With a server recession underway and its latest Epyc CPUs and Instinct GPU accelerators still ramping, this was a predictably soft, but still not terrible in the scheme of things, quarter for AMD. But the company is projecting that its datacenter business will still have somewhere around 50 percent growth in the second half of 2023 compared to the first half and that will make up for a lot of lost ground.
In the second quarter ended in June, AMD’s overall revenues were down 18.2 percent to $5.36 billion and thanks to investments in its various chip lines and lower volumes in the PC and gaming lines the company’s profits collapsed from $447 million in the year ago period (which was no great shakes in its own right) to a mere $27 million in the current quarter. And like Intel in the same quarter, AMD had to resort to using tax benefits to even get there. AMD had a $20 million operating loss, and it was $46 million in other income and a $23 million tax benefit that allowed AMD to post that $27 million gain.
AMD ended the quarter with $6.29 billion in cash and short term investments as the quarter ended, so it has plenty of cushion to get through a tough spot in the PC business and a slowdown in the datacenter business.
The Data Center group had sales of $1.32 billion in the quarter, down 11.1 percent, and operating income collapsed by 68.9 percent to $147 million, or 11.1 percent of revenue. (That’s a lot of ones, isn’t it?) The sales and profitability of the Data Center group were pretty much a carbon copy of what happened in the first quarter. In the first half of 2022, AMD’s Data Center group had $2.78 billion in revenues and $899 million in operating profit, which represented 32.3 percent of revenues. In the first half of 2023, when in theory AMD should have been minting coin with its “Genoa” Epyc 9004 processors launched in November last year, demand has been sluggish thanks to a stall in spending by the hyperscalers and cloud builders and skittishness by enterprises, and for 1H 2023, revenues are only $2.62 billion for the Data Center group, down 5.9 percent, and profitability at the operating level fell by 67.2 percent to a mere $295 million.
AMD and Wall Street keep talking about how the “El Capitan” supercomputer being built by Hewlett Packard Enterprise using AMD CPUs and GPUs will boost revenues by several hundred million dollars. This makes sense, given that the machine costs $500 million and the AMD motors represent the vast majority of the cost. But we don’t necessarily believe that AMD will make much profit off this deal, as is the long history of capability-class supercomputers sold to the national labs of the world. AMD will get to recognize this El Capitan revenue because HPE gets the parts to put into the machine, but HPE itself will have to go through a long acceptance process with Lawrence Livermore National Laboratory before it can in turn recognize the revenue it gets as the primary contractor for the building of the system. This will happen in 2024 for sure, but when depends on the benchmarks that Lawrence Livermore has set. As soon as the lab accepted the nodes, AMD can book the revenue for the “Antares” Instinct MI300A CPU-GPU hybrids.
On a call with Wall Street analysts, chief executive officer Lisa Su said that AMD was on track to launch and deliver the MI300A hybrid GPU-GPU engines and the MI300X standalone GPUs in the fourth quarter and touted the fact that Amazon Web Services, Microsoft Azure, Oracle Cloud, and Alibaba Cloud had all launched instances based on the Genoa CPUs. There are over 30 instances based on Genoa worldwide, and all told, there are 670 instances worldwide powered by AMD CPUs and by the end of the year the company projects there will be nearly 900 – with the bulk of those new instances being powered by Genoa chips. Revenues from the Genoa CPUs doubled sequentially from Q1 to Q2, and the addition of “Bergamo” and “Genoa-X” variants will help drive sales further, and the “Sienna” Epyc CPU for hyperscalers will launch later this quarter and join the mix. Su added that AMD expects sequential growth in the double digits – which obviously can be anywhere from 10 percent to 99 percent growth, so that is a pretty wide bracket – in Q3.
But the Genoa ramp takes times, and revenues were down in the Data Center group mostly because sales of the prior generation “Milan” CPUs are lower and the operating income was impacted by higher research and development costs and the lower CPU revenues.
Jean Hu, AMD’s chief financial officer, said on the call that in Q3, AMD expected Data Center group sales to be flattish year-on-year and up “double digits” sequentially. Flattish means somewhere around $1.6 billion perhaps and given what Su said about the second half being 50 percent larger for Data Center group compared to the first half, that puts Data Center revenues in Q4 at around $2.32 billion – what will clearly be AMD’s best quarter in the glass house in its history. And that would be over 40 percent growth year-on-year, too, which is impressive considering that Q4 2022 was the best revenue quarter in the datacenter for AMD to date. But as we said, it remains to be seen how profitable all of this Q4 2023 business will be. . . .
“In the datacenter market, we see a mixed environment as AI deployments are expanding,” Su explained on the call with Wall Street. “However, cloud customers continue optimizing their datacenter compute and enterprise customers remain cautious with new deployments. Against this backdrop, we expect strong growth driven by higher fourth gen Epyc and Ryzen 7000 processor sales and initial shipments of our Instinct MI300 accelerators in the fourth quarter. Longer term, while we are still in the very early days of the new era of AI, it is clear that AI represents a multibillion dollar growth opportunity for AMD across cloud, edge, and an increasingly diverse number of intelligent endpoints.”
AMD’s prognostications are for AI accelerators to drive over $150 billion in revenues across the IT industry by 2027, and AMD is increasing its research, development, and go-to-market spending to try to capture a larger piece of this pie.
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