Portfolio company Advanced Micro Devices (AMD) reported a strong third quarter result after the closing bell yesterday.

Revenues increased 54% YoY and 12% QoQ to $4.3 billion, topping estimates $4.112 billion. Advanced Micro Devices keeps growing its business at a torrid pace, with this quarter representing the fifth in a row of greater than 50% YoY revenue growth. Each of AMD’s business lines grew significantly in the quarter, but the data center business was a standout with sales more than doubling.  

Margins are expanding as well thanks to sales growth of higher priced products like EPYC, Ryzen, and Radeon processors.  Adjusted gross margins increased 440 basis points YoY and 80 basis points QoQ to 48%. 

This all leads to adjusted earnings per share which grew 78% YoY and 16% QoQ to $0.73, topping estimates of $0.66. 

“AMD had another record quarter as revenue grew 54% and operating income doubled year-over-year,” AMD President and CEO Dr. Lisa Su said in the press release. “3rd Gen EPYC processor shipments ramped significantly in the quarter as our data center sales more than doubled year-over-year. Our business significantly accelerated in 2021, growing faster than the market based on our leadership products and consistent execution."

Breaking Down the Results:

• In the Computing and Graphics segment, revenue increased 44% YoY and 7% QoQ to $2.4 billion, topping estimates of $2.328 billion.  Revenue growth was driven by higher Ryzen, Radeon, and AMD Instinct processor sales. The company added that the average selling price for both Client Processors and GPUs increased YoY and QoQ.

  • Of note, AMD said its Ryzen 5000 processor shipments increased by a double-digit percentage sequentially as management believes it gained revenue share for the sixth straight quarter. Commercial Client growth YoY was driven by new deployments across the public sector and Fortune 1000 technology, energy, and automotive customers. Businesses of every kind are using AMD-based commercial notebook designs.

  • In graphics, revenue more than doubled on a YoY basis, with sales up a strong double-digit percentage sequentially thanks to shipments of the next-generation AMD CDNA 2 data center GPU and demand for Radeon 6000 GPUs. 

• In the Enterprise, Embedded and Semicustom segment, revenue increased 69% YoY and 20% QoQ to $1.9 billion, topping estimates of $1.777 billion. Revenue growth was driven by higher sales for EPYC processors and semi-customer products, which if you are not aware, go into the popular gaming PlayStation 5 and Xbox Series X/S consoles.

  • In Server, AMD delivered its sixth straight quarter of record server processor revenue, with sales up more than double YoY and a double-digit percentage sequentially thanks to the 3rd Gen EPYC processors ramp which is moving much faster than the prior generation.

  • In the cloud, AMD said multiple hyperscalers expanded their deployments of 3rd Gen EPYC processors to power their internal workloads. Of note, both Microsoft Azure and Google recently announced multiple new AMD-powered instances.

  • And in enterprise, growth was “particularly strong” as more than 100 3rd Gen EPYC process platforms from Dell, HPE, Lenovo, Super Micro, Cisco, and others ramp into broader end customer deployments. 

Guidance:

Turning to the fourth quarter, the company said it expects revenue to be approximately $4.5 billion, plus or minus $100 million, representing growth of approximately 39% YoY and 4% QoQ. The YoY growth is expected to be driven by all parts of the business, while the QoQ gains are expected to be driven by higher server and semi-custom revenue, which makes sense because demand for game consoles continues to outpace supply. Stores are always sold out of the new Playstation and Xbox.

On a different note, during the conference call Dr. Su said she expects the PC market to be “flattish,” which isn’t necessarily a bad thing as AMD see opportunities to gain share.  

Management’s $4.5 billion revenue outlook compares quite favorably to the consensus estimate of $4.252 billion. Management’s margin outlook appears solid as well, with AMD projecting adjusted gross margins of approximately 49.5% versus estimates of 49.4%. The margin expansion on a sequential basis is impressive when considering how one of the revenue growth callouts was the semi-custom business, a lower margin revenue stream. All in all, a strong fourth-quarter outlook and analysts will be revising their estimates higher.

In an update to their pending acquisition of Xilinx, management said regulatory progress has been made, and they reiterated their belief that the deal will close by the end of the calendar year. Dr. Su said on the earnings call that the deal “provides significant benefits to AMD, including expanding our product portfolio with leadership adaptive computing and AI solutions. And further diversifying our customer base into complementary markets, including wired and wireless communications, industrial and automotive.” We have been disappointed with how the Xilinx deal has not closed in a timelier fashion, but as shareholders, we are willing to let this slide because management has continually delivered "beat and raise" quarters all year and even announced a share repurchase program in May. In the third quarter, the company bought back 7 million shares worth $750 million.

Bottom Line:

Overall, AMD delivered yet another quarterly beat with a higher than expected outlook. However, since there was no eyebrow-raising surprise, especially no substantial further progress update on the Xylinx acquisition, it is understandable to see shares trading flat right now. While this may be disappointing to some, we think it is important to take a step back and remember how hot the stock was into earnings. Including yesterday's session, AMD has traded higher in ten of the past eleven trading sessions, pushing shares to brand new all time highs.