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Exclusive Interview: AMD CEO Tells Us 'There's No Panic' About Chip Industry Weak Spots

Exclusive Interview: AMD CEO Tells Us 'There's No Panic' About Chip Industry Weak Spots



Exclusive: AMD CEO Tells Us 'There's No Panic' About Chip Industry Weak Spots


Date Published:

Written by: Tiernan Ray
Edited by: Ophir Gottlieb

Disclaimer

The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.


LEDE

Shares of chip maker Advanced Micro Devices (AMD) have dropped with the rest of the market after the company's disappointing Q3 revenue report on 10-24-2018.


But in an interview with Capital Market Laboratories (CMLviz), chief executive Lisa Su stuck to the message that for her is key: New products introduced in the past three years are becoming a larger and larger percentage of sales, leading to profit margin expansion and market share gains.


"We feel good about where the business is," said Su, while allowing that there was "some noise" from a build-up of GPU inventory in the retail sales channel that depressed revenue.

Nor is Su fazed by the various weak signals from peers such as Cypress Semiconductor (CY) - which last night warned of weaker industrial-market chip growth - and Texas Instruments (TXN), which reported on Tuesday as well, and said demand cooled in most of its markets.

"I do see some softness in industrial and automotive, and we'll have to see how that plays out in the broader backdrop," said Su. But PC and data center markets are doing well, she said. "We've been through a lot, with tariffs and such, but there's no panic. It's just a matter of making sure we are reading the signals."

To recap, AMD's revenue rose by 4%, year over year, to $1.65 billion, yielding EPS of 13 cents, excluding some costs. That fell short of analysts' expectation for $1.71 billion in revenue, though the EPS was a penny better than expected.

The outlook was more sharply below expectations, with this quarter's revenue projected at $1.4 billion to $1.5 billion, versus consensus of $1.59 billion.

Profit margin in the quarter was a star of the report, with gross profit margin expanding to 40% from 36% a year ago and 37% in the prior quarter. Profit is expected to be even higher this quarter, the company said.

For Su, the most important thing is that "We are now hitting an important milestone," given new products, will be "over 50% of revenue" this quarter. "That drives [gross margin] margin expansion above 41%."

Su reflected on other topics, such as machine learning, the role of memory chips in the data center, and the semi-custom business. Read the full Q&A below.


CEO Lisa Su headshot, courtesy of AMD

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CMLViz: What points do you think are most important for investors to focus on in the results and outlook?

Lisa Su: From our standpoint, there were a couple moving pieces in our Q3. Our focus has always been on our new products, and momentum, and I think we have seen real nice pickup, especially around Ryzen and Epyc, in both Q3's results and in our outlook. Where we had a little noise was in inventory in the GPU channel. But overall, we feel good about where the business is, especially the new growth around new products. We are now hitting an important milestone. Our new products - the ones we started launching in March of 2017, that have now been coming along for six quarters, as we get into Q4, over 50% of revenue is in those new products, and that drives [gross margin] margin expansion above 41%.

Q: What do you make of the softness in the broader semi market? Is it time to panic?

A: I think people are in general a bit cautious in this macroeconomic environment, and I understand that. It is pockets of the market where you have seen some issue. There are some markets that are slowing down from some of the growth we saw earlier in the year. I would say it's not a blanket statement, and certainly in our market, we look at PCs and at data center, and you know, in fact, we view this market as actually doing okay. Data center is doing well, PCs are doing better than some might have expected this year. But I do see some softness in industrial and automotive, and we'll have to see how that plays out in the broader backdrop. We've been through a lot, with tariffs and such, but there's no panic. It's just a matter of making sure we are reading the signals.

Q: People seem to want to know if that 41% gross profit margin forecast in Q4 is a new baseline for the company's margins going forward. Is it?

A: I would say, look, we've done a good job expanding that margin, we expect our new product momentum to continue, and, you always say, Who knows what's going to happen. But, we feel really good about the trajectory of margins, it is an important indicator for the adoption rate of new product. We will continue to focus on expanding margin.

Q: The decline in blockchain revenue as a percentage of total revenue that you indicated contributed to the shortfall in GPU sales reinforces the worst fears of skeptics on your stock, namely, that blockchain will forever be a persistent factor of volatility in your results.

A: Certainly the market [for GPU sales] has been affected by inventory that accumulated when demand was high, say in the first half of the year. And I said on the call, we will see that last for a while, I would say a couple quarters. But we will work through it. As these things go - in general, industries go through times of peak demand and then somewhat oversupply - these supply/demand imbalances happen from time to time. Our goal is to keep peaks and valleys smoother. As for blockchain, yes, it is a very volatile type of thing. I would say in our world we try to dampen that volatility, but, yes, it is volatile, it goes through peaks and valleys. Last year had been one of those peaks, and this is now a valley.

Q: Memory chips seem to be playing an increasingly important role in the data center. What's your strategy with respect to memory technology?

A: Yes, I think memory is strategic. We partner with all the memory-chip makers. On GPU, we've been a big adopter of high-bandwidth memory. We think it offers real advantages in bandwidth. I do think that memory architecture and hierarchy are important when you talk about system performance. We don't see ourselves actually entering the memory market, but we do see ourselves co-engineering with memory partners for the best interfaces available, and we are working with them on next generation architectures that will work optimally for our architecture.

Q: I've seen increasing efforts for artificial intelligence and machine learning frameworks to be optimized to chips, such as with Google's TPU, frameworks such as PyTorch. When will you work with those developers to have more native optimization for your GPUs for data center?

A: I do think that for particularly the GPU side, optimization of frameworks and libraries is important to us. We focus on TensorFlow, and Caffe and PyTorch, those guys that are the most important. We continue to work on doing that, it's important to continue that. We are looking at broadening our user base, and when we think about Radeon and our OpenCompute platform, we are trying to leverage the open source community to really develop for AMD. We recognize, though, that a lot of the heavy work has to be done by us internally.

Q: You mentioned on the call that we are going into the seventh year of the video game console cycle, products that are an important contributor to your semi-custom and embedded business. And that aging of the console cycle affects the growth of that business for you. Over many years, should we expect that semi-custom will continue to be dominated by the cycles of video games, or can it eventually escape that?

A: We are very tied to the console at the moment, and we expect that, as you said, as we go into the seventh year, there's a decline as a result. But if I take a step back and look at where we play, I consider it [semi-custom] a really strong value proposition for us, to take our IP [intellectual property] and customize it for various large customers and incorporate their IP, so it's still a very good market for us, where we can be successful. But there are also other avenues for that business, including in the data center.

Q: People really seem to want you to take advantage of Intel's current capacity constraints on the PC microprocessor side to be more aggressive in your own PC-chip sales. Do you have more to say on whether you'll be aggressive in that respect?

A: I appreciate that. We are, first and foremost, focused on our products, being competitive and well-positioned. There are some pockets of shortages in the industry, it's true, and we are ramping our products to satisfy that. That is a near term view; but in the medium-term, the important thing is for more members of the ecosystem to be more balanced in their platform choices. This is an opportunity for AMD at a time when we have great products and a supply chain that provides some diversity. But I don't want to be too short-term focused.

Q: Vega [GPUs for mobile computing] is ramping now. When will we know if it's a success?

A: You'll see some of our partner announcements shortly showing Vega in mobile. It is a very unique combination of the Vega architecture in a good form factor. I think you'll see some of that in the fourth quarter. We will also introduce the Vega 7-nanometer version this quarter. All of that points to the success of the Vega architecture.

Q: You're headlining CES this coming January, congratulations. Wanna give us some idea of how you'll do that spot?

A: I'm excited about CES. We are very excited to be a part of it, it's a honor for AMD, and for me, and we are looking to put on a good show. I think our goal is to showcase how important high-performance computing is in the world. I think it's an excellent opportunity to showcase our corner of the world, we'll talk about industry applications and some of our technology, and how it impacts the industry. So, I'm very excited.

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The author has no position in AMD at the time of this writing.

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