Advanced Micro Devices, Inc. (NASDAQ:AMD) reported slightly better second-quarter results than expected, but its third-quarter outlook was less optimistic.
AMD’s Performance Driven By Data Centers
Advanced Micro Devices, Inc. (NASDAQ:AMD) second-quarter revenues jumped 70% year-over-year to $6.6 billion. No business performed better than Data Center, powered by EPYC processor sales.
AMD expected $6.5 billion in Q2 2022 sales +/- $200 million, so actual sales were within expectations. The company has routinely beaten its sales guidance in FY 2021 and Q1 2022. Thus the chip company has only had a decent quarter. Its Data Centers sector saw an 83% year-over-year increase to $1.5 billion.
The Gaming revenue grew 32% year over year to $1.7 billion. Semi-custom gaming sales climbed, but its graphics sales fell. The company’s new Gaming sector comprises desktop, laptop, and console GPU sales.
Recent purchases of Xilinx and Pensando have boosted the Data Center industry. The $1.9 billion Pensando acquisition expands AMD’s Data Center product range. The Data Center business is positioned for continued growth as more workloads move to the cloud. This is significant when PC shipping and Gaming sectors show signs of a downturn.
Advanced Micro Devices, Inc. (NASDAQ:AMD) continues to kill it in Data Centers because it has a superb product line-up and because Intel is postponing the delivery of its 4th gen Xeon server processors, code-named Sapphire Rapids. Intel is still validating these chips, but Sapphire Rapids will be ready this year, with a volume ramp expected by year’s end. According to rumors, Sapphire Rapids may be delayed to Q1 2023.
The 2021 graphics card shortage has boosted AMD’s financial performance. A significant GPU shortage, partially caused by cryptocurrency miners who used graphics cards for mining, has driven record GPU prices throughout FY 2021. Prices have reduced due to lowering bitcoin prices and GPU demand in 2022. The RX 6000 GPU is now 0.86 X MSRP in July. AMD’s Gaming sector will suffer from declining pricing power.
Gross Margins Aren’t a Concern
AMD’s non-GAAP gross margins grew 1 PP sequentially and 6 PP year-over-year to 54% in Q2 2022, thanks to Data Centers and Embedded businesses. Embedded encompasses Xilinx’s product portfolio.
AMD’s business is sound as long as gross margins expand or remain stable. Gross margins are the canary in the coal mine for the chip industry, and two consecutive quarters of reductions would signal a cyclical correction that might slow its revenue growth.
Recession Dangers
Intel predicted that sluggish PC shipments in 2022 will hurt chip sales. Gartner predicts that PCs, tablets, and mobile phone shipments will fall 7.6% this year, with PC shipments falling 9.5%. Consumers bought new computers for remote work during the epidemic, so they don’t need to upgrade again. Intel predicted a downturn in the PC business for FY 2022, and AMD said the market would stay weak.
Profitability
Strong EPYC sales propelled AMD’s operating cash flow past $1 billion in Q2 2022. Despite increasing capital expenditures, free cash flow was above $900 million. The free cash flow margin fell sequentially to 13.8% and may come under greater pressure if its gaming pricing strength wanes.
FY 2022 Outlook
AMD’s third-quarter guidance is not great and implies top-line contraction, but the company is still expected to grow quickly. AMD expects Q3 2022 revenues of $6.7 billion +/- $200 million, a 55% year-over-year increase. AMD’s Q3 2022 projection predicts a 15 PP drop in growth compared to Q2 2022. AMD predicts a 54% gross margin.
A downturn in the PC market might impair CPU sales, resulting in lower revenues and gross margins. Even if growth slows, it’s still a good investment.
Bottom Line
Advanced Micro Devices, Inc. had an excellent second quarter. Business is strong across the board, particularly in Data Centers. Xilinx and Pensando strengthen server market position, and Intel’s Sapphire Rapids launch boosts AMD.
The main growth potential is Data Centers, and the company will roll out new EPYC (Genoa-X) processors that offer better performance than prior-gen CPUs. Its growing Data Center business may offset PC market decline and reduced GPU sales in the Gaming category.
Featured Image: Megapixl @Andreistanescu
