Analyst Conference Summary

semiconductors
technology

conference date: July 17, 2014 @ 2:30 PM Pacific Time
for quarter ending: June 28, 2014 (second quarter, Q2)

Forward-looking statements

Overview: Hit middle of prior guidance. Computing Solutions segment decreased 20% y/y, which will disappoint many investors. GAAP earnings negative, non-GAAP positive. Guidance for Q3 is disappointing.

Basic data (GAAP):

Revenue was $1.44 billion, up 3% sequentially from $1.40 billion, and up 24% from $1.16 billion in the year-earlier quarter.

Net income was negative $36 million, down sequentially from negative $20 million, but up from negative $74 million year-earlier.

EPS (earnings per share) were negative $0.05, down sequentially from negative $0.03, but up from negative $0.10 year-earlier.

Guidance:

For Q3 2014 revenue is expected to be anywhere from down 1% to up 5%. 35% gross margin. Non-GAAP operating expense $435 million. $42 million interest expense.

Conference Highlights:

AMD made significant progress in transforming the company. Highlighted y/y revenue increase and non-GAAP EPS. AMD continues to invest in innovation to fuel future growth. Still on track for 40% of revenue from semicustom chips. Demand for game consoles was strong, and is expected to be strong in Q3.

Non-GAAP results: net income $17 million, up 42% sequentially from $12 million and up from negative $65 million year-earlier. EPS of $0.02, flat sequentially from $0.02 and up from negative $0.09 year-earlier. Adjusted EBITDA was $137 million, down slightly sequentially from $139 million. The main exclusions from GAAP accounting were: $49 million loss on debt redemption and $4 million amortization of acquired intangibles.

GAAP gross margin was 35%, flat sequentially from 35%, despite higher console SoC sales, helped by increased notebook units.

Computing Solutions segment revenue of $669 million was up 1% sequentially from $663 million but down 20% from $841 million in the year-earlier quarter. Operating income $9 million, improved both sequentially and y/y. Prices (ASP) were up sequentially and y/y. Dense server revenues in H1 doubled revenue from H1 2013. Desktop component channel was weak, offset by stronger OEM business. Notebook APU sales improved.

Believes overall PC market will continue to be down 5% to 7% y/y this year, as weak consumer demand offsets improved enterprise demand.

Embedded products are doing well.

Graphics and Visual Solutions segment revenue of $772 million increased 5% sequentially from $734 million, and was up 141% from $320 million in the year-earlier quarter. Operating income was $82 million, down sequentially from $91 million, but up y/y from zero. Increase was from semi-custom SoC chips, while GPU units decreased both sequentially and y/y, despite an increase in sales of professional graphics chips and desktop OEM GPUs. Notebook GPU demand was good, by high end GPU demand dropped as crytocurrency demand dropped. "Regaining graphics market share remains a priority."

Believes still on track to get 1 to 2 semicustom large design wins. Believes will be able to demonstrate a transformed AMD in 2015.

In the quarter AMD gave its plans for 64-bit ARM chips and demonstrated the Seattle processor. HSA (Heterogeneous System Architecture) planned advances in energy efficiency were also announced. New APUs and GPUs were announced and introduced.

Cash and equivalents (including marketable securities) ended at $948 million, down sequentially from $982 million. Inventory increased $91 million. $295 million liability payable to GlobalFoundries. $2.2 billion debt. Cash flow from operating activities was negative $28 million, up sequentially from negative $204 million. During the quarter new notes were issued at 7% due in 2024 and the 8.1% notes due in 2017 were repurchased.

Plans to manage inventory levels down in H2.

No debt now should come due before 2019, and interest is now at a reduced rate.

Cost of sales was $948 million, leaving gross profit of $498 million. Research and development expense was $277 million. Marketing, general and administrative expense $154 million. Amortization $4 million. Leaving an operating profit of $63 million. Interest and other expense was $95 million. Taxes $4 million.

AMD had 10,300 employees.

Q&A:

Seasonality of game console business? We are aiming at a more balanced execution throughout the year. Game consoles will ramp in Q3, but more balanced with first half of year. They are still bringing on new game titles and regions, but we manufacture and ship ahead of the OEMs.

Pipeline for major semicustom chips? We are making progress. We are on track to announce 1 or 2 confidential design wins in 2014. We are seeing opportunities in mobility and networking. Emphasized on track for wins.

Computing solutions launches planned? We had good uptakes on our first half launches, which helped stabilize the PC business. But AMD is "overindexed" to the weaker, consumer side of the business. So AMD is going after more commercial business. On server side we should see Seattle in production towards the end of the year.

Cash at end of Q3 should be near the $1 billion optimal zone.

Q3 peak quarter, is that just for gaming consoles? It was based on game consoles. We are trying to create consistent revenue across all 4 quarters so we can consistently deliver profitability. In Q4 typically PC segment is higher than Q3.

20 nm, FinFet? Process technology is important, but AMD has also invested in architecture and software. We have to be competitive in process, we will be shipping 20 nm products in 2015. There is a lot of leg in 28 nm, with good price points, but we will move to 20 nm when it is to our advantage, and FinFET too.

Q3 discrete graphics, computer segment? We see stabilization in compute, we like our new introductions in notebook space. Q2 softness was in enthusiast discrete GPUs, with second-hand high-end cards flooding the market. Channel in PC was softer than we expected. Our entry into the commercial PC market is still early, though we have seen some good signs.

Gross margin flat sequentially despite higher % of console SoCs? Gaming console chips will peak in Q3, but not be a major boost, so we can maintain margins with new products in professional graphics, etc.

Beema and Kaveri APUs are expected to do well in the second half.

We can't talk about semicustom SoC possible wins in advance because the customers are using these to gain competitive advantage. The margins will depend on the markets they are in.

Pricing of gaming console chips over time? These are long-term agreements. We have a cost take-down curve. We are motivated to help customers get costs out of the systems. It is very predictable, and we believe we can improve our margins.

GlobalFoundries update? They are shipping GPUs and game console products. We have taken about 1/2 the wafers we agreed to for the year with them, so we should hit our target for the year.

Q3 guidance appears to be for flat revenue y/y, how would you get growth beyond that? We see opportunity in game console revenue to the typical two and one-half year peak. We will continue to build out the embedded and pro graphics businesses. We have gotten the business to profitability, which we will augment with new businesses. Then in 2016 we will introduce next-generation technology.

But PC business is not stable, it has been down? The important thing is we had a sequential increase in Q2. The important thing is to get into the commercial market, in addition to maintaining our place in the consumer market.

Our semicustom margins and ASPs have been what we expected.

The consumer side is really down, we see continued pressure in the consumer notebook and desktop market for the rest of the year.

Intel efforts in low end of market, with Baytrail? We could chase the low end ASPs, but it would not be terribly profitable. Our goal is to mix up, not to go for share for share's sake. There is no doubt there is pressure there. We are being very deliberate about where we think we are most differentiated.

Discrete graphics was down in Q2, we hope to gain share in Q3, but are not giving specific guidance for that.

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