Analyst Conference Summary

conference date: October 17, 2013 @ 2:30 PM Pacific Time
for quarter ending: September 29, 2013 (third quarter, Q3)

Forward-looking statements

Overview: Revenue topped guidance range, but still not that far into the black.

Basic data (GAAP):

Revenue was $1.46 billion, up 26% sequentially from $1.16 billion and up 15% from $1.27 billion in the year-earlier quarter.

Net income was $48 million, up sequentially from negative $74 million and up from negative $157 million year-earlier.

EPS (earnings per share) were $0.06, up sequentially from negative $0.10 and also up from negative $0.21 year-earlier.

Guidance:

Q4 2013 revenue expected to increase 2 to 8% sequentially. 35% non-GAAP gross margin. Non-GAAP Operating Expense near $450 million.

Conference Highlights:

"AMD returned to profitability and generated free cash flow in Q3 as we continued to successfully execute the strategic transformation plan we outlined a year ago," according to CEO Rory Read. Growth was driven by the semi-custom (including game console) business.

Now in second phase of strategy, executing well and selling more of the new products. Over 30% of revenue in third quarter was from semicustom and embedded chips. Reduced expenses even as revenue increased.

Successfully shipped millions of units to Sony and Microsoft for game consoles. These are two of the most complex SoCs ever made for consumer products. New socket opportunities are being developed.

Non-GAAP results: net income $31 million, up sequentially from negative $65 million and up from negative $150 million year-earlier. EPS of $0.04, up sequentially from negative $0.09 and up from negative $0.20 year-earlier.

Gross margin was 36%, down 4% sequentially despite including a $19 million (about 1%) benefit from sale of reserved inventory. But was in line with expectations.

Computing Solutions segment revenue of $790 million decreased 6% sequentially and 15% y/y due to decreased notebook shipments and chipsets. Desktop unit shipments increased. Segment operating income was $22 million. ASPs were flat sequentially and down y/y. Sees low power as key to server industry going forward. PC market remains important despite soft demand. Expects PC industry 10% unit declines in 2013 and again in 2014. Kabini ramping and going into high volume OEM platforms. A10 APUs doing well in channel.

Graphics and Visual Solutions segment revenue of $671 million increased 110% sequentially and 95% y/y largely from semi-custom business. GPU revenue declined both sequentially and y/y. New GPU products were introduced late in the quarter. Operating income was $79 million, and ASPs were down sequentially and y/y. Professional graphics division had its 5th consecutive quarter of growth. Believes new Radeon R7 and R9 graphics cards based on GCN architecture, introduced in the quarter, will generate growth starting in Q4.

Verizon announced its new public cloud would be powered by AMD SeaMicro servers with Opteron processors.

AMD plans to offer both 64-bit ARM and x86 solutions in 2014.

Toshiba and HP announced new notebook models based on Temash AMD APUs.

Cash and equivalents (including marketable securities) ended at $1.2 billion, up sequentially from $1.1 billion. $56 million cash came from a real-estate deal. Long term debt is $2 billion, and there was $495 million payable to Globalfoundries. Deferred income was $139 million. Accounts receivable rose to $873 million, up $243 million y/y. Inventories rose to $922 million, up $360 million y/y. $52 million depreciation and amortization. Free cash flow was $6 million.

Cost of sales was $940 million, leaving gross profit of $521 million. Research and development expense was $288 million. Marketing, general and administrative expense $155 million. Amortization $5 million. Restructuring gain $22 million. Total operating expense $426 million. Leaving an operating profit of $95 million. Interest and other expense was $44 million. Taxes $3 million.

Adjusted EBITDA was $153 million.

Third Phase of Strategy is to generate 50% of future revenue from high growth markets over the next two years. Believes semi-custom margins will improve with time.

Q&A:

Graphics revenue Q4? We have a multi-quarter market share growth strategy that we are executing on. We expect to gain share in Q4.

Microprocessor Q4? We are managing into a declining PC market. We know Q1 and Q2 will be typically seasonally light. We will manage inventory accordingly.

Semi-custom margins? We reached mid-teens due to higher revenue and steep ramp. It could improve there if volumes increase. Other customers have been impressed by the complexity we achieved and our execution, possibly leading to future product wins.

Process technology? We are fully in 28 nm for our current products. Our designs are moving to 20 nm and then FinFet.

PC business with Intel aggressive at lower price points? We have an interesting current product set. From our OEM customers we see we can compete well. Just two years ago 90% of our business was in PCs, in Q3 it was less than 70%. The go-go era of PCs is over, we are attacking the new market opportunities.

$200 million payment in Q1? We are above our $1.1 billion goal in cash. We are confident we can maintain cash at this level, given the volume of new business we are doing.

Gaming ramp trajectory? We need to look at 2014 as a full year, in the black as a whole. Consoles traditionally last about 5 years and peak in year 3. There will be some seasonality in Q1 and Q2. We will talk about Q1 on the Q4 results call.

Q4 inventory levels should remain flat from Q3.

We are discussing 2014 pricing with Globalfoundries.

Could console geographic ramp offset normal Q1 seasonality? It is the launch year, so seasonality may not be as bad as in a non-launch year.

Computing results, AMD down more % than competitor? Consumer market is feeling more pressure than enterprise market. AMD has been too dependent on notebooks, we need to make more progress on desktops.

Q4 guidance assumes PC segment will continue to be under pressure.

Gobalfoundry wafer supply agreement? We are on track to use the amount we contracted for 2013.

Will game SoCs stay at 28 nm? We are likely to move technology nodes during the cycle, at least to 20 nm, which should reduce costs per unit.

SeaMicro? We are very pleased with the SeaMicro pipeline. We continue to see a strong pipeline for datacenters for cloud infrastructures. Early Verizon employments were Intel, now transitioning to Opteron.

Server new product timing? 64-bit ARM should sample Q1 2014. SeaMicro servers will use the ARM chip for a full solution, some time in 2014.

TSMC wafers proceed our chip shipments, which explains our Q4 estimates for console chips vs. theirs.

We will pay the $200 million to Globalfoundries in Q1 using cash coming in from sales in Q4, allowing us to maintain our minimal $1.2 billion cash target.

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