Analyst Conference Summary

semiconductors
technology

conference date: October 24, 2017 @ 2:00 PM Pacific Time
for quarter ending: October 1, 2017 (third quarter, Q3)

I sold my remaining AMD stock on July 26, 2017. I will continue coverage, and may buy back in at any time.

Forward-looking statements

Overview: Strong y/y revenue and earnings growth, both also higher than top end of guidance.

Basic data (GAAP):

Revenue was $1.64 billion, up 34% sequentially from $1.22 billion, and up 25% from $1.31 billion in the year-earlier quarter.

Net income was $71 million, up sequentially from negative $16 million, and up from negative $406 million year-earlier.

EPS (earnings per share) were $0.07, up sequentially from negative $0.02, and up from negative $0.50 year-earlier.

Guidance:

Q4 2017 revenue is expected to be down 12% to 18% sequentially. At the 15% midpoint that would still result in y/y growth of 26%.

For full year 2017 revenue should be up by at least 20%. Prior guidance was for an increase in the mid-to-high teens.

Conference Highlights:

CEO Lisa Su said, "Our third quarter new product introductions and financial execution mark another important milestone as we establish AMD as a premier growth company in the technology industry." "Demonstrated the significant growth potential of AMD."

Non-GAAP results: net income $110 million, up 479% sequentially from $19 million and up 307% from $27 million year-earlier. EPS $0.10, up sequentially from $0.02 and up from $0.03 year-earlier. Gross margin 35%. Stock based compensation was $29 million. Adjusted EBITDA was $191 million.

GAAP gross margin was 35%. The y/y GAAP net income and EPS improvement was largely because of the large WSA expense in 2016.

Closed an IP agreement in the quarter that added revenue to both segments.

Computing and Graphics segment revenue of $819 million was up 24% sequentially from $659 million and up 74% y/y, driven by higher Ryzen and GPU sales and better ASPs and margins. Operating income was $70 million. GPU growth was "significant." Client computing was up double digits y/y. Ryzen OEM adoption is rising. Ryzen mobile APUs to launch soon.

Enterprise, Embedded and Semi-Custom segment revenue of $824 million was up 46% sequentially from $563 million and near flat y/y. Operating income was $84 million, down y/y on higher costs. Sequential increase was seasonal semi-custom SoC sales for game consoles. Saw some EPYC server processor revenue, with more datacenter customers and OEMs signing on.

The Other segment showed an operating loss of $28 million.

Cash and equivalents (including marketable securities) ended at $879 million, up sequentially from $844 million, due mainly to changes in working capital to increase inventories. Long-term debt was reduced to $1.36 billion sequentially from $1.38 billion. Cash Flow from operations was $66 million. Free cash flow was $32 million.

GAAP cost of sales was $1.07 billion, leaving gross profit of $573 million. Research and development expense was $315 million. Marketing, general and administrative expense $132 million. Licensing gain $0 million. Leaving an operating profit of $126 million. Interest expense $31 million. Other expense was $3 million. Taxes $19 million.

"Q3 2017 GAAP diluted earnings per share calculated based on 1,042 million shares and non-GAAP diluted earnings per share is calculated based on 1,143 million shares, which includes 100.6 million shares related to the Company’s 2026 convertible notes and also includes a $5 million cash interest expense add-back to net income under the "if converted" method."

Q&A:

IP licensing one-of or ongoing? Patent licensing. Going forward we have a pipeline of IP deals in progress. But focus is on product-related revenue.

Q4 Ryzen mobile and Epyc contributions? We are pleased with the revenue ramps. But we are seasonal with a Q3 peak. We will ship Ryzen mobile in Q4. We will build on Epyc. But we see slower cryptocurrency demand.

2018 semicustom wins outside gaming? We are expanding the customer set. We are working with potential customers outside the game consoles. Some new products could ramp in the second half of 2018.

Q4 margins? Multiple puts and takes. Q3 had a rich mix and some IP revenue. New products will continue to ramp and help Q4 margins, but no IP revenue. So about flat net.

Early testing of Epyc chips is going to both cloud and non-cloud applications. Dell and HP platforms will help with ramp in Q4.

Radeon Instinct MI25 Vega launch? We started shipping volume in Q3 and are seeing high interest, so expact a further ramp in Q4. We continue to invest in the software for it.

CPU vs. GPU businesses? Both grew, particularly Ryzen desktop and desktop GPU. Record GPU quarter on Vega launch and strong gaming and blockchain demand. We are seeing significant share gain in Ryzen 5 and 7. Blockchain is hard to separate because it goes through the same channels as gaming. We now have healthier levels in the channel.

We are still at the early stage of the Ryzen ramp, particularly OEM ramps.

Op ex, investment philosophy in 2018? We want to target towards R&D, but there are also go to market costs. 31% of revenue was the guidance for 2017, but may end up more at 30%. Our long term target is 26% to 30%.

Roadmap? 7 nm will be a major node for us, across all our businesses. We see an opportunity for 12 nm for certain products in 2018 to augment performance. We should be able to do 7 nm at multiple foundries.

We believe semi-custom will be down y/y, but that is expected as we are in the fifth year of this gaming cycle.

PC market? Some softness at low end of Chinese market, but basically about as expected.

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