AMD Announces Q1 2019 Results: Ryzen Rises, Revenue Recedes

AMD announced its Q1 2019 results yesterday, and the results, while not great, actually highlight how much the company’s position has improved since it launched Ryzen back in 2017. Sales for the quarter were $1.23B, down 10 percent from Q4 2018 (roughly in-line with seasonality) and 23 percent from Q1 2018. AMD reported higher operating expenses of $543M compared to $477M a year ago, both directly related to the 7nm ramp. An increase in inventory ahead of the Ryzen launch occurred for the same reason.

AMD’s gross margin was the star of the show, rising 3 points quarter-on-quarter and five points year-on-year. AMD attributed much of the 3 percent gain to “a charge in the fourth quarter of 2018 related to older technology licenses,” but claimed the five point improvement over the last twelve months was the result of improved Epyc, Ryzen, and data center GPU sales. The company also picked up $60M from its licensing deal with THATIC.

One thing to keep in mind when considering AMD’s results compared to this period last year. The crypto boom was still in full swing in Q1 2018, and that had a markedly positive effect on AMD back then. Now that the bubble has burst, AMD looks comparatively worse as a result. AMD attributed the year-on-year fall off in revenue to the decline of the crypto market, while the much smaller quarterly decline was due to lower client CPU sales. Despite this, growth in Ryzen and Epyc sales was strong. Here’s CEO Lisa Su:

Ryzen and EPYC processor and data center GPU revenue more than doubled year-over-year, helping expand gross margin by five percentage points, and partially offsetting graphics channel softness and lower semi-custom revenue.

Looking at our Computing and Graphics segment, revenue declined year-over-year as higher client processor sales were offset by lower graphics sales to the channel. Client processor sales increased by a strong double-digit percentage from the year ago period, as unit shipments increased significantly and our new products drove higher client ASP. As a result, we believe we gained unit market share for the sixth straight quarter.

Client CPU average selling prices (ASPs) grew in desktop year-on-year as Ryzen filled in the channel, but fell slightly quarter-on-quarter due to mobile declines.

In a recent article discussing what kind of improvements AMD customers should expect from the third-generation Ryzen / Zen 2 CPU family, I discussed AMD’s margins and how the company simply doesn’t have room to slash pricing to gut its per-core pricing in the way some of its fans would like it to, 7nm transition or no. The company’s financial results today highlight this. The slideshow below expands on this topic.

AMD had $1.27B in revenue, resulting in a $16M net income, on a 41 percent gross margin. Pull that margin down to 36 percent — what the company reported in Q4 2018 — and gross margin falls to $457.92M, down from $521M. AMD's small $16M profit becomes a $64M loss.

The company's cash balance has improved over the past two years, up 14 percent from Q1 2018 and 41 percent from Q2 2017.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. AMD's EBITDA has improved substantially over time, even if it still fell in Q1 2019, which has implications for the next slide.

Some of AMD's earnings have been plowed into reducing its debt. The company has paid off 19 percent of its outstanding debt over the past five quarters. Its gross leverage trend (debt divided by EBITDA) has improved by a much larger amount because AMD's EBITDA is much higher than it was in Q4 2017.

The reason AMD is still profitable — albeit narrowly — despite a revenue hit and a simultaneous increase in operating expenses is due in part to its ability to command higher margins than it once did. ET is a technical site, not a stock firm, and I don’t give investment advice. But you don’t need to be a stock broker to see the relationship between earning a higher margin on product sales and having more room to absorb higher costs and lower unit volume. The worst thing AMD could do, having survived 2011 – early 2017, would be to turn its back on those improvements by slashing prices. The fact that AMD’s gross margin is being partly nudged by one-time payments only makes this issue more significant — the company does not have room to take a margin hit if it wants to remain profitable.

When asked about AMD’s margin structure specifically, CFO Devinder Kumar said:

The client and data center businesses are higher than corporate average and the semi-custom business and graphics as we just said in the last quarter are lower than corporate average, especially graphics consumer side and the data center, GPU side obviously is better.

He was then asked a follow-up question by David Wong:

“Great. And our gross margins rising for your microprocessor businesses at the moment?”

Here’s Kumar’s answer:

I think earlier in the year this is the second quarter, we are getting the second quarter at 21% guide and our guidance for the year is greater than 41% on an annual basis, is what we have stated so far.

AMD clearly has no plans to reduce its microprocessor gross margins. The price structure anticipated by various rumors online are not compatible with statements by the company’s corporate officers.

We don’t know for certain that AMD gained market share, but the company believes it did, and that’s what was forecast by multiple research firms, due to the ongoing Intel CPU shortage. The slight decrease in mobile ASPs that the company noted could have been caused by its entry into the low-end Chromebook market. For Q2 2019, AMD expects revenue of $1.52B, an increase of 19 percent sequentially but down 13 percent year-on-year. The year-on-year decline is expected to be driven by lower semi-custom revenue, partly offset by increased server sales.

The falling semi-custom revenue is to be expected, and AMD told investors it expects semi-custom revenue to decline by approximately 20 percent this year. When AMD first unveiled its semi-custom wins with the Xbox One and PS4, it announced that the revenue deal it had struck with Sony and Microsoft was designed to deliver the highest profits in the first few years, with AMD’s earnings per APU declining at an undisclosed rate thereafter. We would expect to see semi-custom revenue head northward again once the Xbox Next and PS5 hit market in 2020, while the data center segment may get a boost once 7nm Epyc CPUs hit market.

A few last interesting tidbits:

While Intel had to walk back its data center predictions as overly optimistic during its last conference call, Lisa Su indicated that the data center market was evolving as AMD expected. AMD’s market share is only in the 3-5 percent range, however, which greatly limits its exposure.

Su’s phrasing in a reference to Navi could be read to indicate a midsummer launch. Her exact words:”As we look at the graphics business, again, the channel inventory situation has improved, and so that we expect that the channel will be up here in the second quarter, and then into the second half as we launch Navi.” This would still satisfy the Q3 requirement (Q2 ends in July).

Su also articulated a new rough target for AMD’s server market share. “[W]e expect that over the next quarter to six quarters, we would continue to ramp our server market share with a goal of getting the double-digit percentage share.”

AMD’s data center GPU and CPU business is worth a “mid-teens” percentage of revenue. On sales of $1.23B and an assumed 15 percent of revenue, that works out to $184.5M in revenue. Su also stated that sales were roughly even between CPU and GPU, implying revenue in Q1 of ~$92M each.

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