Analyst Conference Summary

semiconductors
technology

conference date: January 19, 2016 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2015 (fourth quarter, Q4)

Forward-looking statements

Overview: Not a good quarter, but at about midpoint of prior guidance, as slow PC sales continue to weigh on the industry, even in the seasonally strong holiday quarter. On the positive side, free cash flow was $21 million.

Basic data (GAAP):

Revenue was $958 million, down 10% sequentially from $1.06 billion, and down 23% from $1.24 billion in the year-earlier quarter.

Net income was negative $102 million, improved sequentially from negative $197 million, and improved from negative $364 million year-earlier.

EPS (earnings per share) were negative $0.13, up sequentially from negative $0.25, and up from negative $0.47 year-earlier.

Guidance:

Q1 2016 is expected to see revenue declines of 11% to 17% from Q4.

For the full year 2016 revenue is expected to grow over 2015. Capital expenditures $70 million. Free cash flow is expected to be positive for the year.

Conference Highlights:

“AMD closed 2015 with solid execution fueled by the second straight quarter of double-digit percentage revenue growth in our Computing and Graphics segment and record annual semi-custom unit shipments,” said Dr. Lisa Su, AMD president and CEO. “While 2015 was challenging from a financial perspective, key R&D investments and a sharpened focus on innovation position us well to deliver great products, improved financial results and share gains in 2016.”

The revenue declines in the quarter were driven by a sequential decline in semicustom SoCs and a y/y decline in client CPU sales.

The sequential improvement in GAAP and non-GAAP EPS was mainly due to there being no repeat of the Q3 inventory write-down.

Non-GAAP results: net income negative $79 million, up sequentially from negative $136 million and down from $18 million year-earlier. EPS of negative $0.10, up sequentially from negative $0.17 and down from positive $0.02 year-earlier. Gross margin 30% up from 23% sequentially. Stock based compensation was $16 million. Negative $5 million adjusted EBITDA.

GAAP gross margin was 30%, down sequentially from 23%.

Computing and Graphics segment revenue of $470 million was up 11% sequentially from $424 millionand down 29% y/y. Operating loss $99 million. Average unit selling prices increased because of richer mix of notebook processors. GPU prices increased both sequentially and y/y. Is winning large PC processor orders from both the private and government sectors.

Enterprise, Embedded and Semi-Custom segment revenue of $488 million was down 23% sequentially from $637 millionand down 15% y/y. Game console royalties were lower. Operating income was $59 million.

The Other segment showed an operating loss of $9 million.

Processor demand for game consoles looks strong for 2016.

Sees continuing challenges is China.

Believes its roadmap is the strongest it has had in a decade. This includes, CPUs, APUs, GPUs, and even server and semi-custom chips.

After the quarter ended AMD previewed its 14nm FinFET Polaris GPU architecture. Also introduced were teh Radeon R9 380X GPU and FirePro W4300 graphics card. New R-Series embedded processors were also introduced. The FX 6330 CPU was introduced specifically for the China market.

The first 64-bit ARM server chip, the Opteron A1100, is now available in volume.

AMD plans to release the first desktop Zen CPU late in 2016, probably after the introduction, or at least sampling, of the Zen server CPU. Believes can "rapidly re-establish our presence in the datacenter" in 2017.

AMD is also looking to raise money from its extensive patent portfolio.

Cash and equivalents (including marketable securities) ended at $785 million, up $30 million sequentially from $755 million. $69 million was used to pay interest. Debt was $2.26 billion, flat sequentially. Free Cash Flow was $21 million. Capital expense was $32 million. Inventory ended at $678 million, down about $85 million sequentially. No debt will mature in 2016.

No debt should come due before 2019, and interest is now at a reduced rate. Some time in the first half of 2016 AMD should receive $320 million in cash from the joint venture agreement with NFME.

GAAP cost of sales was $675 million, leaving gross profit of $283 million. Research and development expense was $229 million. Marketing, general and administrative expense $109 million. Amortization $0 million. Restructuring benefit $6 million. Leaving an operating profit of negative $49 million. Interest and other expense was $43 million. Tax $10 million.

Plans to return to non-GAAP profitability in the second half of 2016.

Q&A:

Guidance to growth in 2016, do you expect game consoles to drive that, other drivers? We see the second half of 2016 higher than the first half. We see game consoles up. We will have a new design generating semi-custom revenue in the second half. And we think we can gain share in the PC market.

Discrete CPU growth? We did see sequential growth in our discrete graphics business. We have a strong GPU product portfolio. The Polaris launch in mid 2016 should drive further growth.

Channel business in China? In 2H 2015 we made progress on inventory levels. q4 was good both in America and Europe, but a "degradation" in China. Overall we view the channel is a positive business in which we can grow share.

Mask costs in operating expenses? That would be more weighted to the end of the year. $320 to $340 million per quarter (non-GAAP) reflects these costs.

GPU share hopes? We made progress with the R9 series in Q4. We are investing in both hardware and software. We see graphics momentum.

We are not giving 2016 margin guidance because we are not sure about the direction of the PC market, particularly in China.

ARM chip contribution in 2016, or 2017? We did ship our first production unit and have some design wins already. It could contribute a modest amount in 2016, but the ARM server market is developing more slowly than expected.

Is slow ARM server development AMD specific or the whole industry? It is the industry. x86 has a lot of momentum. That is why we still emphasize our x86 server program. But the ARM segment is worth watching.

Strategy for earnings growth? We look at overall progress for 2016 and forward. It is about the roadmap allowing us to grow share in our target markets, which we saw some of in the second half of 2015. We need to continue to do well in client compute and graphics, as well as new semi-custom and server markets. We are entering 2016 with the strongest portfolio we have had in a long time.

PC unit declines in industry in 2016? Low to mid-single digit declines.

How can you gain PC share in 2016 if Zen does not enter until late in the year? We believe we gained a bit of share in Q4. We cleaned up channel inventory. We have a stronger product roadmap. Our commerical products are stronger. Our Q1 guidance includes the dip in semi-custom as the game consoles slump off the holiday sales. We believe we can gain PC chip share in Q1.

The free cash flow positive guidance for 2016 does not use the cash from the NFME deal.

Size of semi-custom win for second half? It is part of our projection of full year-revenue growth. The semi-custom business tends to peak in Q3 (because of game consoles), and we expect unit growth with a modest ASP decline. [So no new details on the new semi-custom customer or application or level of revenue - WPM]

Believes Zen class products should be able to address 80% of the server market, "but not the very high end."

HBM momentum, competitor ramp? We got the performance benefit we expected. It is at the high point of cost, so we only introduced it at the high end. HBM should be important over 3 to 5 years, as the cost comes down we will introduce it to lower price points.

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