AMD Reports Q4 2020 Earnings: Analyst Q&A Transcript

At the end of every financial call, invited financial analysts have an opportunity to probe the key members of the company on the numbers, as well as future products. We just had AMD’s Q4 2020 Financial call, covering all of Q4 developments as well as 2020 as a whole. On the call was CEO Dr. Lisa Su and CFO Davinder Kumar.

This is a transcription with additional clarity added.

Barclays: Your numbers showcase a robust annual guidance for 2021, with AMD stating that you expect to see all segments up in revenue. Can you give us any color or detail with regards segment and product lines?

Lisa Su: So we’re excited as we move into 2021. 2020 was a quite a strong growth year for us. For our annual guidance, we expect to see strength across all of our businesses. This will naturally be led by our large segments: Server, PC, and Semi-custom/console. We will also see growth in graphics across consumer graphics and datacenter graphics as we ramp out the full product lines across 2021. Overall growth in 2021 will come from the strength of our new product portfolio coupled with positive demand environment.

Q: For the shape of revenue in 2021, you stated that it will be better than seasonal as we enter the year. Can you talk about your thoughts on the overall PC market, as well as how AMD’s year will be shaped by the semicustom business in H1 compared to H2?

Lisa Su: You saw a bit of our expectations in what we said with our Q1 guidance – Q1 will have better than normal seasonality. In a normal year we see typically see the first half on a decline, below the second half which is often consumer strong. From the shape from market coming out of 2020, we see that the PC and gaming segments are performing better than seasonally expected, and they also have pent up demand. We are also seeing strong datacenter growth, with server demand up sequentially in Q1. This is on the strength on our Rome product and the Milan product ramp. It means that the 2021 yearly performance will have a different shape compared to normal, but with strong demand across our three key segments: PC, datacenter and gaming.

Cowen: In the server numbers, we’re seeing a bigger dollar contribution to growth compared to prior years. Lisa mentioned accelerated growth for the datacenter in 2021, off of a business that doubled last year. Are there drivers of server growth alongside simply launching Milan?

Lisa Su: We are happy with our DC progress, and 2020 was a strong year. We expect to see a strong growth of our DC business in 2021. Cloud business is strengthening as we go into the first half of the year, both with current generation Rome as well as next-generation Milan. The reception to Milan from our customers is strong, with a good performance profile. We started shipments of Milan to key cloud customers in Q4, and we will continue in Q1 (full launch in March). We expect to see more new customers, and more current customers adopting our Milan platform. We will have a very strong enterprise portfolio, and strong time-to-market partnerships with key OEMs. That's part of our launch plan later in Q1. Overall we are optimistic in DC, and we see a lot of need for compute in the cloud and for the enterprise market. In that instance, Milan is very well positioned.

Q: It is no secret that industry is supply constrained, both due to market growth as well as the pandemic. Could you characterize the magnitude of supply constraints AMD is facing, and could they be hindering growth? Most analysts thought that the big CAPEX increase from TSMC might have been due to Intel ordering supply – but as you look through this year, does the guidance for FY2021 incorporate increasing supply and assumption of better supply?

Lisa Su: As we look at the environment in 2020, it was strong. That led to a strong revenue ramp in our business, as well as the businesses of our peers. For AMD, the demand exceeded our planning, and as a result we did have supply constraints as we ended the year. This was mostly confined to our PC market offerings, particularly the low end of both PC and gaming. As it pertains to our manufacturing partners, we're getting great support from them, especially as the industry needs to increase capacity. But we have added capacity, with more coming online through 2021 into the second half. How we think about it all, with respect to our full year 2021 guidance, is that we have good visibility into both our supply side and the expected demand side, that's the reason we are confident in our guidance.

Bank of America: Can you help us dissect the Q1 and 2021 outlook, particularly with and without the semi-custom business? Can you explain the moving drivers?

Lisa Su: In Q1, we do expect to see the PC market and console business to be a bit better than seasonal. Normally consoles would be seasonally down double digits, and we expect consoles to be modestly down, but still higher than what is seasonally normal. We expect to see a sequential QoQ increase in the server business and graphics as we ramp products there. As we go into 2021, we're in a place where we have 3 businesses that scale. Our FY2021 guidance encompasses growth in all three - PC, DC, and Gaming. This is due to the visibility we have on these platforms into launches and the strength of our portfolio. We see lots of demand across all three segments, and well balanced demand between the three. We also expect to see growth in consumer graphics and datacenter graphics due to new products and deployments as well.

Q: In Q1 this year, Intel is also launching its datacenter server product. In the near term, there has been some discussion about cloud digestion of server processors. Could you address that, and the demand environment you are seeing from cloud and HPC customers? As we play out to 2021, both AMD and Intel will be almost on the same manufacturing node - how that will play a role to your decision making for customers? Often the discussion is one dimensional about the node, but what's your confidence and visibility in the DC market?

Lisa Su: Near term, cloud is a period for us that is seeing strong demand. We saw strength and demand in Q4, and we see robust demand in Q1. Those are good signals for us. For 2021, we're excited about Milan as it's a strong product. We've already seen what Zen 3 can do in the desktop and notebook markets, and it builds upon what we did in Rome. With the manufacturing process, while it is one aspect of competitiveness, we've also focused on overall performance and system performance both in cloud and enterprise. Milan is the most balanced product we have both for enterprise applications as well as cloud applications. For visibility, we have better visibility this year than we've had in past years. This is our 3rd gen EPYC, and we’ve developed deeper customer relationships - lots of decisions have already made by our customers during the testing our products. It will be an exciting year, and we are pleased with Milan’s performance and level of market interest.

Stacy Rasgon, Bernstein: A question about server margins. In Q4 we saw ‘high teens’ (15-19%) server revenue about $600m as part of the revenue for the quarter. But the gross margins from AMD missed guidance by a few tenths of percent, despite the server market being a high gross margin business. Is this due to the console business (which has lower margins) and the mix of consoles over servers? Also a similar thing with AMD’s 2021 guidance - consoles are expected to trend down in Q1 with all else up, but gross margins are only slightly increasing.

Lisa Su: On Q4, we saw strength across a couple of different businesses compared to our guidance. We saw strength in our console deliverables as well as PC and the datacenter. Overall our revenue was weighted to PC in 4Q for our client business. It is about what we expected for the quarter. In Q1 2021, we will see our PC and console revenue a bit better than seasonal – at a time when consoles are often down double digits, we see them still down but not as much. We will also see datacenter also up. As we look to the full year, we see the mix of business adapting where there is demand.

Q: With regards the pricing environment on servers – your main competitor has talked about a more competitive environment in the server market, the result being an impact on their average selling prices (ASPs) and overall margins. What did you see in Q4 for AMD’s server business, and what have you incorporated into your 2021 guidance for this?

Lisa Su: In Q4, we actually saw our server ASPs up sequentially quarter on quarter, mostly because of the product mix chosen by our customers as well as our first Milan shipments and the ramp of Milan. As we go into 2021, the server environment is still competitive, as it has always been. Our focus isn't to compete on price, but on overall value and total cost of ownership (TCO) as we go into 2021. For us ASPs are determined more by the mix of products that our cloud and enterprise customers use. We are still cloud weighted, and we will be cloud weighted going into 2021. For us, the ASP environment is what it has been for a while.

Goldman Sachs: Can you speak to the expectations for the PC market this year? Is there any concern due to a strong 2020? What's embedded in guidance for this? Also what traction do you see in the commercial market over the consumer market?

Lisa Su: 2020 was strong year for us in the PC market, and you've heard this from OEMs as well. In 2021 most people are saying the segment will have a middle single-digit (3-7%) type of growth, and we see similar market forces. The shape of that revenue distribution is expected to be a bit different to normal, with the first half of the year stronger than most people expect. Our focus in the PC market is clear – it is in segments where we can move up the stack to a more premium product. This means segments such as the gaming markets, the premium consumer notebook market, and commercial markets. At AMD we have made commercial progress with Ryzen, and that business develops over several quarters. Overall our expectation for the PC market is strong as we go into 2021. It's one of our elements of our growth. We're focused on growth in commercial as well, growth in gaming, and premium consumer. Ryzen 5000 has had strong reception on both desktop and mobile.

Q: OpEX. AMD’s rate of spend is in line with growth, but still quite fast. How is that spend profile transferring into growth over the next couple of years? Earlier this year AMD was guiding 20% growth through to 2023, but with +45% last year and AMD guiding +37% this year, is 20% still the right number to consider?

Lisa Su: This is a great time to invest in the business. AMD’s model has been to continually investment, but at a rate slower than revenue growth in order to get leverage in our model. Our actual spend of OpEx has decreased as a percentage of revenue, but actual dollar amounts have gone up as revenue has increased and as we build out. AMD has a strong spend on R&D, on expanding product portfolio, and we have leaned hard on our CPU and GPU expertise. We have our GPU split out into gaming and compute, so we have competitive offerings in both, for example. We have more investment going forward in system IP to link the CPU and GPU, as well as software, and investments going into the market. We're becoming a company of scale, and that helps ensure we have breadth and depth of roadmap and customer support for long term objectives.

Wells Fargo: On Milan, at the analyst day AMD talked about expanding its ability to address workloads. As we think about Milan, how do you compare it to Rome, how should we think about ASP uplift compared to Milan as it ramps.

Lisa Su: We see the expansion of our competitiveness across enterprise workloads as well as broad cloud workloads. We want to improve TCO for our customers, so as our product performance goes up, we do expect some ASP lift as well, but overall for customers it is so important that the TCO improves generation over generation. Particularly with Milan, the single threaded performance uplifts are helpful - some enterprise workloads that can't use all of the cores will be able to benefit from Milan’s single threaded performance. We are launching Milan later this quarter, and overall we feel very good about its positioning.

Q: On DC GPU side, revenue has been lumpy from quarter to quarter. Is there a point at which you see it as a regular revenue stream, and in the future as a growth driver?

Lisa Su: Our datacenter GPU market is coming into its own. It will still likely be lumpy Q-to-Q due to number of customers we have for that product line. We see 2021 as a growth year for DC GPU as our CDNA products enable higher production in larger HPC installments, as well as our cloud products in ML and AI. We expect to see it as a multi-year growth driver over several years. 2021 is an important year for our DC GPU business, as well as next few years.

Q: Deutsche Bank. Speaking to the GPU side for the client. While AMD has done a great job on its CPU client share, is AMD optimistic in the client GPU space, and what are challenges/opportunities here?

Lisa Su: Our GPU business has been focused on ensuring consistency in our roadmap. The first generation of RDNA had 50% performance per watt increase, and we launched the next generation RDNA2 a few months ago, and we will fill out that portfolio. Consistency is needed, and there is pent up demand for GPUs and gaming. It's an attractive market for us, and the consumer GPU business will grow for AMD in 2021. We expect to make progress with OEM and AIBs. Over the coming years, the team is also working very hard on RDNA3. For us we’re looking at consistency, a top to bottom stack offering, and using depth and breadth of customer relationships to drive this business.

Q: Looking to gross margins (GM) in 2021 as a whole, it is good to see the guidance rising to 47%. What are the puts and takes here? If the semicustom business is growing (typically lower GM), what's offsetting that to keep the GM rise?

Devinder Kumar: So for AMD, we expect server and client revenues to be up in 2021. The semicustom business had a 2020 ramp in Q3/Q4, and we will see growth in 2021. We're talking about our GM moving from 45% to 47% YoY, and semicustom is a lower GM than average. Our client and server growth offsets this.

Lisa Su: Consoles are typically what we call a below corporate average gross margin product, but it offers quite a reasonable operational margin. Server is above that corporate average, and our server revenue is expected to grow substantially in 2021. The PC business is expected to see mix improvement towards higher GM products as we move to more premium elements in the stack.

Credit Suisse: Again on GM - given the product mix in Q4, with the first quarter of the console ramping up, the gross margin numbers put up by AMD were quite good. How should we think about GM without consoles - as we see 2021 we should see GM improve over time, so what's the exit rate of GM in the 2021 guidance? Why isn't it higher due to tail winds?

Lisa Su: At this point it is early in the year – while we have good visibility in puts and takes, there is still lots to unfold. All the statements you make are accurate, and console margins have history of improving over time. We will just have to look at the mix of all the business as it plays out. By the end of the year ramp, you will see improvements over the year, and it's all about the product mix in any given quarter.

Q: The semiconductor business is becoming more strategic to world governments. Intel is lobbying hard for incentives in Washington. How can AMD be part of that conversation, based on AMD's IP and market share? AMD is much a national champion in semis as Intel, but the focus in Washington is in on the manufacturing. How do you get Washington to consider AMD important in that mix?

Lisa Su: As it relates to the government focus on manufacturing, that's well documented and historically been the case. That being said, there is also a focus on leading edge research and making sure it is well supported. We participate in many of the industry associations here, and the key is to invest in leading edge research and manufacturing to push the envelope. We invest a lot, and we agree that as an industry we should invest.

Q: Do you expect to be direct beneficiary of any incentives that come out of Washington, or will it be through industry partners?

Lisa Su: We will see how it plays out. If it is to be through manufacturing, then we will see the benefit through our partners. But we are strong on research, and we will continue to be there.

RBC Capital Markets: Speaking to manufacturing, AMD has had three products ramp in Q4. What would the gross margins look like if TSMC’s yields looked like what they did in 2018? Is TSMC yield improving as per a normal environment?

Lisa Su: On gross margin, we are right where our long term roadmap says we would be. The roadmap is tracking to 50%. There are ebbs and flows based on product cycle, and we're seeing growth in four or five of our large businesses at once, and the mix between consumer/commercial, cloud/enterprise, and the mix between consumer/DC graphics all come into play. When we put that together and we're pleased we grew margins by 2pts last year, and guiding up 2pts in 2021. Yields play into this of course.

Q: The total addressable market for PCs is surprisingly up. Can you talk about AMD's 3 major markets - what is the industry going to do?

Lisa Su: In PCs, if you look at what the sources are saying, we are expecting mid single-digit (3-7%) growth. In the server market, both enterprise and cloud are expected to see modest growth. Gaming is hard to call because it's on a different product cycle. We said we expect +37% growth through 2021, and that is mostly due to portfolio and growth opportunities, and we think we're growing ahead of the market. The 2020 market was stronger than most projected at beginning 2020, so we'll see what 2021 brings.

Morgan Stanley: The cloud business for our server products – AMD has talked about the need to sell the cloud as a service when selling to the cloud. Where are you with internal cloud workloads vs enterprise facing workloads facing the cloud?

Lisa Su: If you look at the cloud environment, we talk about both internal workloads for the cloud providers and external workloads that their customers run on the cloud instances. We've done very well with internal cloud workloads. We have seen many of those cloud internal applications ramp on AMD in Q3/Q4, and customers are pleased with the performance. We will see that carrying over to Milan. The move from Rome to Milan isn't too heavy a lift, and we will continue this effort into 2021. For external workloads, we've spent effort the business development engine that sells along with cloud vendors and enterprise OEM solutions. Our conversation with enterprises is a hybrid conversation with OEM partners. We discuss on-premises cloud vs cloud vendor offerings with customers. It has all progressed nicely, leading to positive commentary. Ultimately we have seen growth in internal and external workloads.

Q: For the DC GPU market, there is talk about merging applications. But with AMD’s cloud gaming initiative, what's the state here, and what the portion of the business is it?

Lisa Su: Cloud gaming portion was a larger portion in previous years. In 2021 we do have additional cloud gaming engagements that will ramp, but it would be a smaller portion of the biz, as HPC would be the larger portion as it ramps up.

UBS: On datacenter renveues, it sounds like AMD’s server CPU share is 12.5% based on the $20 billion TAM numbers you gave last year. We’re currently in a situation where Milan is ramping, and you have visibility into your offerings and market in 2021.  What is the next mile post for AMD in server CPU share as you look into 2021?

Lisa Su: We don't have a new target to share! This is a given with the variance in the market. We have given the view that the server business is a high tends % of revenue, predominantly in server CPUs given that DC GPU was a small part. As we go into 2021, our server CPU offerings will be a significant growth driver. We will give you updates over 2021 as it grows as a relative size of the business.

Q: On the DC GPU business, we’ve seen it flattish this year, and to grow over 2021. How much can it grow – should we expect double YoY? While it is not big from a dollar point of view, how big would Frontier (the all-AMD Exascale supercomputer coming online in 2021) be to that business?

Lisa Su: DC GPU is still relatively small for us. It was actually down YoY because some of the cloud gaming ramps in 2019 paused in 2020 due to the global situation. For 2021 we see it as a growth driver as relative size - yes it could double. But to think about it, we said that we'd like that business to be $500m as a first milestone, and we're making progress to that milestone.