Key points
- AMD beat estimates as data center sales rose 97%
- AMD's fourth-quarter gross margin forecast slipped to 55%
- AMD plans for PC shipments to fall by double digits in 2027
AMD (AMD) reported third-quarter revenue of $13.4 billion, up 45% from a year earlier, as data center sales nearly doubled. Revenue beat both AMD's own forecast and the $13.09 billion analysts expected, according to LSEG data cited by CNBC.
Adjusted earnings came to $2.09 a share, above the $1.95 estimate. AMD had forecast revenue of about $13 billion, plus or minus $300 million, according to its earnings release.
For the fourth quarter, AMD expects revenue of about $17 billion, plus or minus 3%. Even the low end of that range, about $16.5 billion by our calculations, is above the $16.2 billion analysts expected. AMD shares were at $517.00 in after-hours trading as of 5:32 p.m. ET, up about 6.7% from their last regular-session trade of $484.50.
On AMD's earnings call, CEO Lisa Su gave a bigger number. AMD now expects revenue to grow more than 80% in 2027, "which is more than twice the long-term financial model we outlined at our financial analyst day last November," she said. She expects server revenue to about double next year and said the data center AI business "will significantly more than double." Data center sales should make up more than 80% of total revenue.
The one soft spot in the forecast is gross margin. AMD expects an adjusted gross margin of about 55% in the fourth quarter, down from 56% in the third and slightly below the 55.3% average estimate from StreetAccount.
Data center sales rose 97%
Data center revenue was a record $8.55 billion, up from $4.34 billion a year earlier. AMD credited demand for EPYC server processors and the launch of its Instinct MI450 AI chips. The segment made up about 64% of AMD's revenue.
In August, CFO Jean Hu said data center sales would accelerate in the second half, and I wrote in my preview that it wasn't clear what she meant by that. It depends how you measure it. Growth from a year earlier slowed to 97% from 107% in the second quarter. But AMD added $1.83 billion of data center revenue from the second quarter, nearly double the $943 million it added the quarter before, by our calculations.
Data center profit grew too. Operating income in the segment rose to $2.88 billion, about 34% of its sales, up from about 31% in the second quarter, by our calculations.
The rest of AMD's business was mixed. PC chip revenue rose 7% to $2.95 billion, gaming fell 40% to $773 million, and embedded revenue rose 29% to $1.11 billion.
The PC business has a harder road ahead. "PC sell-through slowed late in the quarter as higher memory and component costs weighed on demand," Su said. Sell-through means sales to end customers, not just to retailers and PC makers. She added, "In 2027, we are planning for PC market unit shipments to decline by a double-digit percentage," though she expects AMD to outperform the market.
For the fourth quarter, Hu said data center revenue should grow about 50% from the third quarter, while client and gaming revenue falls more than 20%.
AMD's margin forecast slipped
This is the number I said I cared about most in my preview. AMD expects much higher sales in the fourth quarter, but it guided its companywide adjusted gross margin down one percentage point, to 55%. The earnings release didn't explain why.
Hu offered a possible clue on the August call, when she said "our gross margin is primarily driven by the business mix." She said data center AI would add revenue and gross profit, "even though the gross margin is slightly below corporate average."
Hu explained the forecast in Q&A on the November 3 call. She said data center AI revenue will pass server revenue in the fourth quarter, and that its margin is "a little bit dilutive to corporate average." She added that "the gross margin dollars are increasing very significantly." Gross margin may vary from quarter to quarter in 2027 as the mix changes, she said, and she expects operating expenses to grow less than half as fast as revenue.
A lower margin on much bigger sales can still mean more gross profit. At the $17 billion revenue midpoint and a 55% margin, adjusted gross profit would be about $9.35 billion, up from $7.48 billion in the third quarter, by our calculations.
The gap with Nvidia (NVDA) hasn't closed. Nvidia forecast a 74% gross margin for its current quarter and reports results on November 17.
Free cash flow fell to $554 million
AMD generated $554 million in free cash flow, down 64% from $1.53 billion a year earlier and down from $1.56 billion in the second quarter. That was about 4% of revenue in a record sales quarter.
The cash flow statement shows where much of the money went. Inventories used about $3 billion in cash during the quarter, and customer receivables used about $1.9 billion. Inventory stood at $11.46 billion at the end of September, up from $7.92 billion at the end of December. Hu said on the call that inventory rose "to fulfill our strong data center demand," and that AMD expects to keep investing in inventory and capacity for 2027. Capital spending was $648 million.
Total debt rose to $7.08 billion from $3.23 billion at the end of June, and Hu said the total includes $4.75 billion of notes AMD sold in August. Cash and short-term investments stood at $15.8 billion.
A $1.1 billion warrant charge hit GAAP earnings
AMD's GAAP earnings were $1.46 a share, well below the $2.09 adjusted figure. The biggest single item is a $1.097 billion charge for the change in the value of warrants issued to customers, which took 66 cents off GAAP earnings per share. The line wasn't there in the second quarter.
AMD's release says only that the warrants went to "certain customers." We know of two big ones. OpenAI and Meta each hold warrants on up to 160 million AMD shares at one cent a share. They vest as the customers deploy Instinct chips and as AMD's stock hits price targets that top out at $600.
Hu said on the call that AMD began recognizing the warrants' impact in the third quarter as it shipped MI450 chips. She said the charge mainly reflected the rise in AMD's share price and changes in the estimated chance that the warrant conditions will be met. It didn't cost AMD any cash, and she expects the quarterly charge to increase as AMD and its customers make progress under the agreements. The cash flow statement lists a slightly larger non-cash warrant figure of $1.18 billion, and the release doesn't explain the difference.
The bigger issue is dilution. If all 320 million shares vest, that's about 20% of AMD's 1.64 billion basic shares, by our calculations. Hu said AMD doesn't expect the warrants to affect its share count in the fourth quarter. AMD's 10-Q should show how many have vested so far.
Nvidia's numbers on November 17 will show how the two compare.
