Analyst Conference Summary

conference date: July 18, 2013 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2013 (second quarter, Q2)

Forward-looking statements

Overview: Revenue was above previous guidance, but still in the red.

Basic data (GAAP):

Revenue was $1.16 billion, up 7% sequentially from $1.09 billion, but down 18% from $1.41 billion in the year-earlier quarter.

Net income was negative $74 million, improving sequentially from negative $146 million, but down from positive $37 million year-earlier.

EPS (earnings per share) were negative $0.10, improved sequentially from negative $0.19, but down from positive $0.05 year-earlier.

Guidance:

For Q3 2013 revenue is expected to increase between 19% and 25% sequentially. No earnings guidance, but gross margin near 36% and operating expense near $450 million. Inventory to be ramped to near $800 million. Mid-point of revenue guidance should be break-even for net income. Cash should be relatively flat.

For the second half AMD expects positive free cash flow and operating profitability.

Conference Highlights:

Non-GAAP results were not that different from GAAP: operating loss of $20 million, net income of negative $65 million, and EPS of negative $0.09. Non-GAAP free cash flow was negative $63 million.

The happy news: "We expect significant revenue growth and a return to profitability in the third quarter." CEO Rory Read notes Q2 performance "was driven by opportunities in our new high-growth and traditional PC businesses." Demand was strong for new products and AMD gained market share.

One goal for the next 2 to 3 years is to transition 50% of revenue to high growth adjacent markets including low power clients, embedded, semi-custom, professional graphics and dense servers. On target to hit 20% in this category in Q4 2013.

AMD changed reportable segments to Computing Solutions (CPUs, APUs, chipsets, embedded, and servers) and Graphics and Visual solutions (GPUs, semi-custom products, game console chips). [Which makes little sense to me. WPM]

Computing Solutions segment revenue was up 12% sequentially to $841 million, but down 20% y/y. Notebook, desktop and server unit shipments were all up. Average Selling Price declined y/y, as did units shipped. Operating income was $2. In particular mobile (notebook) processor unit shipments were up double digits sequentially with new APU introductions targeted at high-volume designs, by region, price point, and form factor, with key OEM customers. Kabini APU is seeing strong adoption, with many systems to launch in second half of year. Server unit increase was based on large datacenter wins.

Graphics and Visual Solutions segment revenue was down 5% sequentially to $320 million, and down 13% y/y. GPU revenue was flat sequentially and down y/y. GPU average selling price decreased sequentially but increased y/y. However, professional (FirePro) graphics had a record quarter. Operating income was zero. Goal is to make AMD the de facto standard for game developers.

Numerous new products and design wins were announced during the quarter. Design wins included APUs for Xbox One and Sony PS4 game consoles, and the new Mac Pro with FirePro graphics. New APUs include Elite Performance, Mainstream and Elite Mobility A-series, which are being widely adopted. The 5 GHz FX-9590 desktop processor was released, as was the Opteron X-series for power-efficient servers. For embedded there was the G-Series, which outperforms Intel's Atom chips.

Notably, for 2014 AMD plans to introduce a server processor based on 64-bit ARM with fabric capability built-in.

Gross margin was good at 40%, but decreased sequentially from a strong Q1 in which there were sales from previously written-off inventory.

Cash and equivalents (including marketable securities) ended at $1.12 billion, down $80 million sequentially from $1.2 billion. Inventories increased $98 million to $711 million. Cash flow from operations was negative $35 million. Adjusted EBITDA was positive $54 million. Capital expenditure was $28 million, depreciation and amortization $54 million. A $40 million payment was made to Globalfoundries related to 2012 wafer purchase reduction.

Cost of sales was $702 million, leaving gross profit of $459 million. Research and development expense was $308 million. Marketing, general and administrative expense $171 million. Amortization $4 million. Restructuring $5 million. Leaving an operating profit of negative $29 million. Interest and other expense was $42 million. Taxes $3 million.

Headcount ended at 9,928, down from 11,737 year-earlier, but up slightly sequentially.

Balance sheet includes a $200 million item to be paid to Globalfoundries in Q1 2014 related to the 2012 agreement for reduction in wafer purchases.

Believes $300 to $600 notebook and desktop will become an increasing proportion of the PC market, which is AMD's pricing sweet spot.

Semi-custom business involves up-front engineering expense, followed by better margins when the chips are in production. The Q2 and Q3 inventory builds are largely related to semi-custom chip production.

Q&A:

Growth prospects, traditional vs. game consoles? We see continuing opportunities in the PC setting, but only slightly stronger in H2 than in H1. Believes can continue to build share given the move to lower price points. The acceleration of revenue in the second half will come from the newer, non-PC products. Sees overall PC market growing in mid-single digits in second half, and would like to gain share within that.

Margins for game console chips? Game console chips have a long life time, but for the first few quarters margins should be in low double-digits.

Yield risk in game console pricing? The SoCs are showing good yields so far.

Pricing of game console chips over time? They are long-term deals with pre-negotiated prices. You can expect what has been the historic case for game consoles: the generation will last 5 to 7 years, and over time prices would move lower, but so would production costs. The power of the business is the revenue ramp combined with an overall AMD operating expense decrease.

Details on upside from Q2 guidance? New product segments, particularly Temash and Kabini, desktop channel, and graphics.

Is ASP decline also driven by new products? This was a matter of mix. We saw more entry point unit shipments.

Seasonality in game consoles? It is like any consumer business, with first half lower than second half, including first half of 2014.

Any way to distinguish Q3 from Q4 for gaming console revenue ramps? We expect to ship units in both quarters.

Profitability in core PC business? Rory is pleased with progress, which is largely from cost control plus increased revenue. The PC market is choppy and will continue to be, but it is a 300 million plus unit market, which we want to take share of. We also have a powerful model in taking our PC IP and applying it to new opportunities with semi-custom chips.

Temash and Kabini vs. Intel's Baytrail device for later in year? We are pleased with performance, including CPU and graphics side, as well as OEM adoption.

Beyond Q3 we will be focused on mix between revenue and operating expense, with op ex increasing much more slowly than revenue. This should give us earnings power. Reusable IP, like the Jaguar core showing up in many different SoCs, greatly leverages our IP without increasing op ex.

AMD is not giving long term guidance for gross margins at this point. We will be focused on operating margins over gross margins.

Console chips at TSMC or Globalfoundries? We have a commitment to Globalfoundries, and we are on track them. We do not share where we make products between the foundries.

You can make the assumption that computing margins are going to be stable in Q3.

Other end markets besides console business that are coming up? We see a strong pipeline for semi-custom SoCs for consumer products and servers. For embedded products X86 for industrial, medical, and casinos should be ramping in 2014.

Server side, if X86 can reach power parity for ARM, is there a need for ARM? We view them as two important ecosystems. ARM will be important for new operating systems [Linux] and high-volume datacenter applications.

Can you address all these markets despite the reduction in head count? Yes, we have been working on reuse of IP, bringing it to solutions for specific markets.

Most of the inventory is in the traditional business, it is the growth in the inventory that is for the gaming console ramp. It can be expected to ship after the ramp. We have some written-down inventory left, about $65 million, but we see no buyer on the horizon right now.

Cash flow positive timing? We are on target to achieve that in the second half. The Q1 2014 $200 million payment should still allow us to maintain cash around $1.1 billion.

Size of SeaMicro business? Our server unit growth was driven by SeaMicro dense servers.

Do you expect Intel's increasing focus on Baytrail to impact your margins? We see this market segment as expanding, and we will continue to introduce new products to stay competitive.

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