Q2 2023 Advanced Micro Devices Inc Earnings Call

Greetings and welcome to the a M D second quarter 2023 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being.

Recorded it is now my pleasure to introduce to you Mitch Haws head of Investor Relations. Thank you Mitch you may begin.

Thank you and welcome to Amd's second quarter 2023 financial results Conference call.

By now you should have had the opportunity to review a copy of our earnings release and accompanying slide where if you have not reviewed these documents. They can be found on the investor relations 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 posted on our website.

Participants on today's conference call are Dr. Lisa Su, our chair and Chief Executive Officer, and Jean Hu, Our executive Vice President Chief Financial Officer and Treasurer.

This is a live call them and will be replayed via webcast on our website.

Before we begin I would like to note that Jean who will attend the Jefferies semiconductor hardware and communications summit on Tuesday August 29th.

And the Deutsche Bank Technology Conference on Thursday August 31, Dr.

Dr. Lisa Su will attend the Goldman Sachs 2023 came in at Copia and Technology Conference on Tuesday September 5th.

Our third quarter 2023 quiet period is expected to begin at the close of business on Friday September 15th.

Finally, 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 statement in our press release for more information on factors that could cause actual results to differ materially.

That I'll hand, the call over to Lisa Lisa.

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

We executed well in the second quarter launching multiple leadership products significantly expanding our AI engagements and ramping our latest send for epic and ryzen product families.

Second quarter revenue declined 18% year over year to $5 4 billion.

Sales were flat sequentially as client and datacenter segment growth was offset by expected declines in our gaming and embedded segments.

AI customer engagements grew by more than seven times sequentially as multiple customers initiated or expanded programs supporting future deployments of instinct M. I T 50, and M. I 300 hardware and software at scale.

Looking at the second quarter business results data Center segment revenue of $1 3 billion was down 11% year over year and up 2% sequentially.

Although market demand remains mixed fourth gen epic CPU adoption accelerated in the quarter with revenue nearly doubling sequentially as cloud providers expanded deployments to power their internal infrastructure and public instance offerings.

In cloud 30, new AMD instances launched in the second quarter with multiple general instances announced by AWS, Alibaba, Microsoft and Oracle.

Generally delivers up to one nine times more performance in enterprise and cloud applications and one eight times more performance per watt than the competition, making it by far the industry's highest performance and most efficient server processor.

As an example, AWS announced its M. Seven a general incidents, which is the highest performance and that's price performance ground purpose X 86 instance, they offer.

In total there are now more than 670, AMD powered cloud instances publicly available and we expect that number to grow 30% to nearly 900 by the end of the year driven largely by new general deployments.

We also expanded our Zen four server product portfolio in the quarter with the launches of Bergamo in general ex.

Microsoft Azure announced the first general X H P. C instances that offer more than five times higher performance and technical computing workloads compared to their prior generation.

With Bergamo, we deliver more than double the performance than competitive offerings for cloud native applications, while offering full X 86 software compatibility.

We were excited to be joined at our launch event by meta where they announced plans to deploy bergamo broadly across their global data center infrastructure to power applications, including Facebook Instagram and Whatsapp.

Looking ahead, Dell HPE, Lenovo supermicro and other large server providers are on track to begin launching their new Bergamo platforms in the third quarter.

In enterprise, while macroeconomic uncertainty resulted in weaker customer demand year over year sales of epic processors for enterprise servers grew sequentially as we closed multiple wins with large energy technology financial services and health care companies.

Overall pull for large enterprises continue to grow for example that go to Brazil, BNP Paribas Chronis, Uber and other large enterprises, all adopted epic processors in the quarter and S. P selected epic processors to power rise with S. A P applications hosted on Google Cloud.

<unk>.

We expect epic revenue to grow by a double digit percentage sequentially in the third quarter led by the expanding fourth Gen epic CPU ramp.

In addition, Siena, our first epic processor optimized for leadership edge server and telco infrastructure is on track to launch this quarter.

Turning to our broader data center business and networking the largest cloud providers expanded their adoption of Penn Sandow Gpus in the quarter highlighted by new deployments with Alibaba and Oracle cloud.

In supercomputing epic and instinct processors continue to be the solutions of choice for the most powerful supercomputers in the world powering 121 of the fastest systems on the latest top 500 list and seven of the 10, most efficient systems on the Green 500 list.

In AI, we made strong progress in the second quarter as we met key hardware and software milestones to address the growing customer pull for our data center AI solutions.

Our AI strategy is focused on three areas first deliver a broad portfolio and multiple multi generation road map of leadership Gpus, Cpus and adaptive computing solutions for AI Inferencing and training.

Second extend the opening proven software platform, we have established that enables our AI hardware to be deployed broadly and easily.

And third expand or deepen collaborative partnerships, we have established across the ecosystem to accelerate deployments of AMD based AI solutions at scale.

We delivered on all three fronts in the second quarter on the software and partnership side hugging face announced plans to optimize thousands of their models for AMD instinct, ryzen epic Radeon versatile and LDL platforms.

To make it easier for developers to tap into the full performance and features of our AI hardware, we deliver significant performance and feature update in our latest rock them software and expanded support for AMD silicon across the leading frameworks, including Pi Torch Tensorflow Onyx and technologies like open AI Triton.

We are receiving positive feedback on the improvements and the new capabilities of our latest rock them software stack from our AI customers and ecosystem partners.

As an example, leading AI software company mosaic ml recently highlighted that our instinct am I to 50 accelerator delivers competitive trading performance with minimal or no changes to the underlying AI software.

On the hardware side, we announced our new instinct M. I 300 X Gpus designed to be the world's most advanced accelerators regenerative AI.

<unk> 300 ex combines our Nextgen C D and E. Three architecture with the industry's largest memory footprint and fastest memory bandwidth. These are critical factors in AI inferencing performance.

Customer interest in our instinct M 300 E and M 300 X Gpus is very high.

Engagements with top tier cloud providers large enterprises, and numerous leading AI companies significantly expanded in the quarter.

We are providing early system access and sampling both products with our lead AI H P C and cloud customers now and remain on track to launch and ramp production in the fourth quarter.

Turning to our client segment revenue declined 54% year over year to $1 billion.

Client segment revenue increased 35% sequentially as Ryzen 7000 series CPU sales grew significantly led by the launches of new notebooks from the largest Oems.

We also launched new commercial offerings with our first ryzen pro notebook and desktop processors powered by our leadership Zen four architecture.

More than 100 AMD powered commercial please see platforms are on track to launch this year from HP, Lenovo and other leading Oems as we grow this important part of our client business.

We expect our client segment will grow in the seasonally stronger second half of the year based on the strength of our product portfolio and increased adoption of our ryzen 7000, Cpus, including the ramp of our Ryzen 70, 40 mobile Cpus that deliver leadership performance and energy efficiency and are the industry's first X 80.

Six processors with a dedicated AI engine.

Going forward, we see AI as a significant PC demand driver as Microsoft and other large software providers incorporate generative AI into their offerings.

We are executing a multi generational ryzen AI processor roadmap, which together with our ecosystem partners will fundamentally change the PC experience.

Yeah.

Now turning to our gaming segment revenue declined 4% year over year to $1 6 billion as higher semi custom revenue was more than offset by lower gaming graphics sales.

Sequentially segment revenue declined 10%.

Semi custom Soc sales were strong in the quarter as Microsoft and Sony had healthy console demand based on improved retail availability globally and the launches of new AAA games.

In gaming graphics, we expanded our Radeon 7000, GPU series in the second quarter with the launch of our mainstream Rx 7600 cards for 10 ADP gaming.

We are on track to further expand our rdna three GPU offerings with the launch of new enthusiast class Radeon 7000 series cards in the third quarter.

Turning to our embedded segment revenue increased 16% year over year to $1 5 billion.

Sequentially revenue declined 7% as solid demand with industrial vision in health care automotive and broadcast customers was offset by softness with communications customers as some operators slowed their infrastructure upgrades.

We expanded our leadership adaptive computing product portfolio in the quarter launching our new versatile premium V. P 19 O two adaptive Soc with advanced chip led packaging the industry's largest and most performance solution for emulating in verifying next generation, a six and S O sees.

And the low end, we announced our Spartan ultra scale, plus FPGA family to address a new range of cost optimized industrial computer vision health care and robotics applications.

We also released enhanced versions of our novato invite our software platforms that make it easier for customers to develop highly performing applications for our versal adaptive ssds.

Embedded CPU sales grew in the quarter with the launches of new AMD powered security storage and networking solutions from HPE Fortinet and other leading vendors.

Looking into the second half of the year after delivering six quarters of very strong year over year growth. We expect embedded segment revenue to decline in the back half of the year as lead times normalized and some customers reduced their inventory levels.

We continue to be very pleased with our embedded design win momentum and in particular, the growing revenue synergy opportunities, we see based on our combined adaptive in embedded processing product portfolio.

In summary, we executed well in the quarter against our strategic priorities.

Looking at the second half of the year, we expect the PC market to grow seasonally with more normalized inventory levels across the supply chain.

In the data center market, we see a mixed environment as AI deployments are expanding however, cloud customers continue optimizing their data center compute and enterprise customers remain cautious with new deployments.

Against this backdrop, we expect strong growth driven by higher fourth Gen epic and Ryzen 7000 processor sales and initial shipments of our instinct M 300 accelerators in the fourth quarter.

Longer term, while we are still in the very early days of the new era of AI. It is clear that AI represents a multibillion dollar growth opportunity for AMD across cloud edge and an increasingly diverse number of intelligent endpoints.

In the data center alone, we expect the market for AI accelerators to reach over 150 billion by 2027.

We have increased our AI related R&D ecosystem enablement and go to market investments to capture a significant share of this emerging market.

The strong progress, we are making executing our AI roadmaps and the rapid pace at which we are expanding our ecosystem of AI hardware and software partners makes us very confident we can deliver leadership training and inference solutions powered by our instinct epic Ryzen, AI, Versal and LVL platforms for our customers and partners.

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Now I'd like to turn the call over to gene to provide additional color on our second quarter results and our outlook for Q3.

Jean.

Thank you Lisa and good afternoon, everyone.

Starting with a review of our financial results for the second quarter, and then provide our current outlook for the third quarter our fiscal 2023.

We are pleased with our second quarter results with revenue of $5 4 billion and diluted earning per share of 58.

Our year over year basis revenue declined 18% as the growth in the in by the segment revenue was more than offset primarily by lower client segment revenue.

Revenue was flat compared to the first quarter as growth in both of the client and datacenter segments was offset by expected declines in the gaming and the impact of the settlement.

Gross margin was 50% down.

Approximately four percentage points from a year ago, primarily driven by lower client segment of performance, partially offset by strong impact the second when nickel falling.

Operating expenses were $1 6 billion, an increase of over 3% year over year, primarily due to higher R&D investments.

Operating income was 1.1 female down 914 meeting year over year and the operating margin was 20%.

Interest expense taxes, and other was 120 meeting.

Second the quality of diluted earning per share was <unk> 58.

Compared to $1 five in the same period last year.

EPS declined on a year over year basis, primarily due to client segment performance.

Now turning to our reportable segments for the second quarter you.

Starting with the datacenter segment revenue was $1 3 billion down 11% year over year, mainly due to lower third generation I pick a processor sales as enterprises demand. It was the software and the inventory levels were elevated to a certain mtc customers.

Data Center revenue grew sequentially, we had a strong sales of our fourth generation I'd take a processors specifically gen Y partially offset by a decline in our adaptive ISO see product sales.

At the center segment operating income was 147 million or 11.

11% of revenue compared to 472 media, all 32% a year ago.

Lower operating income was primarily due to lower revenue and the increased R&D investment to support future growth.

<unk> segment revenue was 998 million down 54% a year over year due to reduced process of shipment, resulting from a weaker PC market and a significant inventory correction cross of the PC supply chain.

Sequential basis revenue grew 35% as we ramped our ryzen 7000 series processors in the PC market conditions improved.

Client segment, the operating loss was 69 million compared to operating income of 676 million a year ago, primarily due to lower revenue. We expect the client segment to return to profitability in the third quarter.

Gaming segment. The revenue was probably 6 billion down 4% year over year semi customer revenue accrual year over year, which was more than offset by lower gaming graphics revenue.

On a sequential basis gaming revenue declined 10% in line with our expectations.

Gaming segment operating income was 200, and the 25 million or 14% of revenue compared to 187 million or 11% a year ago, primarily due to higher semi customer revenue.

In <unk> segment revenue was $1 5 billion up 16% year over year, primarily driven by strength in the industrial patients health care automotive pasture and emulation market.

On a sequential basis embedded segment revenue declined 7%, primarily due to weaker communication market demand.

<unk> segment operating income was 757 medium all 52% of revenue compared to 641 million.

51%, a year ago, primarily driven by higher revenue.

Turning to the balance sheet and the cash flow during the quarter, we generated 379 million in cash from operations free cash flow was 254 million inventory.

Increased by 332 million to support the continued ramp of advanced technology products.

We expect inventory to decline as we ship this product to customers in the second half of the year.

At the end of the quarter cash cash equivalents and short term investment was strong at $6 3 billion.

Now turning to our third quarter 2023 outlook we.

We expect revenue to be approximately $5 7 billion, plus or minus the 300 million and an increase of approximately two 5% year over year and approximately six 5% sequentially.

Year over year leaseback revenue for the clay on the segment to be up data center segment to be flattish and the gaming and embedded segments to decline.

Sequentially, we expect the client and the data center segment to each grow by a double digit percentage and the gaming and embedded segments to decline.

non-GAAP gross margin to be approximately 51% non-GAAP operating expenses to be approximately 1.65, BB&T non-GAAP effective tax rate to be 13% and a diluted share count is expected to be approximately $1 63 billion shares.

In closing I am pleased to read our second quarter top line and the Baltimore execution, we expect our new product ramps across the data center and the client the segment to drive sequential growth into the third quarter Importantly, our leadership of product portfolio data center and the AI investment.

<unk> and the financial strength position us well for long term growth.

With that I'll turn it back to Mitch for Q&A session.

Thank you John .

John we're happy to pull the audience for questions.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

We ask that you please limit yourself to one question and one follow up. Thank you one moment please pull for questions.

And the first question comes from the line of Matt Ramsay with TD Cowen. Please proceed with your question.

Yes. Good afternoon, thanks for taking my questions.

Congrats on the results.

I guess Lisa My My first question is around the data center business I think we're all across the.

History observing.

A shift in workload and spending patterns.

And maybe weave arguably never seen.

And your companies in a great position to participate on on both sides of that on the CPU strength.

In the AI space last quarter, you had given us some metrics around potentially being able to grow your data center business by 50% in the second half of the year versus the first half and maybe you could give us a little bit of an update on how youre thinking about that milestone and the drivers of growth across CPU and accelerator for the back half. Thanks.

Yes sure Matt. Thanks for the question, so you're absolutely right. It's a very dynamic market right now in the data center, we certainly see let me go through some of the pieces. So on the positive side, we certainly see that acceleration of AI demand.

From our standpoint, we see it in a couple of ways. We have a number of design wins in AI deployments as sort of the the CPU that goes with Gpus as well as other accelerators. So in the head nodes that we've seen that positive on the CPU side. We've also seen some strong interest in our <unk> 250 accelerator.

Which is currently shipping right now and we see very strong pull on the <unk> 300 accelerators that are starting production in the fourth quarter. So those are the positive market dynamics as we go into the second half of the year.

We also see some of the softer cloud spend that is happening outside of AI as some of the cloud vendors are optimizing sort of their their capex and enterprise I would say is still on the weaker side, but with all of that in place and we are expecting a large ramp in the second half for our data center business and weighted towards the fourth quarter and we.

I'm still looking at a ZIP code of let's call it 50% plus or minus second half to first half. So it's a lot of it is a big ramp but.

When we look at all the components I think the customer pull is certainly there and it's exciting to be in this part of the industry.

Thank you for that Lisa I guess as my follow up still sticking with the data center business.

Your.

The company's aggressively trying to ramp.

Ramp up of the hardware and the software side.

300 programs to support AI, there's been some.

Conflicting reports as to whether all of those deployments are on time I think you've in the prepared script.

Said, what do you guys think about that I guess my question is really around.

The software work and the hardware itself that Youre doing with your lead customers, maybe you could give a little bit about I guess, firstly, how the customer feedback has been on the performance of the hardware itself and secondly, how how you think the software work Youre doing with your lead customers will translate into other customer deployments.

As we worked through next year. Thanks.

Yeah sure absolutely. So if I give you just some color.

And sort of how the customer engagements are going theres very strong customer interest across the board in our AI solutions.

That includes let's call it multiple tier one hyperscale <unk> that were engaged with it includes some large enterprises and it also includes served this new category of some of these AI centric companies that are sort of very forward looking in terms of how they're deploying and building AI solutions. So yes from that aperture we've made a lot.

Progress with our <unk> software stack.

Actually there's a lot more to do but I would say the progress that we've made has been significant and we're getting lots of feedback from those lead customers. We're seeing the benefits of the optimization so working.

Also on the higher level model framework some of the work that we're doing with the <unk> Foundation and the work that we're doing with Onyx with Triton and the key is we're getting significant real time feedback from some of these lead customers. So we're learning at a very fast pace in terms of the feedback on our performance.

A number of companies have now been able to look at.

250 across a broad range of workloads and Thats a good translation as you go to <unk> 300, and the feedback has been.

Positive we have customer sampling either on our sort of lab systems, they're accessing the hardware or sampling in their labs and I would say so far are very positive. The pull is there theres a lot of work to be done, but we feel very good about the progress of our.

Overall AI solutions for the data center.

Thanks Lisa.

Thanks, Matt.

And the next question comes from the line of Aaron Rakers with Wells Fargo. Please proceed with your question.

Yes, thanks for taking the question just kind of building unmatched matts comments or questions.

Just want to go back to your kind of the implied revenue for the data center business for the back half of the year.

Gene I think last quarter, you had alluded to for the full year the expectation is still growing.

10% or double digits I should say for the full year. The data center business, just confirming that and I guess, what I'm really trying to ask is I guess, given the guidance of flat year over year growth in data Center <unk>. It would seem if my math is correct, you're you're implying a 50% or so increase sequentially into <unk> I'm, just trying to frame it exact.

How youre thinking about the cadence of what <unk>.

<unk> looks like underpinning that expectation.

Hi, Aaron Thanks for the question I think I said, Lisa just mentioned earlier, it's a very dynamic market. There puts and takes that we have a tremendously strong momentum with our product portfolio.

But there is a continued.

Continued softness in enterprise market and also quality optimization is still ongoing so overall on balance we think the year over year, it's probably more like a high single digit.

It's a really strong.

Strong ramp not only in Q Q3, right sequentially. It means to the double digit strong double digit and the Q4 of costs that we're going to see continued sequential strong ramp.

Yes.

That's helpful. Jim and then just kind of following up on that as well.

How are you guys. How have you guys kind of manage through with that ramp in mind, the supply chain side I know that.

Your manufacturing partners talked about expanding there.

Their capacity significantly just curious of what youre seeing as far as being able to fulfill that that degree of demand as we look into not just this quarter, but into <unk> into <unk>.

Yeah sure Erin so we have been really investing in our supply chain of sort of the data center growth is so strategic to us that this has been part of the strategy. So if you look at all aspects of the supply chain from the wafers to the backend capacity to some of the specific components that you need.

To do something of the class of <unk> 300, we've worked with the entire supply chain, we feel that we have ample supply for an aggressive ramp in the fourth quarter and into 2024, but this is certainly one of the areas that we spent quite a bit of time to ensure that we do have that confidence.

Thank you.

Thanks Darren.

And the next question comes from the line of Toshi Hari with Goldman Sachs. Please proceed with your question.

Hi, Thank you so much for taking the question. My first one is on the data center business as well and I just wanted to follow up on sort of the Q3 to Q4 dynamic.

I do apologize if I missed this but.

And the implied growth rate.

In data center in Q4 can you speak to what percentage of that is supercomputing I think theres a theres a big project that's slated to.

In Q4.

And is there any contribution from the instinct series outside of supercomputing as well or is it primarily your server CPU franchise.

Yes, sure Tokyo, Thanks for the question so.

As gene said.

In the third quarter, we expect double digit.

Sequential growth in data center, that's primarily epic so thats, primarily the Zen four let's call. It the combination of Genworth Bergamo as that continues to ramp.

As we go into the fourth quarter, there is an implied a.

Significant ramp in revenue.

There are multiple components to that so there is the server CPU side will continue to ramp.

As we see Gen four ramp there is a.

Sort of large call it.

Lumpy supercomputer wins, so our el Capitano when will.

It will be in the fourth quarter, primarily with a little bit in the first quarter and then we will have contribution from.

Both of <unk> 300, ex going too.

A large AI customers as they start their initial ramps as well as <unk>.

A number of customers, who have now view that as a very very good option for some of the workloads that are not necessarily the largest language models are the largest parameters, let's call it more.

Sort of the other AI workloads. So those are the components of the.

Of the fourth quarter sort of implied a growth.

Lots of lots of pieces to it.

But clearly a big piece of it is the 300 ramp.

That's helpful. Thank you Lisa and then shifting gears a little bit follow up question on the client side, you talked about the business returning to profitability in Q3, which is which is great, but you're still well below where you were in in 'twenty, one and 'twenty two from an operating margin perspective can you speak to the competitive landscape and the climb.

Business is there a path back to call it 20%, 30% operating margins there and do you have any cost initiatives ongoing to get you back to that level of profitability and client. Thank you, yes, yes sure maybe let me start and then maybe Jean can add some comments. So look I think the PC business has been.

So we're very fairly volatile over the last number of quarters from the pandemic highs to some of the inventory digestion that we were all dealing with.

I can say that I am pleased to say that I think the growth that we're seeing that we saw here in the second quarter and that we see in the second half.

Is the strength of our product portfolio I think the the ryzen 7000 series is doing well, there's good customer Paul I think from a competitive dynamic standpoint, the business is always competitive, but we feel good about the most important thing that was a little bit of a drag on operating margins was the revenue.

The revenue being low as well as some of the.

We had a case where the.

The sell in was below consumption as we were normalizing inventory levels in the supply chain.

As we get past that what we see is I think the client business continues to grow.

We believe that no client will grow into 2024 as well in terms of some of the cost initiatives we have.

Been let's call it optimizing sort of the overall R&D footprint, but maybe I'll, let gene comment some more.

Yeah on the Opex side. The team has done a great job during the process to really optimize the investment in client segments to be more efficient and effective.

You look at Oh, I'll come at the company level, our Opex has been largely flattish, but we are investing in AI data center and the strategic priorities that we have of which generate a much higher return on investment and so we have optimized it we feel pretty good about this level for operating expenses to continue.

To invest in client segment as Lisa mentioned, it's really about revenue the model will leverage to generate the profitability, we should be able to get back to 20%.

Thank you.

And the next question comes from the line of Harlan sur with J P. Morgan. Please proceed with your question.

Yes, good afternoon, and thank you for taking my question could perceive the quarter over quarter, and flexing or ethics business Park or did that enterprise customers. Thank you didn't mention.

Can you muted environment.

But the team continues to drive share gains with global corporations are ramping to Noah.

Are you anticipating enterprise segment to contribute to the strong second half growth profile of your data center business.

Yes, thanks for the question Harlan.

Look the enterprise business is very strategic to us we feel that we're underrepresented and it's a place that we're putting more resources because again when.

When we look at the value proposition of Genoa, and the entire sort of Zen four portfolio. We think it plays very well into the enterprise. So we're pleased to see the growth in the second quarter. We do believe that we're on a path to continue to grow.

The second half of the year and beyond and the key here is.

Also investments in some of the go to market activities. So investing in more sort of business development folks that can call directly on these enterprise customers together with our OEM partners and ensure that our value proposition is.

Very well understood.

Perfect. Thank you and then.

On the accelerated compute side, you know general purpose computer bad might be new.

You did in China, but a significant amount of unmet demand for accelerated computing is regeneron I know there were performance thresholds put in place last year, maybe U S government might lower that performance threshold against or I'm, not sure, but let's say barring that right has the team looked into developing China specific skus of yours.

And my 215 or your U M. I 300 platforms. It seems like the opportunity here is quite large.

Yeah, Harlan look China is a very important market for us.

Certainly across our portfolio as we think about.

Certainly the accelerator market.

Our our plan is to of course be fully compliant with U S export.

Trolls, but we do believe there is an opportunity to develop product for our customer set in China.

That is looking for AI solutions, and we will continue to work in that direction.

Thank you Lisa.

Thanks Harlan.

And the next question comes from the line of Vivek Arya with Bank of America Securities. Please proceed with your question.

Alright. Thank you for taking my question. The first one just a clarification would it be reasonable to assume that your GPU accelerators says that it could be about 500 ish million. This year, so about seven 8% of data center.

If that is the right number and does it mean your server Cpus here that effectively flattish year on year this year.

Yes, I mean, Vivek I don't know that I would go into quite that.

That granularity what we will say is the the GPU sales in the first half of the year were very low.

As we were sort of in a product transition timing as we go into.

The.

The second half of the year and particularly in the fourth quarter. We will have 300 ramp I think your number may be a little bit high in terms of the GPU sales, but overall in general I think our expectation is that as gene said the datacenter business given all of the market dynamics, we see at up high single digits year on year.

We see much.

Better second half compared to first half and I think the product portfolio and the ramp of Genoa and Bergamo as well as the ramp of <unk> 300.

Our key components of the second half ramp.

Thank you Lisa and for my follow up just a kind of a broader question on AI accelerators in the commercial market. So I'm, excluding the supercomputing the El Cabo projects etcetera, what is the AMD specific edge in this market that are already strong and established a kind of merchant there's a number of ASIC options.

A number of your.

Traditional competitors, Intel and others and several startups are also ramping. So my question is what is AMD specific niche in this market what is your value proposition and how sustainable is it.

Because you are just starting to sample the product now so I'm trying to.

Get some realistic sense of how big it can be and what the specific kind of niche and differentiation is Florida AMB in this market.

Yeah sure Vivek. So I think maybe let me take a step back and just talk about sort of our investments in AI. So our investments in AI are very broad and I know theres a lot of interest around datacenter, but I don't want us to lose track of the investments on the edge.

As well as in the client but to your question on <unk>.

What is our value proposition in the datacenter.

Think what we have shown is that we have.

<unk> strong capability.

With supercomputing as you've mentioned.

And then as you look at AI.

There are many different types of AI.

Look across training and inference.

The largest language models and what drives some of the performance in there when we look at <unk> 300, 300 is actually designed to be a highly flexible family of products that looks across all of these different segments and in particular, we've seen a lot of interest is in the sort of.

Large language model inference, So am I 300 X has.

The highest memory bandwidth has the highest memory capacity and if you look at that inference workload, it's actually a very.

It's very dependent on those things that being said, we also believe that we have a very strong value proposition and training as well when you look across those workloads and the investments that we're making not just today, but going forward with our next generation 400 series and so on and so forth.

We definitely believe that we have a very competitive and capable.

Hardware roadmap I think the discussion about AMD frankly has always been about the software roadmap and we do see a.

A bit of a change here on the software side number one we've put a tremendous amount of resource on it so bringing together our former xilinx software team together with the AMD.

Sort of based software team.

Dramatically increased the resources and also the focus has now been on.

Sort of optimizing at these higher level models. So if you think about the frameworks around Pi torch and Triton and Onyx.

Many of the new AI centric companies are actually optimizing at a different level and they are working very closely with us. So in this place where AI is tremendously exciting I think there will be multiple winners and we will be first to say that there are multiple winners, but we think our portfolio is is actually a fairly unique in the sense that we do.

Have Cpus Gpus.

The accelerated technology with ryzen AI.

On the PC side as well as in the embedded side with our xilinx portfolio. So I think it's a pretty broad and capable portfolio.

Yeah.

Thank you.

And the next question comes from the line of Stacy <unk> with Bernstein Research. Please proceed with your question.

Hi, guys. Thanks for taking my questions I wanted to first go back to the Q4 data center, Greg So if I do my math right.

Is something like $700 million sequentially data center from Q3 to Q4, so how much of that how about Europe that use them are 300 versus CPU.

Given the lumpiness of the El cap of 10 piece.

Does that imply for the potential seasonality into Q1 as most of it rolled off.

Yeah sure. So it is a large ramp stacy into the fourth quarter I think.

The largest piece of that is the 300 ramp.

There is also a significant component that's just the epic processor ramp with as I said the <unk> portfolio.

In terms of the Lumpiness of the revenue and where it goes into 2024, let me give you kind of a few pieces. So I think there was a question earlier about how much of the <unk> 300 revenue was AI centric versus let's call. It supercomputing centric the larger pieces supercomputing, but it's meaningful.

Revenue contribution from from AI as we go into 2024, our expectation is again, let me go back to the customer interest on <unk> 300, <unk> is very high there are a number of customers that are looking to deploy as quickly as possible. So we would expect.

Early deployments as we go into the.

The first half of 2024, and then we would expect more volume in the second half of 'twenty four as those things fully qualify. So it is going to be a little bit lumpy as we get through the next few quarters, but our visibility is such that there are multiple customers.

They are looking to deploy as as soon as possible and we're working very closely with them to do the co engineering necessary to get them ramped.

I mean, but like of the $700 million, it's like $400 million of an El cap of 10 or is it 500 millions of 300 million likely how big is the El Cabo San please.

You can assume that the <unk> is.

Several hundred million dollars.

Several hundred okay.

For my follow up.

Gross margins are you coming up in the back in the second.

Kind of missed in the quarter I know the rounded up to 50, but they were 40 97.

<unk> 51 for Q3 gene, where do you see gross margin sitting like in Q4, as we exit the year.

Yes, I think the gross margin is.

For us the primary driver as we discussed in the past, it's really mix and if you look at our guidance our outlook for Q3 gross margin of 51%.

More than one percentage point improvement sequentially. Despite the overall very significant hydro wind from embedded the business is declining in Q3, So the data center and the clay on the business are expected to grow double digit sequentially and provide a positive impact on the gross margin.

Which actually more than offset the hydro wind from embedded the business. So going into Q4 again, we are not guiding Q4 and the <unk>.

Going to depend down makes I would say one thing is you will have a similar dynamics. It right data centers, we expect to grow very significantly at the same time that we're going to have the same headwind from embedded that business declining.

Declining sequentially. So overall, we do expect gross margin to improve from this level going forward.

Okay. Thank you.

And the next question comes from the line of Joe Moore with Morgan Stanley . Please proceed with your question.

Great. Thank you you've talked about the embedded business declining as you move into the second half can you give us a sense for how much and is that decline a function of the comm infrastructure market or are you seeing weakness.

Beyond that part of the market.

Yes sure Joe Thanks for the question.

So look.

When I look at the embedded business I think we should start by remembering that we're coming off of six quarters of very strong growth I mean, this business has performed extremely well.

And I'm very pleased with the overall momentum in the business to your exact question of what we're seeing in the markets. We're actually seeing the core markets hold up pretty well, so let's call it.

Aerospace and defense strong industrial vision in health care strong test and emulation strong we are seeing communications weakness. So that is the primary driver of the second half commentary and Theres also some inventory optimization as you might expect since our lead times have come down over the last several months.

So in terms of ZIP code I would say think of it as double digit down sequentially.

In the third quarter and.

That's the that's the current view that we have but overall the business has been extremely strong for us. So I think this is.

So unexpected.

Klein as we come off the cycle.

Great and any sense for beyond this quarter since we've asked you. So many Q4 questions already today.

Any sense for is that kind of the bottom level or do you expect it to be some continued contraction.

Yeah.

As Jim would say, we're not guiding for the fourth quarter, but I think you should expect embedded sort of in that similar ZIP code yes.

That's what I would say.

Okay, great. Thank you.

And the next question comes from the line of Timothy Arcuri with UBS. Please proceed with your question.

Thanks, a lot Jim My first question is on inventory.

It's going to come down a bit as you ramp into the Q4, obviously you have a big Q4.

Can you sort of shape that out for us.

Before this.

Normalized inventory days were kind of 90 to 100 days.

Or do you think youre going to exit Q4 in terms of.

Inventory days.

Yes, Tim Thanks for the question I think.

As we ramp those product lines in Q3 into Q4, you will see inventory come down for GE in Q3 and in Q4 again.

<unk>.

The inventory days of inventory, probably it will be around 110 to 120 days.

Key thing he said right. If you look at the amount of our product. They are like our advanced process technology five nanometer nanometer ethics.

The manufacturing cycle tend to be long so in the longer term.

They expect to us from a days of inventory be more around 100, 120 days versus traditionally like 80 days 75 days that will be too short for really most of the advanced process technologies.

Thanks, a lot.

Then my.

Hello. This is for you Lisa so.

I mean, if you kind of add up the units.

Customer interest I mean, you can easily get to a several hundred thousand units. It seems to me for the for the M. 300 X next year. So the question really is on that.

On the supply chain and particularly close do you think do you think that's going to be a bottleneck for you I know that.

They've been expanding capacity I know you've been trying to procure more there can you sort of talk about that and sort of do you think that supply could become a limiting factor for you next year. Thanks.

Yes, absolutely so I'm not going to comment on the exact units.

But what I will say is we.

We've been <unk>.

Focus on the supply chain for <unk> 300 for quite some time. It is tight there is no question that it's tight in the industry.

However, we have.

Sort of commitments for significant capacity across the entire supply chain. So cost is one piece of it high bandwidth memory is another piece of it.

And then just a general.

The general capacity requirements and look our goal is.

To make this a significant growth driver for AMD I think it's a it's a it's a great market opportunity, we love the engagements with customers.

It's our responsibility to provide the supply.

For the demand and so that's what we've been working on.

Thanks, a lot.

Thanks, Tim.

And the next question comes from the line of Christopher Rolland with <unk>. Please proceed with your question.

Hey, guys. Thanks for the question more on the <unk> 300 opportunity.

You guys called out as a multibillion dollar.

Growth opportunity I was wondering if perhaps you could put a timeframe around that multibillion dollar opportunity.

But more specifically.

Have you guys ported over.

300, <unk> two <unk> 300 have you looked at the performance how do they perform are you excited about that and then in terms of Hyperscale uptake.

Is it the X version the GPU only version that you expect to be the biggest seller here and have you had any semi custom.

Configurations here.

You know that potentially might even include an FPGA or.

Or other kind of Lego movements on the 300. Thank you.

Sure. So there were a lot of aspects to that question Chris So.

Let me try to give you some.

Some work here I don't think were ready to talk about timing yet of revenue numbers.

We will say is we do believe it's a multibillion dollar opportunity.

I think 2024 is a very important year for us ramping <unk> 300 in multiple customers.

Is sort of over the next several quarters is.

Very important I think I'd mentioned earlier in the Q&A that the customer interest is actually diverse which is great.

<unk> sort of the what you would expect in terms of the large tier one hyperscale.

But I think the sort of these new class of sort of AI focused companies have been working very closely with us.

And then some of the large enterprises are also looking at.

Ramping up their efforts.

The performance that we see is.

<unk> I think the large language model work that we've done we've done a lot of it on <unk> hundred 50, and we've seen very good.

So we're very good results that's on both training as well as in France.

As we go through <unk> 300 again, the early results are strong.

The for AI applications, what we're seeing now is mid 300, <unk>, So let's call it the GPU only version.

Is is the one that is.

Sort of most prevalent.

The AI customer engagements, but the 300, <unk> actually which is sort of where we have the CPU and the GPU more closely coupled together.

Is also of interest so I think the key is I think we've built a platform that does allow people to kind of.

What is best for the models for the workloads that they're trying to enable.

And that's what we're that's what we're working on.

Great and just as a quick follow up then Sienna.

Telco is a market kind of owned by your competitor there. They have a lot of software around telco what kind of share do you think you can take in the telecom market from them over the next few years.

Yeah. We're we're excited about C&I I think fit.

Again, it's as you said, it's a niche that we haven't previously been focused on I think our interactions with the telco suppliers are there.

They are anxious to have <unk> be a part of their portfolio. Sienna is also one that we'll use for other edge applications or let's call. It lower end applications that need the performance of Gen four but perhaps not the heavy platform.

That we have on the general in Bergamo. So we do think we're starting from a very low point. So there is an opportunity to gain share over the next couple of years and.

We'll focus on that.

Thanks, so much Lisa.

Thanks, Chris.

And the next question comes from the line of Chris Danley with Citi. Please proceed with your question.

Thanks for squeezing me in.

Lisa So if the a M. I <unk> 250, 300 et cetera ramp or the revenue was mostly GPU only what kind of an impact would that have on the.

On the A&D gross margin would that still be gross margin accretive or dilutive or neutral to your corporate gross margin.

Thanks, Chris.

No.

I think for the let me just make sure I get the.

<unk>.

The statement clear so.

Both <unk> 300 day, and mid 300, <unk> will be part of the ramp, particularly in the fourth quarter and as we go into next year for the for the AI specific applications. We are more heavily weighted towards <unk> 300 ex.

Just given sort of the where the software is written and to your question about gross margins at the corporate level. So you would we would expect that.

Our AI business will be accretive to gross margins at the corporate level and obviously as you start the ramp there is theres a little bit of learning, but overall, we expect it to be accretive to our corporate gross margins.

Great and then for my follow up I just had.

Clarification, so it sounds like most of the M.

My revenue you have in the Hopper right now or at least the committed revenue as well.

Cap is that is that true and.

Do you have other I guess confirmed or hard orders for that or maybe just spend some time.

Telling us.

You are working with our customers are what it takes for them to go from Hey, we're interested to hear is a purchase order.

Yeah. So.

Maybe if your question is do we have other customers who are committed to 300 other than El cap. The answer is yes.

We have a number of customers who are actually committed.

The way these things go actually its not different not very different than how our server ramp goes right. I mean, one starts with an initial deployment.

Insurers that the software works ensures that we have all of the the reliability and capability in the data center and then they ramp from that.

I'll say the difference in AI.

Deployments is I think customers are willing to go very quickly there is sort of a desire and a agility.

Because we all want to accelerate the amount of AI compute that's out there and so the speed in which customers are engaged and customers are making decisions is actually.

Faster than they would in sort of a normal sort of regular environment and thats, great. I think that's helping us as I said earlier learn perfect the software.

All the all of the capabilities in place for <unk>.

A significant ramp next year.

Thanks Lisa.

John we have time for one more question.

Okay and our final question comes from the line of harsh Kumar with Piper Sandler. Please proceed with your question.

Hey, guys. Thanks for letting me ask a question Lisa we're looking forward to an exciting second half for your company I had a quick question on the server share do you think that there is a theoretical limit to the shared that AMD can get historically initially we had $80 20 was up where the prevailing rule then you busted through that now we're hearing customers.

Russia was 70 30 is more like it.

More importantly are there any large vendors for your several business, where you have significantly more than 30% share, let's say 40, or even 50% sure and I have a follow up.

Yes sure harsh thanks for the question.

Thank you.

In the server business I think the most important thing for our customers is that we have a strong roadmap and that it's a roadmap that they can count on and we've been building that sort of working model that roadmap and that trust over the past four or five years. So I don't think theres any theory.

Medical cap on AMD share I would say if.

If we look today there are multiple customers who have deployed in their datacenters at more than 50% share and from our view the place where we have perhaps been a bit more underrepresented is in the enterprise and Thats, just a matter of sort of the breadth of enterprise customers and the breadth of enterprise software. So we believe that we.

Have leadership today, and we will very very focused on ensuring that we continued leadership in the market and with that there is an opportunity to continue to gain share in the server market.

Thank you Lisa.

My second one can you help us think a little bit about the generative.

Let's say you know if you can size for us some kind of metrics as to how many dollars of spend today are you seeing from your customers on generative AI for let's say each dollar of regulators server CPU spend.

Is there a metric that we can think golf is that a trend today and where do you think it can be in a couple of years.

Yeah, I think harsh the best way to answer that and now we're all sort of.

It's all a crystal ball as to what's going to happen over the next four or five years. There's no question that the the.

The demand for generative AI solutions is very high.

And there's a lot of compute capacity that needs to put in the way we've sized the market is it can perhaps grow at a rate of let's call it 50% CAGR plus or minus over the next three or four years, so that would take us to $150 billion market by the time, we get to 2027 now that's all accelerators in the data center so that.

Includes.

<unk> that includes other asics and other accelerators.

But I think we have an opportunity to address a large portion of that market. So that that makes it.

Very clear prior.

Priority for us, it's our number one strategic priority.

We continue to work closely with our customers as they optimize between CPU and GPU spend.

Thank you Lisa.

Thank you great John that concludes today's call. Thank you to everyone for joining us today.

Yes.

Ladies and gentlemen, you may now disconnect your lines at this time. Thank you for your participation.

Okay.

Yes.

Mhm.

Yes.

Mhm.

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Yes.

Sure.

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Sure.

Yeah.

Okay.

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Yes.

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