Advanced Micro Devices, Inc. (NASDAQ: AMD) Q3 2019 Earnings Conference October 29, 2019 5:30 PM ET
Laura Graves – Investor Relations
Lisa Su – President and Chief Executive Officer  Devinder Kumar – Senior Vice President, Chief Financial Officer and Treasurer
Conference Call Participants
Mark Lipacis – Jefferies
David Wong – Instinet
Matthew Ramsay – Cowen and Company
John Pitzer – Credit Suisse Securities (NYSE: USA) LLC
Stacy Rasgon – Sanford C. Bernstein & Co, LLC
Aaron Rakers – Wells Fargo Securities
Toshiya Hari – Goldman Sachs & amp; Company, Inc.
Mitch Steves – BC Capital Markets Wealth Management
Harsh Kumar – Piper Jaffray
Timothy Arcuri – UBS Securities, LLC
Greetings and Welcome to Advanced Micro Units Third Quarter 201 9 Revenue Conference call. At this point, all participants are in listening mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is recorded.
It's now my pleasure to introduce your host, Laura Graves. Please go ahead.
Thank you and welcome to the third quarter 2019 financial results conference call. Now you should have had the opportunity to review a copy of our revenue update and slides. If you have not reviewed these items, they can be found on the Investor Relations page on AMD's website, amd.com.
Participants in today's conference call are Dr. Lisa Su, our President and CEO; and Devinder Kumar, our senior director, chief financial officer and treasurer. This is a direct call and will be replayed via webcast on our website.
I want to highlight some important dates for you. On Wednesday, November 6, Mark Papermaster, Executive Vice President and Chief Technology Officer, will present at the Bernstein Technology Summit in New York City. On Monday, December 9, Ruth Cotter, Senior Director of Worldwide Marketing, Human Resources and Investor Relations, will present at the UBS Global Technology Conference in New York City. Thursday, December 12, Forrest Norrod, senior director and general manager of the Data Center and Embedded Solutions Group will present at the Barclays Technology Conference in San Francisco; and our quiet time for the fourth quarter of 2019 is expected to begin at the close of business on Friday 13. December.
Today's discussion contains forward-looking statements based on the environment as we currently see. These statements are based on current perceptions, assumptions and expectations, speak only as of this effective date and as such involve risks and uncertainties that may cause actual results to differ materially from our current expectations. We will first and foremost refer to non-GAAP financial metrics during this call, except for GAAP operating income and segments.
The non-GAAP financial measures referred to today are aligned to our most – to their most directly comparable GAAP financial measures in today's press release, which is posted on our website. Please refer to the warning in our press release for more information. You will also find detailed discussions of our risk factors in our filings with the SEC and in particular AMD's quarterly report on Form 10-Q for the quarter ended June 30, 2019.
Now I will leave that call to Lisa. Lisa?
Thanks, Laura, and good afternoon to everyone who listened today.
I am pleased with our strong implementation and results in the third quarter. We delivered our highest quarterly revenue since 2005, our highest quarterly gross margin since 2012, and significantly increased our net revenue, all driven by our first full quarter of 7-nanometer Ryzen, Radeon and EPYC processor sales. Third-quarter revenue of $ 1.8 billion increased 9% year over year and 18% sequentially, and we expanded gross margin by 3 percentage points year over year.
As for the Computing and Graphics segment. Revenues increased by 36% from the previous year and in order. Demand for Ryzen desktop and notebook processors drove a significant increase in device shipments and ASP, resulting in our highest customer processor quarterly revenue since 2011.
We saw particularly high demand for our top-end Ryzen processors, and think we got client processor unit share for the eighth straight quarter. On desktop machines, we see strong demand for Ryzen 3000 and earlier generation Ryzen 2000 processors. Both product families are consistently among the top sellers at leading e-tailors and retailers around the world.
In a commercial, HP and Lenovo announced new desktop computers powered by our Ryzen PRO 3000 series processors in the third quarter. We continue to expand our presence in the commercial market as more finance, retail, education and healthcare customers buy AMD-based PCs and Chromebooks to run their businesses.
We are about to expand the offering of desktop products in November, with the launches of the industry's first 16-core mainstream desktop processor, as well as our third-generation Ryzen Threadripper processor family. These products will offer outstanding combinations of core counts, performance and energy efficiency for the most demanding high-end desktop and content creation applications.
In mobile, we still had a quarter of strong double-digit percentage growth in portable processor revenue, driven by a richer product mix and increased unit shipments. The number of AMD-powered laptops from major OEMs has increased by 50% this year, including several premium laptops being the first AMD-powered Microsoft Surface laptop.
We worked closely with Microsoft over several years to develop AMD-exclusive 15-inch Consumer Surface Laptop 3, which includes a custom Ryzen Microsoft Surface Edition processor and multiple operating system and software optimizations that will benefit all AMD devices. powered Windows systems.
We are very pleased with our client industry momentum this year and expect the revenue from the client processor to grow sequentially in the fourth quarter as we enter the seasonally strong holiday season.
In graphics, revenue increased year over year, mainly driven by higher sales of GPU channels. Shipments of our Radeon 5000 GPU family with our RDNA architecture increased in order, and we see solid demand for the new products based on their competitiveness and features.
For mainstream players, we started sending Radeon RX 5500 GPU in the third quarter. Acer, HP, Lenovo and MSI announced plans to offer the new GPU on their upcoming PCs, and several AIB partners are planning to launch RX 5500 cards in the fourth quarter.
The data center's GPU sales went down sequentially and roughly flat the year before. -year. We added more cloud and HPC gains in the quarter, highlighted by Microsoft's announcement of a new external desktop offering for graphics-intensive workloads powered by EPYC CPUs and Radeon Instinct GPUs.
business, while continuing to expand our footprint with customers, and targeted workloads for data centers.
Referring to our Enterprise Embedded and Semi Custom segment. Revenue fell 27% from a year ago, when significantly higher revenue from the server processor was offset by lower Semi Custom sales. We expect Semi Custom demand to soften further in the fourth quarter, now that both Microsoft and Sony have announced new AMD-powered consoles for holidays 2020.
On server, we had our highest quarterly CPU revenue since 2006, as strong Second-generation EPYC processor demand is growing by more than 50% sequential increase in unit shipments and revenue. Second generation EPYC processors are the high performance server CPUs in the industry and have set more than 100 world records.
Our latest EPYC processors have up to 64 cores and deliver a TCO advantage between 25 and 50% versus competitive offerings. As a result of our clear performance leadership and differentiated feature sets, we are building momentum with cloud, enterprise and HPC customers.
In cloud, Amazon AWS, IBM Cloud, Microsoft Azure, OVH Cloud, Twitter, and Tencent, all announced plans to deploy EPYC processors in their data centers. At our launch event, Google became the latest provider of megadata centers to deploy EPYC processors as they announced second generation EPYC processors have been deployed across their entire production data center environment infrastructure and will also be used to operate the Google Cloud Platform.
In the business, Dell, HPE and Lenovo more than doubled their AMD-driven server portfolio as they launched new platforms with second-generation EPYC processors, helping us add dozens of new telecom, healthcare, financial services customers , manufacturing and energy customers
We secured several new HPC gains during the quarter, including three separate US Department of Defense supercomputers and what is expected to be the UK's fastest-growing scientific computer. We expect server revenue to grow sequentially by a strong double-digit percentage in the fourth quarter, while continuing to ramp up our second-generation EPYC processors. We are on track to achieve our short-term target of double-digit server CPU share by the middle of next year.
In summary, we are right where we want to be in our long-term strategic plan. We have the strongest product portfolio in our history. We performed our product launches and production ramps very well in the third quarter, as our new products drove higher revenues, margin expansion and increased profitability.
We are about to leave 2019 with another quarter of significant growth, driven by the ramp of our 7-nanometer products and believe we are well positioned to build on momentum ahead in 2020 and beyond as we deliver a Even stronger sets of leader products that can drive sustained growth, an increased share of $ 75 billion market -performance computing and graphics technologies.
Now I want to transfer the call to Devinder to give some extra color to our financial results for the third quarter.
Thanks, Lisa, and good afternoon, everyone. We are pleased with the strong financial results for the third quarter with revenue of $ 1.8 billion, an increase of 18% quarter over quarter and our high quality revenue since the fourth quarter of 2005. Third quarter shows our financial momentum and the strength of our business model with operating income and net income, which grew significantly year over year.
Quarterly revenue was 9% – up 9% from a year ago, when strong sales of Ryzen and EPYC processors and Radeon Gaming GPUs more than offset lower Semi Custom sales. The gross margin of 43% increased by 320 basis points from a year ago, our 10th consecutive quarter year-on-year.
Operating expenses increased 13% the year before to $ 539 million, driven mainly by increased R&D investment and support for our new product introductions. Operating revenue was $ 240 million, up $ 54 million, or 29% from a year ago, due to higher revenue from new higher margin products.
The operating margin was 13%, up 210 basis points from a year ago. Net income was $ 219 million, up $ 69 million, or 46% from a year ago, and diluted earnings per share were $ 0.18 per share, compared to $ 0.13 per share a year ago.
We now turn to the results of the business segment. Computing and graphics segment revenue was $ 1.28 billion, up 36% year-on-year, driven by strong sales of GPU clients and gaming.
Data processing and graphics revenue was $ 179 million, compared to $ 100 million a year ago, driven by higher Ryzen processor sales. Enterprise Embedded and Semi Custom segment revenue was $ 525 million, down from $ 715 million the year before. As expected, Semi Custom revenues were low in the third quarter, as the market is waiting for the next generation of AMD power gaming consoles from Sony and Microsoft.
EPYC data center CPU revenue grew by over 50% in succession, driven by shipments of our second generation product during the quarter. The EESC segment's operating revenues were $ 61 million, compared to $ 86 million a year ago – due to lower revenues and higher operating expenses.
When it comes to balance. I am very pleased with the continued improvement of the balance. Cash, cash equivalents and marketable securities amounted to $ 1.2 billion at the end of the quarter, higher than the gross debt of $ 1.1 billion, which resulted in AMD being net cash positive.
During the quarter, we withdrew $ 206 million of debt, resulting in a $ 40 million loss recorded in our GAAP income statement. The debt reduction included $ 126 million in convertible senior nodes in exchange for 16 million shares. To date, we have reduced gross debt by $ 441 million.
Free cash flow was positive $ 179 million in the third quarter and cash flow from operations was $ 234 million. Inventory was $ 1 billion, up from the previous quarter in anticipation of higher revenues in the fourth quarter.
Adjusted EBITDA was $ 300 million, compared to $ 227 million a year ago, driven by higher quarterly revenue. On a subsequent 12-month basis, adjusted EBITDA was $ 745 million and gross leverage at the end of the quarter 1.5 times.
We now turn to the outlook for the fourth quarter of 2019. We expect sales to be about $ 2.1 billion, plus or minus $ 50 million, an increase of about 48% year over year and 17% in order. The sequential increase and year over year I expected to be driven by growth in Ryzen, EPYC and Radeon processor sales, offset by a further boost to Semi Custom processor revenue.
In addition, for Q4 2019, we expect GAAP gross margin to be approximately 44%; non-GAAP operating expenses will be approximately $ 535 million; non-GAAP interest expenses, taxes and other to be approximately $ 22 million; and the diluted share of the fourth quarter is expected to be approximately 1.21 billion shares.
Finally, we had an excellent third quarter and are still focused on increasing our management portfolio of high-performance products to deliver strong revenue growth and gross margin expansion in the fourth quarter.
With that, I will return it to Laura for the question-and-answer session. Laura?
Thanks, Devinder. Operator, we are ready to go ahead of our first question.
Thank you. We will now conduct a question-and-answer session. [Operator Instructions] Our first question today comes from Mark Lipacis from Jefferies. Your line is now live.
Here. Thank you for taking my question. The first for Lisa. You had mentioned the total cost of ownership in your prepared comments. And I wonder, I suppose I could imagine that the total cost of ownership over a lifetime of a 7-nanometer server chip can be greater than the cost of a server chip compared to a 14-nanometer server chip.
so I wonder if you might just be able to clarify the comments you provided about total cost of ownership and quantify if that is the case, how do you see it? And how many – what percentage of your data center customers actually look at total cost of ownership and evaluation of the products? Is it – does everyone do it, or does anyone just look at the price? And I wonder, what do you think it has – the impact that can have on competitive pricing environments? That is the first question. Thanks.
Sure. Thanks for the question, Mark. So I mean, maybe let me give you some context for that kind of data center business for us, and then I'll answer your question. But from what we see, there is a very strong value proposition for Rome. When you look at what we can do based on performance, power consumption and how it plays into total cost of ownership, we look at it across all workloads.
So whether you are talking about a virtualized environment, or you are talking about high-performance computing, or you are talking about the workload of the enterprise, we see a strong performance, as well as a strong overall cost of ownership.
To your exact question, I think, server purchases – or server buyers are very, I would say, sophisticated. And so most ownership costs are definitely in the conversation in most cases. And it's not just about performance, but performance at a given power level and also when it comes to given density. And that has taken place in a number of customer engagements.
And then the overall point of – we think Rome is very well positioned. Price itself is a factor, but I would say it is not the most important factor. I think the performance, the power, the total cost of ownership are important buying factors. And we have seen very, very strong customer engagement across the board, across all the workload for these drivers.
Thank you. And a follow up, if I can. On – when you think about your share gain – that your potential to get a share as you look into 2020, can you talk about what you see as the biggest potential gaining factors in it? And like how to control the potential factors? And I hope, can you talk with your view on the availability of 7-nanometer slices or technical support for your customers trying to put together solutions? Thanks.
Yes. Sure, Mark. Then a couple of different questions there. Let me try to get through it. I would say that since the launch of Rome in August we have had a very strong start. We had a whole quarter of revenue here in the third quarter, and we saw it in a kind of ramp of units and revenue.
What we see is that qualifications go faster with second generation EPYC than with first generation, so customers are familiar with our platforms. In some cases, customers operate with drop-in platforms. And so they can take virtually the same or very similar platform they had for first-generation and drop-in second-generation, they are familiar with our architecture.
And then, I think, from market share, we feel good about the transition from Naples to Rome. I think the platform readiness across our OEMs and the number of platforms we have across the major OEMs is also very strong. And we are happy with the set that is – which has both new and existing platforms there.
And then, from the point of view of where we are going in the fourth quarter into 2020, I think we feel very, very good about where we are with the data center customers. When it comes to more customers – support and all that, as I said, customers are much, much more familiar with second-generation architecture compared to first generation, and that's good for the ramp to Rome.
As far as I'm concerned, I think you asked about the 7-nanometer ramp and its availability there, we had a really big ramp here in the third quarter of the 7-nanometer. We basically launched three complete product families, Ryzen, EPYC, as well as our Radeon Gaming product families in the third quarter, and it went very well.
We are very happy with that. It is the fastest ramp that we have certainly made in recent memory. And into the fourth quarter and into 2020, I think we feel very good about the availability of Rome, as well as the rest of our products.
Mark Lipacis  Thank you. Very useful.
Thanks. Next question today comes from David Wong from Instinet. Your line is now live.
Thank you very much. Can you give us some idea of what your revenue was from 7-nanometer products in the September quarter, and what you expect them to be in the December quarter?
I think what I can say, David, and I might start Devinder has some comments. The 7-nanometer ramp has gone very quickly – here in the third quarter. When we look at overall new product revenues, certainly in the third quarter, we had a significant portion of the 7-nanometer. This will increase again as we enter the fourth quarter as well. And that is the way to think about it on our most important product lines. We go very fast from 14 to 7.
Okay, great. And within the Computing and Graphics segment, is there 36% sequential growth? So can you give us some idea of how – which client CPU sales grew in order? And individually, what was the PC GPU sales sequence growth?
Yes. So if you look at the CG segment from a sequential point of view, we saw the client processors increase the most. And it was certainly the driver as both desktop and mobile. Desktop was higher than mobile, but both grew up very nicely.
If you look at the GPUs overall, they actually declined a bit in order. And that decline was primarily driven by data center GPUs, which fell just because of some of the cloud buying cycles. Overall, games went well, and we still expect it. As we enter the fourth quarter, you will see that the data center's GPUs will increase as well as I mentioned in the prepared notes that client and graphics would also increase.
David Wong  Great. Thank you.
Thanks. The next question comes from Matt Ramsay from Cowen. Your line is now alive.
Thank you very much. Good afternoon. Before jumping in, I just congratulate Devinder on being cash positive. The – Lisa, a few questions about Rome. We have traced some of the strengths such as Google, Microsoft and Amazon. But I wonder if you might comment a bit on the server business in China, given some disruption there just to the general CapEx? And also the OEM business you are now focusing on Dell, HP and Lenovo, and how do you expect these things to develop over the next few quarters? Thanks.
Yes. So now as we look – let me answer the first question when it comes to cloud customers. I think we are very pleased with the cloud adoption. We are engaged in all major Tier 1 and many of the Tier 2 suppliers, and I believe we are making good progress there.
When it comes to China in particular, we are well committed. They are in both cloud and enterprise. Obviously there is some disruption due to some of the China customers who are on the device list, and we are following it closely. But when it comes to that overall, I think, where we believe there is a strong opinion poll for Rome, both across the cloud as well as for the business.
On the corporate side, I would say that the HPC market has been very good for us. And so we have won quite a few of the bids, and they tend to be early users of the technology. And that is an indication of the proposal of strong value.
As we move into more general business, the launch of HPE, Dell and Lenovo, as well as Super Micro and the other ODM platforms, is wider than ours – the first generation of EPYC, and we see it in the pipeline as we look. So much activity is going on right now. And we feel very good about how it will develop over the next few quarters in terms of business profits.
Thank you very much. Just as a follow-up from me on the client business, there is obviously a lot of progress being made with the results you just presented. And I go back to some comments from your primary competitor about their conversation, I think, and talk about the density of their own 14-nanometer supply, and also that they may not have addressed any of the lower markets yet, ASPs are quite strong up. I wonder how much of your competitor's supply density might have led to these gains compared to what kind of benefits of your own product? If there's something you can talk about, Lisa, would it be very helpful? Thanks.
Yes. Sure, Matt. So the customer business has really had a very strong year. I mean, if you look at how it's played out over the last couple of quarters, I'd say Third Place Ryzen has done really well in our desktop portfolio. It is extremely well positioned. And where we see the highest demand is at the highest level in Ryzen 9 and Ryzen 7. And that's why you see the ASP strength in the business.
Mobile is also doing very well. And what we see again, on mobile, the mix of Ryzen is now a dominant mix of business. And we actually see very good momentum in commercial as well as our traditional consumer markets. So we also see good sequential growth in ASPs there.
There is some noise in the system as it relates to some supply constraints and all that. I want to see that most of the time, again, the pockets are at the low end. I do not think it is a significant driver for our business. Our business is primarily driven by our new platforms, the fact that we are in a number of premium platforms on both the laptop side, and only the strength we have in the DIY channel is there, and that contributes to positive mix, as well as unit growth in the client business.
Thank you very much.
Operator  Our next question comes from Vivek Arya of Bank of America. Your line is now alive.
Thank you for taking my question and congratulating me for the strong growth and execution. I have two questions too. Lisa, first in the data center industry, I know you mentioned that the goal is still to be in the double-digit unit share route sometime in the middle of next year. Can you help us tune into where the share is in the third quarter and what the target is in the fourth quarter? And if you've seen your competitor respond to server share gains through prices or other means?
Yes. So, Vivek, as you know, we don't necessarily want to go before us when it comes to server share. But what we want to say is ours – Q3 was our highest unit of sorts with EPYC. And so we see good strength and mainly a very quick transition to Rome. We expect it to continue to grow as we enter Q4 and into the first half of next year.
So this is about multiple platforms being ramped up and multiple platforms within a given customer. And you should see, we saw a number of announcements around our launches here in Q3, and you should see more announcements as we enter the fourth quarter, as well as the first half of next year.
Your question is, do we see any unusual activity from a competition standpoint? Look, our view is that the competition is aggressive. We will always be aggressive and we expect that. There is a very competitive market out there. That is the case, I think, we feel very good about how our product is positioned and also the product's readiness.
So, the question before, are the platforms ready? How is the customer support? I think it's very strong. And I think our OEM and ODM partners have done a fantastic job with the breadth of platforms, and that will help us continue to grow overall.
OK. And for my follow-up, thank you. I had some sort of conceptual question in the longer term, that is, it is good to see the gross margins getting better and the cost discipline. But do you think it's time to actually increase OpEx a lot and really go after maximizing your footprint, properly, adding more resources, more systems, instead of trying to optimize profitability? I'm just curious to hear how you look at the pillows and take around you, whether you should maximize your footprint rather than profitability at this level?
Lisa Su  Yes. Look, that's a good question, Vivek. I'm asked about it from time to time. What you want to see is, I think, we are very conscious of where we are going. So in other words, roadmaps, and I mean, the long-term type of financial roadmap, I think we understand pretty well. We want to show both top and bottom gearing, and that is definitely our goal.
We spent a little more this year than we originally planned, and frankly, because the opportunities are very strong. And most of the additional spending is directed towards R&D with the notion of platform investment, software investment to ensure that we capture the opportunities we have. I think we have the right balance, Vivek. And certainly, as we enter 2020, we will continue to look at that balance. But I think we are very well balanced between top line and bottom line growth.
Thank you. Our next question comes from John Pitzer of Credit Suisse. Your line is now alive.
Yes. Congratulations, guys. Takk for at du la meg stille spørsmålet. Lisa, det første spørsmålet mitt er, kan du hjelpe meg å forstå litt om trekkraften du får i bedriftsmarkedet på både Ryzen og i EPYC? Og hva slags milepæl skal vi se på i forhold til den slags vertikale?
Ja. So the – we’re very excited about the opportunities for us in the commercial space. And I will tell you, when we look at our go-to-market investments, we are putting a lot of feet on the street, as well as just general go-to-market around commercial.
Starting with Ryzen. I think, you have seen and you should have seen that the number of commercial platforms that we have continues to get stronger. And it’s not just the number of platforms, but the quality of the platforms. Certainly, Lenovo ThinkPad is a premium brand that is very key. We have a very strong HP commercial offerings. We have additional desktops coming out as well.
What we are seeing is good traction in the commercial space, and that is a stronger part of the PC market. And we’ll continue to talk about that as it relates to new platforms. Certainly, as we refresh our mobile platform going into next year, I think, you’ll see even stronger commercial offerings there. We’re investing heavily in security and manageability and all those other aspects that are important in the commercial space.
As it relates to EPYC in the enterprise, I’m actually very encouraged with what we see in the enterprise. We had originally said that, we thought we would be more cloud, sort of cloud would go first and then enterprise would take longer. I think, what we currently see is, cloud is certainly a big driver of our business, but our enterprise business is coming along very nicely. And I really would say that, the key metrics there are more top tier brands adopting EPYC and talking about that publicly.
We have had a number of engagements. I mentioned earlier that the pipeline that we see in enterprise across our top OEM has increased very significantly, just in the last sort of two months since we launched. So the awareness around EPYC, as well as the awareness around these new platforms, I think is strong and we’ll continue to build that out as we go forward.
That’s helpful. Lisa, then may be from my follow-up, as really the analyst community look out to modeling 2020, the GPU/CPU is relatively straightforward relative to market share expectations we might have. I’m just kind of curious if you could give us some help on the Semi Custom business, it’s impacted by ASC 606 and also we’ve got a new gaming cycle next year. I know you don’t want to preannounce customer product. But how should we think about the Semi Custom business trending throughout 2020 in broad strokes?
Yes. So I think it’s a good question and we will certainly give you more guidance as we get into 2020. But the way to think about it at a high level is, we are going to a product transition with Semi Custom now. And in 2019, for example, we’ve had the unusual cycle where the second-half of 2019 is pretty soft for Semi Custom compared to the first-half. And what you should expect in 2020 is that that would flip strongly.
So I think both of our large customers have said that, they’re planning a holiday 2020 launch. That would mean that the Semi Custom business would be quite heavily weighted in the second-half. So you should expect that revenue in the first-half will be, again, quite soft, with a strong recovery in the second-half of the year. And the way I look at it is, the gaming business, the console business is a strong business for us. And so it will be one of the growth drivers as we go into 2020 and beyond.
Thank you. Our next question is coming from Stacy Rasgon from Bernstein Research. Your line is now live.
Hi, guys. Thanks for taking my questions. First, I wanted to ask about gross margins. I mean, I guess, I’m glad to see them up. But given what’s going on with the mix, I mean, I think you said GPUs were down sequentially. We’ve got data center up more than 50%, Ryzen is growing, you have the Samsung IP in there. I guess, I’m just surprised not to see them up more, both in the quarter, as well as into Q4. I was wondering if you could give us a little bit of more color about what’s driving that margin evolution, given the positive drivers of mix that I think should be there?
I think if you look at it from a quarter-to-quarter standpoint, you were talking about Q2 to Q3, you’re right about the mix of the product, in particular, with the ramp of the 7-nanometer products and the margins are up. Last quarter, we had, call it, 41% and this time is slightly above 43%. And that is fundamentally due to the new product that are ramping and, obviously, some benefit from the Semi Custom business has been down slightly in Q3 compared to Q2. So that’s that.
And then as you get into the Q4 timeframe with the guide at 44% is driven by the new leadership products. Demand for the high-end of the product – of our products pack is driving a richer mix. And obviously, there’s a little bit of benefit, as Lisa said earlier, with the soft Semi Custom revenue. So I think, overall, it’s interesting.
I thought those new products were supposed to have gross margins in aggregate of over 50%, and they’re driving like a massive mix shift and even we’ve got gross margins up a couple of points?
I think that…
…which seem like what am I getting wrong?
I think the numbers are coming out to be a couple of hundred basis points up on a quarterly basis, with the ramp of the 7-nanometer product. I don’t think there’s anything wrong. You have to look at the mix of the product relative to the total revenue of the company at the $1.8 billion. And I think that that’s how it comes up, Stacy.
I think, Stacy, maybe if this will help. In each of the product lines, we are certainly mixing up, and that’s why you see some of the ASP goodness. But you also have some legacy product, right, and we continue to sell some legacy product as well. And so that’s the – that’s perhaps the other piece.
But I think, as Devinder said, look, we’re very happy with the way the gross margin has progressed. I think, if you look at our long-term model, we had said 40 to 44 points and we’ll be exiting the year at 44. And I think very well positions us well as we go into 2020 and turnover more of the product portfolio to the new products.
Okay. Thank you. For my follow-up, I wanted to ask about the EPYC server ramp into next quarter. So you’re up, you said more than 50% this quarter, so that might be what $80 million to $100 million maybe sequentially, which is, I guess, good. Your competitor added almost a $1.5 billion sequentially in data center this quarter.
So when you say next quarter that you’re, I mean, I guess you did gain share, you got 50%, your units were up 20%, but even so. So when you’re saying next quarter, you’re going to grow by strong double digits on EPYC. Do you think that that’s like better than the trend that we saw in Q3, it’s more stuff around? So I mean, if we were up 50% sequential in Q3, do you think we could be better than that in Q4? Is that what strong double-digit means, or do you have a different meeting in mind?
Well, I think, we have in mind strong double digits. So I would say – no, and Stacy, I’m not being facetious. But, again, they’re all kinds of puts and takes. What I will say, though, is put in context, that the product has basically been in market since early August.
And if you put that in context and we’re saying that the transition is going quickly. And we have a number of new platforms that are – literally they’ve been in market four to eight weeks. With the way that server cycles goes, I’m actually pretty happy with how it’s ramping. And I expect, as I said, that Q4 will be another strong quarter for us. And it’s just a matter of continuing to diligently ramp the platforms.
Got it. Thank you.
Thank you. Our next question is coming from Aaron Rakers from Wells Fargo. Your line is now live.
Yes. Thanks for taking the question. I have a question and a follow-up as well. Sticking to the server or the EPYC ramp, I’m just curious of out of the gate, what kind of mix have you seen maybe skewed towards the 48 and 64 core solutions? And what I’m really getting at is, how do we think about the blended ASP trend on EPYC as Rome fully ramped?
Yes. So Aaron, it’s fair to say that, as initially out of the chute, we are seeing a higher mix to the higher-end. So, more 48 and 64 cores as a mix. I think those are very attractive products and really taking the full advantage of the EPYC product line. We are seeing, as you might expect, with that mix that the Rome ASPs are showing lift versus the previous first-generation EPYC.
As we go forward, you would expect that to build out a little bit more. So, we have a full product portfolio for the server parts. But then you also expect that, you’ll get more enterprise in that and enterprise tends to have a higher ASP. So the net of all that is, I can say in the server market, we feel very good about where we’re positioned from an ASP standpoint. And from a sort of unit share to revenue share, I think, they’re actually quite close.
Okay. And then just as a quick follow-up, maybe more of a model question. I think last quarter, you talked about the Semi Custom business being down in the mid-30% range. You also talked about Samsung contributions being around $100 million for the full-year. I’m just curious, is that still where we stand? And what was kind of the Samsung contribution this last quarter?
I think on the Samsung base, if you look at the second-half, it’s approximately $100 million, slightly about half was taken in Q3 and the other half will come in Q4. So that’s absolutely right.
And then on the…
And then – yes.
Yes. On the Semi Custom side, we had said last quarter that it would be down, let’s call it, mid-30%s. It’s probably when you look at it in aggregate for the second-half of the year, it’ll be down a bit more than mid-30%s, let’s call it high-30%s.
Okay. Thank you.
Thank you. Our next question is coming from Toshiya Hari from Goldman Sachs. Your line is now live.
Good afternoon. Thanks so much for taking the question. Lisa, I had a follow-up question on your server CPU business. And I guess, the question is, when you think about pricing and sort of the margin profile that you’re seeing in that business today, how does that compare with what you had planned for six or nine months ago? Is pricing and margins coming in pretty much in line with expectations, or are they coming in a little bit better?
And then as you think about the margin profile for that business going into 2020, given 7-nanometer potentially maturing into next year, given the mix and given the change in customer mix from cloud to enterprise, so those two dynamics serve as tailwinds for your margins in that business?
Yes. So I would say that the margin mix, as we look here in the beginning of the ramp, is about what we expected. It’s about what we expected. So, the only thing I would say and I said it earlier, is the product mix is perhaps a little bit higher in the early part of the ramp. But overall, the margins are pretty close to what we expected. The pricing environment is pretty close to what we expected.
And as we go into 2020, I think, the other piece of it is that the business scale will increase as we grow the business. And so that actually helps to absorb some of the fixed costs as well.
Okay. And then as a quick follow-up, your nearest competitor talked about pull-ins in their data center business, particularly in China. Was there anything in the quarter that you thought was kind of abnormal from a customer activity standpoint on the client side, or the server side? And if so, how big was that? And how should we think about kind of the implications into Q4 and potentially the early part of 2020? Thank you.
Yes. When we look at, both the client and server business, I wouldn’t say that we saw any significant pull-ins due to tariffs or other reasons. We monitor sort of certainly, very closely the sell-in and sell-through trend. And we believe that what we’re seeing in terms of the growth of the businesses is actually just new platforms running – ramping. And given where we are in the product cycle that makes sense. And so I wouldn’t say that we saw any significance of pull-ins in the quarter.
Thank you. Our next question is coming from Mitch Steves from RBC. Your line is now live.
Hey, guys, thanks for taking my question. I just had two. I guess, first, for Devinder, I realized you don’t want to provide any kind of 2020 numbers, but you already asked a 100 different ways. So may as well save you guys sometime. So if I look at the first-half of 2020, is there any reason why the gross margins won’t be higher than they are in December quarter?
I really don’t want to get into 2020. There are several product transitions and play as you guys you heard in the product questions. We have a Semi Custom business that’s in transition. We have obviously the rest of the business and transition the ramp in 7 nanometers. Lisa referred to some of the legacy product, so there’s a lot of puts and takes. And I think, we want to talk about 2020 once we get past 2019 and put it to bed and we can come back and talk about 2020 in about 90 days from now.
Okay, gotcha. And then secondly, just for Lisa. There has been a lot of articles in terms of some firmware issues or some software bugs and things like that. Could you maybe just help us address all of them at once and just kind of talk about what you guys did to fix them? Because we’re still seeing kind of articles pop-up here and there, and just want to make sure there’s been no issues in terms of the software?
Let me make sure I understand what you mean, Mitch, which product line are you referring to, or what are you exactly referring to?
So there have been specific articles in Ryzen, right, saying that there’s issues with the BIOS and things like that, and performance metrics a little bit lower, but then you guys kind of really noted that you have improved them or fixed them. But we’re still kind of seeing them in the market even today, for example. So just wanted to know in terms of what happened, and then secondly, if everything’s been resolved?
Yes. So your question was relative to the third-generation of Ryzen. Look, I think, overall, when you look at the third-generation of Ryzen in the platforms that we’ve put out, we’re very, very pleased with how that ramp has gone.
And when we look at the sales from a sell-through standpoint, we’re very pleased with where it is. There have been some platform, sort of optimizations that we’ve done through working with our ODM partners and the motherboard partners to try to sort of improve the optimization of the maximum boost frequency, which is, I think, what you’re referring to. And that has largely been addressed over the last couple of weeks. But I would consider that more of a optimization versus any type of major update, and we – we’re going to continue to improve the platform.
So you’re going to see that, as is normal with a new platform that will continue to improve the platforms over time. But I will say that, we’re very pleased with how third-gen Ryzen has done in the marketplace. And we’re excited with the launch of the 16 core, 3950X, as well as the Threadripper family in the next couple of weeks as well.
Perfect. Thank you.
Operator, we have time for about two more questions, please.
Thank you Our next question is coming from Harsh Kumar from Piper Jaffray. Your line is now live.
Yes. Hey, guys, just a quick one. As you look at your leverages for gross margins, what would you consider as your greatest leverage? Is it just sales growth as you take share, or is it more products going to 7-nanometer?
I think if we look at the product definitely then the new product and the 7 -nanometers are very good tailwinds for the gross margin. But also the mix of the business comes into play, the more data center revenue we capture in terms of market share, obviously, helps our gross margin, the high-end of the stack, in particular, in the client PC business that helps the gross margin. So it’s basically, those are the things that have the gross margin as we go forward from 2019.
And as you look out, where do you think margins can go?
Well, we painted, as Lisa said earlier, when we painted our long-term target model, we painted 40 to 44 in the 2017 timeframe, that’s what we said. We exit and we add 44, and we’ll come back and update that sometime in 2020.
Fair enough. Thanks, guys.
Thank you, Harsh.
Thank you. Our final question today is coming from Timothy Arcuri from UBS. Your line is now live.
Thanks a lot. I think in the past, you’ve given the percentage of total revenue that was data center CPU and GPU combined. Can you give us that number?
Yes. I mean, as a percentage of revenue, it’s similar to what it has been in the past few quarters, although, the server portion was significantly higher, as we saw, as we said earlier, greater than 50%, sequential increase in server CPU revenue – unit shipments and revenue, so that definitely helps.
Yes, got it. Okay. And I guess, just a bigger picture question. In terms of the kind of competitive edge you have, some of it relates to process technology. But, of course, your competitor could just go to TSMC to build CPUs as well. But I guess, there’s other parts that relate to your fundamental architecture, which is the chiplet memory density in your IPC advantage. So I guess, can you kind of break down, Lisa? Can you break down on how much of the advantage really is process-related versus how much is actually architecture-related? Thanks.
Yes. So, Timothy, the way I would answer that question is, we’ve made a set of choices, and the set of choices include process technology, they include architecture, our chiplet architecture, they include sort of our overall system architecture. And I think we’ve made it set of good choices.
Going forward, we are not relying on process technology as the main driver. We think process technology is necessary. It’s necessary to be sort of at the leading edge of process technology. And so, today, 7-nanometer is a great node, and we’re getting a lot of benefit from it. We will transition to the 5-nanometer node at the appropriate time and get great benefit from that as well. But we’re doing a lot in architecture. And I would say, that the architecture is where we believe the highest leverage is for our product portfolio going forward.
Got it. Thank you, Lisa.
Thank you. We’ve reached the end of our question-and-answer session. I’d like to turn the floor back over for any further or closing comments.
Thank you very much, operator, and thank you, everyone, for joining us on the call today. We do have a number of events planned here in the fourth quarter, and we look forward to seeing you all soon. Have a great evening.
Thank you. That does conclude today’s teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.