Analyst Conference Summary

semiconductors
technology

conference date: July 21, 2016 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2016 (second quarter, Q2)

Forward-looking statements

Overview: Greatly exceeded revenue guidance and reached non-GAAP operating profitability. Non-GAAP net income was lower than GAAP net income.

Basic data (GAAP):

Revenue was $1,027 million, up 23% sequentially from $832 million, and up 9% from $942 million in the year-earlier quarter.

Net income was $69 million, up sequentially from negative $109 million, and improved from negative $181 million year-earlier.

EPS (earnings per share) were $0.08, up sequentially from negative $0.14, and up from negative $0.23 year-earlier.

Guidance:

For Q3 revenue is expected to increase 15% to 21% over Q2. Graphics and semi-custom will drive the increase. Inventory should drop to about $700 million.

Conference Highlights:

CEO Lisa Su said ""Based on the strength of our semi-custom products and demand for our latest Radeon RX GPUs and 7th Generation A-Series APUs, we are well positioned to drive growth and market share gains in the second half of the year." Graphic sales were better than usual seasonality.

Recognizes there is more work to do, but believes will have full-year revenue growth in 2016 and non-GAAP operating profitability in the second half of the year.

John Caldwell was appointed Chairman of the Board of Directors.

Marketing spend was increased in the quarter.

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.

The ATMP JV transaction with NFME closed in Q2, generating a substantial amount of cash and a $26 million licensing gain.

Non-GAAP results: net income negative $40 million, up sequentially from negative $96 million and up from negative $131 million year-earlier. EPS of negative $0.05, down sequentially from negative $0.12 and down from negative $0.17 year-earlier. Gross margin % up from 32% sequentially. Stock based compensation was $18 million. $21 million capital expense. $36 million adjusted EBITDA. The main reason non-GAAP net income was lower than GAAP net income was a $150 million gain on sale of 85% of ATMP JV, less a $27 million tax provision for said sale.

GAAP gross margin was 31%, down sequentially from 32% due to higher mix of semi-custom chips.

Computing and Graphics segment revenue of $435 million was down 5% sequentially from $460 million but up 15% y/y. Desktop processor sales declined sequentially, but notebook processors and GPUs ramped from year-earlier. Graphics performance was particularly strong, the highest desktop GPU shipments since Q4 2014. Polaris 14 nm GPUs went on sale before the quarter ended in the RX 480 graphics cards. Believes gained share with FirePro professional graphics products. 7th generation A-series mobile APUs were launched in the quarter and shipments are ramping well.

Enterprise, Embedded and Semi-Custom segment revenue of $592 million was up 59% sequentially from $372 million and up 5% y/y. Expect shipments to peak in Q3. Believes revenue will grow y/y. New XBox models go on sale soon, while the more advanced Project Scorpio will be available for the holidays in 2017 and is one of the 2 new semi-custom wins AMD had talked about.

Zen server CPU should ship in first half of 2017.

The Other segment showed an operating loss of $11 million.

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.

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

AMD joined an alliance with ARM, Huawei, Xilinx and other companies for datacenter interconnection technology.

Cash and equivalents (including marketable securities) ended at $957 million, up $241 million sequentially from $716 million. Debt was $2.24 billion, flat sequentially from $2.24 billion. Cash Flow from operations was negative $85 million. Capital expense was $ million. Inventory ended at $743 million, up sequentially from $675 million. No debt will mature in 2016.

GAAP cost of sales was $708 million, leaving gross profit of $319 million. Research and development expense was $243 million. Marketing, general and administrative expense $117 million. Amortization $0 million. Restructuring benefit $7 million. Licensing gain $26 million. Leaving an operating profit of negative $8 million. Interest expense $41 million. Other income was $150 million. Tax $29 million.

Q&A:

Ramp in dollars of new semi-custom ramp? We see the business strong for the year, ramping the current products into the holiday season, and then a decline in Q4. The new business should have the same seasonality.

X480 graphics supply? We had good supply on launch day. The demand has continued strong, so some dealers have run out of supply. The 14 nm yields are good so we hope to catch up with demand and also launch the other products in the line.

China licensing pipeline? The JV is now in operation and on track. It takes a while to bring the products to fruition. We will keep you informed.

Semi-custom design win accounting? Total of 3 new design wins, about $1.5 billion in new revenue over 3 to 4 years. One ramps this quarter, Scorpio is in 2017. The third one we will give info on when there is more visibility. We have design wins outside of game consoles. It is a good business model for our capabilities.

Zen server market specifics? It is a new CPU design with ambitious goals. We demoed server systems. Customer interest has increased. We closed a number of design wins and have more in the pipeline. It is a general purpose server CPU for a variety of workloads including cloud and enterprise. We want a high quality launch for our customers.

Timing of desktop Zen launch? Desktop Zen should ship in volume in Q1 2017, for the enthusiast segment. A notebook version with integrated graphics will be later in 2017.

Q4 weaker from numbers? Q1 base for revenue was low. Both computing and graphics should do well, semi-custom drops off in Q4, shipping mostly in Q3.

Demand into the channel for notebook? Our OEM customers have adopted our notebook technology, and we have made gains in commercial. We believe the sell-though share is increasing.

Wafer purchases at Global Foundries? In line with demand and mix of business. We purchased about $260 million in wafers. The 2016 WSA is not finalized. We don't share which products we produce at which foundries.

View on Softbank acquisition of ARM? We have a lot of respect for ARM, they are more a partner than a competitor. Our high-performance IP is unique. We are looking for opportunities to monetize our IP beyond our own products.

PC market overall? For 2016 we expect a high-single digit decline, despite some more positive signals. OEM looks okay, but channel is weaker than we would like. We have platforms that should do well for back-to-school and holidays, but roughly seasonal growth.

Gross margins going forward? It is largely the mix of business and our investments in our roadmap. In 2017 we have the Zen introduction and pro-graphics. We think 31% is about right for Q3. Op ex will rise to $350 million in Q3 to support new products and marketing.

China Server JV IP property risk? We are licensing AMD technology. We expect to recognize $22 million revenue in Q3 based on milestones reached.

We believe our PC business has stabilized and we expect y/y growth helped along by new product launches.

EESC profitability is not just a function of gaming consoles. Embedded is important, and investing in the new server chips also affects it.

Vega GPU will be a high performance GPU using high bandwidth memory. Details later.

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