Q3 2019 Earnings Call
Greetings and welcome to the advanced micro devices third quarter 2019 earnings conference call.
Time, all participants are any listen only mode.
<unk> answer session will follow a formal presentation.
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As a reminder, this conference is being recorded its my pleasure to introduce your host Lora Graves. Please go ahead.
Thank you and welcome to Andy's third quarter 2019 financial results Conference call.
Now you should have had the opportunity to review a copy of our earnings release and side. If you have not reviewed these items. They can be found on the investor Relations page, they empties website and be dot com.
Participants on today's conference call are Dr., Lisa Su, our president and Chief Executive Officer and of Inter Kumar, Our senior Vice President Chief Financial Officer and Treasurer.
Just a life call it will be replayed via webcast on our website.
I mean like to highlight some important dates for you on Wednesday November six more Papermaster executive Vice President and Chief Technology Officer will present, the Bernstein Technology Summit in New York City.
On Monday December night, Ruth Cotter Senior Vice President of worldwide marketing human resources, and Investor Relations will present at the U.P.S. Global Technology Conference also in New York City.
On Thursday December 12 force Neurology Senior Vice President and General manager of the data Center and embedded solutions group will present at the Barclays Technology Conference in San Francisco.
And our fourth quarter 2019 quiet time is expected to begin at the close of business on Friday December 13th.
Today's discussion contains forward looking statements based on the environment as we currently see it.
The statements are based on current beliefs assumptions and expectations speak only as of the current date and as such involve risks uncertainties that could cause actual results to differ materially from our current expectations.
We will refer primarily to non-GAAP financial metrics during this call except for revenue and segment operational results, which are on a GAAP basis.
non-GAAP financial measures reference today are reconciled on their most to their most directly comparable GAAP financial measure in today's press release, which is posted on our website.
Please refer to the cautionary statement in our press release for more information you'll also find detailed discussions about her risk factors in our filings with the FCC and in particular and these quarterly report on Form 10-Q for the quarter ended June Thirtyth 2019.
With that I'll hand, the call overt Lisa Lisa.
Thank you Laura and good afternoon to all those listening in today.
I'm pleased with our strong third quarter execution and results.
We delivered our highest quarterly revenues since 2005, our highest quarterly gross margin since 2012 and increased net income significantly all driven by our first full quarter of seven nanometer rising radiology and epic processor sales.
Third quarter revenue of 1.8 billion increased 9% year over year, an 18% sequentially and we expanded gross margins by three percentage points year over year.
Turning to our computing and graphics segment revenue increased 36% year over year and sequentially.
Demand for rice in desktop and notebook processors drove a significant increase in unit shipments and S. P.
Resulting in our highest quiet processor quarterly revenue since 2011.
We saw a particularly strong demand for top end riser processors and believe we gained client processor unit share for the eighth straight quarter.
And desktops, we're seeing strong demand for a rise in 3000 and previous generation rise in 2000 processors.
Well its product families are consistently among the top sellers at leading etailers in retailers globally.
In commercial H.P., Lenovo announced new desktop Pcs powered by a rise in pro 3000 juries processors in the third quarter.
We're continuing to expand our presence in the commercial market as more financial retail education, and health care customers purchase A.M.D. based Pcs and chromebooks to power their businesses.
We are on track to expand our desktop product offerings in November with the launches of the industry's first 16 core mainstream desktop processor as well as our third generation rises drug group or processor family.
These products will offer unmatched combinations of core counts performance in energy efficiency for the most demanding high end desktop and content creation applications.
In mobile we had another quarter of strong double digit percentage notebook processor revenue growth driven by a richer product mix increased unit shipments.
The number of M.D. powered laptops for major Oems has increased by 50% this year, including multiple premium notebooks like the first ever A.M.D. powered Microsoft surface laptop.
We collaborated closely with Microsoft over several years to develop the A.M.D. exclusive 15 inch consumer surface laptop three which includes a custom rising Microsoft surface addition processor.
Multiple operating systems and software optimizations that will benefit all A.M.D. powered windows systems.
We're very pleased with our momentum in the client business. This year and expect quiet processor revenue to grow sequentially in the fourth quarter as we head into the seasonally strong holiday season.
In graphics revenue increased year over year, driven largely by higher channel GPU sales.
Shipments of our radio and 5000 GPU family, featuring our DNA architecture increased sequentially and we're seeing solid demand for the new products based on their competitor performance and features.
For mainstream gamers, we began shipping the radio on Rx 5500, GPU into third quarter.
Hey, Sir H.P., Lenovo and M.S. I announced plans to offer the new GPU in their upcoming Pcs and multiple I'd be partners planned to launch Rx 5500 cards during the fourth quarter.
[laughter] data center, GPU sales were down sequentially and roughly flat year over year.
We added multiple cloud in HPC wins in the quarter highlighted by Microsoft's announcement of a new remote desktop offering for graphics intensive workloads powered by epics Gpus and radiata instinct Gpus.
We're making good progress growing this margin accretive part of our business as we continue expanding our footprint with marquee customers in targeted datacenter workloads.
Turning to our enterprise embedded in semi custom segment revenue decreased 27% from a year ago at significantly higher server processor revenue was offset by lower semi custom sales.
We expect semi custom demand to further softened in the fourth quarter no that both Microsoft and Sony have announced new M.D. powered console for holiday 2020.
In server, we had our highest quarterly CPQ revenues since 2006 as strong second generation epic processor demand drove a greater than 50% sequential increase and unit shipments and revenue.
Second Gen Epic processors are the highest performance server steep use in the industry and have set more than 100 World Records.
Our newest epic processors feature up to 64 quarters, and deliver a 25% to 50% TCR advantage versus competitive offerings.
As a result of our clear performance leadership and differentiated features that we're building momentum with cloud enterprise in HPC customers.
In cloud Amazon ADW S I'd be I'm cloud, Microsoft Azure, OVH cloud, Twitter and Tencent, all announced plans to deploy epic processors in their data centers.
At our launch event, Google became the latest Mega data center provider to adopt a bit processors as they announced second generation epic processors have been deployed across their internal infrastructure production datacenter environment and will also be used to power the Google cloud platform.
In enterprise Dell HP E N Lenovo more than doubled their A.M.D. powered server portfolio as they launched new platforms recurring second Gen epic processors, helping us add dozens of new telecom healthcare financial services manufacturing and energy customers in the.
Quarter.
We also secured multiple new H.P.C. wins in the quarter, including three separate U.S. Department of defense supercomputers, and what is expected to be the fastest scientific computer in the UK.
We expect server revenue to grow sequentially by a strong double digit percentage in the fourth quarter as we continue ramping our second generation epic processors.
We remain on track to achieve our near term goal of double digit servers keep you share by mid next year.
In summary, we're right, where we want to be on our long term strategic plan.
We had the strongest product portfolio in our history.
We executed our product launches and production ramps very well the third quarter as our new products drove higher revenue margin expansion and increased profitability.
We're on track to exit 2019, with another quarter of significant growth driven by the ramp of our seven nanometer products and believe we're well positioned to build on our momentum in 2020 and beyond as we deliver an even stronger set of leadership products that can drive sustained growth and increased fair.
The $75 billion market for high performance computing and graphics technologies.
Now I'd like to turn the call over to the vendor to provide some additional color on our third quarter financial performance.
Thank you Lisa and good afternoon, everyone. We're pleased with all the strong third quarter financial results with revenue of 1.8 billion up 18% quarter over quarter and have a highest quarterly revenues since the fourth quarter <unk> 2005, the third quarter showcases all financial momentum.
The strength of our business model with operating income and net income growing significantly year over year.
Quarterly revenue was nine up 9%, probably you undergo a strong sales of ryzen, an epic processes and review on gaming Gpus more than offset lower semi custom sands gross margin of 43% was up 310 20 basis points told me you ought to go our 10th consecutive quarter.
Year over year expansion.
Operating expenses grew 13% Youre will yield to fly has been 39 million, primarily driven by increased R&D investments and support fall when new product introductions.
Operating income was 240 million up 54 million was 29% probably yonah goal due to increase revenue from new higher margin products operating margin was 13% up.
210 basis points told me you ought to go net income was 219 million up 69 million, 46% from a younger goal and diluted earnings per share was 18 cents per share compared to 13 cents per share, but you got a goal.
Now turning to the business segment results.
Building, a dropping segment revenue was 1.28 billion all 36% year over year.
One by strong blind close so and gaming Gpus suits.
Computing and dropping segment operating income was 179 million compared to 100 billion a year ago, driven by higher rising across those things.
Enterprise embedded and semi custom segment revenue was 525 million down from 715 million to you the prior year.
That's anticipated semi custom revenue was lower in the third quarter has the market Davita next generation M.B., followed game console from Sony and Microsoft.
I think datacenter CPC revenue grew by almost 50% sequentially driven by ship one solve all the second generation product in the quarter.
Yes see segment operating income was 61 million compared to 86 million, you're a year ago due to lower revenue and higher operating expenses.
Going through the balance sheet I'm very pleased with the continuing improvement of our balance sheet cash cash equivalents and marketable securities totaled 1.2 billion at the end of the quota higher than the gross debt of 1.1 billion, resulting in M.D. been net cash positive.
During the quarter, we retired 206 million of dead, which resulted in a loss of 40 million recorded on our GAAP income statement.
A reduction in debt and do that Hundredd, good and 6 million of convertible senior notes in exchange for 16 million shares.
Today, we have reduced gross debt by 441 million.
Free cash flow was positive 179 million he's a third quarter had cash flow from operations was 234 million.
Inventory was 1 billion up slightly from the prior quarter in anticipation of higher revenue in the fourth quarter.
Adjusted EBITDA was 300 million compared to 227 million a year ago, driven by a quarterly earnings on a trailing 12 month basis. Adjusted EBITDA was seven but 45 million had gross leverage at the end of the court, though was 1.5 times.
Now turning to the outlook for the fourth quarter COVID-19, we expect revenue to be approximately 2.1 billion plus or minus 50 million an increase of approximately 48% year over year, and 17% sequentially the sequential and year over year increases I expect.
But to be driven by growth in ryzen ethnic and read your process sales offset by a for the softening of semi custom processing revenue.
In addition for Q4 2019, we expect non-GAAP gross margin to be approximately 44% non-GAAP operating expenses to be approximately 535 million non-GAAP interest expense, Texas, and although to be approximately 22 million and fourth quarter diluted share count.
It's expected to be approximately 1.21 billion chess and.
In closing, we had an excellent third quarter and remained focus on ramping our leadership portfolio of high performance products delivered strong revenue growth and gross margin expansion in the fourth quarter.
With that I'll turn it back to law <unk> for the question answer session Laura.
Thank you defender operator, we're ready to go ahead and pull for our first question.
Thank you will not be conducting a question answer session. If you like to ask your question. Please press star one of your telephone keypad a confirmation Tony will indicate your line is in the question Q you May press star to if he'd like true movie question from the Q for participants using speaker equipment and may be necessary to pick up or handset before pressing star.
One moment, please what we poll for questions.
Our first question today is coming from Mark what passes from Jefferies. Your line is allies.
Hi, Thanks for taking my question first one for Lisa you had mentioned that total cost of ownership in your prepared comments and I Wonder if I I guess I could imagine that the total cost of ownership over a lifetime of Oh, both of US seven nanometer server chip might be.
Greater than the price of <unk>, although of Oh that server chip, a when compared to a 14 nanometer server chip and so I'm wondering if you could oh, maybe just clarify the comments you made on total cost of ownership and and quantify if that if that is the case you know how you see it and.
How many but what percentage of your data center customers actually look at total cost of ownership and evaluating all the products is it is it does everybody do that or do some just look at the price and and I'm wondering like what do you think.
What do you think that has impact that might have on the on the competitive pricing environment.
That's the first question. Thank you.
Sure Hey, Thanks for the question Mark So I mean, maybe let me give some context on yes, where the the data center business for US and then I'll answer. Your question look I think from what we see there is a very strong value proposition for Roe.
When you look at you know just what we're able to do from you know just the the amount of performance the power consumption and then how that plays into total cost of ownership you know we see it across all workloads, so whether you're talking about a virtualized environment, where you're talking about high performance computing or you're talking.
About the enterprise you know sort of a workloads, we see a strong performance as well as strong total cost of ownership onto your exact question. I think you know server purchases or server purchasers are very I would say sophisticated.
And so in most cases, a total cost of ownership is definitely in the conversation and it's not just about you know performance, but performance out of given power level and you know also in a in terms of you know given a density and that has played out in a number of our customer engagements and and so the the.
Overall point of Yeah, we think that Rome is very well positioned or you know price in of itself is one factor, but I would say it's not the primary factor I think the a you know performance power total cost of ownership are all important buying factors and we've seen a you know very very strong engagement from customers.
Across the board across all workloads.
For these drivers.
Thanks. Thank you a follow up if I may on the or when you think about your share gain that your potential to gain share as you look into 2020 can you talk about what you view as the biggest potential gating factors and that and like how you're managing.
Those potential factors and I'm, hoping you can talk to.
Your view on availability of seven nanometer wafers or and UBS engineering support for your customers, who are trying to put together solutions. Thank you.
Yeah sure Mark So I'm a couple of different questions. There, let me, let me try to get through.
I will say it since our launch of Rone and in August we had a very strong start.
We had I it full quarter of a of revenue here in the third quarter and you know we saw that in sort of the ramp of units and revenue. What we are seeing is that the qualifications are going faster with the second generation of epic then with the first generation so customers are familiar with our platforms.
I'm in some cases customers are doing dropping platforms and so they can take no virtually the same were very similar platform that they had for first doesn't drop in the second gen. They're familiar with our architecture and so I think.
From a market fair standpoint.
We feel good about the transition from Naples to Rome, I think the platform readiness across our Oems a number of platforms that we have across the major Oems is also a very strong and we're pleased with the sets that are that have a bose.
The new and existing platforms, there and so you know from the standpoint of a where we are going in the fourth quarter and into 2020, I think we feel.
Hi, good about a where we are with the data center customers as it relates to customers more support and all that stuff like I said customers are much much more familiar with the architecture.
In the second generation compared to the first generation and that is that a that is good for the rapid from as it relates to I think you asked about a you know.
The seven nanometer ramp and the availability.
There we had a very large ramp I'm here in the third quarter, a with 'em seven nanometer you know, we essentially ran three full product families. A rise in epic as well as our you know radio on a gaming product families in the third quarter and it went very well and we're very pleased with it it's the fastest ramp that we.
Done I'm certainly in recent memory and going into the fourth quarter and into 2020, I think we we feel very good about the availability of of Rome, as well as the rest of our products.
Thank you very helpful.
Thank you. My next question today is coming from David Wong from inside that your line is now alive.
It's actually much can you give us some idea of what your revenues went from seven nanometer products in the September quarter on what you record they'll be in the December quarter.
I think what I can say, a David and I'll start maybe the vendor has some additional comments the ramp for seven nanometer has gone very quickly and you know here in the third quarter. When we look at no overall, new product revenue certainly in the third quarter, we had a significant piece of that be.
Be seven nanometer that will increase again as we go into the fourth quarter as well and so the way to think about it is for our or you know major product lines, we're transitioning a very fast from 14 to seven.
Okay, Great. Adam we didn't you all Oh, I'm computing and graphics segment does not 36% a sequential gross up could you give us some idea of how watch clients GPU sales grew sequentially and separately, what the P. Gpus yields a sequential growth once.
Yeah. So if you look at the C.G. segment from a sequential standpoint, we saw the the client sheep use increase the most and those were yeah. Those were certainly the driver being both desktop and mobile desktop was higher than mobile.
Both grew up very nicely. If you look at Gpus overall, they actually declined a bit sequentially and that decline was primarily driven by data center Gpus, a which declined just due to some of the buying cycles in the cloud I'm. You know overall, you know gaming did well and you know we continue to.
Back to that as we go into the fourth quarter, you'll see that the data center Gpus will increase as well as I mentioned, the prepared remarks that client and graphics would also increase.
Great. Thanks, so much.
Thank you. My next question is coming from Matt Ramsey from Cowen. Your line is now lives.
Thank you very much good afternoon before I jump in my questions just congrats to the vendor on being cash positive.
The Lisa couple of questions on on Rome, we've been tracking some of the strength.
Google, Microsoft and Amazon, but I Wonder if you might comment a little bit about the server business in China.
Given some disruptions there just overall capex and and also the OEM business that you are now ramping with Dell HP and Lenovo and how you expect those things to trend over the next couple of quarters. Thank you.
Yeah, so that as we look so let me answer. The first question is as it relates to the cloud customers I think we're very pleased with the cloud adoption. You know we are engaged them across all major you know a tier one and many of the tier two approval service providers and I think we're making good progress there.
As it relates specifically to China, we are well engaged they're in both cloud and enterprise. Obviously, there is I'm a little bit of disruption due to you know some of the I try to customers that are on the entities list and and we follow that closely but as it relates overall I think where we believe that there is.
You know strong pull for Rome, both across cloud as well as enterprise on enterprise side, what I will say is that the the HPC market has been really good for us and so we have one quite a few of the bids and they tend to be early adopters of the technology and so that's one in.
Indication of the strong value proposition as we go into more general enterprise. The launch of you know H.P.E., Dell and Lenovo as well as Super micro and the other are we owed B.M. platforms is broader than the first generation of epic and we're seeing.
That in the pipeline.
We see so I'm a lot of activity going on right now and we feel really good about how that's going to develop over the next couple of quarters in terms of enterprise wins.
Thanks, very much for that just a follow up from me on on the client business.
Obviously, a lot of progress that's been made with the results that you've just put up.
And I kind of go back to some comments made by your primary competitor on their call I think talking about tightness in their own 14 nanometer supply.
And also.
Maybe not addressed some of the lower tiers of the market.
These are up quite strongly I wonder how much some of the supply tightness from.
Competitor might have led to these gains versus what sort of the merits of your own product.
And you could talk about that leases I'd be really helpful. Thank you.
Yeah sure Matt So loved the client business has really had a very strong here I mean, if you look at how it's played out over the last couple of quarters, Yeah, I'll say that in our desktop portfolio. During the third Gen. Rising has done very very well, it's extremely well positioned and where we're seeing the highest demand is at the highest here.
Sort of in the rise in nine and a the rising seven and so that's why you see the S.P. strength.
In a in the business mobile is also ramping very nicely and what we're seeing again in mobile is the mix of rising is no a predominant mix of the business and we're seeing actually.
Very nice momentum and commercial as well as our traditional consumer markets. So we also see I'm good sequential growth in ASP is there a yeah. There are some noise in the system as it relates to some supply constraints and all that stuff I would you that is mostly you know again its pockets it at the low end I don't.
I think it's a significant driver of our business you know our business is driven primarily by our new platforms. I'm. You know the fact that we are in a number of a premium platforms on both the the notebook side as well that's just the strength that we're having in the Iwai channel is is a is there and that's contributing.
The positive mix as well as a unit growth in the client business.
Thanks very much.
Our next question is coming from a deck are you from bank of America. Your line is alive.
Thanks for taking my question then the congratulations on the strong growth then execution at two question does Lisa first on the data Center business Oh, I know you mentioned that the target is to be on track for double digit kind of unit share sometime in the middle of next year could you help us level.
As to where the share it is in Q3 and what the target is.
In Q4, and if you have seen your competitor to react to your silver share gains in any way to pricing or other means.
Yeah. So you know back as as you know, we we don't necessarily want to get ahead of ourselves in terms of server share, but what we will say is you know our you know the a the Q3 quarter was our highest units you know sort of with a with epic and so we are seeing no good shrinks and.
A predominantly a very fast transition to Rome, a we expect that to continue to go grow as we go into Q4 and into the first stuff first half of next year. So this is about a more platforms ramping and multiple platforms I'm within within a given customer and you should see.
We saw a number of announcements around our launches here in Q3, and you feel you should see additional announcements as we go into the fourth quarter as a as well as the first half of next year I'm sure. Your question about you know do we see any unusual activity from a competition standpoint.
Well our view is that the competition its aggressive will always be aggressive and we're counting on that it's very competitive market out there.
That being the case I think we are feeling very good about how our product is positioned and also the readiness of the product. So you know the the question earlier about other platforms ready you know how is the customer support I think it's very strong and I think our our OEM and ODM partners have done.
A phenomenal job a with the breadth of platforms and that will help us or continue to grow.
Overall.
All right and for my follow up decide to kind of a longer term conceptual question, which is it's good to see gross margins, improving and and the cost discipline, but do you think this is the time to actually increase opex unlocked and really go off for maximizing Oh footprint I'm right I didn't more resources more so.
Systems, rather than trying to optimize profitability I'm just curious to hear how you are looking at the puts and takes around.
You know, whether you should be maximizing footprint rather than profitability.
Yeah, well get a it's a good question comes back I get asked it thought from time to time, what you know what you will see is I think we're very cognizant of where we're going so in other words the roadmap I mean, the you know the long term sort of financial road map I think we understand pretty well we want to show no leverage on both.
Up and bottom line and that's certainly I'm certainly our goal yeah, we did spend a little bit more this year than we originally.
Originally planned and that was that was frankly, because the opportunities are very strong and yeah most of the.
Additional spend is targeted at R&D, a with the notion of you know platform investment software investments to ensure that we capture.
The the opportunities that we have I think where we have the right balance was backend certainly as we go into you know 2020, we'll we'll continue to look at that balanced, but yeah. I think we are very well balanced between you know top line and ER and a bottom line.
[noise] <unk>.
Thank you. My next question is coming from John Pitzer from Credit Suisse. Your line is alive.
[noise] Yeah. Congratulations guys. Thanks, Let me ask the question. We think it's my first question is it just can you help me understand a little bit about the traction you're getting in the enterprise market on both rising and an epic and kind of what milestones should we be looking at relative to that sort of voting.
Yes so.
The we're very excited about the opportunities for us in the commercial space and I will tell you. When we look at our go to market investments, we're putting a lot of feet on the street as well as you know just a general go to market around commercial I'm, starting with rising I think you.
I have seen and who you should have seen that you know the number of commercial platforms that we have continues to get stronger and it's not just the number of platforms, but the quality of the platforms. You know certainly you know Lenovo Thinkpad is a premium brand that is a very key you know we have a very strong you know H.P. commercial offerings we.
Have additional desktops coming out as well what we're seeing is no. Good traction in the commercial space and that is a stronger part of the of the PC market and we'll continue to talk about that as it relates to new platforms. I'm you know certainly as we refresh our mobile platform going into next year I think you'll see.
You know, even a stronger commercial offerings, there Oh, we're investing heavily in a security and Manageability and all those other aspects that are important in the commercial space.
As it relates to epic in the enterprise I'm actually very encouraged with saw what we see in the enterprise. We had originally said that yeah. We thought we would be more cloud or you know sort of cloud would go first and then enterprise would take longer I think what we currently see is you know cloud is search.
Only a big driver our of our business, but our enterprise business is coming along very nicely and you know I really would say that Ah you know the key metrics. There are no more top pure bred adopting epic and talking about that publicly we have had a number of engagement.
I mentioned earlier that the pipeline that we see an enterprise across our top Oems has increased very significantly just in the last you know sort of two months I'm since we launched so the awareness around epic as well as the awareness around these new platforms I think is strong.
And we'll continue to build that out as we as we go forward.
That's helpful. These are then maybe as my follow up as we'd be in the animals community Lookout to modeling 2020. The Gpus GPU is relatively straight forward relative to market. Your expectations. We might have I'm just kind of curious if you can give us some help on the semi custom business. It's impacted by yes, six so six and also we've got.
The new gaming cycle next year, I know you don't want a preannounced customer product, but but how when should we think about the semi custom business trending throughout 2020 in broad strokes, yeah. So I think.
It's a it's a good question and we will certainly give you more.
More guidance as we get into a into since 2020, but the way to think about it at a high level is we're going through a product transition with semi custom now and you know in 2019. For example, we've had the unusual cycle, where the second half of 2019 is is pretty soft for semi custom come.
Her to the first half and what you should expect in 2020 is that that would that would slip strongly. So I think both of our large customers have said that they're planning a holiday 2020 launch that would mean that the semi custom business would be quite heavily weighted in the second half.
So you should expect that revenue in the first half will be again quite soft a with a strong recovery in the second half of the year and you know the way I look at it is you know the gaming business. The console business. It is a strong business for us and so it will be one of the growth drivers as we go into 2020 and a and beyond.
Thank you.
Thank you. Our next question is coming from Stacy Rasgon from Bernstein Research. Your line is now lives.
Hi, guys. Thanks for taking my questions first or one basketball gross margins I mean, I guess I'm glad to see them up.
But given what's going on with the mix I mean, I think you said they gpus were down sequentially was that data center up more than 50 per share implies is growing.
The Samsung IP in there I guess I'm just surprised.
Not to see them up more both in the quarter as well as into Q4, I'm I was wondering give us a little bit of more color.
How about what's driving that margin evolution, given the positive drivers mix. It I think should be there.
I think if you look at it from a quarter to quarter standpoint, even talking about Q2, two good three you're right about the mix. So the product in particular with the with the ramp up to seven nanometer products and the margins off you know last quarter, we had call. It 41% at this time is slightly above 43% and that is fundamentally due to the new product.
No ramping and obviously some benefit from the semi custom this has been down slightly in Q3 compared to Q2. So that's the and then as you get into the Q4 timeframe with the guide at 44% is driven by the new leadership products demand for the high end of the product have all products stack is driving a richer mix.
And obviously, there's a little bit of benefit that's the so said earlier with the soft softer semi custom revenue so I think.
I thought on those new products were supposed to up gross margins, an aggregate of over 50% and they're driving like a massive mix shift can get you've only got gross margins up a couple of points.
Yeah, what am I getting wrong.
I think the numbers all coming ought to be a couple of under bases points up on a quarterly basis with the ramp of the so not a middle product how do you get anything anything wrong.
You have to look at the mix all the product relative to the total revenue of the company as a $1.8 billion and I think that that's I would come subsidy I think Stacy maybe if this will help you know in each of the product lines. We are certainly you know mixing up and that's why you see some of the D.A.S.P. goodness, but you.
We also have some legacy product right and you know we continue to sell some legacy product as well and so that's the that's perhaps the other piece, but I think as Devinder said, we're very happy with the way. The gross margin is progressing I think you know do you look at our long term model. We had said 40 to 44 points and you know will be exiting the year ads.
At 44, and no I think very well and positions us well as we go into 2020 and turn over more of the product portfolio to to the new products.
Okay. Thank you for my follow up I wanted to ask about the us the uptick surber ramp into next quarter. So Europe , you said more than 50% this quarters that might be what $80 million to $100 million, maybe sequentially, which is I guess good.
Your competitor added almost a one and a half billion dollars sequentially in data center. This quarter. So when you say next quarter that your I mean, I guess you gained share your up 50% their units were up 20%, but even so so when you're sitting next quarter, you're gonna grow by strong double digits on on epic do you think that that's like better than the trend that we saw in.
In Q3 is more that's more stuff ramps I mean, if we were up 50% sequentially. In Q3. If you think we can be better than that in Q4 is that what strong double digit means what do you have a different on meeting your line.
Well I think we have in mind strong double digits [laughter] told I would say [laughter], no and said you I'm not being facetious, but you know again, they're they're all kinds of puts and takes a what I will say, though is put put in context that the product has basically been in market since early August and if you.
Put that in context.
And you know, we're saying that the ER the transition is going quickly.
And you know we have a a number of new platforms that are literally they've been in market four to eight weeks with the way the server cycle goes I'm actually pretty happy with how it's ramping and I expect as I said that Q4 will be another strong quarter for us and it's just a matter of.
Continuing to diligently ramp the platforms.
Got it thank you.
Thank you for next question is coming from Aaron Rakers from Wells Fargo. Your line is now live.
Yeah. Thanks for taking the question I've a question a follow up as well you know sticking to the server or the epic ramp I'm just curious that.
How do they gave what what kind of mix have you seen you know maybe skewed towards the 48 and 64 core solutions and what I'm really getting at is how do we think about the blended E.S.P. trend on epic as as room fully ramped.
Yeah, So a aaron it's a it's fair to say that as initially out of the shoot we are seeing a higher mix to the higher end. So you know more 48, and 64 course as the mix I think those are.
Very very attractive products and you know really take it that the full advantage of the epic a product line. We are seeing as you might expect what that mix that the Rome espy's are showing lift versus the previous first generation epic as we go forward you would expect that to build out a little bit more.
So you know we have a full product portfolio for us for the server parts. But then you also expect that you'll you'll get more enterprise in that and enterprise tends to have a higher ASP. So the net of all that is I can say in the server market we feel.
Very good about where we're positioned from an S.P. standpoint, and from a you know sort of unit share to revenue share I think there there there are actually quite close.
Okay and then there's just as a quick follow up maybe more of a model question I think last quarter, you talked about the semi custom business being down in the mid 30% range. You also talked about Samsung contribution to be around 100 million for the full year I'm. Just curious is that still where we stand and what was kind of the Samsung contribution this last quarter.
No I think on the on the Samsung piece of the look of the second half is approximately $100 million slightly.
Half was taken in Q3 and the other half will come in coupon. So that's absolutely right.
And then I'm getting.
Yeah on the semi custom side, we had said last quarter that it would be down let's call. It mid thirtys, it's probably when you look at it in aggregate for the second half the year it'll be down a bit more than mid thirtys.
Let's call it high Thirtys.
Okay. Thank you.
Thank you. My next question is coming from Toshiya Hari from Goldman Sachs. Your line is now live.
[noise] good afternoon. Thank so much for taking my question Lisa how to follow up question on your servers GPU business.
And I guess the question as you know when you think about pricing and sort of the margin profile you, but you're seeing in that business today, how does that compare with what you had planned for six or nine months ago, 'cause, it's pricing and margin coming in pretty much in line with it with expectations or are they coming in a little bit better and then how do you think about.
The margin profile for that business going into 2020.
Given you know seven nanometer potentially maturing into next year, given the mix and given the changing customer mix from from cloud to enterprise should those two dynamics a surface tailwinds for your for your margins in that business.
Yeah, So I would say that the margin mix you know as we look here in the beginning of the ramp is about what we expected its about what we expected. So you know the only thing I would say and I said. It earlier is the the product mix is perhaps a little bit higher I'm in the a in the early part of the ramp but overall.
Oh, you know the margins are are pretty close what we expected the pricing environment is pretty close to what we expected and as we go into 2020 I think the other piece of it is that the business scale will increase as we grow the business and so that a you know that actually helps to absorb some of the some of the fixed costs.
So as well.
Okay, and then as a quick follow up your nearest competitor talked about.
Poland and they're in their data center business, particularly in China was there anything in the quarter that you thought was kind of normal from up from a customer activity standpoint, I'm on the pine side or or the server side and if so how big was out and how should we think about kind of the implications into Q4 and.
Potentially the early part of 2020, thank you.
Yeah. When we look at you know bought the client and server business I wouldn't say that we saw any significant pull ins due to tariffs or other reasons. Yeah. We we monitor sort of you know certainly very closely the selling and sell through trend and we believe that what we're seeing in terms of the growth of the business is actually.
I, just new platforms running a ramping and given where we are in the product cycle that makes sense and so I wouldn't say that we saw any significance of a pull ins I'm in the quarter.
Thank you.
Thank you. My next question is coming from Mitch Steves from RBC. Your line is not a lot.
Hey, guys. Thanks for taking my question I had two I guess first for Devinder I realize you don't want to providing me kind of 2020 numbers, but you're going after the 100 different ways. So maybe I'll see if you guys. Some time, so if I look at the first half a 20 is there any reason why the gross margins won't be higher than they are in December quarter.
You know I really don't want to getting the 2020, you know there are several product transitions and players you as you heard in the prior questions well, we have the semi custom besides that some transition.
We have obviously the vessel the businesses and position the ramp in seven nanometers, Lisa let it slip because some of the legacy products, where there's a lot of puts and takes and I think we wanted to talk about 2020 . Once we get past 2019 and put it a bit and we can come back and talk about 2020 in about 90 days from though.
Okay got you and then secondly, just for leasing here, there's been a lot of articles in terms of some firmware issues or some software bugs and things of that could you maybe just help us address all of them at once and just kinda talk about where you guys did to fix them actually we're still seeing kind of articles pop up here in there and just want to make sure there's been no issues in terms the software.
Let me make sure I understand what you mean, Mitch with which product line are you referring to or what are you exactly referring to.
There have been specific articles are running down right, saying that there's issues with the bio some things on time performance metrics, a little bit lower but then you guys kind of really I noted that you've improved them or fix him or some kind of seen them in the market. Even today. For example, so just wanted to know in terms of what what happened and then secondly, if its everything's been resolved.
Yes. So so your question was relative to the a the third generation of rising look you know I think overall when you look at the third generation of rising in the platforms that we put out we're very very pleased with how that ramp is gone and when we look at the sales.
From a you know sell through standpoint, we're very pleased with where it is they're there have been some platform you know sort of optimizations that we've done through a working with our old B.M. partners and I'm the motherboard partners to try to.
Sort of improved the optimization of the maximum boost frequency, which is I think what you're referring to.
And I'm sure that has.
Largely have been addressed all over the last couple of weeks, but I would consider that more of the optimization versus you know any any type of major update and and we were going to continue to improve the platform. So you're going to see that you know a as is normal was a a new platform that will continue to improve the platforms over time.
But I will say that we're very pleased with how their generalizing has done I'm in the marketplace and and you were excited with the the launch of the 16 core 30, 950 ex as well as the trigger for family in the next next couple of weeks a as well.
Perfect. Thank you.
Operator, we have time for about two more questions. Please. Thank you. Our next question is coming from harsh Kumar from Piper Jaffray. Your line is now live.
Yeah, Hey, guys just a quick one as you look at deal Leverages for gross margins what would you consider as Joe as you as your greatest Lightbridges. It just stills growth as you take share or is it more products going to seven nanometer.
I think I think if you look at the product a definitely than the new product on the seven nanometers. So a very good tailwinds for the gross margin, but also the mix or the business comes into play you know the mall datacenter revenue.
Recapture in total market channel, obviously helps a gross margin the high end of the stack and particularly Indian decline PC. Besides that helps the gross margin. So it's basically those are the things that have the gross margin as we go to go forward from 29 team.
And as you as you look out where do you think margins can go.
Well, we painted as Lisa said earlier it wouldn't be Pinto long term target model you know we pay into twin 40 to 40 fall.
Into 2017 timeframe. That's what we said we exit can we had 40 pool and we'll come back an updated that sometime in two into trend team.
Fair enough thanks, guys.
Thank you.
Thank you. Our final question today is coming from Timothy Arcuri from you'd be US. Your line is now live.
Thanks, a lot I figured the past you've given the percentage of of a you know total revenue that was datacenter CPQ and GPU combine can you give us that number.
Yeah, I mean as a percentage of revenue it's similar to what it does in the past few quarters. We'll go to silver portion was significantly higher as we saw as he said earlier greater than 50% sequential increase in so ASCP revenue unit shipment and revenue so that definitely helps.
Yeah got it Okay, and then I guess just a bigger picture question in terms of the you know kind of come competitive edge. You have you know some of it relates to process technology, but of course, you know you're you know your competitor could just go to TSMC to build see for use as well, but I guess, there's other parts that relate to your to your fundamental architecture.
Which is the chip with the memory density and your I.P.C. advantage. So I guess can you kind of break down Lisa can you break down how much of the advantage really is process related versus how much is actually architecture related. Thanks.
Yeah, So ER Timothy the way I would answer that question is we've made a set of choices and the set of choices include process technology. They include architecture, you know our triplett architecture. They include sort of our overall you know system architecture, and I think we've made instead of the choices I'm going forward we're not.
Relying on process technology as the main driver a we think process technology is necessary that's necessary to be you know sort of at the leading edge of process technology and so you know today seven nanometer is you know a great node and we're getting a lot of benefit from it we will transition to the five nanometer meter note at the appropriate timing.
Great benefit from that as well, but we're doing a lot in architecture and I would say that architecture is is where we believe the highest leverages a you know for our product portfolio going forward.
Got it thank you Lisa.
Thank you we reach of our question answer session ought to turn the floor back over for any further closing comments.
Thank you very much operator, and thank you everyone for joining us on the call today, we do have a number of a events plant here in the fourth quarter and we look forward to team you. All soon have a great evening.
Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.
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