Analyst Conference Summary

semiconductors
technology

conference date: October 20, 2016 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2016 (third quarter, Q3)

Forward-looking statements

Overview: Revenue was way over prior guidance, which should mean the future is bright, but still not good enough to satiate the AMD Bears. Keep in mind Q3 is the seasonally strongest quarter for AMD. Very large difference between GAAP and non-GAAP numbers due mainly to a $340 million charge explained below.

Basic data (GAAP):

Revenue was $1.307 billion, up 27% sequentially from $1.027 billion, and up 23% from $1.061 billion in the year-earlier quarter.

Net income was negative $406 million, down sequentially from $69 million, and improved from negative $197 million year-earlier.

EPS (earnings per share) were negative $0.50, down sequentially from $0.08, and up from negative $0.25 year-earlier.

Guidance:

For Q4 revenue will show a seasonal decline of 15% to 21%. At an 18% decline Q4 2016 revenue will be 12% above Q4 2015 revenue. This will be a 14 week quarter, v. the usual 13 week quarter. 32% non-GAAP gross margin. $350 million non-GAAP operating expense. $25 million IP licensing gain. Cash up. Inventory down to $660 million. 930 million shares.

Conference Highlights:

CEO Lisa Su said "We now expect to deliver higher 2016 annual revenue based on stronger demand for AMD semi-custom solutions and Polaris GPUs. This positions us well to accelerate our growth in 2017 as we introduce new high-performance computing and graphics products." There are significant opportunities over the next 12 to 18 months to expand revenue and profits.

Non-GAAP results: net income $27 million, up sequentially from negative $40 million and up from negative $136 million year-earlier. EPS of $0.03, up sequentially from negative $0.05 and up from negative $0.17 year-earlier. Gross margin 31% . Stock based compensation was $23 million. Excludes $340 million charge for amendment to Wafer Supply Agreement, $61 million loss on debt redemption, $33 million depreciation, and various smaller charges.

GAAP gross margin was 5%, down sequentially from 31% due to wafer supply agreement and other charges.

Computing and Graphics segment revenue of $472 million was up 9% sequentially from $435 million and up 11% y/y. Sales of GPUs and mobile processors increased, but desktop sales declined. RX GPUs now account for over 50% of revenue and overall GPU revenue was up double digits y/y. Professional graphics growth continued. Operating loss $66 million. ASPs down sequentially but flat y/y, but GPU ASPs increased.

Enterprise, Embedded and Semi-Custom segment revenue of $835 million was up 41% sequentially from $592 million and up 31% y/y. Operating income was $136 million and included at $24 million IP licensing gain.

The Other segment showed an operating loss of $363 million driven by the $340 million wafer supply charge.

During the quarter a 5 year amendment was made to the WSA (wafer supply agreement) with GlobalFoundries, resulting in the non-cash charges hurting GAAP numbers.

AMD raised $1.4 billion in new capital in 2.125% convertible notes and common stock. Interest expense should be reduced significantly ($55 million per year) beginning in Q4. Redeemed the 2020 notes and other debts.

Zen based products remain on schedule for release in first half of 2017; already has design wins. RX 460 and RX 470 GPUs were released in the quarter. Radeon Pro WX professional graphics cards were "unveiled". HP and Alienware design wins with Radeon GPU chips were notable. Sony announced in Q3, and introduced in Q4, new versions of is PS4 using AMD chips.

Now supplying GPU chips to multiple cloud service providers.

Cash and equivalents (including marketable securities) ended at $1.26 billion, up $301 million sequentially from $957 million. Debt was $1.63 billion, reduced sequentially from $2.24 billion. Cash Flow from operations was $29 million. Free cash flow was $20 million. "We plan to further reduce debt by deploying a significant portion of the remaining cash from our capital markets transactions." AMD also owes Globalfoundries $284 million and owes $144 million to ATMP JV.

GAAP cost of sales was $1,248 million, leaving gross profit of $59 million. Research and development expense was $259 million. Marketing, general and administrative expense $117 million. Amortization $0 million. Restructuring benefit $0 million. Licensing loss $24 million. Leaving an operating profit of negative $293 million. Interest expense $41 million. Other income was $63 million. Taxes $4 million. Loss from ATMP JV 5 million.

Q&A:

Zen design wins in desktop and server, timing of launches? We are on track to launch in the first half of the year for both desktop and server. Desktop first in Q1. We have widely sampled, customers have working hardware in their labs. Server focus includes OEM, enterprise and cloud. We are seeing a lot of interest from our partners.

Server GPU acceleration v. competition? We are pleased with consumer side with Polaris, and on professional side. Alibaba is using pre-Polaris Firepro parts. Feedback is positive, continuing to work on software, seems to be competitive and is margin accretive. Vega will create more interest in 2017.

Alibaba, is it more deep learning or cloud services, are they pairing with Zen or with Intel? It is the beginning of a long term collaboration. Key is GPU based cloud server apps like gaming. Cloud is an important market for us to focus on.

Tesla self-driving car, surprised AMD was even considered? Our GPUs are competitive in that space.

Q4 guidance, 14th week? It does not have much impact on revenue as it comes during the holiday, when customers have shut down. The extra op ex is in the guidance.

R&D investment rates? We have been very prudent in op ex, but increased R&D relative to other expenses. We see some large opportunities, like Zen for datacenters. We will invest more, but be very prudent. We want to get free cash flow for the full year.

GPU sales in Q4? Computing and graphics should grow in Q4, both graphics and computing. The decline will be in semi-custom.

We have some active discussions for new semi-custom, no announcement right now.

Believes should be good initial demand for Summit Ridge desktop.

GPU market share metrics? Demand was strong in Q3, was channel based, at first was some supply constraint but not as quarter progressed. Should see some Polaris ramps with OEMs in Q4.

Wafer Supply Agreement second sourcing? Decisions will be product by product. 7 nm is a key target node for the WSA. Customers were part of the reason for second sourcing. But we have needed to ramp a large number of products quickly, that is the main reason.

Summit Ridge volume launch for desktop is in Q1. We will have more color on the server launch next year.

Gross margin guidance v. drop in semi-custom revenue? The 1% increase is due to the change in mix.

Cash use? Long term we want to reduce debt and get to no net debt.

Performance desktop opportunity? Believes can improve on the current 10% PC market share. The performance of the chips is where we want it, so the ramp should be solid. Third party benchmarks should be available in Q1.

Console unit sales trend, channel stocking? Consoles should not be looked at quarterly, but annually. In Q2 and Q3 their is build, then consumer sales in Q4. Console business is up on an annual basis.

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