Analyst Conference Summary

semiconductors
technology

conference date: January 20, 2015 @ 2:30 PM Pacific Time
for quarter ending: December 27, 2014 (fourth quarter, Q4)

Forward-looking statements

Overview: Not a good quarter, but not as bad as many expected. Vast differences between results depending if you look at GAAP, non-GAAP, or cash flow numbers.

Basic data (GAAP):

Revenue was $1.24 billion, down 13% sequentially from $1.43 billion, and down 22% from $1.59 billion in the year-earlier quarter.

Net income was negative $364 million, way down sequentially from $17 million, and down from $89 million year-earlier.

EPS (earnings per share) were negative $0.47, down sequentially from $0.02, and down from negative $0.11 year-earlier.

Guidance:

For Q1 2015 revenue will decline 12% to 18% from Q4.

For the full year 2015 AMD expect to be non-GAAP profitable.

Conference Highlights:

Progress in new markets and embedded designs was offset by the overall weakness in AMD's consumer PC business, with high inventories in distribution channels. AMD took steps to reduce the channel inventory, hurting Q4 results. However, AMD is seeing some success selling a better mix of products to OEMs.

AMD hopes to lead the industry transition to 64-bit ARM server chips. Design wins were won for the Opteron A-series, which should launch later in 2015.

For the full year revenue grew for the first time since 2011 and managed profitability on a non-GAAP basis.

AMD plans to continue to correct inventory in Q1 in order to position itself to launch new products later in the year. Growth could return in Q2, when Carrizo will launch. Also will continue to shift R&D investment to enterprise, embedded, and semi-custom solutions.

Non-GAAP results: net income $2 million, down sequentially from $20 million and down from $20 million year-earlier. EPS of $0.00, sequentially from $0.03 but down from $0.06 year-earlier. Adjusted EBITDA was $96 million, down sequentially from $133 million. Gross margin 34%.

Q4 was characterized by a number of accounting and one-time charges. The main items excluded from GAAP accounting were: $233 million for goodwill impairment, $71 million for restructuring and other special charges,$4 million for amortization of acquired intangibles, and a $58 million inventory adjustment charge mostly related to older APU chips.

GAAP gross margin was 29%, down both sequentially and y/y from 35%.

Computing and Graphics segment revenue of $662 million was down 15% sequentially from $781 million and down 25% from $888 million in the year-earlier quarter. Operating loss was $56 million. Mobile APU chip units (A8 and A10) and prices increased sequentially. Notebook GPUs also showed strong revenue growth.

Enterprise, Embedded and Semi-Custom segment revenue of $577 million fell 11% sequentially from $648 million, and was down 17% from $699 million in the year-earlier quarter. Operating income was $109 million, up sequentially from $108 million, and but down y/y from $129. The sequential decrease was largely due to the high intake of gaming chips by Sony and Microsoft in Q3. Sell through was strong. Embedded processor revenue also increased sequentially. Airbus, QNAP, and Analogic all launched new products using AMD chips in the quarter.

AMD stuck a $383 million operating loss in the "other" segment, which had no revenue.

Cash and equivalents (including marketable securities) ended at $1.04 billion, up about $100 million sequentially from $938 million. Inventory dropped to $685 million from $897 million. $2.21 billion debt, nearly flat sequentially. Cash flow from operations $116 million. Free Cash flow was $94 million.

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

GAAP cost of sales was $879 million, leaving gross profit of $360 million. Research and development expense was $238 million. Marketing, general and administrative expense $144 million. Amortization $4 million. Restructuring and special charges $71 million. Goodwill impairment $233 million. Leaving an operating profit of negative $330 million. Interest and other expense was $37 million. Tax benefit $3 million.

Headcount keeps going down, ending at 9,687 employees, down from 10,571 a year earlier.

Q&A:

Details of Q1 revenue decline guidance? Typical Q1 seasonality would be down about 7% in PCs and more than that in gaming consoles. The difference is largely in PC chips and discrete graphics chips, not in enterprise or embedded chips.

For 2015 we expect both semi-custom gaming console chips and embedded chips to continue to ramp y/y, but are not guiding to the size of the ramp.

Basis of guiding to non-GAAP profitability in 2015? Non-cash stock based compensation expense should be about $80 million for the year. Other than that the main basis is controlling expenses.

HSA support in Carrizo, are there any applications out there? It will also have an improved battery life. There are a number of HSA applications available in the video consumer space.

What leads you to see a healthy trajectory for PCs and graphics business in Q2? It is based on design wins and seeing an improvement in the desktop channel, following inventory corrections in Q4 and Q1.

Large semi-custom design wins update? "They included both x86 and ARM." We'll have NRE (?) revenue in 2015 and production revenue in 2016.

Server demand statement? AMD has lost a lot of server share. x86 will dominate the market for some time due to legacy applications, but ARM is an opportunity for dense servers.

Does guidance exclude the non-cash stock compensation expense? Yes.

Our OEM business is larger than our channel business, but the inventory excess is concentrated in the channel, particularly in China for desktop entry-level parts. It is not that the channel can't be a good business, we just ended up with too much inventory.

Were there penalties for underspending on your Globalfoundries wafer supply agreement (WSA) in 2014, or expected in 2015? No. The $212 million accounts payable to Globalfoundries was for purchases in 2014 and will be paid in Q1. We should still have about $1 billion in cash at the end of Q1.

We are trying to manage Op Ex in line with revenue to stay above break-even, while still investing in R&D for future profitable products.

ASPs (prices) for game console chips? ASPs are controlled by agreement, and they do decline each year.

Embedded vs. PC issue? "We want to make some bolder technology bets in that area to fuel that growth." We hope to stabilize the PC segment, which is still over 300 million units, with products that meet customer needs.

Is the Seattle ARM chip being delayed? It has sampled to customers already. Customers are building and testing software, so while we should see some production shipments in 2015, we expect a slow ramp.

Process technology? We are designing 14 nanometer chips. We'll talk about that and FinFET timelines on analyst day.

Enterprise side of PC market? The inventory problem is mainly on the consumer side. We have products that are increasingly capable on the enterprise side. Recent design wins "give us some optimism about commercial." Since we are underrepresented in commercial, it is an area of potential growth.

Need more detail? AMD posted the full transcript of the AMD Q4 2014 Earnings Conference Call

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