Earnings Call: Q2 2014

Jul 17, 2014

Good day, ladies and gentlemen. Thank you for standing by, Welcome to the Advanced Micro Devices Q2 Earnings Conference Call. And instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference to our host, Ms. Ruth Cotter, Corporate Vice President of Investor Relations. Thank you and welcome to AMD's 2nd 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 you've not reviewed these documents, they can be Chief Executive Officer and Devinder Kumar, our Senior Vice President and Chief Financial Officer Lisa Su, our Senior Vice President and Chief Operating Officer will be present for the Q and A portion of the call. This is a live call and will be replayed via webcast on amd.com. I'd like to take the opportunity to highlight a few dates for you. Devinder Kumar will attend the Jefferies Semiconductor Hardware and Communications Infrastructure Summit On August 27 in Chicago, Rory Reed will attend the Deutsche Bank Technology Conference on September 9 in Las Vegas. Our Q3 quiet time will begin at the close of business on Friday, September 12. And lastly, we intend to announce 3rd quarter earnings on October 16. Please note that non GAAP financial measures referenced during this call are reconciled to the most directly comparable GAAP financial Measure in the press release and CFO commentary posted on our website at quarterlyearnings.amd.com. 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 around our risk factors in our filings with the SEC and in particular AMD's quarterly report on Form 10 Q for the quarter ended March 29, 2014. Now with that, I'll hand the call over to Rory. Rory? Thank you, Ruth. The 2nd quarter capped off a solid first half of the year for AMD. We have made significant progress in transforming our company. This was highlighted by our 2nd quarter results including revenue of $1,440,000,000 An increase of 24% from the year ago period and non GAAP EPS of $0.02 an improvement of $0.11 Compared to the same period last year, we are clearly executing our strategy, Building a stronger AMD business model and enhancing our ability to deliver consistent performance. We have diligently managed expense and lowered our cost structure, significantly reducing operating expense, While strategically investing in innovations that will fuel our future growth. At the same time, We have relentlessly focused on improving and consistently executing, hitting our key product milestones and ensuring we deliver on our commitments to our customers. We have improved our balance sheet by reprofiling debt at lower rates, which we expect will reduce our interest expense with no significant debt coming due until 2019. We have driven our AMD leadership processing and graphics technology into new markets And we are currently on track to generate approximately 40% of our revenue from these high growth markets for the full year 20 14. And we also remain on track to deliver 50% of our revenue from these high growth markets by year end 2015. As a result, for the 1st 6 months of 2014, AMD's revenue increased 26 And our non GAAP EPS improved by $0.26 compared to the first half of twenty thirteen. We have now delivered 4 consecutive quarters of non GAAP profitability and we remain on track to deliver on our commitment of non GAAP profitability and revenue growth for the full year 2014. Now let's turn our attention to our business achievements in the Q2. Semi custom SoC shipments increased from the prior quarter As we continue to see strong demand for AMD powered game consoles, we had record semi custom unit shipments In the Q2 and we expect to continue to ramp shipments into the Q3, our peak quarter As Microsoft and Sony prepare for the holiday cycle. In our embedded business, Revenue increased by double digit percentage from the previous quarter as new design wins started to ramp in this key growth Market. We launched several new products in the quarter and announced win with HP's Thin clients as well as Boeing's next generation advanced cockpit display systems to name just a few. Most importantly, looking at our embedded pipeline, our design win momentum accelerated in the first In our Professional Graphics business, unit shipments increased significantly from the prior period As we continue to grow our FirePro business with Apple, Dell and HP, we look forward to driving even more share gains in this margin accretive market. In our dense server business, first half twenty fourteen revenues More than double compared to the year ago period and we are actively sampling Seattle, The industry's first 28 nanometer 64 bit ARM Server Processor and remain on track for launch in the 4th quarter. Now let's turn to the PC market. The overall PC market has shown signs of improvement, Largely driven by the commercial refresh cycles. However, the consumer market remains under pressure and we expect the overall PC market is going to continue to be down by 5% to 7% for the year 2014. In the Q2, AMD's overall microprocessor unit shipments increased sequentially for the first time in 4 quarters, Driven by the introduction of new notebooks from Acer, Dell, HP, Lenovo and others powered by our latest I remain on track to more than double the number of AMD based commercial offerings available by the end of the year. HP has already announced a full range of elite commercial offerings powered by AMD And additional OEMs will begin rolling out AMD's power commercial offerings this quarter. In the desktop space, demand for our desktop APUs was strong from our OEMs. However, the desktop component channel was Softer than we expected. We believe that with the expansion of our A Series APU portfolio and ramp of our first low powered socketed desktop APU, this business will strengthen over the coming quarters. Overall, we saw the 1st sequential revenue increase for our Computing Solutions segment in 4 quarters. Our PC strategy remains focused on delivering profitability by diversifying into the commercial, the overall PC business and leveraging the channel to deliver profitability. Now let's turn to Graphics. In Graphics, we saw strong growth in our notebook GPUs as OEM design wins began to ramp in the quarter. This was offset by a decline for our enthusiast class offerings in the AIB channel as demand from cryptocurrency We expect to increase GPU shipments this quarter as market pricing for our R7 and R9 offerings become more consistent and as we head into the what is typically the stronger second half of the year for GPUs. Regaining graphics market share remains a priority and we are confident that our products, go to market programs Design wins can drive gains throughout the coming quarters. Today, we are more than halfway through our 3 step transformational strategy. I am pleased with the progress that we have made As shown by the significant turnaround in our results and our strong continued momentum, we still have more work to do. In the second half of the year, we are focusing on delivering non GAAP profitability in 2014 and Full year revenue growth by continuing the following: the ongoing ramp of our semi custom SoCs to meet the strong game console demand, driving sales for the expanded number of design wins we have secured in the commercial space, Which is clearly the strongest performing part of the PC market, return to growth in our channel business and gain share Great graphics and continued growth in the embedded and professional graphics markets and Securing additional design wins. We also remain on track to secure 1 to 2 additional semi custom design wins That will help us accelerate our transformation throughout the coming years. So in summary, we're demonstrating that our 3 step Transformation is driving solid progress and results at AMD. To help drive continued success In the next phase of our transformation, last month, we realigned several internal functions to create a single market focused team designed to strengthen our traditional PC business and drive future growth in adjacent markets where our leadership IP to lead this new organization and she will oversee daily operations of our product road map strategy and execution to help drive long term growth. Our 3 step transformation will take us through 20 At which time a different AMD will have a diversified portfolio, consistent and our next generation technology, which will take us to the next phase. Our strategy is working and we look forward to updating you on our progress and success as we forge ahead. With that, let me turn the call over to Devinder. Devinder? Thank you, Rory, and good afternoon to all those listening in today. We had good financial performance in the 2nd quarter, capping off a solid first half of twenty fourteen. We grew revenue sequentially and realized our 4th straight quarter of non GAAP net income. We also continued to make progress on our strategy to transform AMD and saw traction in our growth businesses As evidenced by the strong performance of our semi custom professional graphics and embedded products. Turning to the specifics for the Q2. Revenue was $1,440,000,000 up 3% sequentially, Driven primarily by strong sales of our semi custom SoC and notebook offerings and up 24% year over year, primarily driven by strong sales of our semi custom SoC offerings. Gross margin was 35%, Flat from the prior quarter despite higher semi custom SoC sales, which have a lower than corporate average gross margin offset by a richer mix of notebook products. Non GAAP operating expenses in the Q2 were $431,000,000 up $10,000,000 from the prior quarter. We continue to manage operating expenses in line with revenue to meet our profitability goals. And for the Q4 in a row, the non GAAP operating expense to revenue ratio was 30% or better. Non GAAP operating income was $67,000,000 and non GAAP net income was $17,000,000 with non GAAP earnings per share of $0.02 Calculated using 764,000,000 diluted shares. 2nd quarter non GAAP earnings per share excludes $49,000,000 of loss from debt redemption in the quarter. Adjusted EBITDA was $137,000,000 down $2,000,000 from the prior quarter. And for the trailing 4 quarters, adjusted EBITDA was $594,000,000 Now turning to the business segments. Computing Solutions segment revenue was 669,000,000 Up 1% sequentially due to higher notebook and embedded processor sales, offset by lower desktop processor and chipset Computing Solutions operating income was $9,000,000 an improvement from an operating loss of $3,000,000 in the Q1. This was driven primarily by improved gross margin from a richer mix of notebook processors. Graphics and Visual Solutions segment revenue was $772,000,000 up $38,000,000 or 5% from the prior quarter, Primarily due to an increase in sales of our semi custom SoCs, operating income was $82,000,000 Compared to an operating income of $91,000,000 in the prior quarter, primarily driven by lower GPU revenue. Turning to the balance sheet. Our cash, cash equivalents and marketable securities balance totaled 9 $48,000,000 at the end of the quarter, down $34,000,000 sequentially, primarily due to the timing of sales and related collections during the quarter. Inventory was $960,000,000 up $91,000,000 primarily driven by increased level of our latest 28 nanometer Microprocessor products and lower shipments to channel distributors. We remain focused on maintaining appropriate levels of inventory and plan to manage inventory levels down throughout the rest of the year. Debt as of the end of the quarter was $2,200,000,000 up seventy $2,000,000 from the prior quarter due to our most recent debt reprofiling activities. In the second quarter, we issued $500,000,000 in principal amount of 7% senior notes due in July 2024, Utilizing the proceeds to fully extinguish our 8.1 8 percent notes due in December 2017. By executing these debt transactions, we have further extended our term debt maturities and have no significant term debt maturities For approximately 5 years. Additionally, we expect to reduce interest expense by approximately $3,000,000 per quarter Starting in Q3, 2014, one housekeeping note, the remaining $41,000,000 net of our 6% Convertible senior notes due in May 2015 have now been reclassified as short term debt On the balance sheet. Accounts payable at the end of the quarter was $511,000,000 up slightly from 483,000,000 In the Q1, we had negative free cash flow of $51,000,000 in Q2 twenty fourteen, an improvement from Q1 of 2014, which included a $200,000,000 cash payment to GlobalFoundries related to the reduction of the take or pay wafer obligation commitments for 2012. Now turning to the outlook. The overall PC market has strengthened largely driven by the commercial space, although there is continued weakness in the consumer PC market. In our semi custom business based on our strong first half shipments, we anticipate semi custom revenue being more evenly spread across the Guidance for the Q3 of 2014 is as follows. AMD expects revenue to increase 2% sequentially plus or minus 3%. Gross margin is expected to be approximately 35%. Non GAAP operating expenses I expect it to approximate $435,000,000 interest expense to be approximately $42,000,000 and the total of interest expense, Taxes and other is expected to be approximately $50,000,000 and inventory is expected to decrease from 2nd quarter levels. In summary, we are pleased with the performance we delivered in the first half of twenty fourteen, in line with our commitments and are singularly focused on continuing to transform the company by executing the plans we have outlined. We remain on track to meeting the financial commitments we set for the year, including continued operating expense discipline, while growing New year over year, achieving non GAAP net income profitability and positive free cash flow generation for 2014. With that, I'll turn it back to Ruth. Ruth? Thank you, Devinder. Operator, we'd be happy for you to pull the audience now please for questions. And our first question comes from Mark Zapposz from Jefferies. Please go ahead. Hi. Thanks for taking my question. The first question, I guess, is on The seasonality of the game console business, I guess, if you look at historically the shipments of the game consoles, they're more back end weighted in the year, Maybe 2 thirds, 1 third or something like this, but it sounds like you're expecting the revenues from game Consoles to be even through the year. So I was hoping you could help me reconcile that. Thank you. Yes. One of the things, Mark, we focused on was To create a more balanced business execution throughout the year, you saw strength in our first half results, Because there was clearly some pent up demand in terms of the gaming, the new country launches and obviously that launch was in the second half of last year. This year has gone very well in terms of the semi custom game console work. It's strong. It's up. It's going to continue to ramp in Q3, but we're seeing a more balanced kind of role. You'll see a little bit more strength in 3Q, But we did profit and take advantage of a more balanced first half of the year. Lisa, did you want to add any more color? Yes. No, Mark, I would say that Since we're still in the first three or four quarters of the game console ramp, it's really hard to call seasonality as they're still bringing on New game titles and new regions. So the best way to look at it is, as a whole, the semi custom business is going to be a strong business for us. We're See great growth year over year. You will see more systems shipped in the second half of the year versus the first half of the year. There is a bit of a timing phenomena between when we And then when our customers manufacture and sell through. So overall strong business, but a little bit more balanced than what you might expect 3 or 4 years from Thank you. That's helpful. And a follow-up question, if I may. On the semi custom programs, Could you give us a sense of how many you have in the pipeline? Last time you talked about the potential to announce 1 or 2 more This year, where are the most likely areas where we could see your success in that business? Thank you. Absolutely. So on the semi custom pipeline, we continue to make good positive progress in the quarter. We are on track to announce 1 or 2 confidential design wins in 2014. I think in terms of markets, the traditional market where we're quite Trong is obviously gaming, but we've seen a lot of activity in mobility as well as several new opportunities in networking that are quite interesting as well. And there's definitely a market trend and interest in terms of this capability. So we've seen an increase in the pipeline over the past 12 months. I don't think So again, we're on track for 1 to 2 wins in 2014. Thank you. Our next question comes from David Wong of Wells Fargo. Please go ahead. Thanks very much. Do you have any major new computing solution processor family launches George, for the second half of this year. We've seen a really good uptake, David, in terms of what we did with Beema and Kovari In the first half, they have been very nice launches. That's part of the reason we've seen that stabilization in our PC business. As you know, David, the PC market is more positive. I got that, but overall still down. That positive drive From the commercial part, we're over indexed to consumer obviously. Those new products we're introducing are giving us that stability and that's And the strategy for us to go after commercial, I think Lisa can add some nice color in terms of Progress that we're making there. It's a more balanced set of PC solutions that we're delivering. And then Lisa also maybe David in terms of the Follow on introductions in the channel for the socketed parts and any other family processors you want to add. Yes, absolutely, David. So in terms What we're doing in the overall Computing Solutions business, we just in the second quarter launched our BIMA, Caveri Mobile, Mullens product lines, those are doing very, very well. Caveri in particular in mobile is Going into our commercial solutions, so we've talked about the AMD Pro A series that has gone nicely. HP announced a set of elite books around that and you'll see Our systems in the second half of the year. You'll see us announce more channel offerings as well in the desktop channel as we fill out our APU product line And then on the server side, we talked about sampling Seattle earlier this year. You'll see that move to the production stage Okay, great. And a quick one for Devinder. Devinder, if I understand correctly, your guidance suggests cash balances will go Up in the Q3? I didn't give cash balances, I mean, up in the Q3. But David, you can assume with the guidance that we have given That will be close to the optimal zone of about $1,000,000,000 from that standpoint. Okay, great. Thank you. Our next question comes from John Pitzer of Credit Suisse. Please go ahead. Yes. Good afternoon, guys. Thanks for letting me ask the question. Rory, first just a clarification to make sure I heard you right. I think in your prepared comments, You called out Q3 as the peak quarter, but I'm not sure if you were just referring to the custom gaming or the overall business? And in general, how do Think about seasonality between Q3 and Q4, especially given that you're in the midst of this gaming ramp. So, Hi, John. The comment was based on the semi custom game console in terms of where that is. You would expect us to ship into those key suppliers Sony and Microsoft in that late third quarter kind of very early 4th quarter in terms of the peak, that's why I commented on that. If you look at the business, what we're trying to do and what we've been very focused on is to try and Create consistent revenue across each quarter so that we can deliver profitability. That's really important to the strategy to be able to deliver that revenue that matches the cost structure and gives us the base to consistently deliver the bottom line. And I think that's what's Nice about the diversification of what we've been doing in terms of getting that nice mix of growth businesses with the traditional. That gives us Buffer and support if one part of the business is a little bit different in a particular quarter, but because of the diversity we get the mix. In terms of seasonality, we wanted to focus on 3Q here. We'll talk about 4Q in the next one. But clearly, we would expect the PC business to continue to traditionally be the same or slightly up. You can piece together each piece of it, but the peak for gaming is definitely in 3Q. That's helpful, Rory. And then guys maybe as my follow-up for either Rory or Lisa, Just conceptually relative to the repositioning of the company, how important now going forward is kind of the Moore's Law treadmill? And I sort of The question because perception is perhaps that you're not moving down nodes as quickly. I know that you've talked about kind of your 20 nanometer roadmap, but you really haven't said much at least to my knowledge on FinFET. And I guess given some of the difficulties or puts and takes that We here out in the investment community are going through with what foundry is doing what and having success at FinFET. I'd be kind of curious How important going forward to your success is kind of that Moore's Law curve? And how do you guys think about 2020 Fin Fed and beyond? Sure, John. So let me take a stab at that. I think when you look at what's important to us, I mean, clearly, process technology is an important element, but we have invested Quite a bit in architecture, design techniques, new IP, software. So I wouldn't say that process technology is the first and primary Determinant for us. It is important that we are on competitive technology. So we've said before and I'll say again that 20 nanometer is an important node for us. We will be shipping products in 20 nanometer next year. And as we move forward, obviously FinFET is also important. So if you look at our business, it is quite a bit more balanced Between the semi custom embedded sort of commercial pro graphics growth portions as well as the more traditional sort of client and graphics So technology plays in all of those businesses. Yes. And we're going to move down the curve, John. There's not any question, but there's a lot of legs in 20 28. You're going to see a nice mix across it because of the nice price points you can get there in terms of the business and the mix that But clearly, we know that we're going to move 2020 is a nice incremental improvement in terms of its technology and fins are obviously going to play a Key role in terms of as we move. But we want to make sure that it's not just technology for technology That we get the balance, the crossover point between the profitability, the cost of the technology and the cost of the product that we can sell, So that we're delivering the bottom line and the balanced results that we've talked about. Thanks a lot guys. Our next question comes from Ross Seymore of Deutsche Bank. Please go ahead. Hi. Thanks for letting me ask a question. I guess, when we look into the 3rd The first question is, can you give us a little idea of the puts and takes of what your expectations are for your Computing Solutions Group and then your standalone traditional graphics Business and kind of sequential growth how that builds into your overall guidance etcetera? Yes. So one of the things Ross That we talked about is that we'd see this stabilization and actually some improvement in the coming quarters in the compute. We like the technology that we brought to market with Bema, Mullens, the Kovari solution, the movement into commercial. I think those are positive puts and you saw that in terms of notebook space. The areas that I saw in the second quarter and I think continues a little bit into Q3 is in the Graphics segment And particularly the enthusiasts, we saw that cryptocurrency as we'd expected to abate, But it was sharp because of the failure of some of those exchanges. And we also saw then because of its sharpness A follow-up in terms of secondhand cards flooding into the market in that period of time based on that whole crypto event. Now on the PC side, I think there's no question that the PC channel also was softer than we expected. We think with the introduction of the products that we're talking about, Lisa touched on them a second ago on an earlier question, That will position for that to improve. But I think what you're seeing is for us, it's Mostly about consumer, that's still a tough tight market. With the new parts of the business that we're going in like commercial, it's early, Really nice signs, some really nice marquee wins. We're going to see that continue, but we've got to be realistic in terms of how fast that ramps. And then we got that channel to start to move in a positive direction again on both parts, both graphics, enthusiast And on the desktop channel. That's kind of the puts and takes and that's kind of why you see that kind of move in a positive but muted Direction. So I guess as my follow-up on the gross margin side of things to the extent you're guiding it flat sequentially, What are the dynamics that allows that to happen? Because it seems like mix is going to move very largely in favor of your semi custom gaming SoCs. Is that still carrying The lower substantially lower gross margin or is the gross margin improving on that side or is there some other mix dynamic we need to appreciate? Yes. The only thing I want to be careful on that I want to say that there's a major shift in gaming. We've had a very Strong gaming business all year long and we expect it to be strong. It's going to peak in 3Q, but I wouldn't say major. That's not the right And I think because we've got a nice balanced business there, we're not seeing some of the changes in terms of the mix. I like nice balanced mix From quarter to quarter to quarter so that we can maintain that. Vinder, do you want to add some color? Sure. As Raul said earlier, we do see the peak from a semi custom unit standpoint in Q3. And Obviously, as you observed, the gross margin is lower than corporate average. However, we do have the offset of the products that Lisa just talked about. Embedded we have momentum, professional graphics we have momentum, some commercial PC and that obviously offsets and that allows us to guide to A flat gross margin compared to the last quarter. Again, it's really about driving a consistent execution and a consistent operation. That's what we're trying to create a different AMD with a diverse set of portfolios and that's why the strategy is working. Great. Thank you. Our next question comes from Christopher Rolland of FBR Capital Markets. Please go ahead. Hey, guys. Thanks for letting me ask a question here. So I guess when it comes to the GPU side, is it fair to say that we'll see double digit Sequential growth in gaming APUs and double digit declines on the GPU side due to the LitecoinAltcoin meltdown? You want to take that? Yes. Let me start with that Chris. The way we should think about the different businesses, so let's talk about GPUs Themselves and the transitions there. When we looked at the GPU market, we have desktop and notebook GPUs that we have the channel market and then we have Pro Graphics business, we've actually made very nice progress in the desktop and notebook GPUs. We saw a ramp of some of the design wins that we told you about earlier in the year In the Q2, we see that continuing as we go into the second half of the year. The AIV or the cryptocurrency Mining thing is a very specific phenomena around that enthusiast segment. We saw some, Rory mentioned earlier, some instability in Market as the quarter progressed because we had a bunch of, let's call it, used cards come into the market and that added to the inventory In place, we do see that lessening as we go into the second half of the year. And our focus is on really getting the gamers and ensuring that the gamers Very much on sort of our Radeon graphics. And then on Pro Graphics, we see that as a growth opportunity. We Saw some improvement in the second quarter and we expect to see some improvement in the second half. So the GPU business has a bunch of different components. I think we've made progress in certain areas. The desktop AIB channel will continue to improve in the second half of the year. Relative To the APUs that you're asking about, I think Beema and Kaveri APUs, we believe that those will do well As those businesses continue to ramp in the second half of the year. Okay, great. And perhaps you guys can size up the odds On the semi custom parts, maybe the first one that you guys might announce. Is it closer to a Bema Mullins Type of semi custom part here with a smaller die size or should we think of something closer to the gaming GPU, APUs, The console APUs and with the margin structure on the smaller parts, could you still hit Something resembling your gaming console APUs? One of the things that's really important in the semi custom space is these are confidential. The customer really wants to create a differentiated solution. As I talked about the first wins Several quarters ago, I talked about them as confidential wins. We really can't get into that specific and Because this is a real customer advantage that they're building. I think it's fair to say that each of those areas we're making very good progress in terms of The kinds of pipeline opportunities we look at both in the traditional strength of gaming, but also in the living Also in other parts of this segment and that looks interesting. Lisa on the margin thing, one of the key things that you've been focused on is mixing Potentially, yes. It's not necessarily staying where it traditionally has been. Yes. The best way to think about it is the margin structure will somewhat reflect The market where the semi custom SoC is going into. So I mentioned a couple of the markets where the opportunities are today In gaming, mobility and several opportunities in networking, you'd expect a different margin profile depending on which market they are in. Great. Thanks, guys. Our next question comes from Joe Moore of Morgan Stanley. Please go ahead. Great. Thank you. For your existing console businesses, can you give us some idea of the pricing trajectory over time? Is it Over the next 12 months, is that going to stay constant? Is there some downward pressure? And is there if there's downward pressure, how does it work? Is there a volume step function that we should think about? Or just generally, how should we think about pricing? So I think the best way to think about pricing is these are long term agreements that we have with our customers. So we have a cost Take down curve, I think we're motivated to help our customers get that get the cost out of the system. And so it's and the way You should think about it. It's quite predictable for us and we continue to work on improving yields and test times And all of the things to ensure that we can improve the margins. And usually, Joe, based on history, what you've seen in The other previous gaming ramps is the peak in terms of volume tends to be in year 2.5, 3.5 out. So We are still very early in this ramp just the year end. Okay, great. And then secondly, when you Talked about the new GlobalFoundries agreement. You talked about moving more GPUs and consoles to GlobalFoundries. Can give us a status update on what's happening there? Yes. So right now, GlobalFoundries is shipping both the GPU products and semi custom game console products. Okay. Great. Thank you very much. Our next question comes from Stacy Rasgon from Sanford Bernstein. Please go Hi, guys. Thanks for letting me ask some questions. First, I want to just take a look at the guidance from a high level. Basically, you're guiding Q3 flat year over year. So you've now annualized the start of your console ramp with PCs in your core business worse than they were and Seems like it's heading south from here. I guess given that setup, how should we be thinking about growth from here going forward? Does this really have to become a batch now On growth in semi custom, growth in ARM Services, growth in professional graphics and the like, I guess, as the business as it stands today, does that form enough of a base? Is it stable enough, I guess to get the growth off those new opportunities, how can we get some I guess degree of confidence that the business itself, the core business Sensei It's going to provide that sort of stability. Yes. So Stacy, if you look at the business from year to year, yes, we've definitely begun that full year in terms of semi custom game console as we talked about that that still historically peaks out in year 2.5, 3.5 percent, so there's still opportunity there. From the standpoint of the PC, what we were looking for and I think everyone on this call has been looking for set stabilization. We've introduced a set of new products. We've seen improvement in notebook. And what we're also doing is diversifying the portfolio going into commercial and that's a good move. We like to see that in terms of we said in the previous call that we'd like to see that improve over the next couple of quarters, That you've got to keep that in a muted kind of way. We'll also continue to build out the embedded business, the ProGraphix These are all new businesses and we're seeing progress on all of those. You're not going to have the huge impact Of the gigantic semi custom that we saw that drove the major turn, what you now want to do is you've gotten the to a profitability level, a consistent level of performance. We're efficiently managing the expense. We're delivering more consistently both in terms of the road And then we augment that over the next several quarters and over the next several years with These new businesses and then ultimately as we complete the transformation, we introduce the next generation technology at the finish of this in 2016. That then positions us for the next phase as we move forward. That's exactly the strategy we've been on and that's how it's Got it. I understand that. But I mean you talked about PC stability. The PC business is not stable. I mean you were down 20% Year over year your competitors up 6%. You had similar trends quarter over quarter. I guess do you need stability in that TC business in To reap or to harvest the fruit of the other businesses, what does the economics look like going forward if the trends that we're seeing in the PC market continue? Yes. But what you're looking for and we started to see remember last quarter we talked about we began to see more seasonality in terms of our PC business quarter to quarter. We saw Again, more stability. We saw it improve. That's a significant event. I got it that from a year to year, there was still Because of the over indexing to consumer, that's not a new event. It clearly makes it easier as you move through it as that becomes a more stable base And that I think is part of the strategy to introduce the things like commercial where that's a greenfield opportunity and go look Some of the progress that we make over the next two quarters in that space, that's a fast growing segment, but that clearly having that more stable, That definitely creates a better base to work from. And the other thing I would add, Rory, just to the point that you made about down 20%, is if you look at the 20% I knew that's fair from a year ago period, but look at profitability. We've maintained that from a profit standpoint within that segment and albeit small, but it's still profitable and we are managing for profitability from a viewpoint of the diversification that we are talking about. And they are obviously the 2 groups that we have created and that's exactly in line with the strategy that we are deploying. Got it. Okay. If I can ask one quick follow-up. How do you manage inventory down next quarter with a flattish revenue GlobalFoundries, if you look at the numbers this year with the takeaway, we are at the halfway mark The year and we've taken approximately half the wafers from GlobalFoundries. And as we go forward into Q3, as you look at the Q2 Two numbers. Q2 is a seasonally low quarter. Typically, if you go back and look historically, inventory is up in Q2 In preparation for Q3 and Q4. And as we said earlier, as we work through the GPU AIB channel returning to normal business conditions. The desktop channel business improves from our standpoint. We expect to ship more to distributors From an overall standpoint that allows us to manage the inventory down for the rest of the year. Okay. Thank you, guys. Our next question comes from Matt Ramsay of Canaccord Genuity. Please go ahead. Yes. Thank you very much for getting me on. I guess the question I would ask, I mean, there's something quite a few points made here about managing the business for operating margins. And I guess in the GBS business, revenue was up, operating margin was down a bit. Obviously, there was the stuff that happened with The currency things on GPU in that market, but maybe you could talk a little bit about where the operating margins are from the semi custom business today And where they go as that business ramps in units, but there might be some ASP downticks with costs coming out? Yes. We don't typically haven't talked specifically at the level of granularity that you're looking from a semi custom standpoint the operating margin, you are right. If you look quarter on quarter from a viewpoint of looking at the profitability is down about $9,000,000 Well, we did have the impact as Ori and Lisa talked about on the cryptocurrency. And as we work through that, we'll see how it shakes out from a Q3 Standpoint, we're not going to get into the specifics of the segment or even the business within the segment for the operating margin. So the only thing I would add To that Matt is, I think you should take away that the semi custom margins are consistent with what we expect. And the ASPs, we understand the cost reduction roadmap and so we expect to be consistent. That's helpful. And just a follow-up for me maybe backing up and looking at things on a bigger picture From an ambidextrous strategy point of view in the ARM server space, there's now going to need to be, I guess, some investments to doing a custom ARM core for the server market versus license scores in the past. And if the goal is to sort of manage operating expense growth and keep it to a minimum, guess, what are the puts and takes of where you're drawing those investments from? And what effects could that have on some of the core businesses where X86 ports are more hurtful? From a standpoint of expense, I think we've done a very good job in terms of driving more efficiency with reuse, Driving the organization in terms of where were the key focus, I think what you should look for over the next couple of years is to continue to focus on efficiency there. I think there's still more opportunity while investing in the key focus growth areas to continue to drive Efficiency on the cost side. It's not going to be as drastic as we've seen in the past, but I think there's continued opportunity to be efficient there because We're simplifying the number of process technologies. We're reusing the IP base. We're really doubling down on those IP blocks that are truly the ones that That's creating the ability to allow us to attack both the ARM core and the X86 Those are 2 big blocks. They're important. We're going to lead in that. We're going to lead on the graphics side. Some of the secondary IP, we're going to let that Have less investment and I think that's the right kind of strategy as we move forward. Based on that, I still think there's more Our next question comes from Betsy Van Heath of Wedbush Securities. Please go ahead. Good afternoon. Roy, you talked about marquee design wins And commercial, I mean, you guys are still heavily weighed to the consumer. When are we going to see that inflection Point in your business when we really see the commercial side to start to take some really meaningful revenue for you? That's my first question. Thanks. Sure. I think commercial you just saw the introduction in the second quarter with HP. You'll see other OEMs as we go Through the balance of the year, I think that people have been both inside and outside of AMD impressed with The kinds of uptake we've gotten from the customers in terms of the competition and the design wins that we've gotten, They'll begin to roll out over the coming quarters. I think what you should think about is, going back to the early question from Stacy, that's a Key part of that ability to stabilize that PC business and to move it up. That's a big change guys from where we were a year ago. And that's key in terms of the second half of this year into next year. Any ramp you look at takes a little bit of it in Terms of ramping up, but the point you should get out of this Betsy is that it's a good product. The people are very interested in it and you should Go talk to HP and see what happens in the marketplace, but that will lead books off to a really nice start. Thanks, Rory. That was very helpful. And then Devinder, gross margin guidance of 35% and Rory mentioned that this is the peak quarter For the gaming console business, so was it fair to say that we could see some gross margin expansion in the December quarter? You're going to have a better product mix with less of Gaming. Yes, Betsy, that's a good try. I'm here to talk about Q3. I'm not about to give guidance for Q4. Oh, come on. That will help. I will say semi custom as you know is lower than corporate average. We've been really consistent about that and we'll talk about Q4 when we meet again in About 90 days. Okay. Okay. Well, I tried. And then speaking about OpEx, another great job of Keeping OpEx down. Is there any more room for improvement where we could get to an even lower level of OpEx? Is there any places that you guys could take some make some cuts there? Yes. As I kind of commented just a second ago, Betsy, I do think There is continued room. I think we've done good work over the past 2 years on that one. I think from an OpEx standpoint, it's balanced in terms of we're going to invest in those key areas that we think are going to drive growth. There are parts of our business that are And Lisa is making those decisions as the COO. The vendor is looking And I still well, I don't think it will be at the same rate of decline we saw over the past 18 or 24 months. I think there's opportunity for us over the next 12 24 months. For sure. Thanks, everybody. That's it for me. Our next question comes from Ramesh Shah from Nomura. Please go ahead. Yes. Thanks a lot. Could you guys just talk a little bit about the desktop processor business? It looked like it was weak in Q2. I think you lost share in Q1 as well. So what's the state of That business, your level of investment and how you see it performing from here? Yes, sure, Ramit. Let me answer So, yes, the desktop channel was softer than we expected in Q2. If you take a look at underneath that and some of the dynamics under We did see some impact of the cryptocurrency mining phenomena in CPUs as well as GPUs, because if you think about it, when you put together one of those mining rigs, You need both a processor and a graphics card. It was a softer quarter in terms of the market as well. And so we saw the distributors We're a bit more cautious on taking on inventory. As we look forward, look, the desktop channel is an important market for us. It's a place where we've So I don't see anything fundamental there. I would say that we'll continue to expand our APU Portfolio, through the Stash, you'll see a couple of more products come out in the second half of the year and we'll continue to focus in that area. Okay. Thanks, Lisa. And on the 1 to 2 semi custom design wins, can you guys quantify the size of those opportunities for us? Sure. So what we've said in the past and is consistent is these opportunities tend to be very unique, but the size of the opportunities that we're looking at are typically in the range of that we're looking at are typically in the range of $250,000,000 to $500,000,000 lifetime revenue overall. Okay. Thank you, Lisa. Thank you. Operator, we'd be happy to take 2 more folks please. Our next question comes from Jim Covello of Goldman Sachs. Please go ahead. Great. Good afternoon. Thanks for letting me ask a question. You guys have a helpful slide on page 4 of the presentation where you just kind of go through what the revenue has looked like in traditional markets versus growth markets over time and kind of culminating in the fifty-fifty split in 2015, is there any way to give us a very high level breakdown of what that chart might look like Break broken down by end market as opposed to just kind of high level traditional versus growth markets? Thank you. And what do you mean Jim by End market, sorry, vertical, computing, gaming, etcetera. No. We really haven't thought about that in a lot of detail. So you got to give us a second Sure. So in the high growth markets, professional graphics dense server 50% of the business, you're going See in that 2016 timeframe, our next generation technology be introduced with the advanced node work, The end market, let us take a work on that, Jim. I don't think we have that prepared here for this discussion. Okay. That's great. Thanks. I could always follow-up on that. And then just in terms of your outlook on the PC In total, which is helpful, you guys are talking about maybe a down 5% to 7%. Understanding that you're a lot more geared toward consumer and that It's a little weaker than enterprise. I think other folks have a more flattish kind of view on the market and that's inclusive of Both the enterprise and the consumer, would you just expect that maybe the numbers for the the expectations for those folks who are thinking the market is flat have to come down a little bit or maybe some of it is just mix shift and it's kind of hard to tell or how can you help us on that one a little bit? Thanks very Yes. No problem, Jim. So I think in terms of the market, I don't think there's any question that commercial has been stronger than everyone anticipated. There's no doubt that's partially driven by the XP refresh. That's for sure. There's also some pent up Commercial demand, we're starting to see and feel a little bit of that as we've now introduced the product. I think it's going to be strong Further than expected. But the real debate has to be in our minds is that where is that peaking in terms of that? Was that the XP thing through that April and it kind of Trails off into the second half of the year. Our thoughts are it's still positive and it's going to be good. But we've got to see a little bit more data on where that commercial is Going to go in terms of is it going to be as robust as it was in this middle part of the year. On the consumer side, I think consumer is actually pretty tough. I don't think consumer is just lightly down. I think consumer is a tough spot in terms of traditional consumer notebook If you're going to add in some of the newer form factor stuff like some of the kind of tablet stuff that mixes in between, you could kind of get to A little higher number. So I really think it matters what you count. If you look at the tablet stuff, people talk about 285. If you look at the PC Somewhere around 300. That's a lot of units compared to where we were even 2, 3 years ago. Tablets were much less Probably under 100 at that time and PCs were around what 365. So I think where you get the differing opinion is what Do you put in there? Do you call those window tablets and put them in PCs? Do you fit the Market have pressure in consumer. We think it's significant. That's definitely tough. And then from the standpoint of commercial, that's definitely the stronger one. The real question there is, does that refresh continue through the full year? Makes sense, Jim? That's really helpful color. Thank you so much. No problem. Anytime, sir. And our final question comes from Mike McConnell of Pacific Crest. Please go ahead. Thanks. Going back to kind of Stacy's line of questioning, I do understand relative to share your competitors' much higher exposure to corporate and your exposure to consumer being part of this. But I guess one thing that's a little concerning is kind of the progress in the share gain they're making in the low end of the market with Baytrail. And I wanted to kind of get your comfort specific to that segment of the market that you guys have Higher relative exposure that if we have game consoles peaking here in Q3 That that isn't going to be the peak also for your year in terms of quarterly revenue. How do we get some comfort that There's a little bit there's not more here than just the exposure between corporate and consumer, particularly in that low end where you have Some pretty decent amount of market share. Yes. One of the things I think you want to look at is, we could chase some of that Pressure in the low end, it tends to be lower ASPs and given some of the market dynamics, it's not terribly profitable. We're going to go and compete in some of that, But we've talked about a strategy to mix up. And I think Lisa can add some color in terms of the ASP trends that we've seen, the kinds of progress we've made with The A-8s and the A-ten, this is one of the strategies. In the past, I think AMD would have chased that down, gone for share for Share sake, we want some of that, but we want it balanced across the portfolio as we mix up, so that it makes sense for us. Yes. There's no doubt there's pressure there, but there's still business for us to get there. And then as we mix up look at the ASP work. Perhaps Lisa some color? Yes. Mike, I think the way to think about our RPC business and sort of our strategy here, I mean, it is very much around being very deliberate about where we We're most differentiated and we can get a strong sort of profitable growth in that standpoint. So if you take a look at You asked specifically about Baytrail. We certainly see Baytrail, no question about it. We see them at the very, very low end sort of entry Price points going up into the mainstream of the notebook and desktop market. And there are places where we choose not to compete because it's just not profitable business. We are looking at how to improve our mix. If you take a look at our ASPs, both sequentially and year over year, you see a very nice trend there and that's very deliberate on ensuring that we are selling our products where they're actually valued. And that's Different from sort of our PC business a year ago. And those are some of the dynamics that help us stabilize the business model, get More profitable growth that sort of thing. Okay. And then one very quick follow-up. Lisa, I just wanted to make sure I heard you correctly. So Discrete Graphics was down. It has to be roughly double digits In Q2 and you said you're expecting it to be down again in Q3. I just wanted to make sure that's accurate. Yes. No, I did not say that. So We said Discrete Graphics was down in Q2 and that was the mix of the AIB channel in particular coming off of a strong Q1. We do expect to gain share in Discrete Graphics. That has been a clear goal. And if you look at the mix of the business going forward, we see opportunities to do that. Okay. But could you what do you think about discrete graphics for Q3, I guess, sequentially? Again, we don't go into segment Detail in terms of guidance, but directionally we expect to grow share. Okay. Thank Great. Operator, that concludes AMG's 2nd quarter earnings conference call. If you could wrap it up, we'd appreciate it. Thank you. Ladies and gentlemen, this does conclude today's call. Thank you for your attendance. You may now disconnect. Everyone have a great day.