Analyst Conference Summary

semiconductors
technology

conference date: January 31, 2017 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2016 (fourth quarter, Q4)

Forward-looking statements

Overview: Despite the seasonal sequential decline, revenue was at the high end of prior guidance and up 16% from Q4 2015. But AMD is still struggling to attain profitability. GPU sales were strong, APU sales not so much.

Basic data (GAAP):

Revenue was $1.11 billion, down 15% sequentially from $1.307 billion, but up 15% from $0.96 billion in the year-earlier quarter.

Net income was negative $51 million, up sequentially from negative $406 million, and improved from negative $102 million year-earlier.

EPS (earnings per share) were negative $0.06, up sequentially from negative $0.50, and up from negative $0.13 year-earlier.

Guidance:

"For Q1 2017, AMD expects revenue to decrease 11 percent sequentially, plus or minus 3 percent. The midpoint of guidance would result in Q1 2017 revenue increasing approximately 18 percent year-over-year." Inventory expected flat sequentially.

Conference Highlights:

CEO Lisa Su said, "We met our strategic objectives in 2016, successfully executing our product roadmaps, regaining share in key markets, strengthening our financial foundation, and delivering annual revenue growth. As we enter 2017, we are well positioned and on-track to deliver our strongest set of high-performance computing and graphics products in more than a decade."

Non-GAAP results: net income negative $8 million, down sequentially from $27 million but up from negative $79 million year-earlier. EPS of negative $0.01 , down sequentially from $0.03 and up from negative $0.10 year-earlier. Gross margin 32% . Stock based compensation was $29 million. Also excludes a $7 million loss on debt redemption and $5 million in non-ash interest expense.

GAAP gross margin was 32%, up sequentially from 5%.

The y/y comparisons may be skewed, since the quarter was 14 weeks, versus 13 weeks in Q4 2015.

Computing and Graphics segment revenue of $600 million was up 27% sequentially from $472 million and up 28% y/y, driven by higher GPU sales and ASPs. Operating loss was $21 million. ASP (average selling price) was down y/y and sequentially from CPU/APU. Revenue grew, on an annual basis, for the first time since 2011. Mobile unit growth accelerated. Channel GPU sales were the highest in 2 years based on the new Polaris chips. Professional graphics revenue set a record. GPUs for servers sales increased significantly.

Enterprise, Embedded and Semi-Custom segment revenue of $506 million was down 39% sequentially from $835 million and up 4% y/y. Operating income was $47 million and included an IP licensing gain. Lower sequential revenue was seasonal, from semi-custom SoCs (for gaming consoles). Unit shipments for gaming consoles set a record. Server GPU Naples development is on track with good customer response, with expanding design wins.

The Other segment showed an operating loss of $29 million.

During the quarter AMD gave information on its forthcoming Ryzen CPU (shipping first week of March) and Naples server processor (shipping in Q2) and Radeon Vega GPU (shipping in Q2). 7th generation AMD Pro processors (APUs) were introduced. FreeSync 2 gaming video technology was introduced.

Ryzen based products remain on schedule for release in early March 2017; already has design wins. Sony announced in Q3, and introduced in Q4, new versions of is PS4 using AMD chips.

Cash and equivalents (including marketable securities) ended at $1.26 billion, flat sequentially from $1.26 billion. Debt was reduced to $1.44 billion sequentially from $1.63 billion. Cash Flow from operations was $188 million. Free cash flow was $167 million.

GAAP cost of sales was $755 million, leaving gross profit of $351 million. Research and development expense was $264 million. Marketing, general and administrative expense $121 million. Licensing gain $31 million. Amortization $0 million. Restructuring benefit $0 million. Licensing loss $31 million. Leaving an operating profit of negative $3 million. Interest expense $34 million. Other expense was $7 million. Tax benefit $5 million. Loss from ATMP JV $2 million.

Full year 2016 revenue was $4.27 billion, up 7% from 2015. GAAP net loss was $497 million, and EPS was negative $0.60. Non-GAAP net loss was $117 million, loss per share was $0.14. Yet claims "achieved non-GAAP operating profitability for the full year." Free cash flow for the year was positive.

AMD is confident it can grown revenue and margins in 2017.

Q&A:

Desktop processors ramping down before Ryzen ramp? Ryzen is a high-end desktop product. The comment was around the channel inventory in desktop. Ryzen should compete with i7 and i5, but eventually will compete at the lower end [where APUs currently are].

We should see Ryzen and Vega doing well in the high end, where we have little presence currently.

Server launch timing and market segments? Ryzen and Naples share the Zen core. Naples customers have been testing the chip. Key workloads would be those needing more threads and memory, or heavy I/O.

Operating loss in Computing and Graphics segment despite GPU ramp? The loss has gone down significantly. Ryzen will have better gross margins, so we expect to get back to profitability. The key is participating at the high end of the GPU and CPU markets.

IP licensing gain? It depends on milestone deliveries. Expect about $25 million in Q1 2017.

Gaming cycle perspective? Gaming console sales have been strong. 2017 will be in the 5th year, cycle would normally start down, but newer PS and Microsoft models might shift that.

Channel inventory GPU? They look normal, we expect a seasonal slowdown in Q1, but believe we drained some inventory in Q4.

Intel and Nvidia, what is your software gap? We have been on a deliberate path to a competitive roadmap. There will be full stacks at launch. We work with the open source community, but will continue to invest in software, which is critical to the graphics market.

Gross margin drivers? Just the product mix. In Q4 this is ahead of launching new products.

In Q1 the semicustom business should be down more than the overall business. We will have one month of Ryzen revenue in the quarter. During the year the Microsoft Scorpio console will ramp.

Operating expense in 2017? We are disciplined with op ex. We believe the new product launches will pay off despite go to market expenses. We will continue to invest in our product road map. In 2016 R&D expense was up and SG&A was down, and we plan to emphasize R&D again going forward.

Cloud v. datacenter, storage, HPC? Naples is a general purpose product that can play in all those segments. Cloud tends to ramp faster, but we see adoption in storage and networking spaces.

We are positioning the new products to be competitive on performance while improving our margins over our current products. There should be some leverage as we gain market share.

Competing with Intel at 10 nm? For top OEM customers, they are investing in our roadmap, not just Zen. We ramped 14 nm and 16 nm very well, and are preparing for 7 nm with our foundries.

We have had some engagements with cloud customers for GPU acceleration, but have a very small base, which we see expanding going forward.

Zen APU plan? We will have the Ravenridge APU in the second half of 2017. We have not announced details of the graphics side yet. It is a very strong notebook part but will also be available for desktop.

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