Earnings Call Transcript
ADVANCED MICRO DEVICES INC (AMD)
Earnings Call Transcript - AMD Q1 2023
Operator, Operator
Hello, and welcome to the AMD First Quarter 2023 Earnings Conference Call. It's now my pleasure to turn the call over to Ruth Cotter. Please go ahead, Ruth.
Ruth Cotter, Senior Vice President, Human Resources and Communications
Thank you, and welcome to AMD's First Quarter 2023 Financial Results Conference Call. By now, you should have had the opportunity to review a copy of our earnings press release and accompanying slides. If you've not reviewed these documents, they can be found on the Investor Relations page of amd.com. We will refer primarily to non-GAAP financial measures during this call. The full non-GAAP to GAAP reconciliations are available in today's press release and slides posted on our website. Participants on today's conference call are Dr. Lisa Su, our Chair and Chief Executive Officer; and Jean Hu, our Executive Vice President, Chief Financial Officer and Treasurer. This is a live call and will be replayed via webcast on our website. Before we begin today's call, we would like to note that Jean Hu will attend the JPM Annual Technology, Media and Communications Conference on Tuesday, May 23; Dan McNamara, Senior Vice President and General Manager, Server Business Unit, will attend the Bank of America Global Technology Conference on Tuesday, June 6. Our second quarter 2023 quiet time is expected to begin at the close of business on Friday, June 16. Today's discussion contains forward-looking statements based on current beliefs, assumptions and expectations, speak only as of today and as such, involve risks and uncertainties that could cause actual results to differ materially from our current expectations. Please refer to the cautionary statement in our press release for more information on factors that could cause actual results to differ materially. Now with that, I'll hand the call over to Lisa. Lisa?
Lisa Su, CEO
Thank you, Ruth, and good afternoon to all those listening in today. We executed very well in the first quarter as we delivered better-than-expected revenue and earnings in a mixed demand environment, launched multiple leadership products across our businesses, and made significant progress accelerating our AI roadmap and customer engagements across our portfolio. First quarter revenue was $5.4 billion, a decrease of 9% year-over-year. Sales of our data center and embedded products contributed more than 50% of overall revenue in the quarter as cloud and embedded revenue grew significantly year-over-year. Looking at the first quarter business results, Data Center segment revenue of $1.3 billion was flat year-over-year with higher cloud sales offset by lower enterprise sales. In cloud, the quarter played out largely as we expected. EPYC CPU sales grew by a strong double-digit percentage year-over-year but declined sequentially as elevated inventory levels with some MDC customers resulted in a lower sell-in TAM for the quarter. Against this backdrop, we were pleased that the largest cloud providers further expanded their AMD deployments in the quarter to power a larger portion of their internal workloads and public instances. 28 new AMD instances launched in the first quarter, including multiple confidential computing offerings from Microsoft Azure, Google Cloud, and Oracle Cloud that take advantage of the unique security features of our EPYC processors. In total, we now have more than 640 AMD-powered public instances available. Enterprise sales declined year-over-year and sequentially as end customer demand softened due to near-term macroeconomic uncertainty. We continued growing our enterprise pipeline and closed multiple wins with Fortune 500 automotive, technology, and financial companies in the quarter. We made strong progress in the quarter, ramping our Zen 4 EPYC CPU portfolio. All of our large cloud customers have Genoa running in their data centers and are on track to begin broad deployments to power their internal workloads and public instances in the second quarter. For the enterprise, Dell, HPE, Lenovo, Super Micro, and other leading providers entered production on new Genoa server platforms that complement their existing third-gen EPYC platforms. We are on track to launch Bergamo, our first cloud-native server CPU and Genoa-X, our fourth Gen EPYC processor with 3D chiplets for leadership in technical computing workloads later this quarter. Although we expect server demand to remain mixed in the second quarter, we are well positioned to grow our cloud and enterprise footprint in the second half of the year based on the strong customer response to the performance and TCO advantages of Genoa, Bergamo, and Genoa-X. Now looking at our broader data center business. In networking, Microsoft Azure launched their first instance powered by our Pensando DPU and software stack that can significantly increase application performance for networking-intensive workloads by enabling 10x more connections per second compared to non-accelerated instances. We expanded our data center product portfolio with the launch of our first ASIC-based Alveo data center media accelerator that supports 4x the number of simultaneous video streams compared to our prior generation. In supercomputing, the Max Planck Society announced plans to build the first supercomputer in the EU powered by fourth-gen EPYC CPUs and Instinct MI300 accelerators that is expected to deliver a 3x increase in application performance and significant TCO improvements compared to their current system. Our AI activities increased significantly in the first quarter, driven by expanded engagements with a broad set of data center and embedded customers. We expanded the software ecosystem support for our Instinct GPUs in the first quarter, highlighted by the launch of the widely used PyTorch 2.0 framework, which now offers native support for our ROCm software. In early April, researchers announced they used the LUMI supercomputer powered by third-gen EPYC CPUs and Instinct MI250 accelerators to train the largest Finnish language model to date. Customer interest has increased significantly for our next-generation Instinct MI300 GPUs for both AI training and inference of large language models. We made excellent progress achieving key MI300 silicon and software readiness milestones in the quarter, and we're on track to launch MI300 later this year to support the El Capitan Exascale supercomputer win at Lawrence Livermore National Laboratory and large cloud AI customers. To execute our broad AI strategy and significantly accelerate this key part of our business, we brought together multiple AI teams from across the company into a single organization under Victor Peng. The new AI group has responsibility for owning our end-to-end AI hardware strategy and driving the development of a complete software ecosystem, including optimized libraries, models, and frameworks spanning our full product portfolio. Now turning to our client segment. Revenue declined 65% year-over-year to $739 million as we shipped significantly below consumption to reduce downstream inventory. As we stated on our last earnings call, we believe the first quarter was the bottom for our client processor business. We expanded our leadership desktop and notebook processor portfolio significantly in the quarter. In desktops, we launched the industry's fastest gaming processors with our Ryzen 7000 X3D series CPUs that combine our Zen 4 core with industry-leading 3D chiplet packaging technology. In mobile, the first notebooks powered by our Dragon Range CPUs launched to strong demand, with multiple third-party reviews highlighting how our 16 core Ryzen 9 7945HX CPU is now the fastest mobile processor available. We also ramped production of our Zen 4-based Phoenix Ryzen 7040 series CPUs in the first quarter for ultrathin and gaming notebooks to support the more than 250 ultrathin gaming and commercial notebook design wins on track to launch this year from Acer, Asus, Dell, HP, and Lenovo. Looking at the year, we continue to expect the PC TAM to be down approximately 10% for 2023 to approximately 260 million units. Based on the strength of our product portfolio, we expect our client CPU sales to grow in the second quarter and in the seasonally stronger second half of the year. Now turning to our Gaming segment. Revenue declined 6% year-over-year to $1.8 billion as higher semi-custom revenue was offset by lower gaming graphics sales. Semi-custom SoC revenue grew year-over-year as demand for premium consoles remains strong following the holiday cycle. In gaming graphics, channel sell-through of our Radeon 6000 and Radeon 7000 series GPUs increased sequentially. We saw strong sales of our high-end Radeon 7900 XTX GPUs in the first quarter, and we're on track to expand our RDNA 3 GPU portfolio with the launch of new mainstream Radeon 7000 series GPUs this quarter. Looking at our Embedded segment. Revenue increased significantly year-over-year to a record $1.6 billion. We saw strength across the majority of our embedded markets, led by increased demand from industrial, vision and health care, test and emulation, communications, aerospace and defense, and automotive customers. Demand for our adaptive computing solutions continues to grow as industrial vision and health care customers actively work to add more advanced compute capabilities across their product lines. We also released new Vitis AI software libraries to enable advanced visualization and AI capabilities for our medical customers and launched our next-generation Kria platform that provides a turnkey solution to deploy our leadership adaptive computing capabilities for smart camera, industrial, and machine vision applications. In Communications, we saw strength with wired customers as new infrastructure design wins ramped into production. We also launched Zynq RFSoC products to accelerate 4G and 5G radio deployments in cost-sensitive markets and formed our first telco solutions lab to validate end-to-end solutions based on AMD CPUs, adaptive SoCs, FPGAs, DPUs, and software. In automotive, deployments of our adaptive silicon solutions for high-end ADAS and AI features grew in the quarter, highlighted by Subaru rolling out its AMD-based EyeSight 4 platform across their full range of vehicles. In addition, we expanded our embedded processor portfolio with the launches of Ryzen 5000 and EPYC 9000 embedded series processors with leadership performance and efficiency as we focus on growing share in the security, storage, edge server, and networking markets. Looking more broadly across our embedded business, we are making great progress in bringing together our expanded portfolio and scale to drive deeper engagements with our largest embedded customers. In summary, I'm pleased with our operational and financial performance in the first quarter. In the near term, we continue to see a mixed demand environment based on the uncertainties in the macro environment. Based on customer demand signals, we expect second-quarter revenue will be flattish sequentially, with growth in our client and data center segments, offset by modest declines in our Gaming and Embedded segments. We remain confident in our ability to grow in the second half of the year, driven by the adoption of our Zen 4 product portfolio, improving demand trends in our client business, and the early ramp of our Instinct MI300 accelerators for HPC and AI. Looking longer term, we have significant growth opportunities ahead based on successfully delivering our road maps and executing our strategic data center and embedded priorities, led by accelerating adoption of our AI products. We are in the very early stages of the AI computing era, and the rate of adoption and growth is faster than any other technology in recent history. And as the recent interest in generative AI highlights, bringing the benefits of large language models and other AI capabilities to cloud, edge, and endpoints require significant increases in compute performance. AMD is very well positioned to capitalize on this increased demand for compute based on our broad portfolio of high-performance and adaptive compute engines, the deep relationships we have established with customers across a diverse set of large markets, and our expanding software capabilities. We are very excited about our opportunity in AI. This is our #1 strategic priority, and we are engaging deeply across our customer set to bring joint solutions to the market, led by our upcoming Instinct MI300 GPUs, Ryzen 7040 Series CPUs with Ryzen AI, Zynq UltraScale+ MPSoCs, LVO V70 data center inference accelerators, and Versal AI adaptive data center and edge SoCs. I look forward to sharing more about our AI progress over the coming quarters as we broaden our portfolio and grow this strategic part of our business. Now I'd like to turn the call over to Jean to provide some additional color on our first-quarter results. Jean?
Jean Hu, CFO
Thank you, Lisa, and good afternoon, everyone. I'll start with a review of our financial results for the first quarter and then provide our current outlook for the second quarter of fiscal 2023. As a reminder, for comparative purposes, first-quarter 2022 results included only partial quarter financial results from the acquisition of Xilinx, which closed in February 2022. Revenue in the fourth quarter was $5.4 billion, a decrease of 9% year-over-year as Embedded segment strength was offset by lower Client segment revenue. Gross margin was 50%, down 2.7 percentage points from a year ago, primarily impacted by Client segment performance. Operating expenses were $1.6 billion, increasing 18% year-over-year, primarily due to the inclusion of a full quarter of expenses from Xilinx and Pensando acquisitions. Operating income was $1.1 billion, down $739 million year-over-year, and the operating margin was 21%. Interest expense, taxes, and other was $128 million. For the first quarter, diluted earnings per share was $0.60 due to better-than-expected revenue and operating expenses. Now turning to our reportable segment for the first quarter. Starting with the Data Center segment, revenue was $1.3 billion, flat year-over-year, driven primarily by higher sales of EPYC processors to cloud customers, offset by lower enterprise server processor sales. Data Center segment operating income was $148 million or 11% of revenue compared to $427 million or 33% a year ago. Lower operating income was primarily due to product mix and increased R&D investments to address large opportunities ahead of us. Client segment revenue was $739 million, down 65% year-over-year as we shipped significantly below consumption to reduce downstream inventory. We expect an improvement in second-quarter Client segment revenue and a seasonally stronger second half. Client segment operating loss was $172 million compared to an operating income of $692 million a year ago, primarily due to lower revenue. Gaming segment revenue was $1.8 billion, down 6% year-over-year. Semi-custom revenue grew double-digit percentages year-over-year, which was more than offset by lower gaming graphics revenue. Gaming segment operating income was $314 million or 18% of revenue compared to $358 million or 19% a year ago. The decrease was primarily due to lower gaming graphics revenue. Embedded segment revenue was $1.6 billion, up $967 million year-over-year, primarily due to a full quarter of Xilinx revenue and the strong performance across multiple end markets. Embedded segment operating income was $798 million or 51% of revenue compared to $277 million or 46% a year ago, primarily driven by the inclusion of a full quarter of Xilinx. Turning to the balance sheet and the cash flow. During the quarter, we generated $486 million in cash from operations, reflecting our strong financial model despite the mixed demand environment. Free cash flow was $328 million. In the first quarter, we increased inventory by $464 million, primarily in anticipation of the ramp of new Data Center and Client product in advanced process nodes. At the end of the quarter, cash, cash equivalents, and short-term investments were $5.9 billion, and we returned $241 million to shareholders through share repurchases. We have $6.3 billion in remaining authorization for share repurchases. In summary, in an uncertain macroeconomic environment, the AMD team executed very well, delivering better-than-expected top-line revenue and earnings. Now turning to our second quarter 2023 outlook. We expect revenue to be approximately $5.3 billion, plus or minus $300 million, a decrease of approximately 19% year-over-year and approximately flat sequentially. Year-over-year, we expect the Client, Gaming, and Data Center segments to decline, partially offset by Embedded segment growth. Sequentially, we expect Client and Data Center segment growth to be offset by modest Gaming and Embedded segment decline. In addition, we expect non-GAAP gross margin to be approximately 50%. Non-GAAP operating expenses to be approximately $1.6 billion. Effective tax rate to be 13%. And the diluted share count is expected to be approximately 1.62 billion shares. In closing, I'm pleased with our strong top-line and bottom-line execution. We have a very strong financial model, and we'll continue to invest in our long-term strategic priorities, including accelerating our AI offerings to drive sustainable value creation over the long term. With that, I'll turn it back to Ruth for the Q&A session.
Ruth Cotter, Senior Vice President, Human Resources and Communications
Thank you, Jean. And Kevin, we're happy to pull the audience for questions.
Operator, Operator
Our first question today is from Vivek Arya at Bank of America.
Vivek Arya, Analyst
Lisa, when I review your full year Data Center outlook indicating some growth, it suggests that Data Center could potentially see a 30% increase in the second half compared to the first half. I'm interested in understanding your confidence and visibility as well as the underlying assumptions that support this perspective. Is there a significant ramp expected from the new products, a recovery in enterprise, or is it related to pricing? Please provide insight into how we should interpret the confidence and visibility regarding the strong ramp suggested in your second half Data Center outlook.
Lisa Su, CEO
Thank you for the question, Vivek. Let me provide some context regarding the current situation in the Data Center. We have mentioned that the environment is mixed. In the first half of the year, some of the larger cloud customers are dealing with inventory and optimization issues, along with a challenging enterprise market. Looking ahead to the second half of the year, we observe several positive indicators. Our product roadmap is robust, and we are receiving favorable feedback from customers regarding Genoa, which is progressing well and stands out in terms of total cost of ownership and overall performance. We believe it is well-positioned for success. The initiatives we undertook in the first half of the year were aimed at ensuring we can support a wider range of workloads as we advance into the second half. From a market perspective, we anticipate a mixed performance in the enterprise segment, but we do expect some improvements, contingent on the macroeconomic conditions. Additionally, alongside Genoa, we are also preparing to launch Bergamo, which is on schedule for release in the second quarter and will ramp up in the second half. By the end of the year, we will also start increasing production of our MI300 GPU. This means we are set to ramp our supercomputing projects as well as our early cloud AI initiatives in the fourth quarter. There are many factors at play, and while we need to observe how the year unfolds, we feel optimistic about our product positioning and roadmap for the Data Center.
Vivek Arya, Analyst
All right. And for my follow-up, Lisa, how do you see the market share evolve in the Data Center in the second half? Do you think that the competitive gap between your and your competitors' products, has that narrowed? Or you still think that in the second half, you have a chance to gain market share in the Data Center?
Lisa Su, CEO
Yes, absolutely, Vivek. Well, I mean, we've gained share nicely over the last four years. When you look at our Data Center progression, it's actually been pretty steady. As we go into the second half of this year, I think we continue to believe that we have a very strong competitive position. So we do think that positions us well to gain share. In the conversations that we're having with customers, I think they're enthusiastic about Zen 4 and what it can bring into cloud workloads as well as enterprise workloads. I think actually Genoa is extremely well positioned for enterprise where we have been underrepresented. So we feel good about the roadmap. I mean, obviously, it's competitive, but we feel very good about our ability to continue to gain share.
Operator, Operator
Next question is coming from Toshiya Hari from Goldman Sachs.
Toshiya Hari, Analyst
Lisa, I wanted to ask about the Embedded business. It's been a really strong business for you since the acquisition of Xilinx. You're guiding the business down sequentially in Q2. Is this sort of the macro/cycle kicking in? Or is it something supply related? If you can kind of expand on the Q2 outlook there and your expectations for the second half, that would be helpful.
Lisa Su, CEO
Yes, absolutely, Toshiya. Thanks for the question. I mean, I think the Embedded business has performed extremely well over the last four or five quarters. Q1 was another record for the Embedded business. When we look underneath it, there is a broad set of market segments that we have exposure to, and the majority of them are actually doing very well. Our thought process for sort of modest decline into Q2 is that we did have a bunch of backlog that we're in the process of clearing, and that backlog will clear in Q2, and then we expect that the growth will moderate a bit. We still very much like the positioning of sort of our aerospace and defense, our industrial, our test and emulation business, and our automotive business. We expect wireless trends to be a little bit weaker as well as consumer trends. So those are the kind of the puts and takes in the market. But I would say the business has performed well above our expectations.
Toshiya Hari, Analyst
That's helpful. And then as my follow-up, maybe one for Jean on the gross margin side of things. In your slide deck, I think you're guiding gross margins up half over half in the second half. Can you maybe speak to the puts and takes and the drivers as you think about gross margins over the next 6 to 9 months?
Jean Hu, CFO
Thank you for the question. Our gross margin is mainly influenced by our product mix. In evaluating our performance in the first half and the guidance for the second quarter, we are quite satisfied with the strong gross margins in both the Data Center and embedded segments. We have not experienced any negative impacts on our gross margin from the Client segment. Looking ahead to the second half, we anticipate an improvement in gross margin as the Data Center segment grows and Embedded remains robust. The extent of this improvement will mostly depend on the recovery of the Client segment. We expect that the gross margin for the Client segment will also improve, but it will still fall short of the corporate average. Thus, the rate of gross margin improvement may hinge on the Client business recovery in the latter half of the year. However, in the long run, we believe the most significant growth opportunities for revenue will be in the Data Center and Embedded segments, which gives us confidence that our gross margin will continue to increase over time.
Operator, Operator
Next question is coming from Aaron Rakers from Wells Fargo.
Aaron Rakers, Analyst
I have two questions as well. First, regarding the timing of the server CPU cycle with Genoa and Bergamo, it's encouraging to hear that you are on track to launch Bergamo. However, I've heard discussions over the last quarter about some DDR5 challenges, specifically related to PMIC issues. I'm interested in knowing if those issues have arisen and how you would describe the current ramp cycle for Genoa.
Lisa Su, CEO
Yes. Sure, Aaron. So yes, look, I think Genoa, we always said, as we launched it, that it would be a little bit more of a longer transition compared to Milan because it is a new platform. So it is the new DDR5, it's PCI Gen 5. And for many of our top customers, they're also doing other things other than upgrading the CPUs. So from that standpoint, I would say the ramp is going about as we expected. We've seen a lot of interest, a lot of customer engineering work that we're doing together in the data centers with our customers, and we feel great about the set of workloads, and we see expansion in the workloads going forward. So overall, our expectation is, particularly as we go into the second half, we'll see Genoa ramp more broadly. But Genoa and Milan are going to coexist throughout the year, just given the breadth of platforms that we have.
Aaron Rakers, Analyst
And anything specific on the DDR5 questions that come up? And then I'm curious but my second question just real quick is the MI300, if we look out beyond just the El Capitan deployment through the course of this year, how do you guys think about success in that data center GPU market as we think about beyond just El Capitan?
Lisa Su, CEO
Yes. Sure, Aaron. So back to the DDR5 question, we haven't seen anything specific on DDR5. It's just normal platform bring up that we're seeing. Now as it relates to your question about MI300, look, we're really excited about the AI opportunity. I think that success for us is having a significant part of the AI overall opportunity. AI for us is broader than cloud. I mean it also includes what we're doing in Clients and Embedded. But specifically, as it relates to MI300, MI300 is actually very well positioned for both HPC or supercomputing workloads as well as for AI workloads. And with the recent interest in generative AI, I would say the pipeline for MI300 has expanded considerably over the last few months, and we're excited about that. We're putting a lot more resources, I mentioned on the prepared remarks, the work that we're doing, sort of taking our Xilinx and sort of the overall AMD AI efforts and collapsing them into one organization, that's primarily to accelerate our AI software work as well as platform work. So success for MI300 is for sure a significant part of sort of the growth in AI in the cloud. And I think we feel good about how we're positioned there.
Operator, Operator
Next question is coming from Matt Ramsey from TD Cowen.
Matthew Ramsay, Analyst
Lisa, my first question relates to the way the business has been trending, particularly with enterprise and the data center market in China being somewhat softer recently, which seems to be continuing into the second quarter. It seems that a significant portion of your data center business, especially in servers during the second half of the year, will be driven by U.S. hyperscale. I would like to know about your visibility regarding unit volumes, pricing, and the timing of ramps. Could you elaborate on that, considering the customer concentration? You mentioned growth for the year-end data center; could you provide a more precise outlook on that? I understand there are market dynamics at play, but it's a significant comment, prompting me to ask for a quantification of the growth expected for the year.
Lisa Su, CEO
Sure. Matt, thanks for the question. So look, I think as we work with our largest cloud customers in the Data Center segment, particularly with our EPYC CPUs, we have very good conversations in terms of what their ramp plans are, what their qualification plans are, which workloads, and which instances. So I feel that we have good visibility. Obviously, some of this is still dependent on overall macro situation and overall demand. But our view is that there is a lot of good progress in the Data Center. Now in terms of quantification, as I said, there's a lot of puts and takes. My view is that enterprise will improve as we go into the second half, and we're seeing some very early signs of improvement in China as well. So our view is, I think, double-digit Data Center growth is what we currently see. And certainly, we would like to ramp Genoa and Bergamo as a large piece given the strength of those products, we'd like to see them grow share over the next couple of quarters.
Matthew Ramsay, Analyst
Lisa, that's helpful. For my follow-up question, I think in the prepared scripts, we're clearly undershipping sell-through to clear the channel in the Client business in the first half of the year. The language used indicated seasonal improvements in the second half. So are you expecting to align shipping with sell-through to address the undershipping of demand? And could you help me understand the magnitude and the moving pieces in the Client segment for the second half?
Lisa Su, CEO
Yes. So we've been undershipping sort of consumption in the Client business for about three quarters now. And certainly, our goal has been to normalize the inventory in the supply chain so that shipments would be closer to consumption. We expect that, that will happen in the second half of the year, and that's what the comment meant that we believe that there will be improvements in the overall inventory positioning. And then we also believe that the Client market is stabilizing. So Q1 was the bottom for our business as well as for the overall market. From what we see although it will be a gradual set of improvements, we do see that the overall market should be better in the second half of the year. We like our product portfolio a lot. I'm excited about having AI-enabled on our Ryzen 7000 series. And we have leadership notebook platforms with Dragon Range. Our desktop roadmap is also quite strong with the new launch of the Ryzen 7000 X3D products. And so I think here in the second quarter, we'll still undership consumption a bit. And by the second half of the year, we should be more normalized between shipments and consumption, and we expect some seasonal improvement into the second half.
Operator, Operator
Your next question is coming from Joe Moore from Morgan Stanley.
Joseph Moore, Analyst
Yes, I guess same question in terms of the cloud business. You mentioned some combination of kind of digestion of spending and inventory reduction. Can you give us a sense of how much inventory was there in hyperscale? How much has it come down? And how much are you sort of maybe undershipping demand in that segment?
Lisa Su, CEO
Yes. I think this is somewhat challenging because every customer is unique. We're observing that different customers are at various stages in their overall cycle. However, we do have strong visibility with all our large customers regarding their objectives for the quarter and the year. Of course, some of that will be influenced by broader economic conditions. Additionally, we're navigating a product transition between our Milan and Genoa offerings and various workloads. Considering all these factors, we believe that the second quarter will see modest growth, with even more growth anticipated in the latter half of the year in relation to the Data Center business. There are many variables at play; each customer is at a different point in their cycle. But overall, we expect the number of workloads utilizing AMD to increase in the upcoming quarters.
Joseph Moore, Analyst
Great. For my follow-up, you mentioned interest in MI300 regarding generative AI. Can you discuss whether this currently represents a revenue pipeline with major hyperscalers or if it's more of an indication of interest? I'm trying to understand your position in establishing yourself in that market.
Lisa Su, CEO
Yes. I would say we have been focused on AI as a strategic priority for AMD for a considerable time. With MI250, we've made significant strides, including work on the LUMI supercomputer utilizing generative AI models. We have also improved library and software optimization with MI250 to enhance overall performance and capabilities. MI300 is looking promising. The nature of workloads has shifted; while discussions a year ago mainly centered on training, they have now moved towards large language model inferencing, which is particularly favorable for GPUs. We expect to start generating revenue with MI300 in the fourth quarter from cloud AI customers, with a more substantial impact anticipated in 2024.
Operator, Operator
Next question is coming from Harlan Sur from JPMorgan.
Harlan Sur, Analyst
Good to see the strong dynamics in Embedded, very diverse end markets. And given their strong market share position here, the Xilinx team is in a really good position to catalyze EPYC attach or Ryzen attached to their FPGA and adaptive compute solutions, right? I think embedded x86 is like a $6 billion to $8 billion per year market opportunity. So, Lisa, given you're a year with Xilinx in the portfolio, can you just give us an update on the synergy unlock and driving higher AMD compute attached to Xilinx sockets?
Lisa Su, CEO
Yes. Thanks, Harlan. It's a great question. The Xilinx portfolio has done extremely well with us. Very strong, I would say, we continue to get more content attached to the FPGAs and the adaptive SoCs. We have seen the beginnings of good traction with the cross-selling and that is an opportunity to take both Ryzen and EPYC CPUs into the broader embedded market. I think the customers are very open to that. I think we have a sales force and a go-to-market capability across this customer set that is very helpful for that. So I do believe that this is a long-term opportunity for us to continue to grow our embedded business. And we've already seen some design wins as a result of the combination of the Xilinx portfolio and the AMD portfolio, and I think we'll see a lot more of that going forward.
Harlan Sur, Analyst
Great. And in terms of other opportunities, there appears to be this trend towards more of your cloud and hyperscale customers opting to do their own silicon solutions around accelerated compute or AI offload ends, right? And if I look at it right, there are less than a handful of the world semiconductor companies that have the compute, graphics, connectivity IP portfolio that you guys have, as well as the capabilities to design these very complex offload SoCs, right? Does the team have a strategy to try and go after some of the semi-custom or full-blown ASIC-based hyperscale programs?
Lisa Su, CEO
We do have a very complete IP portfolio across various technologies, including CPUs, GPUs, FPGAs, adaptive SoCs, and DPUs, supported by a capable semi-custom team. Beyond hyperscalers, we see higher volume opportunities outside of game consoles that could benefit from custom solutions. This combination of IP is beneficial and represents a long-term opportunity for us, where we can add significant value to our largest customers.
Operator, Operator
Next question is coming from Ross Seymore from Deutsche Bank.
Ross Seymore, Analyst
Lisa, I would like to discuss the pricing environment in a general sense. Your team has done a commendable job of enhancing customer benefits and implementing price increases to offset cost hikes. However, the competitive pressure and market softness right now seem to present challenges to that approach. Could you share your thoughts on the future trajectory of pricing in both your Data Center market, which is particularly important, as well as in your Client market, especially as we move into the next couple of years?
Lisa Su, CEO
Yes, Ross, I believe a couple of points are worth mentioning. In the Data Center market, pricing remains relatively stable. This stability stems from our objective to enhance our capabilities. As we transition from Milan to Genoa, we are increasing our cores and performance. The performance per dollar we provide to our customers creates an incentive for them to adopt our technologies and solutions. I anticipate this trend will continue. In the Client business, considering the current inventory situation, it is a more competitive environment. From my perspective, we are focused on normalizing inventory levels. It is crucial to align shipments with consumption, as this promotes a healthier business environment overall. Additionally, we need to maintain our product values, ensuring that our products deliver superior performance per dollar and performance per watt in the market.
Ross Seymore, Analyst
And pivoting for my follow-up on the AI side and MI300. I just wanted to know what you would describe as your competitive advantages? Everybody knows that's a market that's exploding right now. There's tons of demand. You guys have all the IP to be able to attack it. But there's a very large incumbent in that space as well. So when you think about what AMD can bring to the market, whether it's hardware, software, heterogeneity of the products you can bring, et cetera, what do you think is the core competitive advantage that can allow you to penetrate that market successfully?
Lisa Su, CEO
Yes, there are a few key points to consider, Ross. Since we haven't announced MI300 yet, more specifications will be revealed in the upcoming quarters. MI300 is unique as it combines both the CPU and GPU, which is a significant advantage for the supercomputing market. In terms of generative AI, we believe we offer a strong value proposition from a hardware perspective, particularly in terms of performance relative to cost, which indicates high market demand. Additionally, our strong customer relationships with EPYC contribute to synergy between EPYC CPU users and MI300 GPU customers. Overall, we see strong demand for AI and believe our position is solid, as there are very few products that can truly meet the needs of large language models. We are confident in our abilities to fulfill that demand.
Operator, Operator
Next question is coming from Tim Arcuri from UBS.
Timothy Arcuri, Analyst
Lisa, there was a lot more talk on this call about AI. And obviously, PyTorch 2.0 now supporting ROCm is a great step forward. But how much would you say software is going to dictate how successful you can be for these workloads? You had mentioned that you're forming this new group, this new AI group. Do you have the internal software capabilities to be successful in AI?
Lisa Su, CEO
Tim, I think the answer is yes. I think we have made significant progress even over the last year in terms of our software capabilities. And the way you should think about our AI portfolio is it's really a broad AI portfolio across client, edge, as well as cloud. And with that, I think the Xilinx team brings a lot of background and capability, especially in inference. We've added significant talent in our AI software as well. The beauty of particularly the cloud opportunity is it's not that many customers, and it's not that many workloads. So when you have sort of very clear customer targets, we're working very, very closely with our customers on optimizing for a handful of workloads that generate significant volume. That gives us a very clear target for what winning is in the market. So we feel good about our opportunities in AI. And I'd like to say that it's a multiyear journey. So this is the beginning of what we think is a very significant market opportunity for us over the next 3 to 5 years.
Timothy Arcuri, Analyst
Can you provide an overview of the projected revenue for the second half of the year? I understand that both Data Center and Embedded are expected to increase this year, with Data Center likely seeing double-digit growth. However, I would like to confirm whether you anticipate total revenues will also rise year-over-year this year.
Lisa Su, CEO
So we're not providing guidance for the full year due to various factors. We expect Q2 to be relatively stable, with growth returning in the second half. We'll have to monitor the macro environment's impact on PCs and enterprise. However, we are optimistic about growth in Embedded and anticipate double-digit growth year-over-year for the Data Center. We'll also need to observe how the other segments develop.
Operator, Operator
Your next question is coming from Ambrish Srivastava from BMO Capital Markets.
Ambrish Srivastava, Analyst
I wanted to revisit the first quarter for Data Center. There seems to be a significant gap in your performance compared to Intel on a quarter-over-quarter basis, nearly double. This marks the first instance of losing market share on a quarter-over-quarter basis in quite some time. Could you provide some insights on that? I understand that quarterly results can be unpredictable, but this gap appears substantial. For my follow-up, could you please remind us of the full year growth expectations for Data Center, particularly regarding the assumptions for cloud and enterprise?
Lisa Su, CEO
Yes. Let me make sure I get your question, Ambrish. So you're asking about Q1 Data Center and whether we think we've lost share on a sequential basis?
Ambrish Srivastava, Analyst
Right. If I look at just your report versus what Intel reported on a Q-over-Q basis, it clearly on a year-over-year basis, you have gained share. But I'm just comparing down $14 million versus what you reported, and so that would imply that you had a share loss versus them unless the Data Center GPU and the Xilinx business was down significantly also on a Q-over-Q basis.
Jean Hu, CFO
Yes, Ambrish, maybe I'll give you a little bit of color. In Q1, the other networking business, including GPU, has been down, that definitely is the case. But from a share perspective, when we look at overall Q1 reported revenue from both sides and analyze the data, we don't believe we lost the share.
Lisa Su, CEO
Yes, that's right, Ambrish. So I think you just have to go through each of the pieces. But I think from an EPYC or a server standpoint, we don't believe we lost share. If anything, we might have gained a little bit. But I think overall, I wouldn't look at it so closely on a quarter-by-quarter basis because there are puts and takes. From what we see overall, we believe that we have a good overall share progression as we go through the year.
Ambrish Srivastava, Analyst
And then the underlying assumptions for full year for Data Center?
Lisa Su, CEO
Underlying assumptions for the full year. I think the key pieces that I talked about are Q2, let's call it, modest growth. We still expect some cloud optimization to be happening. As we go into the second half of the year, we'll see a stronger ramp of Genoa and the beginnings of the ramp of Bergamo. We think enterprise is still more dependent on macro, but we do believe that that improves as we go into the second half of the year. And then we'll have the beginnings of our MI300 ramp in the fourth quarter for both supercomputing and some early AI workloads.
Operator, Operator
Next question is coming from Stacy Rasgon from Bernstein Research.
Stacy Rasgon, Analyst
For my first one, Lisa, can you just like clarify this explicitly for me. So you said double-digit Data Center. Was that a full year statement? Or was that a second half year-over-year statement? Or was that a half-over-half statement for Data Center?
Lisa Su, CEO
Yes. Let me be clear. That was a year-over-year statement. So double-digit Data Center growth for the full year of 2023 versus 2022.
Stacy Rasgon, Analyst
Got it. Based on what you achieved in the first quarter and what you're suggesting for the second quarter, it looks like you'll need around 50% year-over-year growth in the second half to reach that goal. So are you confirming that now?
Lisa Su, CEO
I am...
Jean Hu, CFO
Yes, your math is right.
Stacy Rasgon, Analyst
Okay. For my second question, Jean, you made a comment on gross margins where you said the increase of gross margins in the second half was dependent on gross margin in Client getting better. I just want to make sure, did I hear that right? And why should I expect Client margins would get better, especially given what Intel has been doing in that space to protect everything? Like why is that something that's going to happen?
Jean Hu, CFO
Yes, Stacy, that's a good question. The way to think about it is if you look at our Q1 gross margins and the Q2 guide around 50%. And as you know, both our Data Center and Embedded have a very strong gross margin performance. And so what the headwinds that impact our gross margin is really PC Client side, which, as we talked about, is we are shipping significantly under the consumption and also to digest inventory in the downstream supply chain. As you know, typically, that's the time you get a significant pressure on the ASP side and on the funding side. That's why our gross margin in the Client segment has been challenged. In the second half, we know it's going to be normalized. That's a very important fact is when you normalize the demand and supply, and we continue to plan a very competitive environment, so don't get us wrong on that front. But it will be better because you are not digesting the inventory, the channel funding, everything, those kinds of price reductions will be much less. So we do think the second half will fly outside, the gross margin will be better than the first half.
Stacy Rasgon, Analyst
Got it. And I apologize, I misspoke as well. 50% half-over-half in Data Center, not year-over-year. So we're all doing it.
Operator, Operator
Our next question is coming from Blayne Curtis from Barclays.
Blayne Curtis, Analyst
I had two. Maybe just to start with following on Stacy's prior question. Could you just comment on what client ASPs did in the March quarter? I mean I assume they're down a decent amount. Your competitor was down, but any color you could provide on what the environment was in March?
Lisa Su, CEO
Yes, sure, Blayne. So the ASPs were down quite a bit on a year-over-year basis, if you're talking about the overall Client business. And what that is, is that's also the Client ASPs were higher in the first half of '22, if you just think about what the supply environment was or the demand environment was in that. And given that we're undershipping in the first quarter, the ASPs are lower.
Blayne Curtis, Analyst
Got it. And then I just wanted to ask you on the Data Center business, the operating profit is down a ton sequentially. And you talked about enterprise being down, I think that's part of it. But it's a big drop, and it looks like gross margin probably is down a bunch too. Can you just comment on why that drop in profitability in Data Center?
Jean Hu, CFO
Yes, Blayne, that's a good question. If you compare year-over-year, you're correct that revenue has remained largely flat, but there has been a significant drop in operating margin. There are two primary factors contributing to this. First, we have made substantial investments, particularly in networking and AI. As you may recall, we finalized the acquisition of Pensando last May or June, which means this quarter reflects the full expenses of Pensando compared to last year. Additionally, we have increased our GPU investment linked to AI, all classified under the Data Center category. The second factor is the product mix. As Lisa mentioned, year-over-year cloud sales experienced significant double-digit growth, while enterprise sales actually declined. In Q1, our data center revenue heavily relies on the cloud market compared to last year. Typically, the gross margin for cloud is lower than that of enterprise. We do anticipate a more balanced situation in Q2 and believe that the enterprise sector will improve moving forward.
Blayne Curtis, Analyst
But I guess the big decline was sequential. So I'm assuming cloud was down sequentially?
Jean Hu, CFO
Yes. Sequentially, it's revenue. If you look at the revenue, it was down very significantly, right? And the mix also is a little bit more indexed to cloud sequentially too.
Lisa Su, CEO
Yes. It's the same factors.
Jean Hu, CFO
Yes.
Lisa Su, CEO
So both the mix to cloud as well as the R&D expense has increased just given the large opportunities that we have across the data center and especially AI.
Operator, Operator
Your final question today is joined from Harsh Kumar from Piper Sandler.
Harsh Kumar, Analyst
Lisa, I had a question. I wanted to ask you about your views on the inferencing market for generative AI 3+. Specifically, I wanted to ask because I think there's some cross currents going on. We're hearing that CPUs are the best way to do inferencing, but then we're hearing the timeliness of CPUs is not there as a function to be able to enable these kinds of instances. So I was curious what you guys think. And then I had a follow-up.
Lisa Su, CEO
I believe that currently, inference is predominantly performed using CPUs. The highest demand at the moment is for generative AI and large language model inferencing, which requires GPUs due to their ability to support training of the most advanced models. These represent the two opposing trends. Inference is becoming an increasingly vital workload given the rapid adoption of AI in various areas. We'll observe CPUs being utilized for smaller tasks, while GPUs will handle the larger tasks.
Harsh Kumar, Analyst
Okay. So it still defers back to GPUs for those. And then a similar question on the MI300 series. I know that you talked a lot about success in the HPC side. But specifically, I was curious if you could talk about any wins or any kind of successes or success stories you might have on the generative AI side with MI300 or 250 series?
Lisa Su, CEO
Yes. So as we said earlier, we've done some really good work on MI250 with AI and large language models. The example that is public is what we've done with LUMI and the training of some of the Finnish models. We're doing quite a bit of work with large customers on MI300. And what we're seeing is very positive results. So we think MI300 is very competitive for generative AI. We'll be talking more about sort of that customer and revenue evolution as we go over the next couple of quarters.
Ruth Cotter, Senior Vice President, Human Resources and Communications
Great. Operator, that concludes today's call. Thank you to everyone for joining us.
Operator, Operator
Thank you. You may now disconnect and have a wonderful day.