Q3 2022 Advanced Micro Devices Inc Earnings Call

November 1, 2022

Hello, and welcome to the M. D third quarter 2022 earnings call. At this time all participants are in a listen only mode. If anyone should require operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation.

As a reminder, this conference is being recorded.

My pleasure to turn the call over to Ruth Cotter. Please go ahead, Ruth Thank you and welcome to Amd's third quarter 2022 financial results Conference call by now you should have had the opportunity to review a copy of our earnings press release and accompanying slide where if you do not receive these documents they can be found on the investor really.

<unk> page of AMD Dot com.

We will refer primarily to non-GAAP financial measures. During this call the full non-GAAP to GAAP reconciliations are available in today's press release and slides, which are posted on AMD dot com as mentioned.

Participants on today's conference call are Dr. Lisa Su, our chair and Chief Executive Officer, and the vendor Kumar, our executive Vice President and Chief Financial Officer, and Treasurer. This is a live call and will be replayed via webcast on our website.

Before we begin today I would like to note that Mark Papermaster, Chief Technology Officer, and Executive Vice President Technology, and engineering will attend the Wells Fargo Technology media and telecommunications promise on Wednesday November 30th.

And our fourth quarter quiet time is expected to begin at the close of business on Friday December 16th.

Today's discussion contains forward looking statements based on current beliefs assumptions and expectations speak only as of today and as such involve risks and uncertainties that could cause actual results to differ materially from our current expectations. Please refer to the cautionary statements in our press release for more.

Information on the factors that could cause actual results to differ materially.

Now with that I'd like to hand, the call over to Lisa Lisa.

Thank you Ruth and good afternoon to all those listening in today.

Our third quarter revenue and gross margin came in below our expectations due to softening PC demand and substantial inventory reduction actions across the PC supply chain.

Despite the macro backdrop overall revenue grew 29% year over year to $5 6 billion as our datacenter gaming and embedded segments each delivered significant year over year growth and performed in line with our expectations.

We also expanded gross margin and grew net income year over year, highlighting the strength of our business.

Turning to the business results, starting with our data center segment revenue increased 45% year over year, and 8% sequentially to $1 6 billion.

We delivered our 10th straight quarter of record server processor sales driven by strong demand for third Gen epic processors and initial shipments of our next generation Genworth CPU to select customers.

Cloud revenue more than doubled year over year and increased sequentially as multiple hyperscale or expanded deployments of epic processors to power their internal properties and more than 70, New AMD instances were launched by Microsoft Azure, Amazon Tencent, Baidu and others in the quarter.

In enterprise OEM revenue was down sequentially as server Oems continued working through match debt issues and some business has slowed the pace of scale of their purchases based on the macro uncertainties.

Looking at the broader competitive landscape, our third Gen epic Cpus in market today are the highest performance and most energy efficient <unk> six server Cpus available and we expect to further extend that lead with our next generation five nanometer Genoa processors, which deliver significant performance energy efficiency and <unk> advantage.

<unk> for both Hyperscale and enterprise workloads.

We won't publicly launched Gen. One next week and are ramping production to support initial cloud deployments and the introduction of fourth Gen epic processor platforms by HP Enterprise, Dell, Lenovo Supermicro and others.

Looking at our broader data center portfolio as expected datacenter GPU sales were down significantly from a year ago. When we had substantial shipments supporting the build out of the frontier extra scale supercomputer.

We made good progress with our data center GPU software enablement work in the quarter, including announcing our role as a founding member of the pie towards foundation.

We look forward to working closely with the largest cloud providers as we drive a standards based approach to the development of popular pie towards deep learning software framework.

Demand from data center customers for our adaptive smart Nic and GPU products was strong during the quarter.

We had record sales of our Xilinx FPGA and networking data center products led by demand from cloud and financial customers.

Sales of our <unk> Gpus also ramps significantly from the prior quarter driven by cloud adoption.

The addition of <unk> to our product portfolio has been very well received by customers highlighted by our enterprise customer pipeline doubling in the few months since the acquisition closed.

We were excited to support <unk> launch of its next generation cloud virtualization platform in the quarter.

Our <unk> Gpus will be included in the first validated server and HCI solutions supporting the new Vmware virtualization offerings from Dell HPE and others that will make it much easier for enterprise customers to build more performance and secured datacenters powered by our industry leading gpus.

Taking a step back we have built significant momentum in our data center business as we have consistently executed our server CPU roadmap and expanded our solutions capabilities with the addition of the Xilinx and <unk> products to our portfolio.

We remain on track to further expand our product portfolio in 2023 with the launches of our edge in telco optimize sienna and cloud optimized Bergamo processors.

With 128 cores and 256 threads per socket, we expect Bergamo will further extend our performance and energy efficiency leadership in cloud workloads.

Customer response has been very strong based on the performance features and software compatibility Bergamo delivers.

We believe our broad family of leadership Cpus, Gpus, <unk> adaptive sse's and Gpus position us well for long term growth and share gains in the data center.

Now turning to our client segment revenue declined 40% year over year to $1 billion.

Our client processor shipments were below PC consumption in the third quarter as we worked closely with our customers to reduce downstream inventory.

Desktop channel sell through increase from the prior quarter driven by increased demand for our Ryzen 5000 series Gpus and the launch of our Ryzen 7000 series processors and <unk> platform in September .

We launched our five nanometer Ryzen 7000 series processors to strong reviews based on delivering leadership performance in gaming productivity and content creation applications.

We expect ryzen 7000, and CPU sales to ramp this quarter aligned with the launches of a broader range of mainstream enthusiast and five motherboards.

Now turning to our gaming segment.

Revenue increased 14% year over year to $1 6 billion as strong semi custom sales offset a decline in gaming graphics.

We delivered our sixth straight quarter of record semi custom Soc sales as demand for the latest game consoles remains strong and Sony and Microsoft prepare for the holiday season.

Gaming graphics revenue declined in the quarter based on soft consumer demand and our focus on reducing downstream GPU inventory.

We will launch our next generation Rdna three Gpus later this week that combine our most advanced gaming graphics architecture with five nanometer triplet designs.

Our high end rdna, three Gpus will deliver strong increases in performance and performance per watt compared to our current products and include new features supporting high resolution high frame rate gaming.

We look forward to sharing more details later this week.

Looking at our embedded segment revenue increased significantly year over year to a record $1 3 billion driven by growth from aerospace and defense industrial and communications customers.

Demand across our core markets remain very strong we had record sales to aerospace and defense and automotive customers, who are increasingly using our FPGA and adaptive soc products to enable differentiated capabilities and features and their products.

Record communications market revenue was driven by growth from both wired and wireless customers. We saw particular strength in North America led by new <unk> wireless installations and expanded wired infrastructure deployments.

Overall demand for our Xilinx products remained strong as we continued to leverage <unk> scale to secure additional supply to address this demand.

Longer term, we're very excited about the growth opportunities in our embedded business.

We closed multiple high revenue design wins in the quarter with automotive networking emulation, and prototyping communications and aerospace and defense customers.

We're also seeing new design win opportunities and deeper engagements with many of our embedded customers based on the expanded breadth of our adaptive Soc.

FPGA, CPU, GPU and CPU product portfolio.

Yeah.

In summary, we are well positioned to navigate the current market dynamics based on our leadership product portfolio strong balance sheet and growth in our datacenter and embedded segments.

We have three clear priorities guiding us.

First and foremost we are focused on executing our roadmaps and delivering our next generation of leadership products.

Second we're building even deeper relationships with our customers as we make AMD a fundamental enabler of their success.

And lastly, we remain very disciplined in how we manage the business. We will continue to invest in our strategic priorities around the data center embedded in commercial markets, while tightening expenses across the rest of the business and aligning our supply chain with the current demand outlook.

The secular trends driving increased demand for high performance and adaptive computing in the cloud at the edge and across intelligent end devices remain unchanged and provide a strong backdrop for long term growth now.

Now I'd like to turn the call over to the vendor to provide some additional color on our third quarter financial performance <unk>.

<unk>.

Thank you Lisa and good afternoon, everyone AMG reported third quarter results in line with the preliminary results, we announced last month, while we are pleased with the performance of our data center gaming and embedded segments each of which grew significantly year over year, our third quarter results also reflect lower than that.

Expected client segment revenue.

Third quarter revenue was $5 6 billion up 29% from a year ago gross.

Gross margin was 50% up 150 basis points from a year ago, primarily driven by higher revenue in the embedded and data center segments, partially offset by lower client revenue and $160 million of inventory pricing and related charges.

The graphics and client businesses.

Operating expenses were $1 5 billion compared to $1 billion a year ago. As we continued to scale. The company operating income was up 20% from a year ago to $1 3 billion driven by revenue growth and higher gross margin.

Operating margin was 23% compared to 24% a year ago due to higher operating expenses net income was $1 1 billion up $202 million from a year ago.

Our earnings per share was <unk> 67 per share compared to 73 per share a year ago, primarily due to lower client segment revenue.

Now turning to our reportable segments, starting with the data Center segment revenue was $1 6 billion up 45% year over year, driven by strong growth in third generation epic So cross sell revenue.

Data Center operating income was 505 billion or 31% of revenue compared to $308 million or 28% a year ago.

Higher operating income was driven primarily by stronger revenue, partially offset by higher operating expenses.

<unk> segment revenue was $1 billion down 40% year over year due to reduced processor shipments, resulting from a weak PC market and a significant inventory correction across the PC supply chain.

Client and operating loss was $26 million compared to operating income of $490 million or 29% of revenue a year ago, primarily due to lower revenue.

Gaming segment revenue was $1 6 billion up 14% year over year, driven by higher semi custom product sales, partially offset by lower gaming graphics revenue.

Gaming operating income was $142 million or 9% of revenue compared to $231 million or 16% a year ago. The decrease was primarily due to lower graphics revenue and inventory pricing and related charges.

Embedded segment revenue was $1 3 billion up $1 2 billion from a year ago, primarily due to the inclusion of xilinx embedded products revenue.

<unk> operating income was $635 million of 49% of revenue compared to 23 million or 30% a year ago, driven primarily by higher revenue.

Turning to the balance sheet cash cash equivalents and short term investments were $5 6 billion at the end of the third quarter.

During the quarter, we repaid the seven 5% senior notes totaling 312 billion that matured in August and deployed $617 million to repurchase common stock.

<unk> six 8 billion in remaining authorization for stock repurchases.

Cash from operations was $965 million and free cash flow was $842 million compared to $764 million in the same quarter last year.

Inventory was $3 4 billion up approximately $721 million from the prior quarter, driven primarily by client products and new products ramping in the second half of the year.

Now turning to our financial outlook today.

Today's outlook is based on current expectations and contemplates near term macroeconomic environment.

For the fourth quarter of 2022, we expect revenue to be approximately $5 5 billion, plus or minus $300 million, an increase of approximately 14% year over year and flat sequentially.

Year over year growth is driven by embedded and data center segments, partially offset by a decline in the client and gaming segments on a sequential basis and better than data center segments I expect it to grow offset by declines in the client and gaming segments.

In addition for Q4 2022, we expect non-GAAP gross margin to be approximately 51% non-GAAP operating expenses to be approximately $1 $5 5 billion or 28% of revenue non-GAAP interest expense taxes and other to be approximately 100.

$75 million based on the 13% effective tax rate and diluted share count to be approximately 162 billion shares.

For the full year, we expect revenue to be approximately $23 5 billion, plus or minus $300 million an increase of approximately 43% led by growth in the embedded and data center segments, We expect non-GAAP gross margin to be approximately 52%.

In closing we continue to focus on executing our long term strategy, while navigating current market conditions, we will prioritize the key investments for our product Roadmaps and long term growth, while taking several near term cost management actions, including pro.

Currently controlling operating expenses and head count growth, while actively managing inventory in line with our revenue expectations.

With that let me turn the call over to route for our Q&A session route.

Thank you to vendor and Kevin if you could please poll the audience for questions.

You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing star one one moment. Please while we poll for questions.

Our first question today is coming from Aaron Rakers from Wells Fargo. Your line is now live.

Yes, thanks for taking the question I have one question one quick follow up I guess.

As we look at your Youre acquiring a piece of the business being down sequentially in the current quarter as we worked through inventory digestion at your customers I'm curious just how you're how you're thinking about kind of the clearing out of inventory do you think we find a bottom are.

Coming out of the December quarter, or any kind of thoughts of just that.

That kind of full expectation of a flushing of inventory in the PC in the PC market for you guys.

Yes sure Erinn.

Thanks for the question so clear.

Clearly the PC business has.

<unk> been very volatile and underperformed for us in the third quarter I think as we go into the fourth quarter, we are guiding.

It's embedded in our guidance is that piece.

<unk> will be down again in the fourth quarter.

Believe that that will be a significant step in clearing inventory between third quarter and the fourth quarter and of course, we'll monitor the macro conditions, but we'll certainly exit.

The year in a better place.

Yes, and then as a quick follow up on the service side of the business I think in the past you've talked about.

Your ability to ship being somewhat supplier.

Supply constraint and I'm just curious if you have an update.

On the supply situation in the server Cpus, especially as we look towards the general processor ramp.

In the next quarter or two.

Sure so in the.

On the server side, we certainly have been ramping up our overall supply I think we've made good progress on that throughout the year, we have more supply in Q4 than we had earlier in the year and some of those.

Some of those investments are coming online here in the fourth quarter. So we expect as we go into 2023 with the general launch not to be supply constrained based on what we currently see.

Yes. Thank you.

Thanks.

Thank you next question is coming from <unk> Hari from Goldman Sachs. Your line is in our lives.

Thanks, So much for taking the question Lisa I wanted to ask a question on the outlook for 2023, specifically and the server CPU business.

I know, it's early and difficult to predict but.

Given given the supply comment that you just made given what youre hearing from customers both on the cloud side as well as the enterprise side and the ramp of your new products. How are you thinking about the positives there versus the macro which continues to be a headwind.

I think many of US have your business growing in data center kind of in the 20% to 30% range is that is that a fair place to be or is that little too optimistic given what you know today.

Yes. So it is a little bit early to talk about 2023 precisely, but maybe let me give you a backdrop of where we see the datacenter market today as you said in the near term there are some overall macro headwinds that are affecting all markets, including the data center market now.

<unk> by segment and so if I go through each of the segments. What we're seeing is I think North America cloud is probably the most resilient out of the segments within the data center market and this is where AMD is the strongest.

Had.

Very good progress.

At the North American cloud vendors and we continue to believe that although there may be some near term, let's call. It optimization of let's call it individual footprints and efficiencies at individual cloud vendors over.

Over the medium term as we go into 2023, we expect.

Growth in that market, particularly customers moving more workloads.

Just given the strength of our product portfolio and.

Overall general and coming forward as we look through the other segments I think China is has been very weak in 2022, and we're not forecasting a significant recovery in 2023. So we'll see how that goes and then on the enterprise side.

I'd say enterprises are probably most impacted by the macro so we have seen customers taking longer to make decisions and perhaps being a little bit more conservative on capex that being said, though we feel very good about our value proposition, we feel very good about our product portfolio and we believe.

In a little bit of a choppy market that we can gain share across that business. So overall I think our data center trends are.

Our good and we need to work through the macro as everyone does.

That's helpful and then as my follow up question on gross margins maybe for the vendor.

Regarding Q4 gross margins up about 100 basis points.

Which is good to see but youre still.

300 basis points below where you were in Q2 and since then obviously client is down significantly your data center business is very resilient and so is the classic xilinx business. So from a mixed perspective, you should be in a better place.

What's driving down gross margins in Q4, I guess versus Q2 are you recognizing another inventory hit or is it something else. Thank you.

No inventory hit first of all associated on the gross margin as you said Q2, 54%. If you go all the way to Q4, 51%, primarily due to weak PC market and client margins coming down for example, if you look at Q3 and all of the businesses were in line with expectations and client margins came in lower we also have for that.

Data center.

<unk> cloud <unk>, which has lower asps. So that also has an impact on margins and then as Lisa mentioned earlier some of the new capacity that we have from a supply standpoint, there are some additional costs from the supply capacity agreements and those all baked in into the Q4, 51% margin guidance.

Thank you.

Thank you next question is coming from Stacy <unk> from Bernstein Research. Your line is now live.

Hi, guys. Thanks for taking my questions answer the first one I wanted to ask about the extra week in Q4, how much revenue is that driving on an overall basis as well as data center, specifically I don't know how linear those.

That business is there any sort of is there any material impact from that extra week.

Yes, Stacy, we're not really counting on a material impact from the extra week I think if you look at the pluses and minuses in the quarter.

The guidance for Q4 really is around sort of Pcs and let's call it gaming being lower and again those are with all the holidays and in place.

Not counting on too much there and then data center.

Is data center embedded R.

Our higher but we're not.

<unk> that the extra week has a material impact.

Got it thank you.

For my follow up I wanted to ask about units versus pricing in Q3, Q4, and I know in Q3 specific we mentioned pricing.

As an impact and it sounds like you're suggesting client margins are coming down I don't know if that's just a cost or if theres a pricing impact as well, but like what is units and pricing is doing and pricing doing client in Q3.

And what are you expecting them into Q4.

Yes, sure Stacy So I think if you look at the third quarter. It was there are a lot of dynamics in the client business. So market was weak.

In particular consumer was weak and we have more of a footprint in consumer.

In that framework, we saw units come down, but we also saw asp's come down on a sequential basis, no I will say that asps were.

Still up on a year over year basis, So we've been let's call it disciplined.

In this pricing environment.

Did see some pricing dynamics in the quarter and we didn't chase unprofitable business and will continue to be sort of.

Watching that space, so that was the.

Pluses or minuses as it relates to client Asps and as we go into the fourth quarter again, I think we're forecasting for <unk>.

Competitive environment, given the market weakness.

And that's.

That's embedded in the guide.

Got it that's helpful. Thank you guys.

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

Thanks for taking my question for the first one.

I just wanted to clarify what is the client revenue, we should be thinking about for Q4 does that $800 million $900 million any help there and then I guess Lisa the bigger question. There is what does client recovery look like.

You get back to the 2 billion quarterly rate do you get to one 5 billion.

I ask that because your competitor was suggesting that next year, the PC Tam would only be down 4% 5%.

It seems a little bit optimistic what do you think AMD is kind of what kind of pieces down does AMD have in mind for next year. So that we get a sense for how does de risk the model from a PC perspective.

Yes, so a couple of different points Vivek, let me just answer the sort of the expectations around Q4, I would say.

We're guiding let's call it modestly down.

For for client and gaming and.

Obviously, we're coming off of what is already a low base in Q3, we want to do that too.

Correct, yes.

Yes, the inventory situation as quickly as possible and as a result, we're going to under ship consumption again in the fourth quarter.

To do that as it relates to next year I think there are a lot of.

Factors this year Pcs will be down quite a bit let's call. It high teens close to 20% as we go into next year I think the industry is calling mid single digits.

That would be.

A good case, I think we should model down to minus 10% and again within our PC business, we expect.

As we get through this inventory correction I mean, we have very good products and I feel very good about our product portfolio and very good about our platforms. Overall, so I do think the PC business.

We will recover as we go into 2023, but we'll have to work through these dynamics over the next.

A quarter or so.

And for my.

Follow up maybe one for you on gross margins.

<unk> of the write offs and pricing actions that you're taking that you took in Q3 and are taking in Q4, how much are the recoverable in Q1. So let's say hypothetically Q1 revenue is the same as Q4 revenue what can gross margins be how much of.

The actions are recoverable and basically how do you start getting back to.

The prior trend of 54% gross margin because the longer term target is over 50.

<unk> 57, so if client revenues don't really grow that much.

Are there actions that can help you will get back to your prior gross margin trajectory. Thank you.

Let me, let me try to answer it. This way if you look at Q3 in and of itself. We came in with about 50% gross margin.

$160 million of charges of which our inventory pricing it related charges, if you adjust for those.

Margin for Q3 is about 52% and we had guided to 54, we came in at 52 and primarily that's due to.

Two reasons Troy do you have the client.

PC market.

And obviously the client margins are down as I said earlier, the rest of the business will perform per the expectations. We have to work through whats going over the PC market over this quarter next quarter and maybe early 'twenty three and then we come back and talk about margins I do feel good about the products, we are introducing especially the new products and perhaps the ability to.

Increased margins from where we are right now guiding 51% and then taking it up from there.

But is the $160 million recoverable I guess, that's really my question.

Those are mostly inventory right. So our pricing actions would take largely I would say not recoverable if that's what you're asking.

I mean can you get back to the 52 that you would have been normalized.

I expect if you don't take these actions in Q1 than should be should you be at a higher gross margin in Q1 versus Q4.

I won't guide Q1, but what I will say from the 51% that we have in Q4, but we can improve from there.

Thank you.

Thank you. Our next question is coming from that Ramsey from Cowen. Your line is now live.

Thank you very much good afternoon, Lisa I have one.

Question on the data Center segment, and then a follow up on client.

On the data center business, if you look back to.

The pre announcement a month ago I think there was a little bit of.

Maybe came in a little bit under where we were modeling I'll just say that way.

So I got a ton of questions on that and I was really interested in some of the comments that you made in your script about how cloud revenue still more than doubled year over year and anyway.

Anyway, just confirming that I got that right.

Maybe if you could help us break down your data center business, a little bit between the strength in cloud that I would expect to continue given the capex commentary, we've heard but there were obviously some headwinds from enterprise that you called out and clearly from HTC bolt on CPU and GPU. So.

That would be helpful to just break it down because I was surprised that that cloud revenue was as strong as it was given given where the numbers came in in the quarter. Thank you.

Yeah sure, Matt So and.

So if we're focused on the third quarter, what I would say is cloud revenue did more than double enterprise revenue was down and and then on the GPU side, because we had a strong.

<unk> in the third quarter of 2021 that was that was down two and perhaps that perhaps that wasn't quite in your modeling but.

The larger dynamics are.

As I said earlier, the North America cloud is probably the best out of all of the all of the data Center segment.

There is some impact on macro, though I mean, I think everyone.

Is aware of that that there is.

There is a little bit of pullback in capex spending that being the case I think our market share is.

Is very good there and will we expect it to continue to grow and as the business becomes more cloud weighted.

There have been a few margin question. So I'll just mentioned as the business becomes more cloud weighted.

That tends to have a little bit of downward pressure on the margin, but our goal right now is footprint and expanding our footprint.

Across cloud and enterprise I will say, even in a weak enterprise market as we go forward over the next few quarters, we feel really good about how we're positioned and.

The platform solutions that are coming out with all of our OEM partners. So I think on a quarter by quarter basis, you may not get the model exactly right, but I think on a.

Longer term basis, I think the product portfolio and the product capabilities.

Should help us continue to gain share.

Thank you Lisa that's helpful I think.

To highlight the cloud momentum continuing.

I guess as my follow up I wanted to kind of revisit what we've learned over the last three or four months in the PC market.

Super dynamic times out there and obviously things have changed and in.

And demand really really quickly from when you guys guided back at the beginning of August until the pre announcement and I just kind of wanted to walk back through sort of the dynamics of how the quarter progressed from when you guys gave the original guidance.

I guess, obviously the market went down there was inventory corrections and whatnot, but just how quickly did you guys see that and I guess the real question coming out of this is how are you thinking about changes you might make in monitoring inventory levels or.

Working with your channel partners.

Just any changes youre thinking about making an operationally to the business to sort of protect from from this kind of thing and come in and I guess going forward. Thanks, very much I think any color that would be really helpful.

Sure Matt So yeah.

Yes, the third quarter.

PC market was very volatile.

Going into it we expected the market would be weak it was weaker than we expected and the weakest portion of the market as the consumer market, where we tend to be more heavily weighted.

I think the thing that perhaps we saw in the market is we are as.

As the overall macro economy.

Economy has also weakened customers in general across the board I've just become more cautious so even as they were selling through their inventory they were not replenishing stock to the same levels and and frankly, we were coming off of a supply demand imbalance where in the first half of the year people were actually trying to gather inventory.

And then in a supply constrained situation. So it is a very dynamic situation I would say I think that we have great partnerships across the supply chain I feel good about the visibility that we have.

I think the market will continue to be volatile, but we will.

We're all sort of bias towards <unk>.

Reducing inventory levels, so that we can better react to the market factors in the market situations. So hopefully that helps a little bit.

Definitely appreciate that Lisa.

Thank you. Your next question today is coming from Joe Moore from Morgan Stanley . Your line is that right.

Great. Thank you.

I Wonder if you could talk a little bit about your visibility in the <unk> part of the business to the extent that we've seen some weakening in kind of broader markets here and there, but generally it's okay. Like can you just talk about how long your visibility extends there how you feel about growth into next year.

Yes, absolutely Joe So the Xilinx business are our embedded business has been performing just extremely well.

Another very strong quarter in Q3, and we have.

We see growth into the fourth quarter.

<unk> been very focused on what's happening within the various sub segments I think.

The nice part of the business as you know is that it has it's very broad based so we have seen.

Communications was up for Us Aerospace and defense very strong automotive was also up for US here in the third quarter. We did see some weaknesses consumer was weak and there was some sub segments of industrial so test <unk> measurement was weaker.

In the third quarter. So we do see the puts and takes there but overall.

I would say the business has strong visibility, we're still supply constrained in certain nodes and some of the legacy nodes. We've made a lot of progress on supply. So we are seeing additional supply come in in Q4 and that leads us to good confidence in Q4, we.

The first half again, we have multiple quarters of visibility just given the lead times in that business and we'll be watching it very carefully but I would say.

Overall.

The product portfolio is strong and we have also gained some share in that business.

Well.

Great. Thank you very much thanks.

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

Hey, everybody. Thanks for letting me ask a couple of questions quickly here Lisa.

If you could give us a little color you talked about the fourth quarter being I guess down modestly in client and gaming can you give relatively similar color for datacenter and embedded just because of the volatility between segments. Obviously has been huge over the last couple of quarters.

Yeah sure Ross.

On a.

Absolute level, we're talking about flattish from Q4 to Q3 595 versus the 556 so.

Yes modest decline in client and gaming within gaming, we would expect consoles to be down in the fourth quarter, given theyre coming off of Q3, which is their peak, that's offset a bit by our new.

Graphics launch that is occurring in the next few weeks and then as it relates to datacenter and embedded it's about the same yes lets call it call it.

Modest plus as we go forward, we expect again cloud to be stronger than enterprise. That's some of the margin dynamics that we were asking earlier.

<unk>.

<unk> as we get more supply modestly up as well.

Great that's perfect and then as my follow up one for either you or the vendor.

As we think about Opex for next year, how do you guys philosophically balance the desire to stick to your business model that you laid out at your most recent analyst day versus the desire to continue to spend continue to gain market share put out the great new products and execute that you've done so well or are those kind of.

Buffers.

Conflicting against each other and how if so do you reconcile that conflict.

Yes, I think I think the key thing is we continue to invest in the strategic areas in data center and embedded in the product Roadmaps. The macro environment has weakened softwares to Pcs and we are taking actions to reduce expenses.

Especially in the rest of the business besides.

<unk> talked about earlier in terms of.

The areas of focus and we have slowed down hiring. So you are right Q4, if you look at on.

Each of our business is high but we are very disciplined in terms of what we're going to do expense section do take time to kick in and we expect as we go out into 2023 the <unk>.

It comes more in balance.

With the revenue and we manage it in line with the revenue out in time.

Maybe Ross if I just add on top of that I think we have the opportunity we have multiple levers and opex. So we are going to be very disciplined as the vendor said that being the case I mean, we feel very good about our strategic direction around data center embedded and the commercial markets. So we want to continue to invest.

There, where we will be more conservative on the consumer facing portions of our business and.

And that's how we'll manage through 2023.

Okay.

Thank you. Our next question is coming from umbrella should recover from BMO. Your line is now live.

Hi, Thank you very much Lisa I wanted to come back to the PC.

The PC business is such a big disparity between your <unk> guide and what <unk> guided to.

Versus.

We will be guiding to in <unk>.

And usually it takes normalize over a longer period of time, but I just wanted to understand is it a case of they took their medicine earlier.

And indeed continue to over ship versus demand.

So just kind of help us understand and there seems to be also.

<unk> that in terms of the strategic pricing and <unk>. So there was some pull in ahead of that.

I've been getting a lot of questions myself I don't understand such a big disparity so any help would be very helpful.

Yeah, sure well I think.

Let me comment on our business right. So for our business as we exited the first half of the year.

I think we were planning for a.

Sort of a reasonable PC market in the second half usually the third quarter is higher.

Then.

The first half in the third and the fourth quarter are seasonally higher and so that's what we were building two together with our customers by the way.

With that expectation I think the market weakness.

As well as just the overall caution in the environment just cause people to behave a bit differently and.

That.

That really required us to work together with our customers on the inventory corrections and as you said there were some temporal sort of dynamics and we're aware of those temporal dynamics some of it is.

Sorry.

Sort of very aggressive pricing that we chose not to follow and.

That's a decision that we made and others are as you might expect there might be some temporal optimization that people are doing.

I think there is anything fundamental I think fundamentally our product portfolio is strong I think we have a very.

Good platforms in place and we'll work through this.

Fully agree that it is kind of a messy.

Market environment that we have to work through but we will work through it.

Got it okay. Thank you and I had a follow up for you then.

Just talk about capacity opening up at the foundries and we have this conversation at the analyst day about the headwind to free cash flow given your need or desire to secure capacity is that going to temporary off now tapered off as we go through the remainder over the next few quarters.

Should be more capacity thats available plus on the PC side.

You shouldnt be much less than what you needed a couple of quarters ago. Thank you.

Yes.

The agreement that we're working on which have some benefit.

Especially as I talked about earlier in the service business. These are long term agreements we have put in place.

The growth of the business.

Given the market backdrop, we will actively with other suppliers in aligning supply with timing of revenue ramp up products and thats something that <unk>.

We're able to do with those suppliers given what's happened to the market. So there is from that standpoint.

Some flexibility overall and that's something we'll work through over the next two to three quarters.

Thank you. Your next question is coming from Harlan sur from Jpmorgan. Your line is now live.

Hello, Good afternoon. Thank.

Thanks for taking my question and data center. The team continues to expand the number of compute instances with your cloud customers on Milan and talked a moment.

Line up and through the ramp of your fourth generation in oil platforms. I think it was a very good dynamics I assume you guys have good visibility here. So how long does the Milan momentum continue into next year and all your cloud customers already qualifying Genoa and when do you expect Youll NOLA.

Start to kick into high volume ramp.

Yes. Thanks for the question Harlan So yes look we're very happy with our Milan.

Sort of workload ramp we are continuing to ramp in Milan.

Here this year and then into next year as well as it relates to Genoa. We did start initial shipments of Genoa to R. R.

Strategic customers in the third quarter and that is continuing in the fourth quarter. So we're ramping up production in the fourth quarter a lot of the let's call it the qualifications or the first instances.

Being qualified here in the fourth quarter into the first quarter and.

And what we've said before is that Milan in general are going to actually coexist for quite some time just given.

How competitive both arb Genoa is a new platform. It is new DDR, five and pcie five and that takes a bit longer for people to qualify and so we would expect both to continue to ramp in 2023 and.

And that's how we're planning the business.

Great. Thank you and despite the macro concerns and as you mentioned some near term workload optimization.

Our North America and club customers.

We're still growing their cloud services business had a strong 30, 40% year over year growth rate and I assume at these types of growth rates like the consumption of compute networking storage workflows and therefore it installed utilization. This is all quite strong and driving that need to build up more compute capacity is this what's driving the team sort of stuff.

Long midterm outlook for this segment or is it more a function of your strong product lineup, which you know im continuing to capture a greater compute sure.

Yeah.

Harlan I would say, it's a little bit of both and I think you said it well.

In the very near term there is a little bit of optimization that each cloud vendors doing but in the medium term what our customers are telling us is they need more compute and the more compute is for additional workloads building out its also for upgrade of let's call. It older <unk>.

<unk>.

Given our new products have very strong.

<unk> power efficiency, given the cost of power and energy around the world. We're actually seeing that also be a driver for some of the conversions.

To AMD in the cloud.

As we go into 2023.

Thank you Phil.

Thanks Harlan.

Thank you. Your next question is coming from Chris <unk> from Citi. Your line is now live.

Yeah.

Thanks Kim.

So if we take the macro out of it can you just go through your <unk>.

Sure expectations in <unk>.

Desktop notebook and server, let's just say for the next 12 months or so.

Let's see I'm trying to think how do I take the macro out of it so.

Your question.

What's the actual Tam aside and just talk about where we're going from a share standpoint is that your question. Yes, you can say relatively where you expect to gain more or less.

Got it okay I want to be responsive to the question well, let's let's start with the data Center I think in the data center, we believe that.

We will continue to gain share we expect to continue to gain share in both cloud and enterprise.

More underrepresented in enterprise and so again, that's a key focus for us, but as we just stated in the last few questions I think North America cloud in particular, I think we see line of sight to <unk>.

Significant new deployments based on our current roadmap.

On the desktop and notebook.

Business, our focus is on certain segments. So we're very focused on premium we're very focused on gaming and we're focused on commercial.

In those areas there are again opportunities for us to continue.

Continue to gain share I think in desktop DIY business or sort of the desktop channel business.

We have a strong lineup, we just launched.

The new Ryzen 7000 series, we have additional products that will launch next year as well.

And that's sort of the puts and takes in the various businesses.

Sure and then as my follow up I guess, just getting back into the the macro so you mentioned that.

Asps are getting a little or at least pricing is getting a little tougher Cpus.

If this downturn in Pcs continues into next year.

If it spreads into the into the data center market. How do you think of pricing going forward and would you choose to maybe give up some share.

If your competitor.

<unk> aggressive on price and the environment is difficult.

Chris I think where we have a very strong value proposition are.

Our strategy is not to lead on price. So if you look at look in the data center, although prices one factor we find prices not the leading factor in the majority of the selections. There is work for us to do in terms of workload optimization, and that's where a lot of our focus has been.

<unk>.

In the data center so.

Hopefully that answers that piece as it relates to the PC business. It is more price sensitive we have seen it become more price sensitive.

I think again, where we have a strong value proposition, we will continue to be very competitive.

But even back.

A year ago, we didn't choose to compete in the CRO market. Because again that was that was just not profitable business for us and so we're going to be disciplined in ensuring that what we're taking is profitable business.

Got it thanks, Lisa thank.

Thank you.

Thank you next question is coming from Timothy Arcuri from UBS. Your line is that right.

Alright, Thanks, a lot I had two Lisa first I wanted to ask you about U S China trade.

And I guess, the recent restrictions that didn't seem to have too much direct impact on you, but the direction of travel it seems pretty clear.

And you report, China as 25% of our revenue, but that sell in so I'm wondering if maybe you can help us with what China is on a consumption basis and kind of how you handicap.

Where are you trying to calm is going when you're making these investment decisions. How do you think about U S, China trade and the direction of travel.

And then I had a follow up two things.

Yes sure Tim So we are certainly watching the situation very closely.

Upon reviewing all of the new regulations as they have gone into effect. It has minimal impact on our revenue in the near term.

We're certainly working very closely with.

Commerce and the rest of the.

The U S government on how those are rolling out and then I think on a on a medium term basis again my view on these things is we will always follow the U S regulations and understand.

The need for National security.

The majority of our China business is let's call. It non data center. So is more in the.

In the PC business as well as some of the.

The consumer facing businesses. So we are paying attention to that as we as.

As we go forward in the business, but for.

For the near term, we have not seen any significant impacts and will continue to follow it very closely.

Thanks, a lot Lisa and then I guess I wanted to ask a question about Pcs. So you guided in late July and it seemed like things were fine and then we lost basically $1 billion basically two months. It would seem like those were massively weak months in I would think that maybe there has been some improvement in the run rate when do you kind of head into Q4 does that mean.

<unk> has sort of leaned out a little bit I mean, the market probably won't be absorbed I don't know if 58 million units in Q3, and you annualize that youre at 200 million units a year, it's like hard to get Pcs that bad next year. So I'm just kind of wondering if you could comment on sort of the.

Run rate because.

August and September it must have been.

Terrible months thanks.

Yeah.

The PC market certainly was volatile in the third quarter I would say that we did.

<unk> a good amount of inventory in the third quarter I think we are our guide indicates a desire to drain more in the fourth quarter and I think we will make progress in that and of course, it all depends on how the macro behaves over the.

The next couple of months, but like I said I think we are we have good visibility into the various market factors and we're planning for a weaker PC environment.

In the fourth quarter.

Thank you Tim.

Operator, we'll take two more questions. Please.

Certainly our next question is coming from Blayne Curtis from Barclays. Your line is now live.

Thanks for taking my question I wanted to go back to just the pricing question. Prior if you look at the decline in your client business a little over 50% is there a way to think about units versus pricing there and I think theres a couple of factors here I'd be curious your thoughts.

The mix away from the high end, but then you mentioned competition just kind of your thoughts as to that.

Impact.

Pricing as well.

Yeah, So blayne and was certainly more units.

I think Stacy asked the question earlier Asps.

Asps were down sequentially, but they were up year over year. So.

The decline was more driven by units, but there wasn't asps factor on a sequential basis and then in terms of what we see in the market I would say that as the market weakened.

There was sort of more pressure at the high end in terms of just velocity and desire to clear inventory and so.

Mix.

Did mix.

Towards lower Asps and towards.

More.

Yes.

No more incentives to clear that inventory as it relates to longer term, though I don't feel like there is a longer term significant mix change.

That's what you were asking.

Well I guess, the second part and maybe I'll ask the second part is.

Gross margins are down 100 basis points from Q3 to Q4 mix is kind of going in your favor with datacenter and embedded but then I guess youre, saying Pcs are not down that much. So I can't I guess I was figuring maybe pricing is not that bad either so.

I guess, that's a long way of asking again.

The reason for the core margins to be down 100 basis points from Q3 Q4.

Yes, Okay. So let me let me try that so if you think about what we see in the business. There is there is a couple of factors. So if you say excluding the.

The charges that we described $160 million in.

Q3, we were about 52%, we're guiding to 51% we do see the client market continuing to be weak we want to make sure that we have we.

We do clear.

Additional inventories, we do see in data center a mix to.

When the mix is higher for North America cloud that tends to be lower lower asps as just given the.

The environment in that business, and then <unk> mentioned that as we increase capacity, particularly in the server market.

There were some we have some additional capacity coming online and that has a bit of cost impact. So those are the couple of factors that get you to the 51%.

Sure.

Thank you. Our final question today is coming from harsh Kumar from Piper Sandler Your line is now live.

Yeah, Hey, guys first of all thanks for squeezing me in Lisa had a question off the near term to call. It midterm view of the data center market.

Do you think that the data center market is inherently growing in the December quarter is the market not AMD.

Do you think and or do you think you're growing because youre launching Genoa.

And to that point, you talked about dislocations and.

And sort of the cloud in the data center market I was curious what specifically are you seeing and if you could differentiate between are you seeing just slower growth orange. The inventory that's built up and then I've got a follow up.

Yeah. So what I would say is again on a very discrete basis I wouldn't say the overall data center market is necessarily up just given the.

The macro impact there is some impact on overall spending.

In terms of our business.

Do have a weighting towards North America cloud that tends to be the most resilient part of the market.

And then as it relates to what's happening in the market like I said.

I think what's happening is enterprises weak I think that is overall people businesses or just being more cautious.

China is weak and has been weak all year and then in cloud in general there is not a in general every customer is a bit different than what they are trying to do.

Some are just optimizing inventory some are optimizing footprint and some are continuing to build and so I wouldn't call. It a market per se I would call it their individual instances.

Four for each customer.

It's helpful for US is what we're talking about is not just Q4 with our customers. We're really talking about what do they need for all of 2023, I mean, we are coming from a place where we were supply constrained and so we're planning for the capacity that's necessary.

There, we see which workloads are moving and when are they moving each of the workloads and so that gives us.

Some visibility into what their spending plans are for 2023.

Very helpful. Alicia and then for my last follow up.

Can you talk about the gaming.

Gaming market in General of course September you mentioned was the peak quarter should December will be off some.

But.

Is this also the peak gaming year.

In 2022, and should we be thinking that gaming will be down or just because these things are still so hard to get your kind of <unk> you still can't get your hands on it easily. So do you think there is more legs left to the growth next year.

Yes, so harsh.

Do believe that there is still some pent up demand, especially coming into this holiday season. So Q3 was the peak for US. This year Q4 is down seasonally as.

As you might expect going into next year I think there are puts and takes I would say the best way to model at this point is to model gaming segment flattish.

And.

Let's see how the holiday season goes but that would be the way we would we would call. It at this point.

Thank you we reached end of our question and answer session I would like to turn the floor back over for any further or closing comments.

Thanks, Kevin and thank you everybody for tuning in today, and we look forward to connecting with you all throughout the quarter.

And we have two important product launches coming up here in the next 10 days. So we'll look forward to that engagement. Thanks, everyone. This concludes the call.

Thank you you may now disconnect and have a wonderful day, we thank you for your participation today.

[music].

That answer session will follow the formal presentation. As a reminder, this conference is being recorded.

<unk> page of AMD Dot com.

And our fourth quarter quiet time is expected to begin at the close of business on Friday December 16th.

Please refer to the cautionary statement in our press release for more information on the factors that could cause actual results to differ materially.

Now with that I'd like to hand, the call over to Lisa Lisa.

Thank you Ruth and good afternoon to all those listening in today.

Our third quarter revenue and gross margin came in below our expectations due to softening PC demand and substantial inventory reduction actions across the PC supply chain.

We also expanded gross margin and grew net income year over year, highlighting the strength of our business.

Turning to the business results, starting with our data center segment revenue increased 45% year over year, and 8% sequentially to $1 6 billion.

In enterprise OEM revenue was down sequentially as server Oems continued working through match that issues in some businesses slowed the pace or scale of their purchases based on the macro uncertainties.

Looking at the broader competitive landscape, our third Gen epic Cpus in market today are the highest performance and most energy efficient <unk> six server Cpus available and we expect to further extend that lead with our next generation five nanometer general processors, which delivers significant performance energy efficiency and <unk> advantage.

<unk> for both Hyperscale and enterprise workloads.

We will publicly launched Gen. One next week and are ramping production to support initial cloud deployments and the introduction of fourth Gen epic processor platforms by HP Enterprise, Dell, Lenovo Supermicro and others.

We made good progress with our data center GPU software enablement work in the quarter, including announcing our role as a founding member of the pie towards foundation.

We look forward to working closely with the largest cloud providers as we drive a standards based approach to the development of popular pie towards deep learning software framework.

Demand from data center customers for our adaptive smart Nic and GPU products was strong during the quarter.

We had record sales of our Xilinx FPGA and networking data center products led by demand from cloud and financial customers.

Sales of our <unk> Gpus also ramped significantly from the prior quarter driven by cloud adoption.

The addition of <unk> to our product portfolio has been very well received by customers highlighted by our enterprise customer pipeline doubling in the few months since the acquisition closed.

We were excited to support <unk> launch of its next generation cloud virtualization platform in the quarter.

Our <unk> Gpus will be included in the first validated server and HCI solutions supporting the new Vmware virtualization offerings from Dell HPE and others that will make it much easier for enterprise customers to build more performance and secure data centers powered by our industry leading gpus.

We remain on track to further expand our product portfolio in 2023 with the launches of our edge in telco optimize sienna and cloud optimized Bergamo processors.

With 128 cores and 256 threads per socket, we expect Bergamo will further extend our performance and energy efficiency leadership in cloud workloads.

Our response has been very strong based on the performance features and software compatibility Bergamo delivers.

We believe our broad family of leadership Cpus, Gpus, <unk> adaptive sse's and Gpus positioning us well for long term growth and share gains in the data center.

Now turning to our client segment revenue declined 40% year over year to $1 billion.

Our client processor shipments were below PC consumption in the third quarter as we worked closely with our customers to reduce downstream inventory.

Desktop channel sell through increased from the prior quarter driven by increased demand for our Ryzen 5000 series Gpus and the launch of our Ryzen 7000 series processors and <unk> platform in September .

We launched our five nanometer Ryzen 7000 series processors to strong reviews based on delivering leadership performance in gaming productivity and content creation applications.

We expect rising 7000, CPU sales to ramp this quarter aligned with the launches of a broader range of mainstream enthusiast am five motherboards.

Now turning to our gaming segment.

Revenue increased 14% year over year to $1 6 billion as strong semi custom sales offset a decline in gaming graphics.

We delivered our sixth straight quarter of record semi custom Soc sales as demand for the latest game consoles remains strong and Sony and Microsoft prepare for the holiday season.

Gaming graphics revenue declined in the quarter based on soft consumer demand and our focus on reducing downstream GPU inventory.

We will launch our next generation Rdna three Gpus later this week that combine our most advanced gaming graphics architecture with five nanometer triplet designs.

We look forward to sharing more details later this week.

Looking at our embedded segment revenue increased significantly year over year to a record $1 3 billion driven by growth from aerospace and defense industrial and communications customers.

Demand across our core markets remained very strong we had record sales to aerospace and defense and automotive customers, who are increasingly using our FPGA and adaptive soc products to enable differentiated capabilities and features and their products.

Overall demand for our Xilinx products remained strong as we continued to leverage AMD scale to secure additional supply to address this demand.

Longer term, we're very excited about the growth opportunities in our embedded business.

We closed multiple high revenue design wins in the quarter with automotive networking emulation, and prototyping communications and aerospace and defense customers.

We're also seeing new design win opportunities and deeper engagements with many of our embedded customers based on the expanded breadth of our adaptive Soc.

PGA, CPU, GPU and CPU product portfolio.

Okay.

In summary, we are well positioned to navigate the current market dynamics based on our leadership product portfolio strong balance sheet and growth in our datacenter and embedded segments.

We have three clear priorities guiding us.

First and foremost we are focused on executing our roadmaps and delivering our next generation of leadership products.

Second we're building even deeper relationships with our customers as we make AMD a fundamental enabler of their success.

Now I'd like to turn the call over to the vendor to provide some additional color on our third quarter financial performance <unk>.

<unk>.

Expected client segment revenue.

Third quarter revenue was $5 6 billion up 29% from a year ago gross.

The graphics and client businesses.

Operating margin was 23% compared to 24% a year ago due to higher operating expenses net income was $1 1 billion up $202 million from a year ago.

Earnings per share was <unk> 67 per share compared to 73 per share a year ago, primarily due to lower client segment revenue.

Now turning to our reportable segments, starting with the data Center segment revenue was $1 6 billion up 45% year over year, driven by strong growth in third generation epic server processor revenue.

Data Center operating income was 505 billion or 31% of revenue compared to $308 million or 28% a year ago.

Higher operating income was driven primarily by stronger revenue, partially offset by higher operating expenses.

Client segment revenue was $1 billion down 40% year over year due to reduced process shipments, resulting from a weak PC market and a significant inventory correction across the PC supply chain.

Client and operating loss was $26 million compared to operating income of $490 million or 29% of revenue a year ago, primarily due to lower revenue.

Gaming segment revenue was $1 6 billion up 14% year over year, driven by higher semi custom product sales, partially offset by lower gaming graphics revenue.

Gaming operating income was $142 million or 9% of revenue compared to 231 million or 16% a year ago. The decrease was primarily due to lower graphics revenue and inventory pricing and related charges and.

Embedded segment revenue was $1 3 billion up $1 2 billion from a year ago, primarily due to the inclusion of xilinx embedded products revenue.

Embedded operating income was $635 million of 49% of revenue compared to $23 million, while 30% a year ago, driven primarily by higher revenue.

Turning to the balance sheet cash cash equivalents and short term investments were $5 6 billion at the end of the third quarter during.

During the quarter, we repaid the seven 5% senior notes totaling 312 billion that matured in August and deployed $617 million to repurchase common stock.

<unk> six 8 billion in remaining authorization for stock repurchases.

Cash from operations was $965 million and free cash flow was $842 million compared to $764 million in the same quarter last year.

Inventory was $3 4 billion up approximately $721 million from the prior quarter, driven primarily by client products and new products ramping in the second half of the year.

Now turning to our financial outlook today.

Today's outlook is based on current expectations and contemplates near term macroeconomic environment.

The fourth quarter of 2022, we expect revenue to be approximately $5 5 billion, plus or minus $300 million, an increase of approximately 14% year over year and flat sequentially. The.

The year over year growth is driven by embedded and data center segments, partially offset by a decline in the client and gaming segments on a sequential basis and better than data center segments I expect it to grow offset by declines in the client and gaming segments.

$75 million based on the 13% effective tax rate and diluted share count to be approximately 162 billion shares.

Controlling operating expenses and head count growth, while actively managing inventory in line with our revenue expectations with that let me turn the call over to route for our Q&A session route.

Thank you to vendor Pam Kevin if you could please poll the audience for questions.

Certainly we will now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your hand.

Before pressing star one one moment, please while we poll for questions.

Our first question today is coming from Aaron Rakers from Wells Fargo. Your line is now live.

Yes, thanks for taking the question I have one question and one quick follow up I guess.

As we look at your Youre acquiring a piece of the business being down sequentially in the current quarter as we work through inventory digestion at your customers I'm curious just how you how you're thinking about kind of the the clearing out of that inventory do you think we find a bottom now coming out of the December quarter or any kind of thoughts of just.

That kind of full expectation of a flushing of inventory in the PC in the PC market for you guys.

Yes sure Erinn.

Thanks for the question so.

Nearly the PC business has been.

<unk> been very volatile and underperformed for us in the third quarter I think as we go into the fourth quarter, we are guiding.

It's embedded in our guidance is that piece.

<unk> will be down again in the fourth quarter.

We believe that that will be a significant step in clearing inventory between third quarter and the fourth quarter and of course, we'll monitor the macro conditions, but we'll certainly exit.

The year in a better place.

And then as a quick follow up on the server side of the business I think in the past you've talked about.

Your ability to ship being somewhat.

Supply constraint I'm just curious if you have an update.

On the supply situation in the server Cpus, especially as we look towards the general processor ramp.

In the next quarter or two.

Sure so in the.

Some of those investments are coming online here in the fourth quarter. So we expect as we go into 2023 with the general launch not to be supply constrained based on what we currently see.

Yes. Thank you.

Thanks.

Thank you next question is coming from <unk> Hari from Goldman Sachs. Your line is now live.

Thanks, So much for taking the question Lisa I wanted to ask a question on the outlook for 2023, specifically and the server CPU business.

I know, it's early and difficult to predict but.

Many of US have your business growing in data center kind of in the 20% to 30% range is that is that a fair place to be or is that little too optimistic given what you know today.

Yes, so it is.

A little bit early to talk about 2023 precisely, but maybe let me give you a backdrop of where we see the datacenter market today as you said in the near term there are some overall macro headwinds that are affecting all markets, including the data center market now it varies by segment and so.

If I go through each of the segments. What we're seeing is I think North America cloud is probably the most resilient out of the segments within the data center market and this is where AMD is the strongest.

Had.

Very good progress.

Over the medium term as we go into 2023, we expect.

Growth in that market, particularly customers moving more workloads.

Just given the strength of our product portfolio and.

I'd say enterprises, probably most impacted by the macro so we have seen customers taking longer to make decisions and perhaps being a little bit more conservative on capex that being said, though we feel very good about our value proposition, we feel very good about our product portfolio and we believe.

In a little bit of a choppy market that we can gain share across that business. So overall I think our data center trends are.

Our good and we need to work through the macro as everyone does.

That's helpful and then as my follow up a question on gross margins maybe for the vendor.

Regarding Q4 gross margins up about 100 basis points.

Which is good to see but you are still.

What's driving down gross margins in Q4, I guess versus Q2 are you recognizing another inventory hit or is it something else. Thank you.

Data center.

Thank you.

Thank you next question is coming from Stacy <unk> from Bernstein Research. Your line is now live.

Hi, guys. Thanks for taking my questions I'll answer the first one I wanted to ask about the extra week in Q4, how much revenue is that driving on an overall basis as well as data center, specifically is there any I don't know how linear those particularly that business is there any sort of is there any material impact from that extra week.

Yes, Stacy, we're not really counting on a material impact from the extra week I think if you look at the pluses and minuses in the quarter.

The guidance for Q4 really is around sort of Pcs and let's call it gaming being lower and again those are with all the holidays in place we're not we're.

We're not counting on too much there and then data center.

Is data center embedded are.

Our higher but we're not.

Expecting that the extra week has a material impact.

Got it thank you.

For my follow up I wanted to ask about units versus pricing in Q3, and Q4 and I know in Q3, specifically we mentioned pricing.

As an impact of it sounds like you're suggesting client margins are coming down I don't know if that's just a cost.

As a pricing impact as well, but like what are the units and pricing is doing when pricing doing client in Q3.

And what are you expecting them into Q4.

Yes, sure Stacy So I think if you look at the third quarter. It was there are a lot of dynamics in the client business. So market was weak.

In particular consumer was weak and we have more of a footprint in consumer so in that framework. We saw units come down, but we also saw asp's.

Come down on a sequential basis, no I will say that asps were still up on a year over year basis. So we've been let's call it disciplined.

In this pricing environment.

Did see some pricing dynamics in the quarter and we didn't chase unprofitable business and will continue to be sort of.

Watching that space, so that was the.

The pluses or minuses as it relates to client Asps and as we go into the fourth quarter.

I think we're forecasting for <unk>.

Competitive environment, given the market weakness.

Yes.

Embedded in the guide.

Got it that's helpful. Thank you guys.

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

Alright, Thanks for taking my question for the first one.

Just wanted to clarify what is the client revenue, we should be thinking about for Q4 does that $800 million $900 million any help there and then I guess Lisa the bigger question. There is what does client recovery look like do you get back to the 2 billion quarterly rate do you get to one and a half billion announced that because your competitor.

<unk> was suggesting that next year, the PC Tam would only be down 4% to 5%.

Yes, so a couple of different points of let me just answer the sort of the expectations around Q4, I would say.

We're guiding let's call it modestly down.

For for client and gaming and.

Obviously, we're coming off of what is already a low base in Q3.

Want to do that to correct the sort of the inventory situation as quickly as possible and as a result, we're going to under ship consumption again in the fourth quarter.

To do that as it relates to next year I think there are a lot of.

Factors this year <unk> will be down quite a bit let's call. It high teens close to 20% as we go into next year I think the industry is calling mid single digits I think that would be.

A good case, I think we should model down to minus 10% and again within our PC business, we expect.

We will recover as we go into 2023, but we will have to work through these dynamics over the next.

A quarter or so.

Understood and Paul.

Follow up maybe one for you on gross margins.

The actions are recoverable and basically how do you start getting back to.

The prior trend of 54% gross margin because the longer term target is over 50.

<unk> 57, so if client revenues don't really grow that much.

Are there actions that can help you will get back to your prior gross margin trajectory. Thank you.

Let me, let me try to answer it. This way if you look at Q3 in and of itself. We came in with about 50% gross margin.

Had $160 million of charges of which our inventory pricing it related charges. If you adjust for those the <unk>.

Margin for Q3 is about 52% and we had guided to 54, we came in at 52 and primarily that's due to.

Two reasons Troy do you have the client.

PC market.

Increased margins from where we are right now guiding 51% and then taking it up from there.

But is the $116 million recoverable I guess, that's really my question.

Those are mostly inventory write saw pricing actions would take largely I would say not recoverable if that's what you're asking.

I mean can you get back to the 52 that you would have been normalized.

I expect if you don't take these actions in Q1 than should be should you be at a higher gross margin in Q1 versus Q4.

One guide Q1, but what I will say from the 51% that we have in Q4, but we can improve from there.

Thank you.

Thank you. Our next question is coming from that Ramsey from Cowen. Your line is now live.

Thank you very much good afternoon, Lisa I have one.

Question on the data Center segment, and then a follow up on client.

On the data center business, if you look back to.

The pre announcement a month ago I think there was a little bit of.

Maybe.

Came in a little bit under where we were modeling I'll just say that way.

So I got a ton of questions on that and I was really interested in some of the comments that you made in your script about how cloud revenue still more than doubled year over year.

Anyway, just confirming that I got that right.

I think that would be helpful to just break it down because I was surprised that that cloud revenue was as strong as it was given given where the numbers came in in the quarter. Thank you.

Yeah sure Matt so so.

So if we're focused on the third quarter, what I would say is cloud revenue did more than double enterprise revenue was down and and then on the GPU side, because we had a strong.

<unk> in the third quarter of 2021 that was that was down two and perhaps that perhaps that wasn't quite in your modeling but.

The larger dynamics are.

As I said earlier, the North America cloud is probably the best out of all of the all the data Center segment.

There is some impact on macro, though I mean, I think everyone.

Is aware of that that there is.

There is a little bit of pullback in capex spending that being the case I think our market share is.

Is very good there and we will we expect it to continue to grow and as the business becomes more cloud weighted.

There have been a few margin questions. So ill just mentioned as the business becomes more cloud weighted.

That tends to have a little bit of downward pressure on the margin, but our goal right now is footprint and expanding our footprint.

Across cloud and enterprise I will say, even in a weak enterprise market as we go forward over the next few quarters, we feel really good about how we're positioned and.

The platform solutions that are coming out with all of our OEM partners. So I think on a quarter by quarter basis, you may not get the model exactly right, but I think on a longer term basis, I think the product portfolio and the product capabilities.

Should help us continue to gain share.

Thank you Lisa that's helpful. I think just.

To highlight the cloud momentum continuing.

I guess as my follow up I wanted to kind of revisit what we've learned over the last three or four months in the PC market.

Super dynamic times out there and obviously things have changed in.

As you might make in monitoring inventory levels or.

Working with your channel partners.

Just any changes youre thinking about making an operationally to the business to sort of protect from from this kind of thing in common and I guess going forward. Thanks, very much I think any color that would be really helpful.

Sure Matt So yeah.

Yes, the third quarter.

PC market was very volatile.

Going into it we expected the market would be weak it was weaker than we expected and the weakest portion of the market as the consumer market, where we tend to be more heavily weighted.

I think the thing that perhaps we saw in the market is.

As the overall macro.

Economy has also weakened customers in general across the board have just become more cautious so even as they were selling through their inventory. They were not replenishing stock to the same levels and frankly, we were coming off of a supply demand imbalance where in the first half of the year people were actually trying to gather inventory.

Okay.

In a supply constrained situation. So it is a very dynamic situation I would say I think that we have great partnerships across the supply chain I feel good about the visibility that we have.

I think the market will continue to be volatile, but we will.

We're all sort of bias towards <unk>.

Reducing inventory levels, so that we can better react to the market factors in the market situations. So hopefully that helps a little bit.

Definitely appreciate that Lisa.

Thank you. Your next question today is coming from Joe Moore from Morgan Stanley . Your line is that right.

Great. Thank you.

Yes, absolutely Joe So the Xilinx business are our embedded business has been performing just extremely well.

Another very strong quarter in Q3, and we have.

We see growth into the fourth quarter.

<unk> been very focused on what's happening within the various sub segments I think.

The nice part of the business as you know is that it has it's very broad based so we have seen.

In the third quarter. So we do see the puts and takes there but overall.

The first half again, we have multiple quarters of visibility just given the lead times in that business and we'll be watching it very carefully but I would say.

Overall.

The product portfolio is strong and we have also gained some share in that business.

Well.

Great. Thank you very much thanks.

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

Hey, everybody. Thanks for letting me ask a couple of questions quickly here Lisa.

Yeah sure Ross.

On a.

Absolute level, we're talking about flattish from Q4 to Q3 595 versus the 556 so.

Yes modest decline in client and gaming within gaming, we would expect consoles to be down in the fourth quarter, given theyre coming off of Q3, which is their peak.

Thats offset a bit by our new.

Graphics launch that is occurring in the next few weeks and then as it relates to datacenter and embedded it's about the same yes lets call it call it.

Modest plus as we go forward, we expect again cloud to be stronger than enterprise. That's some of the margin dynamics that we were asking earlier.

<unk>.

<unk> as we get more supply modestly up as well.

Great that's perfect and then as my follow up one for either you or the vendor.

Buffers.

Conflicting against each other and how if so do you reconcile that can infliction.

Yes, I think I think the key thing is we continue to invest in our strategic areas in data center and embedded in the product Roadmaps. The macro environment has begun the software to Pcs and we are taking actions to reduce expenses.

Especially in the rest of the business besides.

<unk> talked about earlier in terms of.

The areas of focus and we have slowed down hiring. So you are right Q4, if you look at it on.

Each of our business is high but we are very disciplined in terms of what we're going to do expense actions do take time to kick in and we expect as we go out into 'twenty two 'twenty three the <unk>.

It comes more in balance.

With the revenue and we manage it in line with the revenue out in time.

There, where we will be more conservative on the consumer facing portions of our business and.

And that's how we'll manage through 2023.

Okay.

Thank you. Our next question is coming from our brochure silver from BMO. Your line is now live.

Hi, Thank you very much Lisa I wanted to come back to the PC.

The PC business is such a big disparity between your <unk> guide and what <unk> guided to.

Versus.

You're guiding to for Q.

And usually it takes normalize over a longer period of time, but I just wanted to understand is it a case of they took their medicine earlier.

And A&D continue to over ship versus demand.

So just kind of help us understand and there seems to be also.

<unk> that in terms of the strategic pricing and <unk>. So there was some pull in ahead of that.

I've been getting a lot of questions myself I do understand it's such a big disparity so any help would be very helpful.

Yeah, sure well I think.

Let me comment on our business right. So for our business as we exited the first half of the year.

I think we were planning for a.

Sort of a reasonable PC market in the second half usually the third quarter is higher.

Then.

The first half in the third and the fourth quarter are seasonally higher and so that's what we were building two together with our customers by the way.

With that expectation I think the market weakness.

As well as just the overall caution in the environment just cause people to behave a bit differently and.

That.

And that really required us to work together with our customers on the inventory corrections and as you said.

There were some temporal sort of dynamics and we're aware of those 10 portal dynamics some of it is.

Barry.

Sort of very aggressive pricing that we chose not to follow and again, that's a decision that we made.

And others are as you might expect there might be some temporal optimization that people are doing I don't think theres anything fundamental I think fundamentally our product portfolio is strong I think we have a very.

Good platforms in place and well <unk>.

Work through this.

Agree that it is kind of a messy.

Market environment that we have to work through but we will work through it.

Got it got it thank you and I had a follow up for you then.

Just talk about capacity opening up at the foundries.

We have this conversation at the analyst day about the headwind to free cash flow given your need or desire to secure capacity is that going to temper off now tapered off as we go through the remainder over the next few quarters as there should be more capacity thats available plus on the PC side.

Should be.

Listen what do you need a couple of quarters ago. Thank you.

Yes, I mean, the capacity agreements that we're working on which have.

Some benefit, especially as I talked about earlier into service peers. These are long term agreements, we have put in place to support the growth of the business.

Given the market backdrop, we will actively with other suppliers in aligning supply with timing of revenue ramp up products and thats something that well be able to do with those suppliers given what's happened to the market. So there is from that standpoint some.

Some flexibility overall and that's something we'll work through over the next two to three quarters.

Thank you. Your next question is coming from Harlan sur from Jpmorgan. Your line is now live.

Hello, Good afternoon. Thank.

Thanks for taking my question and data center. The team continues to expand the number of compute instances with your cloud customers on Milan seems like the momentum.

Start to kick into high volume ramp.

Yes. Thanks for the question Harlan So yes look we're very happy with our Milan.

Sort of workload ramp we are continuing to ramp in Milan.

Here this year and then into next year as well as it relates to Genoa, We did start initial shipments of Genoa to our.

Strategic customers in the third quarter and that is continuing in the fourth quarter. So we're ramping production in the fourth quarter a lot of the let's call it the qualifications or the first instances.

Being qualified here in the fourth quarter into the first quarter and.

What we said before is that Milan in general are going to actually coexist for quite some time just given.

How competitive both our general is a new platform. It is new DDR, five and pcie five and that takes a bit longer for people to qualify and so we would expect both to continue to ramp in 2023 and.

And Thats how were planning the business.

Great. Thank you and despite the macro concerns and as you mentioned some near term workload optimization.

Our North America and club customers.

We're still growing their cloud services.

Drawn 30, 40% year over year growth rate and I assume at these types of growth rates like the consumption of compute networking storage workflows and therefore it installed utilization. This is all quite strong and driving a need to build up more compute capacity is this what's driving the team sort of strong mid term outlook for this segment or is it more.

Or a function of your strong product lineup, which you know continuing to capture a greater compute sure.

Yeah.

Harlan I would say, it's a little bit of both and I think you said it well.

<unk>.

Given our new products have very strong <unk>.

Power efficiency, given the cost of power and energy around the world. We're actually seeing that also be a driver for some of the conversions.

AMD in the cloud.

As we go into 2023.

Thank you Phil.

Harlan.

Thank you next question is coming from Kristine Lee from Citi. Your line is now live.

Sure.

Okay. Thanks Kim.

If we take the macro out of it can you just go through your share.

Sure expectations in.

Desktop notebook and server, let's just say for the next 12 months or so.

Yeah.

Let's see I'm trying to think how do I take the macro out of it. So your question.

What the actual Tam aside and just talk about where we're going from a share standpoint is that your your question, Yes you.

You can say relatively where you expect to gain more or less.

Got it okay, I want to be responsive to the question.

Well, let's let's start with the data center I think in the data center, we believe that.

We will continue to gain share we expect to continue to gain share in both cloud and enterprise.

More underrepresented in enterprise and so again, that's a key focus.

For us, but as we just stated in the last few questions I think North America cloud in particular, I think we see line of sight to <unk>.

Significant new deployments based on our current roadmap.

On the desktop and notebook.

Business, our focus is on certain segments. So we're very focused on premium we're very focused on gaming and we're focused on commercial.

In those areas there are again opportunities for us to.

We continue to gain share I think in desktop DIY business or sort of the desktop channel business.

We have a strong lineup, we just launched.

The new Ryzen 7000 series, we have additional products that will launch next year as well.

And that's sort of the puts and takes in the various businesses.

Sure and then as my follow up I guess, just getting back into the the macro so you mentioned that.

Asps are getting a little or at least pricing is getting a little tougher than Cpus.

If this downturn in Pcs continues into next year.

If it spreads into the into the data center market. How do you think of pricing going forward and would you choose to maybe give up some share.

If your competitor.

Aggressive on price and the environment is difficult.

Chris I think where we have a very strong value proposition are.

<unk>.

In the data center, so hopefully that answers that piece as it relates to the PC business. It is more price sensitive we have seen it become more price sensitive I think again, where we have a strong value proposition, we will continue to be very competitive.

But even back.

Got it thanks, Lisa thank.

Thank you.

Thank you next question is coming from Timothy Arcuri from UBS. Your line is online.

Alright, Thanks, a lot I had two Lisa first I wanted to ask you about U S China trade and.

I guess the recent restrictions that didn't seem to have too much direct impact on you, but the direction of travel it seems pretty clear.

And you report, China as 25% of our revenue, but that sell in so I'm wondering if maybe you can help us with what China is on a consumption basis and kind of how you handicap.

Where are you trying to calm is going when you're making these investment decisions. How do you think about the U S China trade and the direction of travel.

And then I had a follow up two things yes.

Yes, sure Tim So we are certainly watching the situation.

Closely.

Upon reviewing all of the new regulations as they have gone into effect.

Is minimal impact on our revenue in the near term.

We're certainly working very closely with.

Commerce and the rest of the.

The U S government on how those are rolling out and then I think on a on a medium term basis again my view on these things is we will always follow the U S regulations and understand.

The need for National security.

The majority of our China business is let's call. It non data center. So is more in the.

In the PC business as well as in some of the.

The consumer facing businesses. So we are paying attention to that as we as.

As we go forward in the business, but for.

For the near term, we have not seen any significant impacts and we will continue to follow it very closely.

Thanks, a lot Lisa and then I guess I wanted to ask a question about <unk>. So you guided in late July and it seemed like things were fine and then we lost basically $1 billion basically in two months. It would seem like those were massively weak months in I would think that maybe there has been some improvement in the run rate when do you kind of head into Q4 does that mean.

Tories sort of leaned out a little bit I mean, the market probably won't be absorbed I don't know if 58 million units in Q3, and you annualize that you were at 200 million units a year, it's hard to get Pcs that bad next year. So I'm just kind of wondering if you could comment on sort of the.

Run rate because.

August and September must've been.

Terrible months thanks.

Yeah.

The PC market certainly was volatile in the third quarter I would say that we did.

<unk> a good amount of inventory in the third quarter I think we are our guide indicates a desire to drain more in the fourth quarter.

And I think we will make progress in that and of course, it all depends on how the macro behaves over the.

The next couple of months, but like I said I think we are we have good visibility into the various market factors and we're planning for a weaker PC environment.

In the fourth quarter.

Thank you Tim.

Operator, we'll take two more questions. Please.

Currently our next question is coming from Blayne Curtis from Barclays. Your line is now live.

Thanks for taking my question I wanted to go back to just the pricing question. Prior if you look at the decline in your client business a little over 50% is there a way to think about units versus pricing there and I think there's a couple of factors there I'd be curious your thoughts.

Mix away from the high end, but then you mentioned competition just kind of your thoughts as to that.

Impact.

Pricing as well.

Yeah, So blayne and was certainly more units.

I think Stacy asked the question earlier.

Asps were down sequentially, but they were up year over year. So.

The decline was more driven by units, but there wasn't asps factor on a sequential basis and then in terms of what we see in the market I would say that as the market weakened.

There was sort of more pressure at the high end in terms of just velocity and desire to clear inventory and so.

The mix.

Good mix.

Towards lower Asps.

Towards.

More.

Yes.

More incentives to clear that inventory as it relates to longer term, though I don't feel like there is a longer term significant mix change.

That's what you were asking.

Well I guess, the second part and maybe I'll ask the second part is <unk>.

I guess, that's a long way of asking again.

The reason for the core margins to be down 100 basis points from Q3 Q4.

Yes, Okay. So let me let me try that so if you think about what we see in the business. There is there is a couple of factors. So if you say excluding the.

The charges that we described $160 million in.

Q3, we were about 52%, we're guiding to 51% we do see the client market continuing to be weak we want to make sure that we have.

We do clear.

Additional inventories, we do see in datacenter our mix too.

When the mix is higher for North America cloud that tends to be lower lower asps as just given the.

The environment in that business, and then <unk> mentioned that as we increase capacity, particularly in the server market.

There were some we have some additional capacity coming online and that has a bit of cost impact. So those are the couple of factors that get you to the 51%.

Sure.

Thank you. Our final question today is coming from harsh Kumar from Piper Sandler Your line is now live.

Yeah, Hey, guys first of all thanks for squeezing me in Alicia I had a question off the near term to call. It midterm view of the data center market.

Do you think that the data center market is inherently growing in the December quarter at the market not AMB.

Do you think and or do you think you're growing because youre launching Genoa.

And to that point, you talked about dislocations and.

Yeah. So what I would say is again on a very discrete basis I wouldn't say the overall data center market is necessarily up just given the.

The macro impact there is some impact on overall spending.

In terms of our business, we do have a weighting towards North America cloud that tends to be the most resilient part of the market.

And then as it relates to what's happening in the market like I said.

I think what's happening is enterprises weak I think that is overall people businesses or just being more cautious.

China is weak and has been weak all year and then in cloud in general there is not a in general every customer is a bit different than what they are trying to do.

Some are just optimizing inventory some are optimizing footprints and then some are continuing to build and so I wouldn't call. It a market per se I would call it their individual instances.

Four for each customer.

It's helpful for US is what we're talking about is not just Q4 with our customers are really talking about what do they need for all of 2023, I mean, we are coming from a place where we were supply constrained and so we're planning for the capacity that's necessary.

There, we see which workloads are moving and when are they moving each of the workloads and so that gives us.

Some visibility into what their spending plans are for 2023.

Very helpful. Alicia and then for my last follow up.

Can you talk about the gaming.

Gaming market in General of course September you mentioned was the peak quarter. So December will be off some.

But.

Is this also the peak gaming year.

In 2022, and should we be thinking that gaming will be down or just because these things are still so hard to get your kind of <unk> you still can get your hands on it easily. So do you think there is more legs left to the growth next year.

Yes, so harsh.

Do believe that there is still some pent up demand, especially coming into this holiday season. So Q3 was the peak for US. This year Q4 is down seasonally as.

As you might expect going into next year I think there are puts and takes I would say the best way to model at this point is to model gaming segment flattish.

And let's see how the holiday season goes but that would be the way we would we would call. It at this point.

Thank you we reached end of our question and answer session I would like to turn the floor back over for any further or closing comments.

Thanks, Kevin and thank you everybody for tuning in today, and we look forward to connecting with you all throughout the quarter and we have two important product launches coming up here in the next 10 days. So we'll look forward to that engagement. Thanks, everyone. This concludes the call.

Thank you you may now disconnect and have a wonderful day, we thank you for your participation today.

Q3 2022 Advanced Micro Devices Inc Earnings Call

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