Key Points
AMD's data center business now brings in nearly two-thirds of total revenue.
Management expects fourth-quarter sales of about $17 billion, a sharp step up from this quarter.
Free cash flow fell as the company stocked up on inventory and took on more debt.
AMD (NASDAQ:AMD) grew third-quarter revenue 45% to a record $13.4 billion as data center sales nearly doubled. Shares rose about 6.5% in after-hours trading. AMD expects growth to speed up to roughly 66% next quarter, but it is spending heavily to get there, and cash hasn't caught up with profits yet.
Key numbers
- Revenue: $13.4 billion, up 45% year over year.
- Data Center revenue: $8.5 billion, up 97%.
- Diluted EPS: $1.46 GAAP, up 95%; $2.09 adjusted, up 74%.
- Free cash flow: $554 million, down from about $1.5 billion.
What it means
Data center growth is lifting profits faster than sales. Chip design costs stay fairly fixed, so each extra dollar of GPU and server CPU sales drops mostly to profit. That pushed GAAP operating margin up 7 points from a year ago.
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The catch is cash. AMD added about $3 billion of inventory in the quarter as it builds Helios rack systems and Venice chips for its fourth-quarter ramp. It also borrowed heavily, more than doubling its debt since June. If those products ship on schedule, the cash comes back, but if demand slips, AMD is left holding a lot of expensive stock.
GAAP profit also took a $1.1 billion hit tied to warrants AMD issued to certain customers. The charge rises with AMD's share price, so a strong stock can shrink reported earnings. The release doesn't say how many warrants are outstanding.
What to watch next
Track whether fourth-quarter revenue lands near the guided $17 billion and inventory starts turning into cash. Also watch whether adjusted gross margin holds near the guided 55% as rack-scale systems ramp.
David Kretzmann has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices. The Motley Fool has a disclosure policy.