their collaboration services. So, while we expect [Technical Difficulty] expecting annual revenue growth of approximately 25% at midpoint on a year-on-year basis. Vivek?

Vivek Arya

Great. Devinder, on the longer-term trends, you know the one trend that we have seen over the last year is that for the first time in AMDs history, you now have a lead over Intel in terms of process technology. So, of course, you know, process technology is, you know, one of the more important things, it's not the only thing, but it's a very important aspect of system performance, but just how important has the [indiscernible] technology advantage in terms of the overall system performance compared to what you saw in the past?

Devinder Kumar

You know, process technology is important. You know, Architecture and the product improvements are important. We have really pushed the envelope for innovative, high-performance computing design. The Zen products, Zen 2 and Zen 3 all deliver significant architectural enhancements, you know, core density has been a driving force behind the processor improvements over the last decade. And we have delivered higher core counts, more power efficiency with each generation, and then the chiplet architecture, design and Infinity Architecture have provided us with a distinct advantage and performance. That said, process leadership is very important.

TSMC has been an excellent partner. We have a great relationship with them. We've been working with them over the last several years, and they've been very supportive of our roadmap at seven nanometers and beyond. You know, we always anticipate competitors being strong, and 10 nanometers would be competitive, but our roadmap is also strong as well, you know, hitting our technology milestones, on the process side, the product roadmap commitments we have made to our customers is the most important thing, and we feel will be critical to our future success.

So, I think so far, we've done a very good job meeting and beating the promises we've made, both publicly and to our customers. We do have a large addressable market to the tune of $79 billion and you know, as you know, but just to remind everybody AMD is the only company in the world that has high performance, compute, and graphic technology on leading edge manufacturing processes, which results in true competitive differentiation with the competitive landscape that you just referenced Vivek. Back to you Viviek.

Vivek Arya

Got it. And then, Devinder maybe digging into the server CPU part, and especially the impact of Milan, you know, so far we have only part of AMD in the context of cloud and enterprise, but it was interesting that in recent calls, you have also started to mention those magic words around 5G, and I think you've highlighted the partnership with Nokia with your next-gen Milan processor. So, talk to us about what is different about Milan versus Rome, that can help AMD address a wider part of the market and then how just should we conceptually think about the trajectory of your share in this market as a result.

Devinder Kumar

Yeah, let me let me just step back. I'll talk about Milan in a second, but let me just step back, you know, we have been in market share growth mode in the server CPU space. And I have steadily built our business quarter-in quarter-out in what we believe is a $19 billion total addressable market. With the first generation of EPYC that we introduced a couple of years ago, we re-established our ecosystem within the data center space; and second generation EPYC, the Rome, as we call it, we're seeing the momentum kick in, given that Rome has twice the performance of the competitive x86 processor.

We're very pleased with how Rome is ramping. We've been in the market now for about nine months, and good visibility into public facing cloud instances and internal workloads. So, for the remainder of the year, we are expecting a significant ramp of the server business. Given that our second generation EPYC processor family now includes the highest performance per core and performance per socket process in the industry. And then you get to our third generation server CPU product, Milan, which is launching at the end of the year, as we continue to execute as committed on our technology and product roadmap, commitments to our customers and shareholders.

You know, Milan is doing well in the labs, and we should start shipping in Q4. And as far as the server business is concerned and future share gains, you know, I truly believe that with Milan coming to the fall, 2020 is an inflection year for the server business. Milan allows us to go into the bulk and almost all of the server space, and that is going to be important because as you look at the sizing of the future server business as we laid out in our financial analysts a couple of months ago, we did say that the data center business will grow to upwards of 30% of overall AMD, which we also have projected to grow at a 20% compound annual growth rate over the next three to four years.

So, while the data center business today is in the mid-teens overall, but with Milan and then the follow on products that we have, we think we can get that to about 30% of AMDs revenue over the next three to four years. Back to you Vivek.

Vivek Arya

Got it? So on the data center, I think the one unique aspect of AMD is that you were able to address it with both the CPU side and the GPU side and as we have seen, from, you know your main competitor in GPUs, how they have expanded the growth opportunity in the data center. So, talk to us about how you are viewing this unique capability at AMD where you can address the workloads in the data center from both a CPU and a GPU perspective along with a very interesting interconnect, the Infinity Fabric technology that you have. So how is this expanding your addressable market in the data center, as well as I think you outlined a number of wins in the HPC area also, recently?

Devinder Kumar

Yeah, no, that's very good. And I think you hit the nail on the head Vivek. You know, when you combine our CPU and GPU IP together with the critical infinity architecture, the resulting solution is very strong, and a very critical differentiation for us. This combination is actually what directly led to our most recent two supercomputer wins that you referenced, we call it Frontier and El Capitan, and that is using AMD CPU and GPU in combination with the Infinity architecture, and really allows us to bridge a historical bottleneck of interconnect and PCIe lanes.

I think the third-generation Infinity Architecture features to be featured in the El Capitan product will enable coherent memory, which will transform data processing. Both the supercomputers are a CPU and GPU win and both will utilize AMDs Infinity architecture in addition to the CPUs and GPUs that come from AMD. The Frontier supercomputer, as you referenced, will be the world's fastest exascale supercomputer when it's delivered in 2021, with 1.5 exaflops, and then the El Capitan system is expected to be more than 2 exaflops in the 2023 timeframe, and for us, majority of the revenue coming in 2022.

You know, our CPUs, GPUs and Infinity architecture will have propelled computational research into the exascale area and enable dramatically improved CPU, GPU, and memory connectivity. These wins are strategically very important to us. Our competitors, and actually our customers see a true advantage and capability with AMD because the technology was architected by the same company to work better together, then you would see if there are different companies providing the same solutions. So, this is something that allows us to be very competitive in what we are seeing is a $35 billion data center market over the longer-term.

Vivek Arya

Got it. And then Devinder, it's interesting, when I look at the PC market, I think AMD has got to be the only company that thinks of the PC market as a growth market because for you, it's more of a shared gain opportunity with some of the newer products like the new Ryzen 4000 products that you have been putting out. I just wanted to get your sense on the overall PC market because on the one hand you have the benefit of the new product pipeline, you know, you're doing very well in desktop CPUs.

On the other hand, we also heard about your competitor wanting to expand their, you know, production and then you know, people worried about just the deceleration and Windows 10 demand and as we get towards the end of that cycle, so just talk to us about, you know, your specific positioning in PC and PC market and just the strength of your pipeline, how you can help offset some of those other headwinds perhaps?

Devinder Kumar

I think Vivek you said it right. I mean, we have always viewed the PC market to be a very important segment of AMDs business. You know, we've delivered as you know, nine straight quarters of double-digit percentage year-on-year notebook revenue growth as you've expanded the number of AMD power laptops available from major OEMs, you know earlier this year, we had our 7 nanometer Ryzen 4000 notebook offering launches, and we've had a number of systems come into the market over the last several months and the reviews have been very, very strong and we are very pleased with the momentum so far.

You know, the Ryzen 4000 laptop processor, as an example is the best Mobile CPU we’ve ever built with high performance 7 nanometer Zen 2 CPU cost in a laptop form factor. And as you know very well winning in the ultra-thin notebook space is key, and we have the world's fastest processor for that space today, including security all-day battery life, which are very critical requirements and we are very competitive in that space.

You know, we are on track to accelerate our mobile growth this year with customers like Acer and ASUS and Dell, HP, Lenovo and other OEMs as we expect to launch more than 135 new Ryzen powered consumer and commercial notebooks over the coming quarters. You know, you will see more premium products coming from AMD together with our OEM partners, along with a significant amount of marketing and co-marketing with our retail partners to ensure that our products are well-positioned and as well as on-shelf with additional marketing programs and retail.

Notebooks is a very strong growth factor for us as we go through 2020 and we expect to gain additional market share in 2020. In the client PC space overall, we are now at high teens from a marketing standpoint, and if you look back just about 10 quarters ago, the market share for the company was in the 8% range, and today it's double that, a little bit higher in desktop than notebook, but both of them are in the high teens, and we really don't see a cap on our share potential.

The share gain in the PC 10, while moving up the stack from top to bottom is really very good, and our PC products are very good best-in-class in many aspects and our customer relationships based on the commitment that we have made over the last few years are very, very good, and we want to continue to gain share in this particular area and like I said, the PC market is important. We want to continue to build the AMD brand in the PC market, on top of the strength of the products that we have making the right investments.

And overall, you know, the market may or may not grow, but we think our revenue can grow from the teens that it is today, over the next three to four years, which implies continued market share gains in the PC market.

Vivek Arya

Very good. And then when we stay on this topic of just competition, recently, we heard from NVIDIA they're moving – also now moving to 7 nanometer and Ampere products first on data center side, and you know, at some point, I imagine on the gaming side, as well, how should we think about AMDs GPU roadmap and the market opportunity across these different end market verticals?

Devinder Kumar

Yeah, you know, on the GPU side, we are really taking the same approach to developing, deploying, and delivering a multi-generation roadmap for GPUs that we took on the CPU side. We have the world's first 7 nanometer GPUs for the data center. You know, one of the things on the gaming side is there's a lot of excitement for NaVi 2 or what our fans have dubbed as the Big Navi. This will be our first RDNA 2 base product. Big NaVi is a halo product, enthusiasts love to buy the best, and we are certainly working on giving them the best.

With the RDNA 2 architecture goes through the entire stack, it will go from mainstream GPUs all the way up to the enthusiasts and then the architecture also goes into the game console products, which I'm sure we'll talk about in a few minutes, as well as our integrated APU products. You know, this allows us to leverage the larger ecosystem, accelerate the development of exciting features like retracing and more. And then as far as the data center is concerned, on the GPU side, CDNA is our data center optimized architecture, which we talked about a little bit at our financial Analysts Day. There are some gaming features that are not needed in compute. And then there are some compute features that are not needed in gaming.

So to gain efficiency and performance, we have decided to bifurcate the architecture. We see this area as a tremendous growth opportunity for both gaming and data center GPUs over the next five years, and the bifurcation of our roadmap will allow us to optimize for the workload and for the used cases that we see so that we can grow revenue in the GPU space, and in addition, the data center GPU space over the next few years.

Vivek Arya

Got it? One question Devinder I got from an investor was that, you know, beyond just process, you know, what are the other aspects that AMD is focusing on to help you maintain this trajectory of shared gains because, you know, at some point inevitably Intel is going to close the gap on 10 nanometer and you know, NVIDIA has now closed the gap on 7 nanometer, but as I you know, flagged before process is not the only thing that matters. So, what are the areas that you think AMD can focus on and lead in? So, it's more than just process that can help you stay on your share gain trajectory in the CPU and the GPU markets?

Devinder Kumar

I think the key is, is being innovative and creative. I mean, AMD from an overall standpoint, and I'm sure you know, many investors and even Vivek, we've had the conversation over the years about investing in the business. Do you have the dollars to invest against competitors that are larger? The key is, yes, process technology is important. You know, we are now ahead on the process technology side, but even when we didn't have the leader on the process technology, there were things that we did from an architecture standpoint.

You've heard about the chiplet architecture where we've deployed from an overall standpoint, and that has served us well. I think the key is to continue to be innovative, continue to see the trends in the market, and to deliver in a creative way, the performance that's needed by the market, as opposed to dictating to the market exactly what you build and then expecting the market to accept that or accept that readily from an overall standpoint, and that's what AMD is all about.

Vivek Arya

Moving Devinder to the semi custom and the gaming cycle, so we are at the start of, you know, a multi-year gaming cycle, so your products are prominently featured in the new game consoles from Sony and Microsoft. You know, if I go back in time, I think over the last, you know, seven to eight years of the last cycle, I believe the company made, I think $7 billion to $10 billion, if I'm not mistaken over that. So, I'm not going to ask you for a 10-year forecast, but just talk to us about how we should think about your growth opportunity in the game console cycle that you know, you're just in front of, in the back half of the year?

Devinder Kumar

Yes. There are certainly connections with the console business. And you are right, Vivek in 2013 is when we introduce and launched with our partners, Sony and Microsoft, using AMDs products within the game console. You know, we're very excited about the console business this year and beyond. And on the next year, we've chosen by both Sony and Microsoft, again, for the next generation systems. And that is something that's going to serve as well because the game console revenue given the fact that it's a mutually exclusive.

It's an exclusive relationship with Sony and Microsoft, and that is something that we can count on for many, many years to come with the game, new game console cycle, playing out over the next few years. You know, if you talk about revenue, you know, I'm not going to give you exact numbers, but it's substantial revenue on an annual basis with the initial ramp happening in a significant manner in the second half of 2020. And, you know, from a unit standpoint, we see the similar to the last generation, where the peak is actually happened in year three or year four.

So it's really a good long term growth business for us from 2021 into the 2023, 2024 timeframe. And that is something that we look forward to. And then as far as ASPs and margins, which is a question that comes up a lot, there's a lot of technology going to these machines. The ASPs and margins will be a bit higher than prior generations, but these are still semi custom products. They are a portion of the R&D based on NRE model we have with these customers, is paid by the customer.

So as is typical, you know, semi-custom products, we expect margins to improve over the life cycle of the console, post launch, and ASPs will see some incremental reductions over time, but from a revenue standpoint starting in Q2 where we are starting to ramp the product, and then it is very heavily weighted in the second half of 2020 as our customers are getting ready to ramp production in support of holiday launches of both the PlayStation 5 and the Xbox Series X consoles, and then we take into 2021 and beyond with significant revenue contribution to AMDs overall revenue.

Vivek Arya

Got it. And on the topic of gaming, you know, you're also partnered with Google with their Stadia game streaming platform. Talk to us about, you know what the growth opportunity is there. If you were in our shoes, how would you size that long-term opportunity in cloud gaming for AMD?

Devinder Kumar

Yeah, Google, you know has been a great partner and we are very excited for the cloud gaming opportunity with them. You know, we believe cloud gaming will become more and more popular over time just like video streaming, because you can play any game at any time in any place on any hardware. You know, I think it's a little bit early to quantify the potential of cloud gaming market, but we are ready to take advantage of this opportunity as it materialize out into the future.

It's also important to remember that cloud gaming is just one opportunity we have in the data center GPU market, and with the products that we have, and the investments we have made, VDI, machine learning, HPC, are all areas that benefit from the technology investment, and we also see significant opportunities in these areas over time.

Vivek Arya

Got it. And then maybe, Devinder, going to the financial side, you mentioned the 20% long term revenue growth opportunity for AMD and I think this year, you said could, you know, the 25%? How should we think about that 20% kind of segmented along the different markets that you serve, so data center PC gaming?

Devinder Kumar

Long term model, as you already mentioned has a few important components, and that is what we believe will accelerate the long term growth. And that is what's the basis of what we provided on a 20% long-term revenue growth guidance that we provided in our long-term model in our financial Analysts Day. You know, based on where the products are positioned, I think it is across the business.

Our data center market is obviously the most exciting. It has the potential to grow from mid-teens percentage of revenue to greater than 30% of total AMD revenue, which itself over time we are projecting to grow at a 20% compound annual growth rate. You know PC and gaming [Technical Difficulty] helps us expand our margins and profitability, and that is where we have projected that from where we were in 2019 at the 43%, gross margin, which is where 2019 ended to get to greater than 50%.

So, data center, CPU and GPUs, PCs and gaming, in particular on the commercial side of the house, and the data center GPU side of the house helps us get to that margin trajectory. So, it's really, you know, those business is all growing. And then we also talked about the semi custom game console revenue starting from 2020, and then having the growth into the year two and year three after the launch.

Vivek Arya

Got it. One other question that I got from an investor was just the visibility of growth in the data center in the back half, just because I think there have been some concerns about maybe a pull-in of CapEx into the first half, you know, with all the work from home and you know, gaming and you know online streaming that we saw in the first half, just how do you think about AMDs opportunity in the data center in the back half?

Devinder Kumar

Yeah, I think first of all, let's talk about Q2, you know, I think Q2 is coming in where we expected and from a market share standpoint, I know, we talked about the target, we laid out, you know, about a year plus ago in terms of getting to the 10% double digit market share, and we are on track to go ahead and do that. Data center market in particular with a 7 nanometer product, you know, given the lead times that we have for the wafers in particular, it is not like within one or two months, you can suddenly ask for more product and get it.

We see a good visibility from our data center customers, in particular the cloud service providers for the second half and based on that we feel the momentum can be sustained from Q2 into Q3 and Q4. It is true that some customers will like the product sooner and more of it if you can get there, but we need to work with our foundry partner to go ahead and get the wafers and then provide the supply. And the second half, you know, we have given overall revenue target for the company on a growth basis, and data center is a key component that is driving the 25% growth at mid-point on a year-on-year basis.

Vivek Arya

Got it. On the gross margin side, the vendors, so, you know, you have expanded gross margins on a very consistent basis. This year, you have guided to about 45% gross margin, but the long-term model is over 50%, give us a sense of how you go from 45% to over 50% over time.

Devinder Kumar

Yeah, I think in short, the answer is mix of revenue from an overall standpoint, and then having more competitive and better products from an overall standpoint that move up the stack from an ASP and margin standpoint. You know, we are building a best-in-class growth company, but we also want to be increasingly profitable with a diverse set of end markets and revenue streams. We expect to see benefit from both ASP expansion and mixed improvements, and this mix will likely be a more significant driver, including the products that we just talked about, in particular, the data center space that have higher ASPs than average and also high ASPs than our historical revenue.

If you're looking from a cost standpoint, you know, we're always looking to improve efficiency from a cost standpoint, but as you know, we already, you know, fabulous semiconductor company and one of our fab partners largest customers. So that is not the largest driver, the larger driver is higher mix, and better mix of revenue overall, in particular data center, but also ASP expansion that drives the gross margin to get us to the greater than 50% out in time.

You know, what's important to keep in time is, you know, even keep in mind is, even with the increase in semi-custom revenue this year, you know, we continue to drive growth in gross profit dollars, operating margin and profitability. And I think the growing diversity in our revenue mix does help us from where we stood just a few years ago are in time to get to that greater than 50% gross margin overall as a company.

Vivek Arya

Got it. And then in the last minute or so that we have, you know, the one underappreciated part of AMD has been the improvement on the balance sheet side, you know, you're on a net cash position, right, which would have been a very hard thing to even imagine a few years ago. So, talk to us about just the company's ability to generate cash. And then how do you think about deploying that cash in terms of whether it's M&A or whether it's other types of cash returns to shareholders?

Devinder Kumar

Yeah, good question. You know I, as you know Vivek, you and I, over the years have been talking about the balance sheet, and I am very pleased with an improvement on our balance sheet, you know, the efforts over the last few years, reducing the debt by more than a billion dollars, as I said earlier, and improving the net cash balances, you know, close to $9 million at the end of last quarter, pretty good support, and that allows us to invest in our priorities.

The fundamental area, from an overall standpoint, in terms of the use of cash is to prioritize the investments in the business as our first priority, in particular, investing in R&D, and then go to markets to drive revenue growth, you know, capital allocation strategy, I talked a little bit about that at the Financial Analyst Day and we've just transition over the last two or three quarters of net cash positive.

Number one priority is, invest in the business, invest in growth, and then obviously over time drive strong shareholder returns, including some of the things that you just talked about, but that's our goal right now, is to really invest in the business and accelerate the trajectory of the business, both from a revenue standpoint, but also better product to drive better margin.

Vivek Arya

Excellent. I think with that we are at the end of our time. Thank you so much Devinder for taking the time to share your insights. I really appreciate it. And thank the investors for joining this call. And with that, we will close the call. Thanks again, Devinder and Jason.

Devinder Kumar

Thank you, Vivek. And thanks to everybody that listened on the call. Stay safe and stay healthy. Bye.

Vivek Arya

Bye.