Analyst Conference Summary

Advanced Micro Devices, Inc.

conference date: October 18, 2012 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2012 (third quarter, Q3)

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Forward-looking statements

Overview: The bad news was pre-announced. The plan put forward in the conference seems shaky: how can you cut cost when what really is needed to compete is even more R&D?

Basic data (GAAP):

Revenue was $1.27 billion, down 10% sequentially from $1.41 billion and down 25% from $1.69 billion in the year-earlier quarter.

Net income was negative $157 million, way down sequentially from $37 million and from $97 million year-earlier.

EPS (earnings per share) were negative $0.21, down sequentially from $0.05 and down from $0.13 million year-earlier.


Q4 revenue is expected to decrease from 13% to 5% from Q3.

Conference Highlights:

Three major factors hurt revenue: the overall global economy, the reluctance of OEMs to stock up for the Windows 8 release, and the shift from PCs to mobile devices. "We underestimated the speed of change in our industry." AMD was already transforming itself, but now must accelerate the process.

A restructuring plan was announced. In the first round abut 15% of the workforce will be terminated. An evaluation will be made in Q1 2013 regarding potential further cuts. $190 million in savings should be seen in 2013, and $20 million in the current quarter. Restructuring expenses of $80 million mainly in the current quarter.

An inventory write-down of $100 million, mainly Llano APUs. Too many were produced and OEMs prefer the new Trinity APUs, prices are low, and demand overall is weak.

The main objective now is to expand AMD's presence in the non-PC market, taking advantage of graphics technology. This could be tablets, but also embedded systems including gaming systems. "There is strong customer interest in our next generation offerings..." Already has working 28nm silicon Cavini (? sp) APU to replace Brazos in the first half of 2013. Intends to reduce PC dependence from 85% of revenue to 50% to 60% of revenue, reaching 20% non-PC in 2013. Will build semi-custom APUs for embedded markets. Already has confidential high-volume design wins in place.

Still has hope for SeaMicro. Not abandoning server or even PC markets, just expanding embedded market share.

After restructuring hopes to be able to be profitable at the $1.3 billion quarterly revenue level, by Q3 2013.

Non-GAAP numbers: operating loss negative $124 million; net loss $150 million; EPS negative $0.20.

Gross margin was 31%, with the main hit being from the write-down.

Cash ended at $1.48 billion, despite a sequential decline. They still have money to operate while they try to fix things. Accounts receivable declined to $683 million, but accounts payable was $860 million, including $448 million to GlobalFoundries. Cash used in operations was $240 million. Capital expense was $32 million.

Computing Solutions revenue of $927 million was down 11% sequentially and 28% y/y on both lower units and lower ASPs (prices). AMD launched the new desktop Trinity APUs after the quarter ended. The Z-60 APU low-power tablet processor was launched to support Windows 8 tablets.

Graphics segment revenue of $342 million was down 7% sequentially and 15% y/y. GPU revenue was down 14% sequentially, but ASPs were up.

Cost of sales was $877 million, leaving gross margin of $392 million. R&D expense was $328 million, marketing and general $188 million, amortization $4 million, and restructuring $3 million. Operating income was negative $131 million. Interest expense $42 million. Other income $16 million.

Headcount was 11,813.


How was $1.3 billion /quarter revenue break-even chosen? By looking at markets and assessing growth opportunities. Already, earlier in the year, we started programs to lower our expense structure by 25%.

But flat op ex for Q4? Yes, things like tape out expenses and a planned marketing campaign to coincide with holiday sales.

Third party [ARM] cores? For SeaMicro fabric. Not more broadly. But we will look at 3rd party IP over time. For SeaMicro probably silicon in 2014.

Accelerating while cutting, how? Simplifying product development cycles, using IP blocks to attack adjacent markets. Confidential design wins are already in place, so we have a basis to deliver on those plans.

Given $1.3 billion break even in Q3 with 20% embedded, does that imply lower PC revenues? We see PCs under pressure for the next several quarters. However, $1.3 billion is not a revenue projection, rather a break-even point. We only gave guidance for Q4 2012.

Cuts more R&D or SG&A? We are not giving that. We are looking into specifics, but the cuts are across all functions and global.

Problems with OEM reluctance to rely on new products, does restructuring scare them more? We had strong success with Trinity. Over 125 Windows 8 systems will have AMD based processors. With Opteron we continue to build relationships with customers.

We are interested in seeing consumer responses to Windows 8, based on our 125 design wins.

Is the 20% embedded goal from already-rumored gaming wins? We have design wins in place, but also see it as a rapidly growing segment where we have competitive advantages. We are going into more end-markets, but those vertical take more time.

Channel sales in Q3 stabilized at Q2 levels. Sell-through improved, and inventory was reduced. Will continue working on the issue.

What buckets are you reducing in the restructuring? The idea is to streamline IP development cycles, not to abandon product lines.

Graphics segment performed in line with expectations and is a stable, key differentiator in our portfolio. The macro effects hit graphics in the quarter, but our products were very competitive.

Are you looking to be acquired given the situation? No.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2012 William P. Meyers