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AMD’s Flexible Manufacturing Strategy Reflects in Gross Margin

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AMD’s manufacturing strategy

Advanced Micro Devices (AMD) seems to be repeating its 2006 growth in the CPU (central processing unit) market, increasing its market share. However, it’s different this time with its multigenerational roadmap, advanced manufacturing process technology, and a focus on research and development. All that is the result of its new manufacturing and product strategy.

In the past, AMD lost market share when it lagged behind Intel (INTC) in process technology. In 2009, AMD spun off its foundry business to create GlobalFoundries for chip manufacturing. In 2016, it modified its wafer supply agreement with GlobalFoundries, which allowed it to switch foundry partners if the latter’s process technology failed to keep up with the pace of its new products.

That worked in AMD’s favor since GlobalFoundries fell behind in the 7 nm (nanometer) node in 2018. It allowed AMD to switch to Taiwan Semiconductor Manufacturing Company (or TSMC) (TSM) to build its 7 nm chips.

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Gross margin

AMD improved its non-GAAP gross margin by 100 basis points sequentially in the first two quarters of 2018. It expects that trend to continue in the third quarter with a 38% gross margin.

Its gross margin is being driven by an increasing mix of its new Radeon, EPYC, and Ryzen processors, which deliver a gross margin of ~50%. In the second quarter, Ryzen CPUs accounted for 60% of AMD’s client revenue. AMD is seeing a growing adoption of its CPUs in the PC and server markets. A CPU supply constraint at Intel could encourage more customers to switch to AMD.

AMD could also see strong gross margin growth in 2019 when it launches its 7 nm products in early 2019. The 7 nm node could put AMD a few months ahead of Intel in process technology. Intel could launch its competitive 10 nm products in mid-2019.

AMD is aiming to achieve 40%–44% gross margin by 2020 by shifting its product mix to new high-performance products and transitioning to smaller nodes.

In the next part, we’ll look at AMD’s operating leverage.

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