Earnings Call: Q4 2013

Jan 21, 2014

Good afternoon. My name is Huey, and I'll be your conference operator for today. At this time, I'd like to welcome everyone to AMD's 4th Quarter 2013 Earnings Conference Call. All lines have been placed It's a listen only mode at this time. After the speakers' remarks, you'll be invited to participate in a question and answer session. As a reminder, this This is being recorded today. I would now like to turn the conference over to Ms. Ruth Carter, Vice President of Investor Relations for AMD. Please go ahead. Thank you, and welcome to AMD's 4th quarter and year end 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 found on AMD's website at quarterlyearnings. .Amd.com. This is a live call and will be replayed via webcast on amd.com. Participants joining us on today's call are Rory Reid, our President and Chief Executive Officer Devinder Kumar, Our Senior Vice President and Chief Financial Officer and we'll also have Lisa Su, our Senior Vice President and General Manager of Global Business Unit, who will participate in the Q and A portion of the call. I'd like to highlight a few dates for you. Devinder will attend the Goldman Sachs Conference on February 12. Our Q1 quiet time will begin at the close of business on March 14th. And lastly, we intend to announce our Q1 2014 earnings on April 17. Dial in information for that This call is expected to be provided in mid March. Please note that the non GAAP financial measures referenced on this call are reconciled to Our most directly comparable GAAP financial measure in the press release and CFO commentary posted on our website quarterlyearnings.amd.com. Before we begin the call today, let me remind everyone that today's discussions contain 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 from our current expectations. Please refer to the cautionary statement in our press release 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 September 28, 2013. Now with that, I'd like to hand the call over to Rory. Rory? Thank you, Ruth. We made good progress last year in executing our 3 step strategic turnaround to restructure, accelerate and Ultimately transform AMD. We completed our restructuring, creating efficient business model with significantly lower operating expenses. We also accelerated our business, Generating strong revenue growth and a return to profitability in the second half of the year by successfully ramping Our strong and diverse set of new products. As we move forward, we will continue to Strategically transform AMD as we diversify our portfolio and drive a larger percentage of our revenue From the semi custom ultra low power client embedded dense server and professional graphics high growth markets. In the Q4, we delivered revenue of $1,590,000,000 an increase of 9% sequentially and 38% from the year ago period, while increasing We exceeded the goal we set for the semi custom and embedded businesses 20% of our revenue by the Q4 of 2013. We believe this validates the strategy we outlined 2 years to embrace the trend reshaping the industry. We remain on track for our growth businesses to generate Approximately 50% of our revenue by the end of 2015. All of this work is underscored by the improved execution across the AMD company as we hit our key product, IP development, supply chain and financial milestones in 2013. Our flawless semi custom production ramp propelled the business in the Q4 and allowed us to meet the strong demand For Sony and Microsoft game consoles, combined Sony and Microsoft reported selling more 7,000,000 units in less than 2 months. This is more than double the number of prior generation Consoles sold in their Q1 of introduction. We expect this momentum will As we increase game console SoC shipments for the year and pursue new wins From our semi custom design pipeline. Our embedded business achieved sequential revenue growth increases Throughout 2013, we have secured design wins to drive further growth and expect continued momentum As we begin offering both X86 and ARM based solutions in 2014. In dense servers, we remain on track to launch 1 of the industry's first 64 bit ARM Server SoCs in 2014. Our unique position offering both X86 Sysix and Arm solutions combined with our years of experience in the server market and industry leading fabric technology Differentiates us as we bring an expanded set of solutions to this important market. We remain on track To begin sampling our new ARM based SoCs later this quarter and we are Seeing strong interest from both traditional server OEMs and end customers like cloud providers. Our Professional Graphics business set a record for the full year revenue in 20 We believe we can drive additional growth based on incremental focus and investments we are making to further our product offerings, expand our work with key software developers and secure more design wins. Apple's new Mac Pro desktop with dual AMD Fire Pro GPUs is a perfect Sample of our momentum in this margin accretive market. Now turning to our traditional businesses. As we said during our last earnings call, we expected GPU revenue As we accelerate the transition to our new R9 and R7 Graphics Chips And that is what happened. Strong demand for our latest graphics chips drove a significant Sequential increase in GPU revenue and ASP. Our strategy to attack the desktop, add in board Channel worked well in the quarter and we expect this trend to continue. We believe we are well Positioned to gain graphics market share in 2014 based on continued channel momentum, Secured wins for our new R7 and R9 discrete mobile GPUs and strong adoption In the professional graphics space, we also delivered our 3rd straight Quarter of desktop processor revenue in the 4th quarter, largely driven by increased shipments of our Higher end APUs and FX CPUs. We also began shipping the desktop version of our newest APU, Kibari in December and we believe it will fuel future growth by delivering performance advantage versus competitive offerings. Givar supports our Mantle API for better gaming experience and is the industry's first product to integrate HSA features that can The consumer notebook market remains soft in the 4th quarter. We focused on improving mix and reducing downstream inventory With our customers, we have secured a number of premium notebook design wins for Kovari and also have solid adoption of our next generation low power Molens and Bema SoCs, which deliver twice the performance per watt of our previous We believe we are taking the right steps to create a more predictable and balanced PC business moving forward By continuing to drive a richer product mix by focusing on parts of the market where we are underrepresented And we have significant growth opportunities. For instance, we have secured Significant number of new commercial client design wins with Tier 1 OEMs, which will launch in the second half of the year. We continue to believe that the PC market will be down for the year. As we discussed during the last Earnings call, our planning assumptions are based on a 10% decline in the market. Since that call, We are seeing some signs that parts of the market may be stabilizing. Given where we are in It is too early to know if these signals will continue or not. We are managing the business to the base assumption, But we are ready and poised to take advantage of any upside as it materializes. So in summary, for 2013, we hit key milestones in Our multi year strategic turnaround. We completed our restructuring, creating a more efficient operating model. We accelerated our business by ramping a strong set of new and diverse products across both traditional And new growth businesses. Our semi custom and embedded offerings delivered more than 20 Percent of our revenue in the 4th quarter and we returned AMD to profitability And positive free cash flow in the second half of the year. Now in 2014, our next objective is to achieve revenue growth And profitability at the net income level for the full year as we leverage our differentiated IP and products to further Expand our growth businesses, participate across a broader part of the traditional PC market to create a more balanced and consistent revenue stream and to continue to pursue efficiencies in our This model that will further reduce operating expenses. We are midway through our multi year turnaround And feel very good about the progress we have made to date and our abilities to continue to meet our commitments. We have built a solid foundation from which we can continue to transform AMD into a more diverse company delivering This is revenue growth and profitability. Now I'd like to turn the call over to Devinder. Devinder? Thank you, Rory. 2013 was a year of many accomplishments for AMD, as we completed the first two phases of our 3 phase transformation We completed the corporate reset and restructuring and had solid execution in the second half of twenty thirteen. At the beginning of 2013, we laid out a number of key financial goals as part of that plan, to return to profitability and positive free cash flow in the second half of the year to reduce our operating expenses by more than 20% from Q1 2012 levels and to generate more than 20% of our revenues from our semi customer and embedded products. I'm happy to report, we achieved and exceeded all of those goals. In addition, we maintained cash balances above our optimal balance of 1.1 1,000,000,000 throughout 2013 and stabilized the business with solid execution and financial discipline. All of this Provides a good foundation as we enter 2014 and continue our strategic transformation. Let me share some specifics for 2013. We achieved revenue of $5,300,000,000 gross margin of 37 percent non GAAP operating expenses of 1 point And year over year, non GAAP operating income of $103,000,000 up from $45,000,000 in 20 12. Capital Furnitures of $84,000,000 down significantly from $133,000,000 in 2012. And finally, We exited 2013 with cash balances including marketable securities of $1,200,000,000 and increased Available liquidity by $500,000,000 through establishing a secured revolving line of credit. Now let me turn to the specifics of the Q4 of 2013. Revenue for the Q4 of 2013 was 1,590,000,000 An increase of 9% from the 3rd quarter and an increase of 38% from the 4th Quarter of 2012. The increase was driven by very strong performance in our Graphics and Visual Solutions segment, driven by increased revenue from Our semi custom SoCs and our new R7 and R9 series of GPU products, which more than offset The decline in revenue in our Computing Solutions segment. Gross margin was 35%, down 1 percentage point sequentially, In line with our expectations, as sales of our semi custom SoCs grew significantly and formed a larger mix of overall revenue, The 4th quarter financial results include a $7,000,000 benefit from the sale of inventory reserved in the Q3 of 2012 as to a similar $19,000,000 benefit in the prior quarter. Non GAAP operating expenses were 4 $52,000,000 above our targeted level of $450,000,000 primarily due to higher expenses in sales and marketing during the holiday period And employee related performance related programs. Non GAAP operating income was $91,000,000 And non GAAP net income was $45,000,000 both of which exclude a net benefit of 48,000,000 From legal settlements in the quarter. We delivered non GAAP earnings per share of $0.06 and adjusted EBITDA of 100 and $65,000,000 excluding a net $48,000,000 benefit from legal settlements. Now turning to the business segments. Computing Solutions segment revenue was $722,000,000 down 9% sequentially, primarily due to decreased chipset and notebook unit Computing Solutions operating loss was $7,000,000 as compared to an operating income of $22,000,000 in the 3rd quarter, primarily due to decreased levels in revenue and higher marketing and employee related performance plan expenses. Graphics and Visual Solutions segment revenue was $865,000,000 up 29 sequentially driven by increased shipments of game console semi custom SoCs and our R7 and R9 series for GPU Products. Graphics and Visual Solutions segment operating income was 121,000,000 Up from $79,000,000 in the prior quarter, primarily due to higher revenue. Turning to the balance sheet. Our cash, cash equivalents and marketable securities balance including long term marketable securities was $1,200,000,000 in line with our Expectations and flat from the 3rd quarter. Inventory was $884,000,000 down $38,000,000 sequentially, Primarily due to higher shipments of products in our Graphics and Visual Solutions segment. Our total wafer purchases from GlobalFoundries in 2013 were approximately $960,000,000 lower than the previously estimated 1.15 due to lower 4th quarter purchases. There were no penalties associated with this reduction. We are actively working on our 2014 wafer supply agreement with GlobalFoundries based on our full year demand expectations With a goal to manage inventory flat to down year over year. Also in the Q1 12, 2014, we paid GlobalFoundries the final $200,000,000 payment related to the reduction of our take or pay wafer obligation commitments In 2012, debt as of the end of the quarter was $2,000,000,000 flat from the prior quarter. During the quarter, We repurchased approximately $50,000,000 of our outstanding 6% 2015 convertible senior notes in the open market. And these purchases were funded by utilizing our secured line of credit revolver. Now turning to the outlook. For the Q1 of 2014, AMD expects revenue to decrease 16% sequentially plus or minus 3 We expect Computing Solutions segment revenue to be down in line with seasonality and we Graphics and Visual Solutions revenue to be down coming off a strong Q4 for our semi custom SoCs. Non GAAP gross margin is expected to be approximately 35%. Non GAAP operating expenses I expect it to be approximately $420,000,000 driven by lower sales and marketing expenses, accelerated IP reuse And rebalancing of resources in some of our businesses. Inventory is expected to be approximately flat from 4th quarter levels and Cash, cash equivalents and marketable securities are expected to be approximately 1,000,000,000 On cash, we have had 2 important cash reference points over the past year. 1, our optimal cash balance target of $1,100,000,000 and The other, our target minimum cash level of $700,000,000 In light of the progress in the transformation of our business model With a more predictable revenue stream from our growth businesses and the availability of 500,000,000 to be in the range of approximately $420,000,000 to $450,000,000 per quarter depending on the timing of R and D expenses And the revenue profile. Taxes of approximately $3,000,000 per quarter to be net income profitable For the year, inventory to be flat to down year over year. Capital expenditures of approximately 120,000,000 To be free cash flow positive for the year and finally to maintain cash, cash equivalents and marketable securities balances In the optimal zone of $1,000,000,000 and above the target minimum of $600,000,000 In summary, we achieved critical milestones in the first two phases of our strategic transformation during 2013 And delivered solid financial performance in the 4th quarter. We remain focused on maintaining the operational and financial discipline that we demonstrated In 2013, as we embark on the 3rd phase of our strategic transformation with the goal of transitioning 50% of our revenue to high growth markets by the end of 2015. With that, I'll turn it back to Ruth. Ruth? Thank you, Devinder. Operator, we'd be now pleased for you to poll the audience for questions. Sure, Ladies and gentlemen, on the phone lines, And it looks like our first question will come from the line David Wong with Wells Fargo. Please go ahead. Your line is open. Thank you very much. Your microprocessor APU ASPs have been doing very well recently. What do you expect going forward in the March quarter? Does Caffiri help ASPs to rise? Hi, David. This is Lisa. Let me answer that question. We have been working hard on the mix of our product portfolio in both desktop and notebook and we saw a nice uptick in Q4. I I think going forward, we do have a strong set of products. We'll have to see how 2014 unfolds. But Caveri, we're very Pleased with the performance and the launch in the desktop channel. You'll be seeing that in the notebooks and we'll also be introducing our new Mullens and BIMA product Later on in the year as well. So we'll continue to work on the mix of the Computing Solutions ASPs going forward. Okay, great. And my other question, Devinder, we you did very well on the profitability in the December quarter. Will you be able to Keep net income flat or positive as you go into the seasonal now? I think as we gave the guidance for Q1, if Do the math. That's how it comes out David. And our goal is obviously to be profitable for the year. And for Q1 with the revenue and the gross margin and OpEx profile that we have, Our goal is to be breakeven or better from a profitability standpoint. Great. Thanks very much. Thank you, sir. And it looks like our next question in queue will come from the line of Hans Moses with Raymond James. Please go ahead. Your line is now open. Yes, thanks. A question on your ARM strategy in Seattle. Based on what you've seen over the past Quarter, has the opportunity in servers in that particular area, has that increased? Has it been the same? Or is it less? So thanks. Hans, on the server strategy and the ARM strategy with our Seattle product, I think our view is that the opportunity is definitely there. We've always said that ARM is a longer term opportunity in terms of how it folds into the server market. But what we've seen is continued interest In our ARM product portfolio, not just from traditional server vendors, but also from some of the cloud vendors. So we're very pleased with the progress With that and we'll continue to work hard with that strategy. And Hans, also remember that we really want to continue to leverage ARM Not only across the server space, but also into embedded and potentially into the semi custom space as it gives us increased capability. We think that ambidextrous part of the strategy and our leadership in 64 bit compute Will give us a significant opportunity and an expansion in TAM that will give us long term opportunity to Span revenue. Thanks. If I can if I may a follow on. The BIMA and Mullens APUs Seem to go right at they go up against Baytrail from Intel. I asked the question last time and I like to ask it again, because I didn't get the proper answer, I suppose. What is the competitive advantage BMO and Mullens versus Baytrail. Thanks. Okay. Hans, let me try to answer that for you. So Mullens and BMO are really targeted At the low power APU space, we just showed some of the latest performance metrics at CES. And what you'll See is that on the graphics performance, it's substantially better. We're talking about 2 50% better In the comparable Baytrail products. And what's different is on the compute performance where we had traditionally been not as strong, we see significant performance improvement. So I think we feel very good about our positioning versus Baytrail. We're continuing to be very aggressive with how we position our products in the space And we will look for a balanced business going forward there. Great. Thanks. Thank you, sir. And Our next phone question will come from Chris Rolland with FBR. Please go ahead. Your line is open. Hi, guys. Thanks for taking the question. So perhaps If you can talk about the staggered geographic launch of the PS4 in Japan in February. I thought this might have made the GPU business a little less Seasonal than normal than we might have expected. And then also I know you guys don't guide 2 quarters ahead, but given that staggered launch, what does that do for 2nd quarter seasonality as well? Maybe we can get some color there. Thanks so much. Okay, Chris. Let me start and then maybe Devinder and Rory can add. When you look at the game console market, it is a 5, 7 year market. When you look at the 1st year launch, there are those different components as you talked about in terms of the staggered launch. If you look at how it's progressed, I mean Q4 was a Very strong quarter. When you look at the launch quarter and the number of units sold that our customers have reported, double what you have In previous launches, when we look into Q1, we do expect a strong quarter as well. And looking into 2014, you would Fact that the second half will be stronger than the first half, but I would guide you to look at when the major titles are released For the various game consoles to see when what you'll see a little bit of I wouldn't call it seasonality, but I would call it a little bit of uptick As that happens. So I think strong expect strong momentum in 2014 off of the 2013 console launch. Okay, great. Thank you. And if you look at PC processors in, let's say, 2012, you guys Down last year you guys were about breakeven on an operating profit basis. So even though you guys PC units down, how are you looking at profitability for that PC Processor division in terms of operating profit for 14. Well, clearly, Chris, our focus is to continue on the next phase of this multi year strategy we laid out 2 years ago, in 2014, our next goal is to drive full year revenue growth and profitability at the net level for the full year. As we look at that, we think it's a combination of our expansion into the new growth markets like embedded, Professional graphics, semi custom, low power client, etcetera, dense server. But also it's about the opportunities we see in In the PC market, we believe the PC market will continue to be down in 2014. But we see an Opportunity for us to continue to move in areas where we're underrepresented. Historically, we've Dominated that lower entry point of consumer notebook. Where we see opportunities to continue to build on the momentum we've seen In the revenue of the desktop channel and then continue to expand into the commercial client segment. These are two Key areas where we can provide leadership and we have been underrepresented in the past. These will give us an opportunity to expand and they're also Areas that tend to have better growth performance than consumer notebook because clearly consumer notebook in the Space has been affected by the tablet, but that commercial area and desktop has been stronger and more resilient. We think that As we mix up the stack, we'll continue to give us opportunity to produce profitability. In terms of A8s And 810s, it was a record year record quarter excuse me in terms of 810s up The stack, which is a perfect example of what we're trying to do and why we saw the expansion on ASPs. Yeah. I can add on top of that, Rory talked about the product and the financial and I mean the business execution. From a financial standpoint, our business is the This is the mix of our transformation. And our focus is that each stand alone business has to be profitable and we will adjust resources And that's why you have seen even in the Computing Solutions business despite the fact that they were down from a revenue standpoint over quarters essentially for that segment we were close to breakeven and that's the way we're going to manage in 2014 as we go forward. Great. Thanks and thanks for that extra color, Devinder. Welcome. Thank you. And our next phone question will come from the line of Stacy Rasgon with Sanford Bernstein. Please go ahead. Your line is open. Hi, guys. Thanks for taking my questions. I wanted to dig in a little bit first into the cash balance. So for this quarter, you were at 1 But you didn't take about $190,000,000 in wafers you were due and you also cut your CapEx versus your guidance, which would have dropped you well below $1,000,000,000 had all that come through. Now you're dropping, I guess, your optimal target and your minimum target and you're sort of attributing that to a better outlook on the business. But I mean, how like how can we read that as anything other than cash balances are coming in lower than what you thought? And so you're Guiding down your targets in order to adjust to that reality. I mean, what's the confidence that we have on the cash balance going forward? Stacy, I think if you look at it from the standpoint of where you started, 1st of all, with the lower wafer purchases in Q4, Taking those wafers in Q4, the cash would have been paid in Q1 would not affect the Q4 cash balance. So that's where we ended up From a Q4 standpoint of the $1,200,000,000 and I know you're familiar with the GlobalFoundries piece of it. We had $200,000,000 due to GlobalFoundries In Q1, 2014 and that money has been paid. And our business model has transformed with more predictability of revenue as I said in my prepared remarks, in particular with the semi custom game console business. And therefore, I'm very comfortable from a viewpoint of resetting The cash balance to the $1,000,000,000 for the optimal range and $600,000,000 minimum. On top of that, as you probably read, we closed secured Revolver line of credit what we call the ABL in Q4 of which we have $500,000,000 available. So when you take our cash balances at the end of Q4 2013, look forward to our Profitability on the full year basis for 2014, I'm confident we can be free cash flow positive for the year. Despite having paid the $200,000,000 of GlobalFoundries, which we did in the early part of January. And Stacy, if you take a look what a year A difference a year makes. At the end of 2012, our cash balance is basically exactly the same a year later at the end of 2013 and arguably probably the most difficult PC market in history. And I think we executed The plans that we laid out quarter by quarter to deliver that and now we're moving into the next phase, which we continue to accelerate Our business based on the new products we've identified, the new growth markets, that's our objective to deliver free cash flow positive for 20 14 as we deliver net income positive for the full year and revenue growth for the full year. Got it. That's helpful. For my follow-up, I wanted to just verify something on the GlobalFoundries. I guess, it looks like they forgave some of the committee. You said there were no penalties from the reduction. Does Does that mean there are no penalties? There weren't any and there won't be any forthcoming? Or is that part of are you negotiating that as part of the 2014? Because the last time you couldn't take the wafers, You wound up still paying for them. You just had a little more time to pay for them. Are we basically done with the 2013 commitment at this point? The 2013 WSA is completed. There are no associated penalties with the reduced papers we took in Q4. Got it. So now it's all about 2014. Okay. Thank you guys. Appreciate it. Thank you. Thank you, sir. And it looks like our next question in queue will come from John Fisk with Credit Suisse. Please go ahead. Your line is open. Hi. This is Andrew Pape dialing in for John. I had a quick question about your seasonality commentary for Computing Solutions. You said C1Q 2014 revenue is expected to be down, Partially being driven by seasonality of Computing Solutions, do you view seasonality as non missing with that particular business? You said on the compute business? Is that what you were saying? Yes. Computing position business. Our view is that We see seasonality in line in 1Q. And I think that's good improvement from what we've Over the past several quarters as we move through this transition, we're looking for our compute business to deliver at seasonal trends, historical Trend in 1Q. And if you remember, I said in the last earnings call that we weren't going to lean into Q4. We took that opportunity To prepare and control and burn down inventory as well as position us for 2014. And I think what you're See based on our guidance is that compute will fall back into line with the historical trends. I think that's good improvement. Yes. I think I wasn't clear with my question. I I just want to get a better sense of how you view seasonality of your computing solution for C1Q. I guess, is that somewhat like down mid single digit quarter over quarter? Or I just wanted to get at what you how you view seasonality for that particular business? Yes, we normally I mean it varies from year to year, but let's say around 8%, 7%, 8% or so. Okay, got And as my follow-up, you said you expect revenue to be up year over year in 2014. Do you expect both business segments to perform? And just If so, do you expect one part of your business to outperform the other? We're in the transformation year of a multi year transformation. We've given the guidance for the quarter and we'll lay that out. We do see Generally, we do not break that out at this point as we move through this transformation. Okay, guys. Thank you very much. Thanks, sir. Thank you. And our next question in queue will come from the line of Ramesh Shah with Nomura. Please go ahead. Your question is please. Yes. Thanks so much guys. Roy, I was hoping I realize it's January, but I was hoping to get some more color on the revenue target for 2014. You're guiding for growth. But Being that The Street's modeling north of 15% growth, I think we're hoping for a little bit more color. Are you Seeing more single digit growth or are you a little bit more optimistic on that? Yes. So from my perspective, I think As we've gone through a very difficult and unprecedented 2013 from a market perspective, I continue to believe the PC market will be down in 2014 a similar amount. And as we've discussed in our last call, We're basing our plannings on that assumption. We see some parts of the market stabilizing for sure in this early part of the year. But as we've Got to CES, we got kind of a mixed story there. So I think that from our perspective, we're going to manage our business to that 10 That base assumption. And if we do see upside, we're going to take advantage of it. Given we're in this very unpredictable Stage of the market and we're also in this transformation. I think it's prudent for us to give the guidance quarter by quarter as We move through this transformation. We've shown our ability to deliver and execute quarter by quarter. And I think What we're saying is we see the opportunity to drive that revenue growth for the year. Let's get a couple more quarters under the belt. We'll lay that out as the year goes on and see how the industry begins to unfold and we'll lay out the year as we go. I think that's the prudent way to handle Yes, I agree. On PCs, which sub segments would you say are showing the highest Grevious stabilization today? Well, I think there's early part to that. I think there's no doubt that the The expiration has driven some activity in the commercial segment. It's one of the reasons Lisa and John Byrne and their teams have targeted The opportunity you're going to see a substantial increase in the number of SKUs that we have, the number of models that we have In the Commercial segment, I think that's done better over the past several quarters. I think it will continue to do Better. I think the component channel has continued to do well. The area that's been the most difficult and obviously most affected by The tablet migration has been entry level consumer notebook. And clearly, we were way Over indexed in that space. Part of our strategy diversify to the high growth market and within the traditional market Diversify into the segments within that PC market where we see future growth. Lisa, you want to add anything else to that? No, I think that covers it. Great. Great. Thank you very much. Operator, we'll take 2 more questioners, please. Understood, ma'am. Our next phone question will come from the line of Jumon with Evercore. Please go ahead. Your line is open. Great. Thanks a lot. For my first question, I want to see if you could talk a bit more about The semi custom business console. Lots of moving pieces out there, very, very strong ramp first through the 1st couple of months here. How do you see the inventory situation? How much more demand do you think there is? I know you talked about expectations for growth year over year, but can you just help us Kind of frame some of your expectations there. Yes, Patrick. Let me try to give you some color on that. So from everything that we see, the semi custom launch has been Very successful, very strong uptake both in sell in as well as sell through inventory. Of course, you'll see more of that from our customer data. From the visibility that we see into 2014, we see also strong uptake. And usually, as you know, These consoles tend to increase in numbers of units through the 3rd 4th year of console launch. So We see 2014 as a strong year for the overall gaming console market in both the Sony and the Microsoft consoles. Okay. And just referring to the can you talk a little bit about the profitability? I think A couple of quarters ago, you guys set a lower operating margin target there. How's the progress on that going? And how are the ASPs Pete is going to how should we think about ASPs trending over the next 1 to 2 years as NRE comes off? Yes, two parts. I think the operating margin, you're right. We had given at the Q3 timeframe and we were just starting to ship the product margin guidance In the low double digits. We came in at the teens as I said for Q3. And in Q4 really we continue to improve. And over time, we believe that we And continue to increase the operating margin within that business and that obviously benefits the operating margin of that business and the company. As you can see, the evidence, if you go look at the GVS segment results for this particular quarter, Q4 At the $865,000,000 revenue, we had about 14% operating margin And that's really good. I'm not going to provide granularity of the operating margin for that particular part of the business on a go forward standpoint, But more looking at the operating margin trajectory between the businesses on the Computing Solutions on the one hand and GBS, the Graphics And Visual Solutions on the other. Patrick, on your question on ASPs and that I think what I'll say is that the ASP reductions are well understood and they're in our model. And with that, as Devinder said, we still Expect over time to be able to improve the operating margins based on the execution of the products. All right. If I could squeeze in one last question just on the dense server business. It's probably my favorite one that you guys have. Could you talk a little bit about your go to market strategy? I guess, do you think that you're going to see an uptick From OEMs first, do you expect early success with direct cloud customers? Just any sense of any color you could give On pace of penetration things like that. Sure. Let me try to do that. So on the M and A server business, I mean, last quarter, we announced Verizon as our 1st megadata Our win with our C Microsystems and that was a big deal. And we see that as really a cloud customer going forward. As we look forward, our dense server business has both chip and Some sales. And so I think on the system side, you'll see more of the cloud customers and there's certainly a number of trials in progress. On the chip side, we're seeing interest from both traditional OEMs as they expand their dense server As well as cloud customers and others looking to expand in To the data center. So I would say on the chip business, it's more mixed. On the system business, we are very focused on those newer workloads. Got you. Thanks so much. Thank you, sir. And we do have time for one final questioner. Our final question for today will from the line of Sarena Bajore with CLSA Securities. Please go ahead. Your line is now open. Thank you. Just One clarification, Devinder. Given your guidance, you're guiding at, I guess, PC down seasonally and which I think implies Graphics to be down about 20% or so. I would have thought gross margins would improve a bit just given the gross margin profile. I'm just wondering Why they're not improving? And then as the business rebounds in Q2 and Q3, how should we think about gross margins? Thank you. I think if you look at it from the viewpoint of the computing solutions where we sit down in line with seasonality and Lisa mentioned earlier the 8%. On the graphics side, it's really a combination of the businesses within graphics and then obviously the semi custom business That obviously is going well from where we executed in Q4 and our customers continue to do well even in Q1. The mix of the revenue obviously is going to lead to that 16% down guidance that we gave. And that's where the gross margin comes out given the mix of Within the Computing Solutions and the graphics on the discrete basis and the semi custom business. But given that semi custom is lower gross margin, my question is as the business comes back in Q2 or Q3, Is there further downside to your 35% forecast? I'm not going to go further out in the year because it's really going to depend then when you get into the late part of 2014, how our growth businesses do, how the semi custom business evolves given the launches that our customers are going to do In other parts of the world. And finally, obviously, on the PC market, we have the transition going We are in the midst of a transformation. Our business model is evolving. We've done as you probably have tracked us the last few quarters Giving the guidance for the gross margin and meeting the gross margin guidance. And in Q1, the gross margin is 35% and we're going Continue to manage that as we go to the year in 2014. It's clear that we've been on this multi year journey and clearly Focused on positioning ourselves for this turn. I think 2013 is going to be remembered as a significant turning point In our history as we defined this multi year transformation to create a stronger and more profitable AMD. And as we look forward, I think you're seeing us target those segments that are going to have growth, look for those areas where we can expand our ASP, where we have opportunity to get new business and to choose those businesses that are going to produce the profitability long Additionally, we'll manage the operating expense to deliver that. And you need to look at this as a body of work over the next 2 years. We've done the 1st 2 years. Think about where we were just a year ago and where we are today. And think about where we can get to this year, because the next goal is growing the revenue for the full year and that profitability and net income for the full year. And then by the end of 2015, 50% of our business comes from the new growth segment. That's a different AMD and that's how we'll manage Quarter by quarter, step by step through the strategy. Thank you. Thank you, operator. This concludes the call. Thank you, presenters. And thank you, ladies and gentlemen. Again, this does conclude today's call. Thank you for your participation and have a Wonderful day. Attendees, you may now all disconnect.