Analyst Conference Summary

semiconductors
technology

conference date: April 21, 2016 @ 2:00 PM Pacific Time
for quarter ending: March 31, 2016 (first quarter, Q1)

Forward-looking statements

Overview: Continuing revenue decline, and losses, but within guidance range. Strong guidance for Q2

Basic data (GAAP):

Revenue was $832 million, down 13% sequentially from $958 million, and down 19% from $1.03 billion in the year-earlier quarter.

Net income was negative $109 million, down sequentially from negative $102 million, but improved from negative $180 million year-earlier.

EPS (earnings per share) were negative $0.14, down sequentially from negative $0.13, and up from negative $0.23 year-earlier.

Guidance:

Revenue for Q2 is expected to be up sequentially by 12% to 18%. Gross margin near 31%. But that includes a licensing gain of $25 million in the revenue. Growth expected to be driven by strong demand for graphics and semi-custom products. Should get $320 million in cash from the ATMP agreement.

Conference Highlights:

CEO Lisa Su said "We continued to strengthen the performance of our Computing and Graphics business as our customers and partners show a growing preference for AMD. We are optimistic about our growth prospects in the second half of the year across our businesses based on new product introductions and design wins."

Decreasing revenue was mainly due to lower sales of semicustom chips and notebook processors.

AMD licensed high-performance processor and SoC technology to a newly-created Joint Venture with THATIC (Tianjin Haiguang Advanced Technology Investment Co., Ltd.) to develop SoCs tailored to the Chinese server market. The $293 million licensing agreement is a meaningful step in AMD's IP monetization strategy. Payments are contingent upon achieving milestones plus royalty payments from the future product sales.

Non-GAAP results: net income negative $96 million, down sequentially from negative $79 million and down from negative $73 million year-earlier. EPS of negative $0.12, down sequentially from negative $0.10 and down from negative $0.09 year-earlier. Gross margin 32%up from 30% sequentially. Stock based compensation was $16 million. Negative $22 million adjusted EBITDA.

GAAP gross margin was 32%, up sequentially from 30%.

Computing and Graphics segment revenue of $460 million was down 2% sequentially from $470 million and down 14% y/y. Desktop and notebook processor sales were down. Operating loss $70 million, which actually improved sequentially and y/y on cost controls. ASPs decreased. GPU ASPs decreased sequentially but improved y/y. Did well against the background of a declining PC market, particularly in China. Believes gained market share.

Enterprise, Embedded and Semi-Custom segment revenue of $372 million was down 24% sequentially from $488 million and down 25% y/y. $16 million operating income was down from $45 million year-earlier on lower sales and higher R&D expense. [Q1 is typically low for shipments to go into gaming consoles]

The Other segment showed an operating loss of $14 million.

Noted repeatedly that this was a 13 week quarter. Q4 will be a 14 week quarter.

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

The Assembly, Test, Mark and Pack agreement should close in Q2. It should generate $320 million in cash.

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. Meanwhile updated products are being introduced. Believes coming VR trend will drive sales.

Polaris 14 nm GPUs are on track to be available midyear.

Still looking to a new major semi-custom client starting in 2016.

Cash and equivalents (including marketable securities) ended at $716 million, down $69 million sequentially from $785 million. $52 million cash was from the new licensing agreement. Debt was $2.24 billion, down slightly sequentially from $2.26 billion. Cash Flow from operations was negative $42 million. Capital expense was $26 million. Inventory ended at $675 million. 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 563$ million, leaving gross profit of $269 million. Research and development expense was $242 million. Marketing, general and administrative expense $105 million. Amortization $0 million. Restructuring benefit $3 million. Leaving an operating profit of negative $68 million. Interest and other expense was $40 million. Tax $1 million.

Plans to return to non-GAAP profitability in the second half of 2016. Believes new products will grow revenue, including profitable growth in 2017 and beyond.

Q&A:

Color on license agreement, relation to cross-license agreement with Intel? We are excited about the partnership for server processors in China. All licenses are for AMD technologies. It gives us a key partner in the Chinese datacenter market.

Any regulatory risk in the deal? We don't think so. We are compliant with U.S. regulators.

Sequential growth guidance in graphics, when does Polaris growth start? More weighted to semi-custom than graphics. We grew units in desktop graphics in Q1. We believe Q2 will continue momentum, then Polaris will drive further gains in the second half.

For licensing, total was $57 million, $52 million after taxes, recognized over 2016.

Zen server opportunity? We are sampling in Q2. Broadly applicable over both enterprise and datacenters.

The Joint Venture roadmap will diverge from ours. We can't talk about foundry manufacturing yet. Having a local Chinese partner should be an advantage in that market, despite its dominance by the incumbent.

Semi-custom ramp, is it seasonal or sustainable? Q3 will be the peak, but we will start ramping in Q2. We believe it will grow y/y.

Why is the gross margin not growing above 32% going forward? The mix of business comes into play. The weighting to semi-custom brings margins down to 31%. Beyond that it depends on mix and our level of investment in our roadmaps.

Exactly what are you licensing into China? Microprocessor technologies and system-on-chip tech, mostly X86 but also ARM, plus fabric and other IP. The JV will be able to manufacture and sell X86 server chips into China. It is not an exclusive deal.

Is not given Polaris launch date, but left open possible revenue from in in Q2.

The full IP monetization strategy will unfold over a number of years. We could sell or license our patents.

We aspire to regain the discrete graphics share that we once had, it will take a number of quarters.

Why so much inventory? It was up slightly in Q1, but we expect higher sales in Q2, then on up in the second half.

We believe VR is a long-term driver, not a near term driver.

Approach to GPU acceleration market? The JV does not cover graphics. We believe GPU acceleration can be a growth driver. We have introduced new professional graphics products and an open GPU compute software system.

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