AMD beat Wall Street’s expectations in Q2 2017, courtesy of strong demand for Ryzen and Epyc (desktop and server) CPUs. This was a significant quarter for AMD, because it marked the first quarter of full availability for the Ryzen CPU family.
Revenue was $1.22 billion, up 19 percent from Q2 2016 and 1.24x from Q1 2017. Gross margin of 33 percent was down 1 percent compared with Q1 2017, but up 2 percent year over year. AMD turned an operating income profit of $25M, compared with a $9M loss last year. While the company still turned in a net loss for the quarter, it slashed the size of that loss dramatically, from $69M in Q2 2016 and $73M in Q1.
In addition, AMD reported a whopping 1.51x increase in Computing Graphics revenue compared with Q2 2016 and a still-significant 1.11x increase compared with Q1 2017. These increases are being driven by demand for AMD’s Ryzen CPUs and Radeon GPUs. AMD’s ASPs (Average Selling Price) increased “significantly” year-on-year, but fell slightly compared with Q1 thanks to lower prices on mobile products. GPU ASPs, on the other hand, grew both quarter-on-quarter and year-on-year.
In the conference call, investors were curious about what future demand AMD expected from cryptocurrency mining, and how it might manage its inventory levels to meet that demand. AMD played fairly coy on this point, both in its presentation and the QA that followed. The company reports its forecasts and current models don’t take cryptocurrency mining into account because of the tendency of such markets to have boom and bust cycles.
Apart from the above, however, AMD significantly increased its guidance for the full year of 2017. Previously, the company had suggested an increase in the low teens for year-end revenue. That’s now risen to the mid-to-high teens — call it 15-19 percent. Operating income was $7M in the CG segment, compared with an $81M loss a year ago and a $15M loss in Q1.
AMD reported double-digit growth in graphics for the sixth quarter in a row, and turned in an operating income profit for the first time in three years. Good times all around.
Consoles and Servers
There were some disparate trends in the enterprise, embedded, and semi-custom segments. CEO Lisa Su acknowledged that AMD would be ramping production to meet console demand in Q3 and Q4 (orders for console hardware typically peak in Q3, for holiday shipments). At the same time, however, AMD’s total console revenue fell 5 percent compared with Q2 2016 while rising 1.44x compared with Q1 2017. AMD stated it had “initial revenue from Epyc datacenter processor shipments in the quarter,” and characterized this recognition as a milestone. The drop-off in operating income is due to the costs of launching Epyc. AMD hopes to capture 10 percent of the server market with Epyc, but acknowledges that this will be a slow ramp and does not expect to hit that point this year.
AMD is still carrying significantly more inventory than it did last year, but confirmed that the GPU shortages that have plagued the market are due to cryptocurrency demand, not any kind of manufacturing shortage. The company expects revenue to increase 23 percent in Q3, plus or minus 3 percent, which would put the midpoint for full-year guidance at 15 percent. Inventory should drop in Q3 as AMD sells off its console inventory to Microsoft and Sony.
Interpreting the Results
This is as strong a quarter as we could’ve asked for. Epyc is doing well, Ryzen 7 continues to sell, and AMD’s midrange graphics refresh appears to have delivered strong performance. Lisa Su confirmed Raven Ridge, the mobile version of Ryzen with integrated graphics, is on-track for launch for the holiday season, which means we’ll get to see a refreshed 8th-generation APU within six months. Our Ryzen 5 benchmarks are shown below, for reference between AMD and Intel’s relative position.
There are still questions about Vega’s launch and launch positioning. But CPUs were always AMD’s primary revenue drivers, followed more recently by semi-custom SoC sales. We don’t have enough information on Vega to speculate about where it’ll fall. But AMD reports that its MI25 Radeon Instinct product family is now shipping to select partners and that the launch of consumer Vega is coming in the very near (think weeks) future.
There have been questions about whether AMD can be profitable with a gross margin of 33-34 percent, which is significantly lower than Intel. I suspect they can be if their ASPs continue to increase — and they should, once Raven Ridge replaces the Excavator-based Bristol Ridge CPU cores in mobile platforms. Toss in some uplift from Vega and slow growth in servers, and AMD’s ASPs should continue to trend higher. Lisa Su didn’t make any commitments about full-year profitability, but if things continue in this vein AMD should be on track through the end of the year.