Earnings Call: Q3 2014

Oct 16, 2014

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the AMD Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I'd now like to turn the conference to our host. Ma'am, you may begin. Thank you, and welcome to AMD's 3rd quarter Earnings Conference Call. By now, you should have had the opportunity to review a copy of our earnings release and the CFO commentary and slides. If This is a live call and will be replayed via webcast on amd.com. I'd like to take this opportunity before the call begins to highlight several dates for you. Matt Skinner, our Corporate Vice President and General Manager of the Graphics Business Unit will present at the UBS Technology Conference on November 18th in California. Divindhu Kumar will present at the Credit Suisse Technology Conference on December 3 in Arizona and at the Raymond James IT Supply Chain Conference on December 8 in New York. Mark Papermaster, our Senior Vice President and Chief Technology Officer will present at the Barclays Global Technology Media and Telecommunications Conference on December 8 in San Francisco. Our Q4 quiet time will begin at the close of business on Friday, December 12. And lastly, we expect to announce our Q4 earnings results on January 20, 2015. Please note that we are now reporting 2 new financial segments Beginning the Q3, Computing and Graphics segment primarily includes desktop and notebook processors and chipsets, Additionally, note that non GAAP financial measures referenced during this call are reconciled to most directly comparable GAAP financial measures Before we begin, let me remind everyone that today's discussion contains forward looking statements based on the environment as we currently see it. Those statements are based on current beliefs, assumptions and expectations, speak only as of the current date and as such involve risks and uncertainties that could cause actual results to differ materially from our current expectations. Please refer to the cautionary statements in today's earnings press release and CFO Commentary for more information. You'll also find detailed discussions about our risk factors in our filings with the SEC and in particular AMD's quarterly report on Form 10 Q for the quarter ended June 28, 2014. Now with that, I'd like to hand the call over to Lisa. Lisa? Thank you, Ruth, and good afternoon to all those listening in today. I'm pleased to be here on my first earnings call as CEO, in addition to covering our quarterly results, I also want to use this opportunity to provide some details on my initial priorities and the steps we are taking to Our 3rd quarter results highlight the progress we have made in diversifying our business as we delivered our 5th straight quarter of non GAAP profitability. While our Enterprise, Embedded and Semi Custom segment had a strong quarter, We did face some challenges in our Computing and Graphics business due to ongoing weakness in the consumer PC market. We know what we need to do So let me give you some more color on each of the segments. Our Enterprise Embedded and Semi Customer segment delivered sequential and year over year revenue and operating profit improvement. We had strong embedded processor revenue growth and secured multiple new design wins across our priority markets. For instance, Arista, a leader in software driven cloud networking began ramping production of new switches powered by our embedded G Series SoC. Our customers also began ramping a number of new retail and educational digital signage wins in the 3rd quarter. We also started sampling our 1st embedded ARM SoC in the quarter and at ARM's TechCon Conference, we demoed the industry's first ever 64 bit ARM Powered Network Function Virtualization Solution. The demo won best in show software product It is a great example of how our leadership arm and x86 offerings are generating increased interest from telecom and networking customers. Our work to lead the industry's transition to 64 bit ARM servers also gained momentum in the quarter. After seeding Optron A Series development kits with key ecosystem partners earlier this year, we expanded availability to software developers and system integrators. We continue building out the 64 bit ARM Server Ecosystem in advance of system launches expected next year. This quarter, we also had public demonstrations of community versions of Red Hat's Fedora and SUSE's open SUSE 64 bit ARM Linux operating systems running Oracle JDK and enterprise class Java platform on our upcoming on A Series SoC. Based on the widespread availability and silicon status of our Seattle Development Boards, we are also seeing a number of our partners where we shipped a record number of units for our game console customers. Q3 will be our peak unit shipment quarter for the year as Microsoft and Sony prepare for the holiday season. And relative to our new semi custom design win pipeline, I am very pleased to announce that we have secured 2 new wins accomplishing our goal to close 1 to 2 new semi custom wins this year. These new semi custom SoCs are expected to deliver combined total lifetime revenue of approximately $1,000,000,000 over approximately 3 years. Design work for these opportunities has started and we anticipate 1st silicon revenue in 2016. Although I can't go into details on the customers or the specific products, it is important to note that we are diversifying our semi custom business beyond gaming. These wins also mark another significant milestone for us as one of the wins is our first 64 bit ARM based semi custom Building on our growing ARM64 momentum in the embedded and server markets. Our semi custom design win pipeline remains strong And we continue to have good opportunities to deliver future growth for this important part of our business. Now turning to our Computing and Graphics segment. The Computing and Graphics business remains very important to us and is an evolving area of the company where we have started a substantial amount of work to transform and strengthen this business. Earlier this year, we laid out several important objectives to improve the financial performance of this segment. These include expanding in the commercial client market, improving our mix in consumer notebooks, gaining share in professional graphics and increasing component in AIV channel sales. We've met our goal to double our commercial client design wins from last year and are pleased with the initial progress we are making to build a richer mix in our PC business. New commercial client offerings from Dell, HP and Lenovo have started ramping, resulting in approximately a 50% increase in our commercial APU shipments from the 2nd quarter. We also improved our notebook APU mix in the quarter as our Caveri processors ramped in mobile design wins And our higher end mobile processor unit shipments increased nearly 50% from the 2nd quarter. Mobile discrete GPU unit shipments also increased from the 2nd quarter as new design wins entered production. And earlier today, Apple announced a number of new Imacs powered by our Radeon GPUs. Included in the wins is the new 27 inches Imac with 5 ks Retina Resolution, which highlights the ongoing move to higher resolution displays. This trend plays well to our And in the professional graphics market, we believe this remains an area where we see the opportunity for ongoing growth. In the Q3, channel sales increased sequentially and we secured several new design wins with Dell and HP that will reach market early next year. Now turning to the desktop processor and graphics performance in the quarter. Although we increased overall desktop processor unit shipments from the previous quarter, our performance in the component and graphics channel was weak. We saw sellout momentum slow, particularly in China and believe there was some downstream inventory build in the quarter causing our distributors to be more cautious managing their inventories. We are committed to these markets and have started taking actions in conjunction with our channel partners to improve sell through in the coming quarters. Now, let me turn to some of my initial priorities and our strategic actions. As I said on our call last week, the strategy we outlined 2 years ago remains the right one for AMD. But to strengthen AMD and better position us for success, we must take some targeted restructuring actions to align our investments Resources with our highest priority opportunities. These actions are not about how we manage the business in the short term, But about how we reengineered the company for the long term and positioned both of our Computing and Graphics and Enterprise Embedded and Semi Custom segments for Profitability and Growth. As part of the plan, you will see us continue to invest in the talent and skills required to develop our world class While we will protect our engineering investments, we will also take the opportunity to streamline parts of the organization to better align them with our highest priority opportunities. Reducing headcount is never easy, but these actions will enable us to become a stronger and more nimble company. In summary, as I step into the role as CEO, I firmly believe we are one of the few companies with the market position and capabilities to deliver world class technologies and great products that will lead the industry forward. My near term priorities are very clear. 1st and foremost, we will focus our energy on delivering great products. We will also ensure that we continue to deepen our customer relationships and continue to We have a unique opportunity in front of us and I'm very much looking forward to the future. Now, I'd like to turn the call over to Devinder to provide some additional color on our Q3 financial performance, 4th quarter guidance and details of our transformation plan. Devinder? Thank you, Lisa, all those listening in today. We continue to make progress on our strategic transformation and delivered non GAAP profitability for the 5th straight quarter Despite a weak consumer PC environment, we managed operating expense, reduced inventory and shipped record quarterly semi custom SoCs. Now let me cover the specifics of the 3rd quarter. Revenue was $1,430,000,000 flat sequentially and down 2% year over year, primarily driven by lower chipset and GPU sales, partially offset by increased sales of semi custom SoCs. 3rd quarter revenue included $27,000,000 related to the licensing of technology. Gross margin was 35%, flat from the prior quarter and included $27,000,000 or a 2% benefit from revenue related to licensing technology. Non GAAP Operating expenses in the Q3 were $428,000,000 down $3,000,000 from the prior quarter. For the 5th quarter in a row, non GAAP operating expense to revenue ratio was 30% or better. Non GAAP operating income was 66,000,000 And non GAAP net income was $20,000,000 with non GAAP earnings per share of 0 point 3rd quarter non GAAP earnings per share excludes amortization of acquired intangible assets of 3,000,000 Interest expense, taxes and other expenses were $46,000,000 in the quarter. During the quarter, AMD entered into interest rate swap transactions. These transactions effectively converted $250,000,000 of AMD's fixed rate 6.75 senior notes due 2019 to a variable interest rate. Based on current interest rates, We anticipate quarterly interest savings from these transactions to be approximately $1,000,000 beginning in the Q4 of 2014. The remaining $250,000,000 portion of AMD 6.75 percent 2019 debt As well as all other term debt on the balance sheet has a weighted average fixed interest rate of 7.1%. Adjusted EBITDA was $133,000,000 down $4,000,000 from the prior quarter and for the trailing 4 quarters Adjusted EBITDA was $574,000,000 Now turning to the business segments. Computing and Graphics revenue was $781,000,000 down 6% sequentially, primarily due to lower chipset and GPU sales. Computing and Graphics operating loss was $17,000,000 compared to a $6,000,000 loss in the prior quarter. This was driven primarily by lower revenue. Enterprise, Embedded and Semi Custom revenue was $648,000,000 up $35,000,000 or 6% from the prior quarter, primarily due to an increase in sales of our semi custom SoCs. Operating income was $108,000,000 up from $97,000,000 in the prior quarter, primarily driven by higher sales of our semi custom SOCs. Turning to the balance sheet. Our cash, cash equivalents and marketable securities balance Total $938,000,000 at the end of the quarter, essentially flat from the prior quarter. Inventory was $897,000,000 down $63,000,000 or 7% from the prior quarter. We remain focused on maintaining appropriate levels of inventory and plan Manage inventory levels down again in the 4th quarter. Debt as of the end of the quarter was 2,200,000,000 Accounts payable at the end of the 3rd quarter was $498,000,000 down slightly from $511,000,000 in the 2nd quarter. We had negative free cash flow of $11,000,000 in Q3, 2014, an improvement of $40,000,000 from the prior quarter. We are ensuring we have the right resources deployed in concert with the evolution of our business model As we right size and strengthen our Computing and Graphics segment resources in line with the market realities of today and further invest in our We expect to reduce our workforce by approximately 7% with the majority of actions completed by the end of the 4th quarter. We anticipate aligning our real estate footprint starting in the Q4 and continuing into the first half of twenty fifteen. Associated with these actions, we expect to record restructuring and impairment charges of approximately 57,000,000 In the Q4 of 2014, consisting primarily of severance related charges and approximately $13,000,000 in the first half of twenty primarily related to real estate actions. We expect to make cash payments of approximately $34,000,000 in the Q4 of 2014 and Approximately $20,000,000 in the first half of twenty fifteen associated with these actions. Based on these actions, We anticipate operational savings, primarily in operating expenses of approximately $9,000,000 in the Q4 of 20 AMD expects revenue to decrease 13% sequentially, plus or minus 3% due to lower revenue and the weak consumer PC environment. Gross margin is expected to be approximately 35%. Non GAAP operating expenses are expected to be approximately $385,000,000 below our prior 2014 Quarterly operating expense guidance range of approximately $420,000,000 to $450,000,000 in line with expected revenue and savings from our restructuring and transformation initiatives. Interest expense and other to be approximately $46,000,000 inventory The impact of the $200,000,000 special payment to GlobalFoundries earlier this year. In summary, While there is more work to be done as we continue our transformation journey, we are positioning AMD to execute our current set of strategic transformation priorities, while focusing on sustainable profitability and driving enhanced returns for our shareholders. With that, I'll turn it back to Ruth. Ruth? Thank you, Devinder. Operator, we'd be happy for you to poll the audience for questions, please. Certainly. And our first question comes from Vivek Arya from Bank of America Merrill Lynch. Please go ahead. Thank you for taking my question. And Lisa, congratulations and good luck in your new role. My question is on the restructuring that you're doing. Which areas will you de Prioritized given this restructuring, do you think you can afford to focus on the same number of markets? Or is it time to narrow the focus? Thank you, Vivek for the question and for the kind thoughts. Relative to the restructuring, we have been looking at all of our markets And all of the things that we do both from an engineering side and a go to market side. From this standpoint, we are very much protecting the And we found opportunities to streamline, particularly on the computing and graphics side, as we look at our go to market and Our infrastructure around that. So as always, I think it's difficult to take these actions, but these will certainly be important steps to help us simplify and operate more Got it. And as a follow-up, I understand the semi custom wins should start helping you in 2016 And maybe it's a little early to talk about 2015, but I'm just curious that if the semi custom only heads What happens in 2015 as you continue to see a somewhat sluggish PC and graphics Market, how are you managing the how do you plan to manage the business in that time frame? And maybe as part B of that question Are there any implications if the market PC and Graphics market stays the way it is, are there any implications on your wafer supply agreement with GlobalFoundries. Thank you. Yes. Let me take the first part of that Vivek and Devinder will take the second part. So relative How we're managing the business? I mean, certainly, if you look at it, we've been very focused on improving the operational performance of the business. I think we've made strong progress in 2014, and for us that they're part of our long term growth strategy. We also have growth that we highlighted in embedded and Professional graphics and some of our other growth markets. And in the traditional PC market, the key areas for us are really changing the mix of the product and We expect that into 2015 as well, as well as some of the work that we're doing in the graphics space like Thank you, Lisa. Vivek, good question on the business. I think what you have seen even over the last couple of years as we had in the 2012 timeframe that we have shown the ability to manage the business in line with revenue to manage the operating expenses, focus on the areas that Lisa talked about his priorities and continue to diversify our revenue, but at the same time making sure that we protect our investments in the core IP Technologies, which is really going to fuel the future growth and long term profitability of the company. Your question on Global Foundries and weather from an inventory standpoint we're on track, very much on track as we end the Q3 here. And Q3 and I expect it to be down in Q4 despite the lower revenue between Q3 and Q4. Thank you. Our next question comes from Mark Lipacis from Jefferies. Please go ahead. Thanks for taking my question. Devinder, maybe for you when you a couple of the income statement questions. The 13% decline that you expect for next quarter, do you You mentioned, I think, Computing and the Embedded business both declining. Is that split evenly between the 2? Is it both business you expect to decline about that much or will be weighted 1 or the other? And when you look at your OpEx savings, you expect of $85,000,000 next year. Is that $21,000,000 a quarter or does that kind of ramp through the year and you exit the year something higher than that? Yes, the first question. I think if you ask me overall from a view The decline of 13%, given the peak quarter that we had in semi custom is weighted towards the semi custom. So as we look at our segment reporting, which has changed effective this quarter, Computing and Graphics and the Embedded Enterprise and Semi Custom, I would say that the I can share with you Q4. I'll tell you that in Q4, as you look at Q3 to Q4, the decline in OpEx Within the company getting close to the customer, we also have actions that we took today and that's Save about $9,000,000 within the quarter. We had some product tape outs in Q3 that don't repeat in Q4 that's some savings. And overall, we've been very focused on managing the OpEx in line with our revenue expectations and revenue profile and that is where the rest of the savings are coming from. So you tried to get sorry, Mark, you tried to get to 2015 and maybe ask the question about But I'm not prepared to get into the 2015 discussion at that point. We can have a little bit more of a discussion about 2015 when we come To the Q4 earnings call in January. Okay. Fair enough. And then if I may one more on the computing side. In 2013, the computing business is running around $900,000,000 a quarter and this year is $800,000,000 a quarter, so it's running lower than that Exiting this year and given, Lisa, that you seem to be streamlining more on the computing side, should we think about this business as being an ex Business or a low double digit growth or a low double digit sorry, low single digit growth or low single digit decline business? Thank you. Yes. So Mark, your question on the Computing and Graphics segment, look, it's a very important business for us. I think it's a little early to talk about longer term Guidance for the business, clearly, our goal is to strengthen it and improve its profitability, particularly in A couple of areas that I talked about earlier. Yes. And I'll add Mark. I think you talked about the numbers in terms of the revenue ranges in 2013 2014. You're Exactly right. If you look at the details that we have provided whereby we have not only provided the new segment information for Q3 or 2014, but also recast the historical data, computing and graphics on the one hand and enterprise embedded and semi customer on the other. And if you go look at the year to date numbers 2013 9 months versus 2014 9 months, the revenue is down as you observed from the 900 Plus $1,000,000 to the $800 plus 1,000,000 13% down. But the losses, there were losses in the 1st three quarters of 2013 It was close to about $90,000,000 and if you add up the last three quarters of 2014, it's more in the $20,000,000 range. So we have Improve the financial performance and the actions that we are taking today and the focus that we are bringing in the Computing and Graphics business It's obviously focused on continuing to improve the financial performance in line with whatever revenue expectations they are. Fair point. Thank you, Devinder. Our next question comes from David Wong of Wells Fargo. Please go ahead. Thanks very much. Devinder, do any of the restructuring Actions that you're planning bringing cash into AMD. For example, might you get any meaningful accounts amounts of cash from real estate or other asset sales? They might, David. They might. I think some of the restructuring actions as I talked in the prepared remarks 2015 first half. And as you can imagine, most of the assets in our case, we don't own the assets, but there are some that we own. Those projects I implied too early to tell whether they bring in cash and how much they bring in, but at least we quantified in terms of the First half of twenty fourteen, what the actions would be of getting out of the space, because we know what the obligations are, Whether they are sitting on our balance sheet or the lease expenses, so too early to tell. And I think as we get to the 2015 time frame because the headcount Actions have to be taken before we can act on the real estate part as you can imagine. So it will be in 2015 timeframe that I'll be able to share more detail on that. Okay, great. And Lisa, you have touched on this, but Just to ask the question explicitly, will the restructuring involve discontinuing future development of any specific product lines that you know about at the moment? Yes, David, I think it's really around streamlining our investments and ensuring that we're on the highest Growth opportunities. So relative to discontinuing a particular product line, we are not discontinuing a particular product line at this time. Great. Thanks very much. Thanks, David. Our next question comes from Hans Mosesmann from Raymond James. Please go ahead. Thank you. Lisa, can you comment about your larger competitor talking about normal seasonality Going into the end of the year, you're saying that there's significant consumer weakness. What's driving the different view of the markets? And Are you just losing market share? Sure, Han. So I think the way to think about the market, because when we look at the market, there's Certain segmentation. So when we look overall, clearly the strength in the PC market has been around commercial primarily. When we look at consumer, it's still choppy and we see it's weak and there's a competitive dynamic in there. From our standpoint, we tend to have more Exposure to some of the emerging geographies, particularly in the channel. And so we are seeing some weakness in China in the emerging geographies. Relative to our MNC business or the large OEMs, I think that business is relatively as expected. So I think it's our view, our segmentation in the PC market is different from our competitors. And if you look at normal seasonality, I Q4 is usually a high sell out a quarter, but from a sell in standpoint, it is typically a little bit down. Okay. Thank you. And if I can follow-up with one more, your competitor is on the tablet side has a very ambitious and aggressive strategy and There in some cases perhaps giving away these chips for free in tablets. Is that impacting perhaps some part of Your business maybe at the low end of the consumer PC market? Yes, Hans, we've discussed this a little bit before. I think it is definitely True that there are some aggressive competitive dynamics, particularly in the low end. A couple of quarters ago, we made about how we're managing that. We are certainly competing in the low end, but we are not going after business that's not profitable. And so if you look at the mix of our business, You see our ASPs up in mobile. And the reason for that is we're actually making good progress at the higher end of the product stack. And at the very, very low end, we're choosing not to go after bad business. Okay. Fair enough. Thank you. Thanks, Hans. Our next question comes from Joanne Feeney of ABR Investment Strategies. Please go ahead. Yes. Thanks for taking my question. And again, welcome Lisa to your first earnings call. I was hoping you could give us a little bit more detail on the graphics business, particularly the consumer graphics business, Wondering if that's what you're seeing or if the new offerings out by your competitor has given you a more cautious outlook on this quarter. Sure, Joanne. Thanks for the question. So overall in graphics, I think we've made progress in certain segments of the graphics market, Certainly in mobile for sure and you see that with some of our OEM wins as well as the recent announcements. On the AIB channel, it has been A little bit weak for us. And if you recall, AIB started in the Q1 very strong around cryptocurrency. And then as we went into the Q2 and with some of the market dynamics there, it was weaker. Relative to the competitive environment, I would agree that Q4 tends to be a stronger seasonal month, a seasonal quarter for Graphics as we go into the holiday season. We've certainly adjusted to some of the competitive dynamics and we have made some positioning changes as well as some new So does that suggest that you're looking at for it to be up or to be down in terms of Well, when we look overall at the CG business, we've said that it will be down. I think there are certain segments within the business that will be up based on The seasonality. Okay. And then, Devinder, I'm curious about your latest move with the interest swaps. Obviously, it's a benefit shorter term to switch to Interest rates for that $250,000,000 but it seems like you're taking a risk here with the U. S. Economy at least improving that interest rates will be going up. And If I heard you correctly, you don't get a benefit from that until the end of the 2015 year. So do you plan to be able to pay that back before that risk really becomes a Thank you, Joanne. That's a good question. I think overall from the way we have crafted the swap interest rate swap transaction, there is a benefit The way we've set it up to the tune of about $1,000,000 a quarter and what you talked about the increased interest rates From some standpoint, there is no risk for the life of the debt that we have on the balance sheet for $2.50 of The fixed rate that we have on the 2019, we have essentially swapped that out and there is some hedging that gets into place. I can get into the details offline with you to go ahead and explain to you how it works and the confidence level We have from a viewpoint of where we sit with that particular that transaction. Okay. That would be great. And then if I can sneak in one last question. With the reorganization of the 2 segments, I was hoping perhaps you could give us a sense of how gross margins compare across those segments and So how rep's operating expenses compare the Compute and Graphics segment obviously showing losses for most of the last eight quarters Sorry, about the last 5 quarters or 6 quarters. I'm wondering whether that's attributable to gross margin difference or if it's really the R The expense on the D and G side that's driving that and where you think that's going to go over time? I think it's a combination of factors. So I I'm not going to provide Joanne unfortunately granularity from a gross margin at the segment level. We do share the revenue The operating income, the thing that you probably know based on the business model for the semi custom in particular, We have been clear that that is below the corporate average from a gross margin standpoint, but that's where you get the benefit from the And our remodel of how products are designed together with the customers, we get the funding for those products. And then when we go Silicon production, there are no sales and marketing dollars. There's a little bit of R and D on an ongoing basis. And the G and A is essentially a fixed So you scale the revenue, the operating margin benefits and that's why you have seen the results as you observed for the EESC segment whereby there is Profitability at the 15%, 16%, 17% of operating income level. As far as the computing and graphics, you Right. If you look back the last 5 quarters, 2 of the 5 quarters we made money and 3 quarters we Revenue is down as the previous question observed and that's what we are doing in terms of managing for long term Profitability at the company level and redistributing resources and redeploying resources potentially from one segment to another, but by the Same token, managing them in line with the revenue expectations for the future. That's helpful. A quick follow-up to that. Just wondering whether there's room in the CNG segment to make the kinds of cuts you need to make to turn that profitable or The competitive pressure you're under is constraining your prices so much and the demands on the research side are so much that you're really in a Difficult spot to cut those costs and raise that operating profit. Can you speak to how you would get that done? Yes, I can address that. I'll ask Lisa to address how This is very methodical. I think you probably recall and maybe that's what you're referring to a couple of years ago when the PC market went down pretty dramatically in 2012 timeframe, we did a reset restructure. And I would say having participated in both of those at the CFO level, Those were more across the board, but these are very targeted, very methodical, protecting the core technology as I talked about and making sure that we do not in any way disrupt the future technology and making sure that the long term growth at the company level is assured and Lisa, you want to comment on that? Yes, Joanne. This is a really important point. So when you look at our strategy and the model that we are Trying to build, it really is around developing leadership IP. So that core CPU and graphics IP is actually used across both segments. And that's very critical and it's being entirely protected in this restructuring action. When we look specifically in the Computing and Graphics business, Relative to the overall infrastructure that was built around these two businesses, the businesses are smaller than they were before. And so there is Significant opportunity to streamline how we operate, how we go to market and just the overall infrastructure that we have. So from an R and D standpoint, very clear that those are the most important investments and ones that will fuel long term growth in both segments. And so those will continue and we do believe that there's opportunity to streamline in the operational side. Okay. Thanks for the help. Good luck. Thanks, Joanne. Our next question comes from Ian Ng from MKM Partners. Please go ahead. Yes, thanks a lot. First question is in GPU inventories. It looks like AIDs aren't really reselling or refurbishing their returns. Looks like they don't want to put excess product into the market. So I read in the filings, are there any implications on Price protections as these AIDs try to monetize their inventory? Yes. Maybe I'll start with that, Ian. So really relative To the AIBs, we work closely very closely with all the channel partners. I did mention that there is some there was some cautiousness In the distribution channel as we were going through the Q3, part of that was just the new products from both ourselves as well as from our competitor. We see that 4th quarter is typically a stronger quarter for the AIB channel and we would expect that the There's nothing unusual. Okay, great. And then Lisa more of a high level question. So now that Sure, the CEO of AMD. I mean, what should we think of as your imprint on the company if the strategy is not changing too much? Is it really executing to the product road Is there any sort of senior management you'd like to bring on board to help meet your goals? Well, I think, Ian, thanks for that question. The strategy is That I believe very much in. It's something that we put together as a leadership team and it really is about taking the technology assets that we have As a company and applying them to higher growth segments. So at a high level, that is absolutely what we're doing. Now relative to what I would like to do, I am Really going to focus on the leadership products and differentiation. I mean, that is the core of what I think will make us successful as a company, as well as our I think there's a lot of opportunity here. This is a multi year transformation that we're going through, but Relative to some of the technology bets that we're making, they will pay off in the next couple of years. So I think you'll see perhaps a little bit more focus on the technology and the products. Okay. Thank you so much. Our next question comes from Christopher Rolland from FBR Markets, please go ahead. Hey, guys. Thanks for the question. And Lisa, congrats again looking forward to seeing your changes at AMD. First Fairchild, I apologize we're in the middle of a fire drill. Fairchild said today that Microsoft Really had ordered all their components ahead of 4Q that build and that they really weren't reordering. So APs might be a different story here. I understand that. But are there any sort of shadows in the story there? Are you seeing a pretty marked sort of decrease in builds in 4Q? Thanks. Thanks for the question, Chris. So relative to Microsoft or actually the game console customers, our lead times are fairly long for the And so we are we synchronize our forecast with the customer forecasts in that So we don't see anything unusual. I think our expectations for the Q4 are very much in line with the customer demands. Okay, great. And then also if we could talk about the Bitcoin mining situation, I guess you guys said you thought that that was going to be a 1 quarter event. Basically, we're sort of wondering here, we do see some channel inventory out there, some parts on eBay and stuff like that in the gray market. Would you say that you guys are still through that? Or would you say that there's maybe a few more quarters to go here? Yes, I think, Chris, if I just take the overall channel, both the desktop and GPU channel, I think there's I think the Bitcoin or the cryptocurrency thing really started in the 2nd quarter, flowed through the 3rd quarter. There were some Your secondhand cards that were out there in the market. I would say that what we're looking at now is really working through some of The product positioning as we go into the Q4. So with most channel inventory issues, it does take a couple of quarters to work through And we are working through those. But I think relative to the cryptocurrency, I think that's lesser of a factor at this point in time. Okay, great. And thanks and congrats again. Thanks, Chris. Our next question comes from Matt Ramsay of Canaccord Genuity. Please go ahead. Yes. Thank you. Lisa, I wanted to ask a quick question about sort of the foundry side with 14 nanometer launching from positioned for the next several quarters until FinFET gets launched at your foundry partner. Sure, Matt. So on the technology It's certainly important and we are doing active designs in FinFET for sure. From our product differentiation standpoint though, if you look at the It tends to be more of an architectural statement versus a process technology statement. So with our launch of Coveri and the amount of compute cores That we have on Caveri, I think that's something that has been attractive to the market. And as we go into our next generation APUs in 2015, They will have added features and functions, some of our heterogeneous software architecture as well. So I think the net of it is clearly the technology is important and we're designing in FinFETs and they're going to be an important node for us as we go forward. But there are many things that we're doing on the architectural and power management side to ensure that we provide differentiated products. Great. And then as a follow-up, you've talked about the gaming business being down in 4Q, which you had talked about last quarter. And I think the stance obviously, it's too early to guide a lot of things for next year, but I think the stance the company has taken As distribution of the gaming console sort of ramp from your partners there that that business should grow on a year over year basis next year, maybe you could talk to the detail that The new wins that you just got are 2016 revenue. Thanks. Yes. Okay. So let me try to Frame it in this way. It is a little bit early to talk about 2015 revenue and units. What I will say is From what we see, the game console business looks strong. We just had One of our partners, Microsoft launched in China and that looked like it was successful. I think everything that we see is this is shaping up to be a solid holiday season. Relative to 2015 seasonality, it is a consumer business, and so we would expect that the first half would be lower Then the second half, and we'll have to see how all of that shakes out through this holiday season. Thank you. Our next question comes from Kevin Cassidy of Stifel Nicolaus. Please go ahead. Hi. This is Dean Grumlaz calling in for Kevin. Thank you very much for taking my call. Could you comment on your traction in Professional and Server GPU market? Sure. So the professional graphics market is Important to us, I think in this quarter, we've certainly improved in the channel. So we had some quarter over quarter growth in the channel in professional graphics as well as some I think in general, professional graphics is a longer sell cycle than some of the consumer graphics. And so we're We're spending quite a bit of effort in both business development and software and ISV development to ensure that we grow that business on a go forward basis. And as a follow-up, going forward, what do you view as your key differentiating advantages in the various GPU markets? Again, I think on the graphics side, it is about graphics performance, performance per watt and compute capability. So there is certainly a Competitive market, but from our standpoint, I think we have very competitive products. And as we as in Professional Graphics, the ISV certifications are quite important. It's really about the investments in those ISV certifications. Thank you very much. Our Our next question comes from Srini Pajjuri from CLSA. Please go ahead. Thank you. Lisa, just wondering the game console business As we look into the next year, when do your prices typically get reset? And also are you expecting any Process node transitions in 2015. And in general, I'm just trying to understand how I should think about the overall profitability versus this year, Assuming that units are relatively flat. Sure. So there the ASPs That we negotiate with the customers are negotiated in advance. So they are certainly booked into our business model. There are ASP declines And then relative I'm sorry, you said relative to operating profits. I think we will, Of course, work very hard on ensuring that we get the cost reductions relative to the ASP reductions So I think from an overall game console business, we view it as a very strong business for us. And are you expecting any process node migrations in this business? There will be process node migrations and we'll talk about them at the appropriate time. Okay, great. And then you mentioned that the 2 new design wins that are expected to ramp sometime in Is there a way to think about the overall opportunity relative to what you're getting from the semi custom business today? So the 2 new semi custom design wins that we talked about, relative opportunity around $1,000,000,000 over a 3 year lifetime. The reason we really like these types of businesses, obviously, is because they're sticky. Once you win them, the recurring revenue is there. I view that there's quite a bit of opportunity for us in semi custom. The pipeline is strong. There's it's across a variety of different And it's an area that we will continue to differentiate given our IP and SoC design capability. Okay. And do you expect the margin profile and the profitability to look similar? So if you look at the overall business, I think we would like to talk about the EESC business versus specific design wins. And the EESC business, you can see has good profitability, and we will continue to work Great. Thank you. Operator, we'd like to take 2 more questions, please. Certainly. Our next question comes from Michael McConnell of Pacific Crest Securities. Please go ahead. Thank you. I just wanted to clarify on the graphic With your sell through commentary in the out and board markets and the inventory commentary, is that a market issue or is that an AMD issue? So relative to the AIB channel, I thought the commentary is the Q3 was slow, some of that was market and some of that was the Sort of our product positioning. As we look into the Q4, we think the market will be a normal quarter and certainly we view the opportunity to improve in the AIB channel. Okay. And then and you just to clarify, you did say channel inventory will be you're expecting No, I think what we said was that there was nothing unusual in the channel inventory relative to the The previous question was about whether the distributors would have enough inventory to support the 4th quarter. Relative to overall channel inventories, our goal is to normalize channel inventories over the next several quarters. And our final question comes from Sanjay Shah Rukhia from Nomura. Please go ahead. Hi, Lisa. I have a question on servers. As you have laid out your strategy and the fact you have moved Servers into semi custom business. Could you talk about how would you defend per my estimates more than $500,000,000 in server revenue? It does look like based on these cost cuts, there's not much significant focus on improving x86 performance as it relates to servers. So what happens to this business? Is it defendable or does it continue to go down? Okay. So maybe let me talk about Servers a little bit more generally and we can clarify some of the specifics. From a general standpoint, the server market is a big large TAM. And So we are certainly interested in growing in servers. From where we are today, our product Portfolio in X86 is several years old and we are certainly looking at updating that over the next couple of years. And then as we look at the opportunity in server, particularly in dense server, I think there's an opportunity for both And so we are going after the newer markets in server versus some of the traditional enterprise. Okay. And as a follow-up, if I Custom design wins and also the 2 new design wins you talked about, are these X86 based or ARM based? So if you're asking about the semi custom revenue today, the semi custom revenue today is all X86 based. As We move forward, we believe ARM will become more important in that business. And then specific to the 2 new semi Operator, thank you. That concludes today's call. If you could wrap it up, we'd appreciate it. Thank you.