AMD said its server processor sales surged more than 50% in the last quarter as the Santa Clara, California-based company released its latest line of EPYC CPUs and continued to erode Intel's market lead in server chips. AMD said it has started selling the second generation EPYC CPUs to customers building data centers, cloud servers and supercomputers, leading to its highest quarterly sales of server chips in the last decade.
The Silicon Valley company said sales of its server processors are set to increase "a strong double-digit percentage" in the current quarter as more customers move to its latest line of Epyc CPUs. Lisa Su, chief executive officer of AMD, said the company should be able to snatch 10% market share in data centers by the second half of next year. Intel commands 95% of the current market for server chips, which tend to cost thousands of dollars.
AMD has been taking advantage of the delays in Intel's development of server chips using the 10-nanometer node. The company's second generation of EPYC CPUs is based on the 7-nanometer node, the most advanced and costly chip production process from TSMC, and are challenging Intel's Xeon CPUs—the current gold standard in public and private data centers—on both price and performance for the first time in more than a decade.
AMD launched its second generation EPYC CPUs, code named Rome, in August. The chips feature up to 64 cores and offer 50% better performance and up to 40% lower costs than some of Intel's 14-nanometer Cascade Lake CPUs, AMD said. That cuts operating costs for cloud and enterprise customers by 25% to 50%, AMD said. Intel, the world's No.1 chip manufacturer, plans to start selling its 10-nanometer Xeon CPUs in late 2020.
"Our view is that the competition is aggressive, and will always be aggressive, and we're counting on that," Su pointed out on an analyst conference call last month. "That being the case, we are very feeling good about how our product is positioned," said Su, who has served as the company's chief executive officer for the last 5 years. She added that "we've seen strong engagement from customers across the board, across all workloads."
Income improved to $120 million, or 11 cents per share, up from $102 million, or 9 cents a share, in the same period last year and up from $35 million, or 3 cents per share, in the second quarter of 2019. The company's operating costs soared 13% over the last year to $539 million driven by additional spending on research, development and the production of its new generation of 7-nanometer Ryzen CPUs, EPYC CPUs and Radeon GPUs.
The company's third-quarter sales totaled $1.8 billion, up 9% year-over-year and up 18% quarter-over-quarter, driven by demand for AMD's Ryzen CPUs and Radeon GPUs used in personal computers. The company's other core business, which sells EPYC CPUs for data centers and semi-custom SoCs for game consoles including Microsoft's Xbox and Sony's PlayStation, has struggled over the last year despite high demand for EPYC CPUs.
The computing and graphics business, which sells computer chips used in desktops and laptops, totaled $1.28 billion, up from $1.09 billion in the third quarter of 2018 and $940 million in the second quarter of 2019, said chief financial officer Devinder Kumar. In July, the company started selling Ryzen CPUs based on TSMC's 7-nanometer technology, in a challenge to Intel's stranglehold on the high end of the market for personal computers.
The Santa Clara, California-based company is seeing strong demand for its latest line of Ryzen CPUs, which lifted average selling prices for client processors in the third quarter. Su said the number of AMD-based laptops from major OEMs has also increased 50% over the last year, including inside products such as Microsoft's new Surface Laptop. "We believe we gained client processor unit share for the eight straight quarter," she said.
Intel said its personal computer business slipped 5% to $9.7 billion in the third quarter as it struggled to combat ongoing shortages of its core processors for laptops. Intel is trying to resolve the shortages—which started in the second half of 2018 and have diminished its market share—in 2020. Global shipments of PCs totaled 68 million units in the third quarter of 2019, up roughly 1% from the same quarter last year, according to Gartner.
The embedded, enterprise and semi-custom segment slipped 27% over the last year and 11% over the last quarter $525 million, as demand for Sony's PlayStation and Microsoft’s Xbox declines ahead of the next generation of consoles to be released in late 2020. AMD said annual semi-custom sales will decline 35% to 40% in the second half of 2019. Su said AMD's sales growth would total 20% without the semi-custom business in 2019.
Demand for the company's more advanced server chips and other 7-nanometer products boosted gross margins to 43%, up from 40% in the same quarter a year ago. Gross margin—the percentage of sales left after subtracting the cost of production—is estimated to be 44% in the fourth quarter of 2019. That would push profit margins to 43% in 2019. Su said that "out of the chute, we are seeing a higher mix to higher end" server processors.
AMD won over most of the major players in the public cloud industry including Microsoft, Amazon and Google in the U.S. and some of the largest Chinese vendors such as Alibaba and Baidu. It is also expanding in enterprise data centers as Dell Technologies, Lenovo, HPE and other OEMs have started selling server platforms based on AMD's EPYC CPUs. AMD has also won contracts for three U.S. Department of Defense supercomputers.
The company has started to steal some business from Intel, which reported revenues of $6.4 billion in the data center segment, up from $6.1 billion in the same quarter last year as customers start to replenish their inventory after a prolonged pause in spending. Even though shipments of its chips declined slightly, Intel's customers are buying more of the most advanced Xeon CPUs in its Cascade Lake family, lifting average selling prices by 9%.
AMD forecasts revenue of $2.1 billion, plus or minus $50 million, in the fourth quarter of 2019, up 48% from the fourth quarter a year ago. "We're on track to exit 2019 with another quarter of significant growth, driven by the ramp of our 7-nanometer products," Su said, "and believe we are well positioned to build our momentum in 2020 and beyond as we deliver an even stronger set of leadership products that can drive sustained growth."
"We have the strongest product portfolio in our history," she added. "We are right where we want to be in our long-term strategic plan."