7/30/19 Rome Launches on August 7th!

Finally AMD reported Q2 2019. After hours AMD was down big due to the initial disappointment of soft guidance for the whole year and Q3, but after people started to digest the earnings call, AMD recovered to $33.50, only 4% down.

The most notable item is that AMD is now guiding mid single digit growth YOY, as opposed to the high single digit growth. So let’s say originally 2019 total revenue was being projected to be $7.0B (8% increase over 2018), now it is more like $6.8B+ (5% increase from $6.5B). Q3 is additionally guided to be at $1.8B, when analysts were looking for $1.85B-1.95B.

At first glance, this soft guidance is indeed disappointing. Given the high hopes Rome brings, plus how well Ryzen 3rd gen have been selling, one would certainly expect a blowout Q3.

However, the earnings call did reveal more details.

First, AMD attributed the softness mainly to an unexpected additional drop in the gaming consoles segment, down mid 30% YOY. Previously AMD had counted on a drop in the 20% range. As both PS4 and Xboxes are both EOL, on their last year of production, a big drop was already expected and planned for. But with the next gen consoles rumored to be extremely powerful, perhaps the Osborne effect is even more pronounced than previously thought.

If the shortfall in revenue is entire due to a drop in the semicustom/console segment, then there is really nothing to worry about. We all know that PS5 and XBox Scarlett will definitely launch in 2020, so the lost revenue will come back in great numbers.

What about the 7 nm chips? The best news is that Rome is being officially launched on August 7th! Not only that, Rome (Epyc 2) has being shipping to the hyperscalers in Q2, and is surpassing expectations.

I know AMD had promised to launch Rome in Q3. I am glad that Rome is being launched early August, rather than late September! This confirmed somewhat the validity of this leak from Chiphell forum, which showed all the skus, pricing and the available purchase date to be August 7, 2019.

Furthermore, Rome has attracted double the number of design wins than Naples, and the ramp up speed is expected to be much faster.

Today Lynx Equity Research came out with a rumor that Google will adopt Rome over Xeon, such that “server boards earmarked for Google are being produced for Epyc CPUs rather than Xeon.”

All in all, the launch on August 7th will be most welcome. More news will likely come out at that time.

Ryzen 3rd gen are selling extremely well. Lisa Su said they are selling more than three times better than previous Ryzen generations over the same time frame.

Samsung deal turned out to be contributing to earnings this year! This is a pleasant surprise. Lisa Su said Samsung will generated $100 M of income, with associated expenses. Specifically she said it is more than IP, so this $100M does not drop directly to the bottom line. Given that all this is related to Samsung and mobile, and Samsung sells 100’s of millions of handsets annually, this mobile RDNA deal may well be huge. Earlier, one analyst had suggested the Samsung deal will not pay AMD until 2021.

China did hurt AMD this quarter. First of all, THATIC Dhyanna royalty is gone, due to US placing Sugon/Hygon etal on the entity list. Lisa Su claimed that, while small in magnitude, AMD was prevented from selling to some Chinese companies, both for PCs and servers, because they were on the entity list. She also said that Samsung deal kinda canceled out the shortfall from THATIC. This is fortuitous. Three months prior, AMD probably did not anticipate the entity list effect, and Samsung deal was not finalized until June. So without the Samsung money, AMD might have actually missed Q2!

Moving forward, Samsung money will only increase. THATIC royalty may actually come back, depending on whether Trump do eventually manage a trade deal with China.

AMD was notably upbeat about Ryzen Mobile also. Lisa specifically mentioned Ryzen Mobile being in time for the back to school and holidays seasons. This is very encouraging, because this is only Ryzen Mobile 2nd gen, which is only 12 nm. When Ryzen Mobile 3rd gen (7 nm) arrives, perhaps it will be inside MS Surface and high-end Chromebooks?

AMD also got rid of $70 M in secured revolving line of credit. Total debt continues to come down.

Gross margin will be 43% for Q3 and 42% for FY 2019. Stacy Rasgon of Bernstein wanted to pin Lisa down on why GM is not higher, due to all these higher GM products. I believe with all the new launches coming up, AMD has plenty of expenditures to incur, and GM will not get above 45% until next year.

OpEx will be at 30% for FY 2019.

Free cash flow is expected to turn positive for 2019. Yet H1 has a negative free cash flow of $300M. Ambrish Srivastava of BMO Capital Markets specifically pressed Devinder about that. Devinder responded vaguely that free cash flow for FY 2019 will not be in the tens of millions, confirming that H2 free cash flow will be positive, at more than $300M!

The most important point of the whole call is the Q4 guidance. AMD had lowered the 2019 growth to mid single digit, which means total revenue will be $6.82B. That means Q4 will need to be more than $2.2B! Joseph Moore of Morgan Stanley asked Lisa Su point blank about this guidance for Q4. Lisa said with all the growth drivers, she feels good about it. Considering that Q4 2018 was merely $1.42B, this is tremendous growth! With GM increasing from 43%, 2020 is looking very good, with addition of consoles, cloud gaming, Milan, high end Navi, Ryzen Mobile 7 nm, etc, etc.

I think the AMD story remains intact, and August 7th will bring more good news!

The earnings call transcript can be found here at SeekingAlpha.

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