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AMD Focuses on Richer Product Mix to Boost Gross Margin

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AMD’s profitability

Advanced Micro Devices’ (AMD) 2018 focus is to improve profitability by gaining its share in high-performance products, and it’s executing that plan well. It reported strong revenue growth in fiscal Q2 2018. That growth materialized into strong profits due to a growing mix of high-performance products that command a higher ASP (average selling price).

In fiscal Q2 2018, AMD’s client computing ASP fell due to a higher mix of its lower ASP desktop CPUs (central processing units). Its GPU (graphics processing unit) ASP rose due to a strong demand for high-margin server GPUs.

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Gross margin

AMD’s non-GAAP gross margin improved 300 basis points YoY (year-over-year) to 37% in fiscal Q2 2018, driven by a growing mix of Ryzen and Epyc products. Its Ryzen CPUs accounted for 60% of its client revenue. Its gross margin rose 100 basis points sequentially as sales of its higher-margin Epyc server CPU rose 50%.

While AMD is still at a 37% gross margin, its rivals Nvidia (NVDA) and Intel (INTC) are enjoying gross margins of more than 60% due to their dominant share in the high-performance processor market. AMD aims to achieve a gross margin of 40%–44% in the long term by increasing the share of its new high-performance products in its product mix.

Gross margin of new products

On its fiscal Q2 2018 earnings call, AMD’s CEO Lisa Su said that Ryzen, Epyc, and Radeon server GPUs have a gross margin of more than 50%, which is far above the company’s overall gross margin of 37%.

AMD is now starting to see the high margin of its new products being accredited to its overall gross margin. This accretion is likely to continue for the coming few quarters as AMD improves its product mix in the second half of 2018 with a larger share of its new high-margin products in its product mix.

The benefit of AMD’s high gross margin trickled down to its bottom line. The company reported net income of $156 million in fiscal Q2 2018. We’ll look at that in the next part.

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