Q2 2020 Advanced Micro Devices Inc Earnings Call
[music].
Hello.
Welcome to the A.M.D. second quarter 2020 conference call.
At this time, all participants are in listen only mode.
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A question answer session.
Oh formal presentation.
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It's not my pleasure, it's true coal over to Ruth Cotter Senior Vice President marketing human resources, and Investor Relations spray Andy It's covered please go ahead.
Thank you and welcome to AMD <unk> second quarter Twentytwenty financial results Conference call by now you should have had the opportunity to review a copy of our earnings release on slide if you've not reviewed these documents. They can be found on the Investor Relations page of M.D. is website AMTI dot com participants on today's call.
This call are Dr., Lisa Su, our president and Chief Executive Officer, and Devinder Kumar, Our senior Vice President Chief Financial Officer on Treasurer.
This is a life call and will be replayed via webcast on our website.
Before we begin today. Please note that M.D. is scheduled to participate in several wall Street events during the third quarter on Tuesday, The first of September Mark Papermaster, Chief Technology Officer, and Executive Vice President Technology, and engineering will participate in the Jefferies virtual semiconductor I T hardware and communicate.
Since infrastructure summit.
On Tuesday September 15th Forest, Norad Senior Vice President and General manager data Center on embedded business solutions group will participate virtually in the Deutsche Bank Technology Conference.
In addition, our third quarter 2020 quiet time is expected to begin at the close of business on Friday, the 11th of September.
Today's discussion will contain forward looking statements based on current beliefs assumptions and expectations speak only as of the current days and as such involve risks and uncertainties that could cause actual results to differ materially from our current expectation.
Please refer to the cautionary statement and our press release for more information on the risks related to any forward looking statements that we may make we will refer primarily to non-GAAP financial metrics. During this call. The non-GAAP financial measures referenced are reconciled to their most directly comparable GAAP financial measure in today's press release on slides.
Posted on our website A.M.D. dotcom now with that I'd like to hand, the call over Telisa Lisa.
Thank you Bruce and good afternoon to all those listening in today.
For the last five years, we've built the technical operational and financial foundation required to drive our long term growth strategy.
We consistently executed on our product Roadmaps established deep partnerships with an expanded set of customers ramped multiple products in leading edge manufacturing technologies and significantly strengthened our balance sheet.
Our strong second quarter results, an increased full year revenue guidance demonstrate how we are successfully scaling our business through our consistent execution.
Looking at the second quarter revenue grew 26% year over year to 1.93 billion driven by strong demand for our leadership server and client processors.
We accelerated our server and mobile processor businesses significantly in the quarter, resulting in rise in epic processor revenue more than doubling year over year.
Importantly, we met or double digit server processor market your goal as datacenter products accounted for more than 20% of our second quarter revenue.
Turning to our computing and graphics segment second quarter revenue increased 45% year over year to 1.37 billion as growth in rising processor sales more than offset lower graphics sales.
We delivered our highest quiet processor revenue in more than 12 years.
Increased working in schooling from home due to cold. Good 19 resulted in a strong PC market in the quarter.
Although we believe our growth was largely driven by our 11th straight quarter of market share gains.
Desktop processor sales decreased sequentially as anticipated while revenue in ASP increased year over year as demand for our higher and rising processors drove a richer mix.
In mobile we had record quarterly notebook processor unit shipments and revenue.
Sales of our latest rising 4000 series processors grew significantly in the quarter, resulting in mobile revenue growing by a strong double digit percentage sequentially and more than doubling from a year ago as both unit shipments in ASP increase significantly.
Multiple third party reviewers have consistently highlighted that our latest notebook processors deliver superior performance and longer battery life compared to the competition.
As a result of this strong performance I'm pleased to report that rising 4000 processor revenue as ramped faster than any mobile processor in our history.
There are now 54, rising 4000 power notebooks in the market.
We expect to continue accelerating our mobile processor business in the second half the year as H.P. and Lenovo ramp their first commercial notebooks powered by rising Pro 4000 series processors and the second wave of more than 30, ultra thin premium and gaming consumer notebooks launch from multiple Oems.
In graphics second quarter revenue declined year over year as strong double digit increase in mobile GPU sales was more than offset by lower desktop channel sales.
Well desktop GPU shipments were lower year over year channel sell out accelerated in the quarter.
Mobile GPU revenue growth was driven by a portion of our our DNA Gpus highlighted by the launches of new Apple professional and Dell gaming notebooks, featuring our radio on 5000 M series Mobile Gpus.
Data center GPU revenue decreased year over year.
We expect revenue to increase in the second half of the year as additional cloud based visual computing wins ramp and we launch our new cdna datacenter GPU architecture optimized for next generation X the scale and machine learning workloads.
Turning to our enterprise embedded in semi custom segment revenue of 565 million decreased 4% year over year due to lower semi custom sales.
Sequentially revenue increased 62% driven by record quarterly server processor sales an increase semi custom product revenue.
In semi custom we passed an important milestone in the second quarter as we began initial production and shipments of our next generation game console associates.
We expect strong second half semi custom growth as we ramp production to support the holiday launches of the new Playstation five and X. box series ex consoles.
Turning to server our focus since launching our epic processors has been on building a solid foundation to drive long term growth.
Our strategy is grounded in driving broad high volume adoption with widespread support from industry, leading cloud and hardware providers.
We passed a significant milestone in the quarter as we achieved our double digit server processor unit share goal based on broad adoption across cloud enterprise and HPC customers.
In cloud multiple hyperscale customers ramped second generation epic processors into high volume production in the quarter to power both their internal infrastructure and publicly available instances.
[noise], Microsoft announced they have added epic processors to power their office online applications used by more than 200 million monthly users.
Tencent ramped up multiple millions of epic processor powered virtual machines to support enhanced collaboration services.
Google announced that effort processors were being used exclusively to power their unique confidential computing the Oems that encrypt data wallet is being processed.
And a ws launch global availability of new compute optimized epic based E C. Two instances.
In enterprise, we have significantly expanded our Tam as the number of Amdy platforms has increased by more than 40%. So far this year.
Recent additions include Dell and HP, introducing multiple hyper converged infrastructure solutions, Lenovo launching dual socket servers for financial retail and manufacturing and and videos selecting AMC epic processors to power its latest DGX AI platforms.
We also secured new HPC wins based on the leadership performance and scalability of second Gen epic processors.
Public highlights include new wins, with leading research institutions, including Indiana University, Purdue and serve as well as Amazon IB, Microsoft and Oracle, all announcing cloud based HPC offerings powered by epic processors.
We're pleased with the momentum in our server business and expect to continue gaining share as additional second gen epic platforms and cloud deployments ramp to volume in the second half of the year.
We remain on track to begin shipping our next generation Milan server processor featuring Gen. Three late this year.
In closing I want to thank our employees and partners for the strong execution. During this unprecedented times as we continue to focus on delivering on our commitments.
While there continues to be some macroeconomic uncertainty and pockets of demand softness our product portfolio is very strong in our markets are resilient.
We are on track to deliver strong growth in the second half the year driven by our current product portfolio and initial shipments of our next generation Zen Threes Gpus and our DNA to Gpus that are on track to launch in late 2020.
I'm very proud of the progress we have made over the last few years, placing AMC on a long term growth trajectory.
Even more excited about the opportunities in front of us as we enter our next phase of growth driven by accelerating our business in multiple markets.
We remain focused on consistently gaining share across the 79 billion dollar market for our high performance products.
We are investing significantly and have added resources to further extend our leadership IP and go to market capabilities as we pursue our ambitious goal to make AMC a best in class growth franchise.
Now I'd like to turn the call over to the vendor to provide some additional color on our second quarter financial performance.
The vendor.
Thank you Lisa and good afternoon, everyone. We executed the second quarter very well amidst a global banking backdrop, we delivered strong financial results introduce industry, leading products and gain CPQ market share.
The second quarter results and increased full year revenue guidance highlight our ability to consistently deliver on our commitment as we continue to drive long term financial drilled.
Second quarter revenue was 1.93 billion up 26% from a year ago and 8% from the prior quarter.
Joe will yield growth was driven by strong horizon and epic process sales gross margin was 44% up 330 basis points from a euro goal driven by client and silver process. So sales.
Operating expenses was 617 million compared to 512 million you on a goal primarily due to ongoing investments in the business operating income more than doubled year over year to 233 million up 122 million from a unit goal driven primary.
Only by revenue growth.
Operating margin increased to 12% as compared to 7% or yield a goal net income was 216 million up 124 million from a year on a goal and diluted earnings per share was 18 cents per share compared to eight cents per share a year ago.
Now turning to the business segment results computing and graphics segment revenue was 1.37 billion up 45% year over year, driven by significant growth in rise unprocessed sales computing and graphics segment operating income was 200 million or.
18% of revenue compared to 22 million or 2% of revenue a year ago.
Enterprise embedded and semi custom segment revenue was 565 million down 4% year over year due to lower semi custom sales, which were largely offset by higher epic process sales.
See segment operating income was 33 million a 6% of revenue compared to an operating income of 89 million a year ago.
Turning to the balance sheet cash and cash equivalents totaled 1.8 billion, including 200 million from all the revolving line of credit which was fully repaid in the third quarter.
Inventory was 1.3 billion up 25% from the prior quarter in anticipation of the revenue ramp in the second half of Twentytwenty and new product launches.
Free cash flow was 152 million in the second quarter.
I'm very pleased with our cash performance in the quarter, which resulted in the first quarter of the year.
For the first half of the yet been free cash flow positive.
Let me now turn to the outlook for the third quarter of Twentytwenty. Today's outlook is based on current expectations and contemplates the current Colby 19, and bonderman global economic backdrop and customer demand signals.
We expect revenue to be approximately 2.55 billion plus or minus 100 million, an increase of approximately 42% year over year and approximately 32% sequentially.
The year over year and sequential increases I expect it to be driven by higher ryzen and epic process sales and next generation semi custom products.
In addition for Q3 Twentytwenty, we expect non-GAAP gross margin to be approximately 44% non-GAAP operating expenses to be approximately 660 million non-GAAP interest expense taxes and other to be approximately 25 million and the diluted check.
And in the third quarter is expected to be approximately 1.23 billion shares.
For the full year Twentytwenty, we now expect higher annual revenue growth of approximately 32% driven by the strength of our PC gaming and datacenter products.
We continue to expect gross margin of approximately 45% for the full year up two points from the prior year.
In closing, while there continues to be global economic uncertainty due to covered 19, we have significant opportunities ahead offers which strong product demand across multiple markets. We are in a good position to accelerate our financial momentum expand gross margins and generate signet.
African cash.
With that I'll turn it back to route for the question answer session route.
Thank you the vendor and operator, please poll the audience for the question answer session.
Certainly will now be conducting a question answer session.
Thank you. Please and the question can you. Please press star one under telephone keypad of confirmation tone would indicate your line is in the question Q.
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One moment, please what we pull for questions.
Our first question today is coming from Mark what pieces from Jefferies. Your line is that a lot.
Hi, Thanks for taking my questions.
A question for lease up you said in the past that your customers.
They don't buy CP use, but they buy roadmaps and I was hoping that you can you can tell us about your roadmap, particularly in servers going forward. How it compares to your competition and does your as part of that does your view of the competitive environment change. After your biggest competitor last week in order to pushing that seven nanometer.
Process.
Thanks, Hi, Mark yes. Thanks for the question. So although we've been very focused over the last couple of years on our roadmap in our strategy and knows for sure when we talk to our customers. It's about ensuring that they understand we have a consistent roadmap that is pushing the leading underperformance.
And on ensuring that we deliver the the performance improvements that are that we promise.
No as as you know with these roadmaps. Many of these decisions are made a years in advance and so we look at you know process technology as well as design and architecture and leading edge packaging. So we feel good about our roadmap. We just we updated our roadmaps at our financial analyst day on in a in March and we continue to be very focused on.
Executing to our Roadmaps.
And on the and when you talk about the the your focus both on your transistor or the process and the architectural lead to.
Can you give us a sense to what extent the share gains that that you're taking right now or are driven by one or the other.
Listen, which would you expect to to maintain a lead in both as you as you launch Milan and.
Farther on down 21 22.
Well I would say that the road map is dependent on all those factors show you have to get the process technology and manufacturing right. We feel good about our roadmap there in our partnership with TSMC and you also have to make the right design in architectural decisions and we feel good about our RCP roadmap. So.
Right now we are on Gen. Two with Rome, we saw a very nice acceleration of our of our data center business due to some of the the key customers that have launched we are on track or we expect to start shipping Milan here late this year and then we're also.
Working in development on Gen, four which are slated for five nanometer.
Thank you.
Thank you. That's question today is coming from put that Correa from Bank of America prolong there's a lot.
Thanks for taking my question and congratulations on the strong growth.
Despite all the happens.
I'm pleased to for my first one given when I think back to the last time MD was really big in the summer rocket was in that 2004 to 2006 timeframe. When marketshare went from 7% to 26% and I've got three or so Peter how would you contrast, the current environment right from.
From a competitive perspective, or just a customer vetting that's to adopt your platform. What would you what's realistic for your market share to kind of approach or those peaks with one of the puts and takes on how different are similar to generic speed. It's now.
Yeah sure if it back Ah. Thanks for the question. So well you know the server market. We've said is very strategic for US, we think theres, a a high demand for sort of pushing the leading edge of performance when I look at our roadmap right now I feel very good about our roadmap I think we have executed.
Well to our roadmap I think we are differentiated in terms of the the performance that we're offering in the server market. We've always said that the datacenter market is a bit of a journey and so this is about putting together multiple generations of of strong execution. So we're pleased with where we.
Our with Roman and the progress that we've made this year I would say we're still in the early innings of what we believe we can do in the server market No I think Rome is a very very competitive product I think as we go into Milan, we see that that's also a very competitive product and our goal is to really satisfied.
Broad swath of the server workloads, and we think we have the capabilities of doing that.
Okay.
A follow up Lisa So you raised full year growth outlook.
32% or so I believe from 25% can you give us some more color on what's driving that upside how much of that is coming from Pcs, how much from silver how much from semi custom and I noticed that you kept the gross margin outlook.
Kind of steady and I'm wondering.
How do we think about gross margins going forward how sensitive is that do your success in the silver market. Thank you.
Ah, yes, so while we did update to our full year guidance I'm you know when we look at you know sort of what's changed over the last 90 days. When we were you know it's you're talking to you in April we were actually expecting that there might be some coded 19 related weakness in the second half due to macroeconomic factors are you know others.
It's like that what we see now is better visibility into the second half the year and so we had originally assumed that the PC market would be down in the second half and we now expect that Pcs that we will grow in the PC in Ah you know PC processors for.
For the second half compared to the first half. We also see data center growing from the second half to the first half and then we have our game console ground that is a strong wrap here in the second half. So I think you know it's a number of factors. We do believe that the market is a little bit better than a than we thought 90 days ago, but we also believe that.
Our product traction is strong and we're seeing that come through with with our customer demand. So those are the reasons for the for the guidance.
I think on gross margin Oh, I'm, sorry, yes on gross margins, Yeah, I think that depends a lot on mix that depends on certain certainly your question was about server.
You know server is certainly accretive to margin I think you know in the PC business. The second half of the year tends to be a bit more consumer focused and and notebook focused and so are you know so that's some of the mix relation there and then we said that the consoles are to creative to margin, we expect that councils.
We'll be very strongly third quarter and although the fourth quarter will be lower for consoles its still going to be a very strong strong second half of the year. So those are the puts and takes there, but we feel that Ah you know the you know the mix is about right to up for the annual guide at a 45%.
Got it thank you.
Thank you. My next question today is coming from that Ramsey from Cowen and company. Your line is alive.
Yes. Thank you good afternoon everybody.
Lisa <unk> I wanted to ask about the PC market and I can you just gave some common.
Maybe some stronger trends than you might have anticipated 90 days ago.
Pretty remarkable for.
Double than for the second quarter.
Record clients.
I Wonder if you might talk about the momentum, particularly in the market.
And then how are you feeling the whole enterprise notebook market and what's the traction like there so far into the back half. Thank you.
Format. So the PC market was strong for us and the PC business was strong for us I'm in the second quarter and as we look into the second half.
You know what we saw was that you know desktops were down as expected but.
But the the a you know the covert 19 type phenomena has increased overall you know the PC PC market and we see a a strong shift from desktop to notebooks.
At the same time I think on our notebook portfolio, particularly the rising 4000 has done extremely well.
We've seen stronger than we have the over 50 platforms in market. We watch the a the sell through and then the consumption of those and I would say it has has been very strongly even exceeded our expectations for the early ramp and our view is that the second half will continue to be.
The.
Good for notebooks and Pcs overall, and that's part of this this idea that Pcs are now with central and and so we see strength in 'em consumer.
We see strength in gaming notebooks, which we had previously been underrepresented, we have a nice a commercial ramp and we do see you know good pipeline around commercial Pcs as well as the education market is quite strong as well.
So you put that together and I think the PC businesses performed well for us.
Got it thanks as a follow up maybe a piece of the business. It's been asked about a little less frequently over the last few quarters.
Your gaming GPU business and.
If you could just put into context, what would the expectations are for improvements and new opportunities for big Novvi as you launch later this year.
And maybe size those opportunities from a data center perspective versus what you might expect in the gaming channel. Thanks.
Yes, so I think the graphics as we mentioned in the prepared remarks was down year over year, we saw a nice ramp of mobile as we launch some of the the Novvi based no mobile products, but the desktop channel was lower this was somewhat as expected from the standpoint on the second quarter.
There's usually a lower quarter for the desktop channel. What we did see is that sell through was pretty good. So I think gaming overall is good we are in the process of a product transition. We are on track to launch our DNA to or as you call. It Big Nabil late this year, we're excited about the our DNA to architecture I think it.
It's it's a full refreshed for us from the top of the stock through the rest of the stock and so I think that will be more of a contributor here as we go into no later this year and into next year.
Thanks Lisa.
Thanks, Matt.
Thank you for next question. Please come from Harlan sur from JP Morgan Your line is alive.
Good afternoon, and great job and accordingly execution on good to see the team hit the double digit percentage market share targets.
In a broadening out at the end market penetration with epic just Lisa just given your customer and design win pipeline and rollout of Milan in the back half of this year. How are you thinking or how should we be thinking about further epic share gains over the next 12 to 18 months.
[noise] sure Harlan. So look we are optimistic about our product positioning of the server market you know much of.
Well you know what we've been doing up through now frankly is making sure that our customers were ready to take advantage of Rome, and I'm, an epic and and so we saw some nice traction here in the first half the year, particularly in the second quarter around some top cloud accounts that have started to ramp in and good volume.
You know as we look forward to the second half the year there are more platforms coming with room, we have a number of OEM platforms that are in a process being launched.
We have additional cloud platforms as well so I think Rome is going to continue to be a strong driver.
Of our growth into the second half of this year as well as next year. We're excited about Milan. Milan is is looking good into labs were working with our customers on on Milan, and and we expect to start shipping that later this year. So yeah I think the way to think about our server business is now again, it's a journey and.
We're pleased with where we are today, but there's there's a there's a significant opportunity for us if we continue to execute well over the next I would say you know more than 12 to 18 months, but really we see this as a multiyear opportunity.
Absolutely and then as a follow up you know we do an annual CIO saw me here at JP Morgan for the past few years, we've been asking global CRM tools are these thinking about or planning to you, but he's a platforms for encore and then the most recent survey that we did in June we actually saw 60% Uva increase.
So the number of Seattles, they're thinking about using a pick up for on Prem onto a petition is that interest level mindshare is growing quite rapidly I guess my questions you need to use the indeed, what is the in the team seem from an actual adoption prospective and what's your sense of your enterprise Nick.
Sort of two to three years from now.
Yeah actually Harlan I saw that data and I thought it was was though it was good data show the yeah. What I would say is that we are making progress I'm in the enterprise business and you know that comes from a number of different factors.
But no first is the availability of platforms and we have a very diverse set of platforms from our OEM partners.
That are now in market. We've also done quite a bit on ecosystem and ensuring that we have the partnerships with the ice VGE and then just basically feet on the street.
Where are you know we're talking directly to on some of these enterprise customers. So I feel.
Good about the progress that we've made you know again I would refer to the fact that you know mindshare is is a leading indicator, but there is a lot for us to do to convert that into a you know marketshare and revenue growth, but we feel like we're on a good path and we're going to continue to focus on both cloud and enterprise grow.
Okay and you know I also mentioned HPC is another key factor for us where we're very focused on showing a strong value proposition for those you know sort of toughest most scientific workloads.
Absolutely. Thank you.
Thanks, Charlie.
Thank you and that's question three three from Joe Moore from Morgan Stanley. Your line is alive.
Great. Thank you.
I just say went from the previous question can you talk a little bit about your enterprise prospects on the PC client side.
Can you give us a sense for how much at this point your business is skewed to consumer and how much progress you're making there in terms of penetrating enterprise business.
Sure Joe No question, our business is more consumer weighted today I will say, we're growing nicely in in commercial Pcs I think you know the the strength of the the before thousand product has has has been good for US I think there's there's a lot of positivity.
Around the performance the battery life the capabilities, they're yeah, we continue to expand our go to market efforts there were partnering very well with our top OEM partners. So I would say that we're still underrepresented in commercial but no question that you know commercial notebook is a a is a big focus.
For us and we're going to continue to to invest and hopefully make progress and that's a sub segment.
Great and then as a follow up and there's been a bunch of press about console builds getting revised up meaningfully by several million units coming from UK.
And yet your upside for the year seems fairly balanced across the segments can you give us just color and what's happening in that console segment is there how much upside and do you could your numbers prove conservative estimates at the back half.
Yeah. So I will say that are or upside is balanced across the segments. There's no question that there's a strong ramp in the second half of the year for consoles, we're continuing to increase supply to me to meet that demand, but overall you know I view it as you know again councils our multi.
Year cycle, and you know the first year I mean, theres a lot of pent up demand for councils Ah, but you know we should think about this as really a multi year cycle and I'm. You know this is just the beginning of the ramp.
Great. Thank you.
Thank you. My next question today is coming from Stacy Rasgon from Bernstein Research Your line is alive.
Hi, guys. Thanks for taking my questions I wanted to follow up on that capacity point, what does your capacity in supply situation looks like and is any of the full year raise or related to capacity freeing up the foundry partners and maybe put another way are you supply rather than demand women at this point what is what does that capacity situation.
Yeah sure Stacy so a lot we have built a strong supply chain. There's no question. It's been a very dynamic year on if you just think about all the puts and takes over the last four or five months, you know I've said before and I'll say again seven nanometer you know is tight and Ah, Yes, we continue to partner closely with.
With <unk> with TSMC to to ensure that we can satisfy our customer demand.
When you ask about the full year raise the full year raise is because demand has gone up from our initial expectations and some of that is due to the market and some of that is due to the strength of our product traction we are increasing capacity to meet those needs.
But it is tight and I would say that Ah you know as we continue to increase capacity or you know we see opportunity there. So I'm from that standpoint, I'm you know demand is strong.
Thank you one follow up <unk>, who is talking about a data center contingency Davidson your digestion.
So what we said you're coming from a different place I'm with new Quater grants and everything so I understand why you weren't growing supplement or not but but what do you shouldn't just globally with your customers are you seeing signs of the market within hyperscale knowing that that just in case you can even if it's not impacting you.
Good to go so well understood reasons.
Yeah, Stacy I think it's a bit hard to generalize you know in from from our visibility what I would say is we have some customers that we see.
You know demand increasing in the second half versus the first half we have some customers who are a little bit lower on the main thing for us and I think you said, it's about the ramping up our platforms and so I'm not sure I would point to a particular digestion phenomena I would say, it's very customer dependent and depending on how much they built out in the first half.
And some customers will be up in some customers will be I'm, a little bit down, but overall, we see an opportunity to grow in the second half.
Got it is at the same across that's helping small and middle class and most.
So my my my comment was Ah Hyperscale comment since that's that's what you're asking about you know when I look at enterprise, what I would say about enterprises. Its also you know a different things happening I would say in terms of enterprise and H.P.C.. We continue to see build out and as I said, we have Newport platforms wrapping that I mean.
Entrant in the prepared remarks, there is a bit of softness and SMB or some of the transactional business and again, we were not very exposed to that portion of the market. So I don't see it as a as it's going down it's just perhaps you're not increasing as fast as we wanted to but but overall you know it really depends on customer spin.
Civic stuff and we don't see sort of this large scale people slowing down I would I would say that way I think theres a need for infrastructure and we see people continuing to invest in infrastructure.
That's very helpful thinking somewhere.
Thank you next question today is coming from Aaron Rakers from Wells Fargo. Your line is not a lot.
So perhaps your phone with your forward is on mute please pick up the handset.
Yes. Thank you can you hear me.
Yes, we can hear yaron.
Okay. Thanks, Casey so congratulations on the quarter I wanted to ask about the data center GPU business. I know you talked about you know the path you know or the or for the cdna caught up going forward I'm. Just curious as you look to your cloud opportunity. How do you gauge or are you thinking about your below.
Do you could call to participate in some of the Eli opportunity negates Little GPU business and you have any update on kind of rock them and how that has opened up opportunities or what we should get spot from a from a software platform perspective.
Yeah sure arent. So look I think that data center GPU business is a it's sort of a midterm growth vector for you know this year I mentioned in the SEC a in the second quarter that ER revenue was lower year on year, but the second half we expected to go up modestly.
No I think the yeah. The view is we have good design wins and cloud gaming we have good design wins across you know sort of cloud VDI type instances very strong in supercomputing and HPC around frontier and L. copy time as sort of our anchor you know supercomputing wins as it real.
Late to machine learning and AI, Oh, we continue to invest in <unk> <unk>. We continue to work you know sort of our strategy around machine learning is partner deeply with a couple of large cloud vendors, who can invest in software with us and we see that as a as a multiyear opportunity, but I will no. It's not a big revenue car.
Attributor here in 2020.
But we see growth opportunity as we go into 2021 and beyond.
Okay, and then as a a quick follow up we talked a lot about kind of just ramping epic in the in a roadmap.
You know I'm just curious how you've invested in the support organization to support this expansion.
You know how has that how has that progress has that been at all limiting factor or is it to some of your ability in the in the service with you market.
Yeah, I think it you know in server seep use it just takes time you know there's a there's a customer qualification process that takes time, but we have we've been very pleased with you know sort of the efforts on both the part of our customers as well as you know sort of our own support teams, we're continuing to invest so if you look at.
Our opex were continuing to invest one of the the key areas is you're building out not just that support infrastructure, but just overall sales and go to market for the enterprise business. So I feel good about where we are our strategy was always to to Oh go through some of the top cloud customers first.
And I'm really pleased to see some of those no get to high volume production and we'll continue to build out that infrastructure in a you know both cloud as well as the enterprise.
Thank you.
Thank goodness question today is coming from Timothy Arcuri from yes, you're right we've got a lot.
Hi, Thanks, I guess, Lisa I wanted to ask maybe in the past month or six weeks or even two months since it's become a you know probably more apparently the customers that your competitors, having you know some manufacturing issues.
Can you speak a little bit to the tenor of the customer conversations has it hasn't changed at all have you felt them incrementally more willing to adoption products. Thanks.
Yeah, I don't think I would say you know maybe four to six weeks is kind of a short time I think I went back up a little bit and say you know over the past couple of quarters, what have we seen and I think over the past couple of quarters. What we have seen is you know.
They they've seen our performance capability and we feel very.
Very good about where our products are positioned I think what what we've also said is look you you can count on us for consistent roadmap.
And we're going to show you each of those data points I think the you know the Milan you know point is an important point for us and that's why we're very focused on ensuring that that that ships. Here. Later this year I think you know the Gen. Four no general point, we've already started engaging customers.
You know customers are very eager you know to understand what the long term road map is and so you know what I would say is you know it's not you know sort of a short term thing it it's more the notion of.
Yeah, we feel that customers are very open you know across a cloud OEM enterprise you know, it's on us to execute and we think about that everyday but in terms of where the road map is what are we trying to accomplish where the customers are theres a pull from customers to engage us across a number workloads.
Yeah, we feel well positioned.
Got it and then I guess I'm also in data center I think you've highlighted before that a potential bottleneck might be to build out your software capabilities and you can you or are there any metrics you can give us in terms of your ability to attract talent has that improved recently sort of in terms of the number software engineers, you've hired anything like that.
Thank you.
Yeah. So I think if you're talking about software that's more of a a GPU a data center GPU statement, you know versus US GPU statement I think we feel actually that our CPQ tools infrastructure and all that stuff is actually pretty well built out.
There is some work that we do with some of the the applications in the ice fees to optimize intune, our our software, but I think that's going very well you know as it relates to the data Center GPU. Yes, you know I think there is more mindshare I think the though the supercomputing wins in and Ah the data set.
Your GPU side have have really helped raise the profile of our GPU capabilities and our software capabilities. So I think we are in a good position there.
And you know from from our standpoint again. This is this is about building out you know sort of multiple vertical applications and doing that are doing that very well. So we continue to invest in the datacenter. It is you know a very a strategic part of our business, but we're making good progress.
That's what we should.
Thank you.
Thank you next question is coming from Mitch Steves from RBC capital markets. Your line is there a lot.
Hey, guys. Thanks, taking my question I wanted to focus on it a little bit of a different topic card kinda can vary xeighty six an arm.
I'm sure you guys salty now to that Apple at this place. It can go Oh with its own arm based chip and historically the reason why you couldn't really use an arm based trips because there was no real developer around it. So I guess is there any risk or how do you guys think about arm based server, becoming a potential competitive threat in the future how would that impact the I could you fix market.
Intel as well so do you have any comment on that in terms of apples potential entrance.
Developing an arm based speaker system.
Yeah, Yeah, I think what I would say is no.
There are gonna be some people who develop their own trips apples announced it in in the Mac space and you know there are some who are building their own in the in the datacenter space.
I still believe this is not about arm versus ex 86, I think it's more about what performance do you offer what capabilities do you offer you know where the overall.
You know ecosystem is and in that sense I think we still feel quite confident that both the PC market as well as the you know the server processor market are predominantly ex 86, I think theres a very good set of offerings out there that are available.
And you know it's on US frankly on us to make sure that the performance that you get the power that you get the performance per dollar you know the capabilities are are very very competitive I'm. So that to you know we're offering you know sort of the a best in class processors in the market.
Got it and just one small one follow up just on the data center cost 20% of revenues is still the datacenter graphics Peafiel smoky small part of the business or was that better this quarter, just trying to get a qualitative understand what happened there.
Yeah that makes though we did say that overall datacenter revenue was up over 20% of revenue this quarter and it was predominantly gpus. So the a the GPU portion of that is still relatively small.
So just to be clear Gpus, we're not we're basically flat sequentially or whether.
They were actually down sequentially.
Okay helpful. Thank you.
Operator, we'll take two more questions Jamie.
Certainly your next question today is coming from Ross Seymore from Deutsche Bank. Your line is though.
Hi, Thanks, Let me ask your question Congrats on the strong results. We started to one short term question and long term question for you and on the short term side of things you have some significant moving parts with new product launches et cetera in both the third and fourth quarter. So I was hoping on the 32% sequential guided you can give a little color by the two end markets.
CNG and that you see side and then it's similar sort of thing when you go into the fourth quarter, you sense any cost would be down sequentially, which is kind of typical seasonality, but the ability for you guys to still grow sequentially, what's really driving that and then I'll follow up with the long term question.
Sure. So let's see on me, let me try to.
Do that so I think so when you talk about the the the Q3 guide so 30%, 32% sequentially. There's a large component of that which is game consoles. So the game console revenue was a relatively modest in the second quarter, it's going to become larger here in the third quarter, but we do.
Do see Pcs, you know growing sequentially as well as a server sheep use a growing sequentially.
And then as we go into the fourth quarter I'm I mentioned earlier that we expect that semi custom will be down a bit.
You know probably not as much as its historically down a frankly, because it's the first year of the of the launch but should be down a bit and then we do have a product launches that we've stated around sort of doesn't three product families as well as the our DNA to product families that would drive some.
The sequential growth in the in the fourth quarter does that did I answer that.
Yes, that's exactly what I want to thank you and then maybe this one, albeit a little clear on the long term side of things on an earlier question was asked about Opex and expand your capabilities et cetera, and you gave us a thoughtful answer to that but generally speaking it seems like your opportunities to take share in aggregate just improved.
Due to your competitors missteps. So when you look at that opportunity. How do you think about organic investments would opic staying at the 29% revenues like you're you're talking about for this year. The a good way to capitalize on that opportunity as opposed to going down to the 26 or 27% you mentioned that your analyst meeting.
Or within that would you keep that a little bit tighter inline with your analyst meeting and maybe even consider going inorganic and tapping into the M&A market now that you have some cash in a very attractive currency to use as well.
Yeah. So.
So, yes, but let me let me answer it this way so well we are very excited about our organic growth opportunities I think.
So we want to stay sort of at that sort of you know very significant growth that you know over 20% CAGR for the next you know a couple of three or four years I think the way. We've managed the business is the prudent way to manage the business and and so op ex will grow opex will grow and you've seen it in the dollar numbers, but it's gonna grow a little bit slower than.
Revenue and we think that's the right thing to do just do a you know to make sure that we do see some leverage you know that being the case because the business is growing so much I mean, we are.
We are investing quite heavily in opex across the business in both the R&D and and go to market. So what was the second part of your question.
Ross.
We just need inorganic right way would that be an add back to broaden your your offering to and to some of your customers well. Yeah look I think we have been focused on the organic growth path. Because there is yeah. So much opportunity there yeah, well look yeah, we'll always keep an eye opening for it you know are there opportunities to.
Enhancer portfolio or do some skills acquisition I'm, if that makes sense, but I think you know, we're very focused on executing the organic growth path.
Thank you.
Thanks Ross.
Thank you all part of question today can be from John Pitzer from Credit Suisse. Your line is not a lot.
Hey, guys. Thanks for squeezing me in and congratulation on a strong quarter, Lisa it's really great to see embedded in the implied fourth quarter guide a gross margin that needs to go with the up about 200 basis points sequentially to meet your full year guidance, and especially with gaming console is being down less than fuse. All I'm wondering maybe just help me on pack that a little bit.
You know when you think about the gaming console cycle is their gross margin improvement available to you as that cycle ramps and matures and I guess more importantly, when you look at both the PC market in the server fleet, where are you relative to optimal product mix vis-a-vis kind of longer term gross margin aspirations.
Yeah sure. So you know obviously, there's a lot to happen between now in the fourth quarter, but I think from the from the guide <unk> what you get is.
We see yeah, the server and Ah you know PC growth generally positive you know if you think about what's what we have planned from now through the rest of the year. We do have some significant new products that will start shipping that will be positive from a gross margin standpoint.
I'm now on a console basis, you know it is true that you know the console margins typically improve.
Over the first you know you know sort of four to six quarters, because you would expect that as we ramp into higher volume that other improvements in and manufacturing costs and so on and so forth. So those are the factors that are in there you know a lot will depend on mix and you know the mix of business being you know what is the mix of consumer versus commercial.
Joel on the PC side, and then on the data center side, the mix between cloud and enterprise and so we have to see how some of those things play out as we go out through a.
Through the end of the year, but overall I think the trend is such that you know you should see sequential growth in a in the gross margins as we go into the fourth quarter for some of the reasons that I mentioned.
That's helpful. Then we serve as a follow on you've always talked about this being a marathon more than a spread and you guys about a pretty methodical strategy to which you've executed too, but I just given the revelations of Intel's missteps last week when you do differently from here to try to take advantage of it.
Well, John I think the most important thing for us is to execute to our commitments to customers and that by the way. That's been the same focus for us over the last few years and it'll continue to be the same focus.
For the next few years, I think consistency and road map for consistency and performance expectations.
You know being capable of of ramping across you know basically what we're asking is for people to trust us with their most important applications and so.
Our focus is very much execute on the road map that we've committed to and that's a that's a that's key for US and no question Theres a lot of a lot of things to do an engineering to get that you know to make that happen, but I think we're very clear on what we want to deliver and I'm more excited frankly about the road map, we have in front of us.
Perfect. Thank you.
Thank you everybody.
For joining the call today, we appreciate it and we look forward to seeing many of you virtually throughout the quarter and operator, if you can close the call me certainly that does conclude todays teleconference. You may disconnect. Your lines. This time and have a wonderful day, we thank you for your participation today.
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