Analyst Conference Summary

semiconductors
technology

conference date: April 16, 2015 @ 2:30 PM Pacific Time
for quarter ending: March 31, 2015 (first quarter, Q1)

Forward-looking statements

Overview: Another lousy quarter, with lousy guidance for Q2. But above the extreme low end of prior guidance for Q1. SeaMicro announcement a stunner.

Basic data (GAAP):

Revenue was $1.03 billion, down 17% sequentially from $1.24 billion, and down 26% from $1.40 billion in the year-earlier quarter.

Net income was negative $180 million, up sequentially from negative $364 million, and down from negative $20 million year-earlier.

EPS (earnings per share) were negative $0.23, up sequentially from negative $0.47, and down from negative $0.03 year-earlier.

Guidance:

Q2 2015 revenue expected anywhere from flat to down 6% sequentially from Q1. 32% non-GAAP gross margin. $355 million non-GAAP operating expenses. Inventories to ramp by about $100 million.

For full year 2015 expects non-GAAP operating expense of $340 to $370 million per quarter. No revenue prediction yet.

Conference Highlights:

PC demand is "challenging" in the bad way, in addition to the usual seasonal slowness. Hopes for a better second half of 2015 "based on completing our work to rebalance channel inventories and shipping strong new products."

AMD is "exiting the dense server systems business," SeaMicro, and [presumably because unable to sell the division] is taking a $75 million non-cash special impairment charge. Keeping the Fabric IP, however.

The coming Carrizo A-Series APUs should improve performance and battery life. Shipped some Carrizo chips in Q1, but systems don't go on sale until Q2. New embedded APU products were introduced by Samsung, GE, and Fujitsu. AMD FreeSync technology is now being offered in displays from Acer, BenQ, and LG Electronics.

Hopes release of Windows 10 will help strengthen the PC market.

The next big thing would be AMD 64-bit ARM server chips, beginning with the Opteron A1100, which is now supported by several major varieties of Linux.

Non-GAAP results: net income negative $73 million, down sequentially from $18 million and down from $35 million year-earlier. EPS of negative $0.09, down sequentially from $0.02 and down from $0.05 year-earlier. Adjusted EBITDA was $13 million, down sequentially from $96 million. Gross margin 32%.

GAAP gross margin was 32%, up sequentially from 29% due to lower inventory adjustment charges.

Computing and Graphics segment revenue of $532 million was down 20% sequentially from $662 million and down 38% from $861 million in the year-earlier quarter. Desktop and notebook CPUs were the biggest drag. Operating loss was $75 million. Believes will be an normal channel inventory at end of Q2. Progress in mobile APUs was demonstrated by a y/y revenue increase. Commercial (vs. consumer) sales increased. FirePro professional graphics cards were also a bright spot.

Enterprise, Embedded and Semi-Custom segment revenue of $498 million fell 14% sequentially from $577 million, and was down 7% from $536 million in the year-earlier quarter. Operating income was $45 million. Console sales were weaker than a year-earlier. Sees this as a long-term growth segment, and continue to refocus R&D dollars on this.

Cash and equivalents (including marketable securities) ended at $906 million, down about $100 million sequentially from $1.04 billion. Inventory rose to $688 million from $685 million. $2.27 billion debt, nearly up sequentially from $2.21 billion. Cash flow from operations negative $173 million.

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

GAAP cost of sales was $704 million, leaving gross profit of $326 million. Research and development expense was $242 million. Marketing, general and administrative expense $131 million. Amortization $3 million. Restructuring $87 million. Leaving an operating profit of negative $137 million. Interest and other expense was $40 million. Tax $3 million.

Made another wager supply agreement with Globalfoundries to purchase about $1 billion in wafers in 2015.

Q&A:

Computing and Graphics decline acceleration, thoughts on M&A? Channel business was close to our expectations. We have product and IP that serve the market well, but we must move away from commodity-like business and towards product differentiation. We are cautious on managing the company through Q2. The C&G and the enterprise and embedded businesses share a lot of IP, so we would like to keep them both.

Semi-custom pipeline? We see a stronger second half. The wins we announced last year are on track, with revenue to start in 2016. We see a nice mix in the potential pipeline, customizing standard products to customized.

X86 and ARM server investments? We see server processors as a growth area going forward.

Selling assets to raise cash? We are managing the cash well. We see no need to do asset sales right now.

Windows 10 release could cause a bit of delay in the normal back-to-school seasonal build.

Gross margin going forward? Margin is flat Q1 to Q2. Product mix is the main driver, plus our discipline. Longer term goal is to grow margins with new products and better mix. We'll have more details on our analyst day on May 6.

Why aren't you taking operating expense even lower? S&M is down 9% q/q, with R&D up to target our long term opportunities, mainly in enterprise and embedded.

Console revenue trajectory? We think the second half will be stronger, based on feedback from our customers. Q3 is the build ahead of holidays. Pricing is expected down y/y.

To support semi-custom end sales in Q4 we need to get them product in Q3 and we need to do wafer starts in Q2, which accounts for the inventory increase in Q2.

Given opportunity to say, like Intel, that second half will be stronger than typical seasonally, stuck to the more conservative "seasonal" increase, even including Windows 10 release.

PC Gaming growing or declining? Gaming in general, and PC gaming in particular, are growth opportunities for AMD. Will be launching new graphics products in the second half, should help us get back to our normal market share.

Globalfoundry $1 billion includes a good mix for PC, graphics, and semicustom. Believes agreed to the right amount for 2015.

Amount of channel burn down, v. end demand? Mobile revenue went up y/y, desktop down, much of which was channel correction. We have decided not to service some business that is unprofitable, which results in overall market share decline. We are trying to get our margins up, not fight over unprofitable market share. We believe Carrizo will help us gain share in the segment of the notebook market we focus on.

SeaMicro was a strategic decision. Micro servers have not developed the way we thought a few years ago. We will address the server business through both standard and custom products. Traditional servers as well as dense and cloud are all important. We a focusing where we think we can win.

Currency impact in Europe? Demand in Eastern Europe was low. Western Europe demand was okay, but our partners are carrying lean inventories.

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