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Shares of Advanced Micro Devices (AMD) keep adding to gains today after its Q1 results yesterday afternoon beat and the company's outlook positively crushed expectations.

The stock is up $1.30, or almost 14%, at $11.01, building on last night’s 9% gain.

Chief Executive Officer Lisa Su was kind enough to take some time to talk with me this morning at the New York Stock Exchange while winging through the East Coast for various meetings.

It's a Jump Ball in Chips



People often talk about semiconductors and electronics in terms of "cycles,” be it the chip cycle itself, the successive generations of Intel (INTC) chips, or the Windows software releases.

In past, AMD could never consistently keep abreast, much less get ahead of, that cycle, which is why it always lost to Intel eventually.

“People are always wondering, Is it sustainable?” Su acknowledges. Will AMD keep making progress or lapse again?

"What you need to be successful is, you need to execute, you need to have attractive markets, you need to have that product roadmap, and you need to keep up with the cycle,” she said.

"We have built an execution engine,” she maintains, in effect, keeping control of all the things the company can control via its own efforts.

But perhaps just as important, it’s no longer really clear what the cycle is, because change is happening so rapidly on so many fronts, Su observed.

“The cycle is up for grabs,” she said. There’s much happening in chips on so many fronts, there’s opportunity for AMD as the challenger to both Intel in microprocessors, the “CPU," and Nvidia (NVDA), in graphics chips, the “GPU."

Following Through on the Plan

The main takeaway from last night: “The primary thing is the growth in our new products, and the product momentum."

We’ve been following a strategy the last few years and we’ve been executing on that. If you really take a step back, at our financial analyst day meeting, we laid out a model, one that includes double-digit revenue growth, and substantial margin expansion, based on competing across a much broader range of areas in the market. Last year, we grew [revenue] mid-twenties percentage, and added a billion dollars, and this year we said we’d grow mid-twenties percentage. So, we are following through on that model we laid out.

Indeed, one of the highlights of yesterday evening’s conference call with analysts is that Su’s chief finanical officer, Devinder Kumar, raised the company’s outlook for the year.

AMD now expects to have “mid-20%” revenue growth this year, up from an expectation offered back in January for “double-digit percentage growth,” said Kumar.

In addition, gross profit margin is now expected to be “greater than 37%,” said Kumar, up from the prior forecast for “greater than 36%."

Storming Nvidia’s Fiefdom

I asked Su if she really thinks she can catch up with CUDA, the software tools that Nvidia has used to achieve and maintain dominance in machine learning and artificial intelligence.

"I think we are offering something different than what CUDA offers,” Su replied.

There are lots of parts needed to make machine learning successful. We believe that we can build an alternative that will work with AMD but also with other accelerators [chips]. That area will really grow over the next five years. We do not believe that battle is over. With all the growth in that market, there is definitely room for an alternative. You have numerous [software] frameworks [for ML], you have MXnet, and Caffe, and Tensor Flow, and many others. CUDA is a proprietary technology. I would say that it used to be the case that with everything, you needed to use proprietary software, until Linux came along. Now, in machine learning, and deep learning, and AI, there is a large and growing feeling that people want alternatives.

Custom AI Chips?

I asked Su about the rise of custom chips by some of the AI leaders, be it Alphabet (GOOGL) unit Google’s “TPU” chip, or rumors that Facebook (FB) wants to pursue its own custom parts. Is AMD’s biggest competition Nvidia, or is it something else, like the TPU?

The goal is to come up with the right solution, and probably, that’s some combination of CPU and GPU and also some custom solutions. I don’t view custom as a bad thing. If a customer wants custom, we are happy with that. Putting aside who makes the chips, we have always believed there is merit in custom silicon. Once things reach a high volume of shipments, something like an ASIC can make sense. The thing to keep in mind is that machine learning and AI are is still very early in their development, they are still evolving.

Note that AMD has its own business unit that makes custom chips, for Sony’s (SNE) PlayStation and Microsoft’s (MSFT) Xbox. Hence, the allusion here is to some potential custom parts for AI down the road, though Su did not tip her hat as to forthcoming custom parts.

I asked whether AMD needs to promote its chips for server computers as specifically for AI, rather than selling them broadly as CPUs and GPUs for a variety of uses, as is the case now.

Said Su, "We have actually started a GPU compute roadmap,” with a part called the “Radeon Instinct MI25” GPU, which is promoted by AMD for its applicability to machine learning in particular. Su noted the company will have future parts in that line using the most cutting-edge manufacturing technology, at "7 nanometers,” seven billionths of a meter at its smallest feature size.

"We say that in this broad category, with the Instinct brand, we have to market a compute chip,” she said, emphasizing broad capabilities, rather than a niche for AI chips.

Where the Roadmap Leads

I asked Su where the “roadmap” stands for the company’s chips, meaning, what new innovations come down the road. Like the cycle, chip companies tend to speak of having a plan for how they’ll bring new parts to market for years. The problem with AMD in past was always that it had one hit, but didn’t follow through.

The AMD chip “architecture” is called “Zen.” Su said the company just started shipping what it refers to as "Zen Plus,” which "competes very well in the desktop space."

The next version, “Zen 2,” is aimed at server and data-center applications. AMD will be offering initial proof of that product, known as “sampling,” later this year, with eventual production in that 7-nanometer manufacturing technology. That was news to analysts on last night’s call, and clearly encouraging to those who hope AMD can take server share from Intel.

The importance of moving server parts to the most cutting-edge manufacturing technology reflects the importance of the server market to AMD. As Su points out, “The data-center opportunity for us is a very large market, it’s a $16 billion TAM [total addressable market.]"

"What customers are looking for is, you get a design win today, and then they say, show us your five-year roadmap,” she says.

That roadmap is not public: AMD has privately shown its customers the plan for reaching a "Zen 3” by 2020. Her point is that the company is continuing to make sure it has successive products and doesn’t run out of gas after initial enthusiasm from customers.

As Intel Slips

I asked Su whether there is an overall advantage for AMD as Intel appears to be losing its classic advantage in the chip manufacturing process.

"We definitely see process technology going our way,” she says, referring to the jargon in the chip business use to describe manufacturing approaches.

"We used to be at a deficit, and we needed to work harder on our designs, but at 7-nano [7-nanometer parts], we are very bullish on that. We are going to be very aggressive with that."

The first chip that AMD moves into the 7-nanometer manufacturing process is not the server CPU chip but rather a forthcoming GPU part, which will offer machine learning capabilities. The company plans to sample that part later this year, and to ultimately go into full production with one of its manufacturing partners, Taiwan Semiconductor Manufacturing (TSM). AMD also produces some of its chips with another company, privately held Global Foundries.

The Only Company With CPU and GPU

Part of AMD’s long-term appeal to bulls is that unlike Intel and Nvidia, AMD sells both the CPU and the GPU, the two main chips in a computer. I asked Su if there’s any evidence that having both parts on offer is giving the company an advantage.

“Yes, there are a couple of examples,” she said. “One is, with the newest Ryzen mobile parts [for laptops], we have reached an inflection point."

The amount of GPU power we have is sufficient to run 1080p gaming, which in past was inconceivable on a mobile computer. We have shown it is possible to replace low-end, discrete graphics with this part. That’s an inflection point for the industry. And then, in enterprise, what we are seeing is that the GPU is becoming much more tightly linked with the CPU. The ability to connect the CPU and the GPU in very efficient ways, to achieve low latency and low overhead, is a strong value proposition to customers.

Today, that link between CPU and GPU depends on how AMD’s computer customers, such as Hewlett Packard Enterprise (HPE), assemble the parts in their machines. it’s a systems-engineering question, she agreed.

But, “Going forward, there are opportunities to optimize the interfaces and the ways we package those together,” she said, a tantalizing indication that chips for servers from AMD could have some very novel approaches.

Blockchain Worries

I pointed out to Su that every quarter, the Street worries how much AMD’s sales are being propped up by bitcoin, blockchain, and other crypto currencies. That market is inherently volatile, and the Street is always waiting for AMD’s sales to come crashing down when demand falls off.

Why doesn’t the Street believe Su and Kumar when they said crypto and block chain are perhaps 10% or less of sales in a given quarter, a claim repeated last night?

Her answer is that crypto and blockchain are a complex market, hard to understand, and to an extent, the sell-side analysts are simply always looking for an information advantage by coming up with their own conjecture as to how much AMD’s sales really are affected.

There are two layers to the matter. One is, just the facts, it's a very complex market, and what some analysts do is, they form a high-level picture of hash rates [a basic metric of crypto-currency mining activity], and if that is going up, then that means to them that we are selling more GPUs. People are learning about the market, and we spend a lot of time with influencers in crypto-currencies to figure it out ourselves. Back in 2013 and 2014, bitcoin did have a big impact on the GPU market, and it was a new market for us. This time around there are a lot of commercial purposes for this blockchain technology. I’m not sure many of the guys totally understand what is happening there. And also, there is a lot of volatility in our stock, and they look for leading indicators. The big picture is, we are a high performance compute company, that’s what I try to keep people focused on.

Correction: A prior version of this post incorrectly stated that the first AMD part using 7-nanometer process technology will be a forthcoming server CPU part. In fact, it will be a forthcoming GPU for use in servers for machine learning. AMD plans to sample its 7-nanometer server CPU part, based on the “Zen 2” architecture, later this year, for production in 2019. AMD has not yet said which manufacturer it will use for the CPU part. My apologies for any confusion caused by the error.

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