Analyst Conference Summary

semiconductors
technology

conference date: July 25, 2017 @ 2:00 PM Pacific Time
for quarter ending: July 1, 2017 (second quarter, Q2)

I owned AMD at the time I wrote this summary, but sold mine on July 26, 2017. I will continue coverage, and may buy back in at any time.

Forward-looking statements

Overview: Good quarter, at top end of guidance, but still barely profitable even on a non-GAAP basis. Not the numbers enthusiasts were looking for.

Basic data (GAAP):

Revenue was $1.22 billion, up 24% sequentially from $984 million, and up 18% from $1.03 billion in the year-earlier quarter.

Net income was negative $16 million, up sequentially from negative $73 million, and down from $69 million year-earlier.

EPS (earnings per share) were negative $0.02, up sequentially from negative $0.08, and down from $0.08 year-earlier.

Guidance:

Q3 revenue is expected to be up 23% over Q2 revenue, plus or minus 3%. At 23% it would represent a 15% y/y increase. [Note: in 2016 Q3 revenue was up 27% sequentially, so this is predicting normal seasonality - WPM]

Full year 2017 now expected with revenue increased by mid to high teens percentage, compared to earlier low-double digit percentage growth.

Conference Highlights:

CEO Lisa Su said, "Our Ryzen desktop processors, Vega GPUs, and EPYC datacenter products have received tremendous industry recognition. We are very pleased with our improved financial performance, including double digit revenue growth and year-over-year gross margin expansion on the strength of our new products."

Non-GAAP results: net income $19 million, up sequentially from negative $38 million and up from negative $40 million year-earlier. EPS $0.02, up sequentially from negative $0.04 and up from negative $0.05 year-earlier. Gross margin 33% . Stock based compensation was $24 million. Adjusted EBITDA was $84 million.

GAAP gross margin was 33%.

Computing and Graphics segment revenue of $659 million was up 11% sequentially from $593 million and up 51% y/y, driven by higher Ryzen and GPU sales and better ASPs. Operating income was $7 million, the first quarter operating profit in three years. All major PC OEMs have announced Ryzen systems to be available for back-to-school or holidays. Radeon demand was driven by gaming and cryptocurrency.

Enterprise, Embedded and Semi-Custom segment revenue of $563 million was up 44% sequentially from $391 million and down 5% y/y. Operating income was $42 million. First Epyc processor revenue was recognized in the quarter. Gaming semi-custom units down y/y. Xbox One X will be available in September. Expects semi-custom revenue to be down for the full year. "On track to re-enter the datacenter market in a major way."

The Other segment showed an operating loss of $24 million.

Cash and equivalents (including marketable securities) ended at $844 million, down sequentially from $943 million, due mainly to changes in working capital to increase inventories. Long-term debt was reduced to $1.38 billion sequentially from $1.41 billion. Cash Flow from operations was negative $82 million. Free cash flow was negative $94 million.

GAAP cost of sales was $818 million, leaving gross profit of $404 million. Research and development expense was $279 million. Marketing, general and administrative expense $125 million. Licensing gain $25 million. Leaving an operating profit of $25 million. Interest expense $32 million. Other expense was $3 million. Taxes $3 million.

Q&A:

Epyc reception? Pleased with June launch, well received by partners and customers including cloud providers. We are adding customer support. Revenue should ramp in 2H. Qualification cycles in this business can take up to a year.

Cryptocurrency effect on GPUs? Q2 tends to be seasonally down, but we were up due to the 580 and 570 launches in April. We did see crypto demand, so the channel is lean and we are working on replenishing, prioritizing supplies to the gaming market. We did not have crypto in our forecast and don't see it as a long-term growth driver.

Enterprise roadmap, 7 nm node? We have executed well on our roadmap. We are investing in 7 nm, it will be key to us, we are working with multiple foundries. We expect a strong competitive roadmap for several generations.

Share count model? The dilutive impact comes from the warrants, the convertible notes, and the employee comp. 1.14 billion share count estimation for Q3.

Op ex? We are investing more in R&D and some employee incentives, which is in our guidance.

When could Ryzen contribution to ASPs be able to overcome the decline in APU chips? We are still early in the Ryzen rollout. OEMs just started selling them at the end of June. Our mobile products are still legacy. In 2H as Ryzen takes off with OEMs and then mobile version, ASPs should improve.

Gross margin guidance for the year, why unchanged? We are up 3 points y/y in q3. The margins are expanding with the premium products, as we expected.

Ryzen notebook launch? Should launch for holidays from OEMs.

Negative free cash flow, when could it turn positive? Because of seasonality, cash flow should improve in Q3 and be overall positive for the year.

Inventories? We are buying wafers to support the new product ramp. It will likely go down in Q3 and be down end-of-year vs. 2016. But will be sufficient to support the business. The Epyc ramp is relatively slow, with little impact on inventory.

Supply issues for GPUs? Completely a function of demand. We are catching up to demand, increasing production, but 2H is typically stronger for demand, so we would have been ramping anyway.

Epyc virtualized environment issue? We see no particular issues, we believe it will do well in those environments.

Module vs. monolithic chip? We decided on the module, it has advantages, customers appreciate the flexibility for single-socket servers.

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