Outside of sales pressures for a game console processor business that should do better in 2020, AMD's (AMD) latest numbers look pretty solid.
On Tuesday afternoon, AMD reported Q3 revenue of $1.80 billion (up 9% annually) and non-GAAP EPS of $0.18, nearly matching consensus analyst estimates of $1.81 billion and $0.18. And the company guided for Q4 revenue of $2.05 billion to $2.15 billion, which compares with a consensus estimate of $2.15 billion.AMD's stock finished after-hours trading down 1.1% to $32.68. It had gone into earnings up 79% on the year.
While AMD's company-wide results and guidance weren't far-removed from analyst estimates, certain parts of its business appear to be performing much better and much worse than expected, respectively.
On one hand, AMD's Computing & Graphics (C&G) segment, which covers sales of its GPUs and PC CPUs, saw revenue grow 36% annually in Q3 to $1.28 billion, easily beating a $1.13 billion consensus. AMD notes the growth was "primarily" driven by higher sales of its Ryzen desktop and notebook processors, with its quarterly PC CPU revenue hitting its highest levels since 2011.
Intel, by comparison, reported last week that its Client Computing Group (CCG), which covers sales of PC and mobile products, saw revenue drop 5% annually in Q3 amid ongoing supply constraints for low-end PC CPUs.
Sales of Ryzen notebook processors, which feature a CPU and an integrated GPU, have been seeing healthy growth following the launch of second-gen chips in early 2019. And AMD did note that GPU sales, which were stung in recent quarters by channel inventory corrections that followed a plunge in demand from cryptocurrency miners, were up annually.
However, AMD's third-gen Ryzen desktop CPUs, which launched in July to very good reviews, likely drove much of the C&G segment's quarterly upside. The CPUs generally compare well in terms of price/performance to similarly-priced Intel desktop CPUs, particularly for workloads involving the simultaneous use of multiple CPU threads.
And for much of Q3, AMD's $499, 12-core, Ryzen 9 3900X desktop CPU was sold out at major retailers. A $749, 16-core CPU (the Ryzel 9 3950X) is due in November, as are third-gen products for its Ryzen Threadripper CPU line, which targets workstations and enthusiast desktops.
Separately, AMD disclosed that sales of its Epyc server CPUs, which are included in its Enterprise, Embedded & Semi-Custom (EESC) segment, rose over 50% sequentially, after having previously seen strong sequential growth in Q2. Server CPU sales hit their highest quarterly level since 2006. AMD's second-gen Epyc CPUs -- they launched in August, generally offer a lot of bang for the buck relative to comparable Intel Xeon server CPUs and have seen strong early interest among supercomputer and cloud server buyers -- had much to do with this growth.
But in spite of Epyc's growth, AMD's total EESC revenue fell 27% annually to $525 million, easily missing a $695 million consensus. Nosediving sales of game console processors -- AMD processors power both Microsoft's (MSFT) Xbox One and Sony's (SNE) PlayStation 4 -- appear to be the culprit, with console processor demand dropping even more than it did when AMD forecast a weak quarter for the business in July.
On the earnings call, CEO Lisa Su indicated AMD expects a lot of the trends it saw in Q3 to continue in Q4.
On one hand, client processor (PC CPU) revenue is expected to grow again, and server CPU revenue is expected grow "by a strong double-digit percentage" sequentially. On the other hand, a week after Microsoft forecast its total gaming revenue will be down by a mid-20s percentage annually in its December quarter amid major console sales declines, AMD expects console processor demand to "further soften" in Q4.
However, this deterioration in console demand has much to do with the fact that the current game console cycle is now six years old, and that Microsoft and Sony both plan to launch next-gen consoles by the 2020 holiday season. And both of these consoles, it should be noted, will be powered by AMD processors that pair an 8-core Ryzen CPU with a powerful GPU based on AMD's new Navi architecture.
Meanwhile, AMD's desktop and server CPU businesses look poised to add to their recent momentum in 2020, with the latter benefiting from improved cloud capital spending and additional qualifications from potential clients. For each business, the big delays that Intel has seen in commercializing a 10-nanometer (10nm) manufacturing process node that's competitive with the 7nm Taiwan Semiconductor (TSM) node that AMD's latest desktop and server CPUs rely on has (together with AMD's engineering work) created a major opportunity.
AMD's GPU and notebook processor businesses are dealing with tougher competitive backdrops. Nvidia (NVDA) is still dominant in the server and high-end gaming GPU markets, and might not be far away from launching its first 7nm GPUs. And whereas AMD's latest notebook processors rely on a relatively less advanced 12nm process, Intel recently ramped production of its first 10nm notebook processor line.
With that said, for now AMD's GPU business is benefiting from a solid mid-range gaming position and cloud gaming design wins, and its notebook processor sales are getting a lift from a slew of design wins with big PC OEMs. And if some recent reports are accurate, the notebook processor business could get a boost next year from the early-2020 launch of 7nm products.
Overall, AMD's Q3 report has a lot in common with its Q2 report, with the company reporting both strong momentum in multiple businesses where it has clear competitive strengths and major headwinds for a console processor business that should look a lot stronger a year from now.
With AMD's stock heading into earnings up sharply on the year and (with the qualifier that this estimate might end up being conservative if AMD executes well) trading for 24 times its consensus 2021 EPS estimate of $1.35, markets are providing a cool response to its latest results and guidance. But like the Q3 guidance that temporarily sparked a major selloff three months ago, the numbers don't do anything to put its long-term story into question.
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