Advanced Micro Devices Inc to acquire ZT Systems M&A Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Matt Ramsay - TD Cowen - Analyst : Lisa, Jean, congrats on the transaction here. Lisa, I just wanted to -- this seems to me like, I guess the market reaction is maybe that you're going to go and do full rack scale architecture and design and build servers and sell them yourselves. But in some of your comments there, you indicated this is about doing customized server level architecture and then allowing your OEM and ODM partners to still work with you in a traditional way, but to bring them to market faster with customized solutions. So maybe you could spend a little bit of time and draw that distinction out a little bit further for us of exactly where the lines are drawn between what you now intend to potentially do internally versus the relationships you've had with your OEM and ODM partners traditionally? And then I have a follow-up. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 19, 2024 / 12:30PM, AMD.OQ - Advanced Micro Devices Inc to acquire ZT Systems M&A Call

Question: Matt Ramsay - TD Cowen - Analyst : Got it. I guess as my follow-up, Jean, a little bit on the transaction you guys mentioned in the script, the large systems manufacturing business that you intend to divest post transaction. So if I heard you right, you're keeping $150 million, give or take, run rate in OpEx, and this will be somewhere breakeven close to it at close. So $150 million, give or take, gross profit. How much revenue run rate of where the business is now, do you intend to keep? And what is the -- I mean, we see one of your major competitors that sell full servers doing 80% gross margin in data center. There are some ODMs that do 15%. I'm just trying to get a feel for where this is going to land in the model. Thank you.

Question: Aaron Rakers - Wells Fargo - Analyst : Yeah. Thanks for taking the question. Also, congrats on the transaction. So I guess building on the last question. I'm just curious, Lisa, you mentioned, again, emphasis around optimizing an annual cadence of your GP road map with the full stack system strategy. The experience you guys have had far with the MI 300 relative to what this brings to the table, is there any context you could provide us with, with regard to how you define success? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 19, 2024 / 12:30PM, AMD.OQ - Advanced Micro Devices Inc to acquire ZT Systems M&A Call What do you -- what does that timetable look like as far as time to deployment? How has that changed necessarily with this acquisition? I'm just curious if you could unpack that a little bit more. And I do have a follow-up.

Question: Aaron Rakers - Wells Fargo - Analyst : Yeah. That's very helpful. And then maybe just building on that a little bit. Can you talk about how networking plays a role in this and whether or not this acquisition provides you with a platform to delve deeper into networking as we look at the optimization that your competitor is doing with their internal networking capabilities? Just is there anything to read into as an accelerator to that part of the strategy?

Question: Harsh Kumar - Piper Sandler - Analyst : Congratulations on the deal. I had a question about the rationale as well. This sounds like more about finding the rack systems designed to the AMD standards. Historically, AMD has been all about open market, open standards. So was the market-based open standards approach for rack level design taking too long? Was it spread out? Was it too dysfunctional that you decided to bring this design approach in-house and show the people how it needs to be done or at least the base standard level? And then for my second one, I'll just ask it upfront, have you found a partner for sale of the manufacturing piece?

Question: Vivek Arya - Bank of America Securities - Analyst : Thanks for taking my question. Lisa, I'm still unclear what the '25 and '26 sales and gross margin contribution for ZT. So I was hoping more specificity. I mean, you're mentioning it is accretive, but at what level of sales and gross margins and how is that worth $4.9 billion or whatever is the net of proceeds? I'm just really hoping for some more specificity because without that, it's very hard to know what the return on investment this is.

Question: Vivek Arya - Bank of America Securities - Analyst : Got it. For my follow-up, I'm curious how much of the ZT business that you intend to keep relies on their partnership or interaction with NVIDIA or BoCom or Intel or some of your competitors? And how much of that business do you expect to retain once that deal is closed?

Question: Ross Seymore - Deutsche Bank - Analyst : Congratulations on the deal. Lisa, I just wanted to dive a little bit into the accelerated side of things as far as your ability to accelerate the growth. You've moved to that one-year cadence. How does this -- the ZT acquisition accelerate that? Or how much faster can you penetrate the $400 billion? Just you guys sound like this is kind of a revenue synergy -- more so than anything on the margin side. So I wanted to just get a little bit more color on the revenue synergies and put some numbers around it.

Question: Ross Seymore - Deutsche Bank - Analyst : Thanks, Lisa. I guess as my one follow-up for Jean, just to go back to the VEX question and maybe try to put a little finer point on it. I know you can't really say the price for which you're going to sell the manufacturing business. But if that's the majority of revenues, I guess all you know right now is you said $4.9 billion is the price. We don't know what the net is going to be. And you said over $10 billion in revenue, but we don't know how much of that you're actually going to keep. So it sounds like we know -- or you believe you're going to have greater than $150 million in gross profit that the exit of next year on an annualized rate. Can you give us any idea as to what the revenue run rate would be for the remaining asset, the gross profit -- or gross margin that you would target over time? Any more color on those points?

Question: Stacy Rasgon - Bernstein Research - Analyst : I mean I don't want to harp on this, I guess maybe I do want to keep harping on it, sorry. Is it just fair to classify the current revenue just because of the effectively ramps to zero, And then on the accretion, it does -- so basically all of the accretion effectively comes from just selling more GPUs, that's where this comes in. So like what do you expect the equation to be exiting '25? Is it just touching breakeven? Do you expect significant accretion? I'm just trying to get some feeling for which I think everybody else on the call is for how much of your GP sales do you actually feel like this accelerates above and beyond like what you currently think you would do without this, I guess, into 2026 and beyond.

Question: Stacy Rasgon - Bernstein Research - Analyst : Got it. And I guess for my follow-up, you've been buying bits and pieces over the last year or so to build out the ecosystem with Pensando and others. Do you need anything else to complete the portfolio relative to what your broader competitor has already built? Like what else should we be looking for? Or is this -- have you now got the complete portfolio you need -- that you think you need to scale this?

Question: Stacy Rasgon - Bernstein Research - Analyst : Like what kind of capabilities?

Question: Toshiya Hari - Goldman Sachs - Analyst : Hi. Good morning. Thanks for taking my questions I had a high-level question regarding competition. Lisa, how does this acquisition position you relative to the nearest competitor? Do you see yourselves as being sort of in line with ZT at this point from a capability standpoint? Do you believe you're fundamentally better positioned? And if you believe you're fundamentally better positioned, if you can walk us through how that is, that will be helpful. And then I have a follow-up.

Question: Toshiya Hari - Goldman Sachs - Analyst : That's helpful. Thank you. And then as my follow-up, the $400 million in contingent payments, you speak to certain post-closing milestones. What are those post-closing milestones? Can you expand on that? Thank you.

Question: Harlan Sur - JPMorgan - Analyst : Yeah. Good morning, and thanks for taking my questions, and congratulations on the acquisition. So maybe you can help us understand the customer benefit, right, with ZT Systems relative to what it is today. So when you -- sampling MI 300x last year, right, how long did it take for your hyperscale cloud and enterprise OEM customers working with AMD to do their server and rack-level designs, right? Was that three months? Was that six months? Was that nine months? And so do you believe with ZT Systems enablement team, you will, by and large, eliminate much of the server rack level design, bring up reliability cycle time and drive a faster time to market for the customers? Is that the idea here?

Question: Harlan Sur - JPMorgan - Analyst : Great. And then as my follow-up, and I know this question I think was asked earlier, but as your enablement team continues to develop these sort of rack scale architectures, where you have total control of the systems design, you can start to exploit things like specialized connectivity networking, right, like so for example, using your Infinity Fabric for GPU to GPU connectivity, not just within server, but across the entire RASK, maybe using a specialized switch copper, optical connectivity, right? Does ZT Systems have this expertise from the networking side? Or is this one of the potential synergies you hope to unlock with your team and ZT Systems' enablement team?

Question: Ben Reitzes - Melius Research - Analyst : My question is with regard to a couple of things. I'll just ask -- there's a lot of background noise here in the airport. So I'll ask both at once. Do you have any guidance to what you think you might get for the manufacturing business? You obviously think there's a breakeven effect of the deal. I'm wondering if that is net of your sale of the net price? And if there's any direction on what the offset will be? And then also, Lisa, if you don't mind, can you talk about how this can work with Silo AI, your other acquisition? Sorry, if I missed that earlier, but can these two organizations work together? And how will that be set up? Thanks.