Earnings Call: Q3 2013

Oct 17, 2013

Good afternoon. My name is Huey, and I'll be your conference for today. At this time, I'd like to welcome everyone to AMD's Third Quarter 2013 Earnings Conference Call. All lines have been placed on 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 conference 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 3rd quarter earnings conference call. By now you should have had the opportunity to review a copy of our earnings release and the CFO commentary and slides. If you have not reviewed these documents, they can be found on AMD's website at quarterlyearnings.amd.com. Participants on today's conference call are Rory Reid, our President and Chief Executive Officer Devinder Kumar, our Senior Vice President and Chief Financial Officer and Lisa Su, our Senior Vice President and General Manager, Global Business Units will be present for the QA portion of the call. This is a live call and will be replayed via webcast on amd.com. I would like to highlight a few dates for you. Devinder Kumar will attend the Credit Suisse Technology Conference on December 3 in Arizona. John Byrne, our Senior Vice President and Chief Sales Officer will attend the Raymond James IT Supply conference on December 10th and the BMO 2013 Tech and Media Conference on December 11th. Our Q4 quiet time will begin at the close of business on Friday, December 13. And lastly, we intend to announce our 4th quarter and year end earnings on January on referenced during this call are reconciled to their most directly comparable GAAP financial measure in the press release and CFO commentary posted on our website at quarterlyearnings.amd.com. Before we begin today, let me remind everyone that the discussion contains forward looking statements based on the environment as we 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 actually cause results to differ materially from our current expectations. Please refer to The cautionary statement in our press release for more information. You may also find detailed discussions about our risk factor in our filings with the SEC And in particular, AMD's quarterly report on Form 10 Q for the quarter ended June 29, 2013. Now with that, I'd like to hand the call over to Rory. Rory? Thank you, Ruth. 3rd quarter revenue 1 $460,000,000 increased 26% sequentially and 15% year over year as we returned Profitability and delivered positive free cash flow. Revenue was higher than guided based on incremental demand for our new semi custom SoCs. The 3 step turnaround plan we outlined a year ago to Restructure, accelerate and ultimately transform AMD is clearly paying off. We completed the restructuring phase of our plan, maintaining cash at optimal levels and beating our $450,000,000 quarterly operating expense goal in the 3rd quarter. We are now in the 2nd phase of our strategy, accelerating our performance by consistently executing our product roadmaps, While growing our new businesses to drive a return to profitability and positive free cash flow. We are also laying the foundation for the 3rd phase of our strategy as we transform AMD to operator. Our progress on this front was Evident in the Q3 as we generated more than 30% of our revenue from our semi custom and embedded businesses. Over the next 2 years, we will continue to transform AMD to expand beyond a slowing transitioning PC industry As we create a more diverse company and look to generate approximately 50% of our revenue from these New high growth markets. We have strategically targeted the semi custom ultra low power client Embedded, dense server and the professional graphics markets where we can offer differentiated products that leverage our APU Our strategy allows us to continue to invest in the product That will drive growth while effectively managing operating expenses. This is by the 10% sequential reduction in our expense to revenue ratio as we drive to best in class operator. Several of our growth businesses passed key milestones in the 3rd quarter. Most significantly, our semi custom business ramped in the quarter. We successfully shipped millions of units to support Sony and Microsoft as they prepare to launch their next generation game consoles. Our game console wins are generating a lot of customer interest as we demonstrate our ability to design And reliably ramp production on 2 of the most complex SoCs ever built for high volume consumer devices. We have several strong semi custom design opportunities moving through the pipeline As customers look to tap into AMD's IP, design and integration expertise to create differentiated winning Solutions. We made good progress in our embedded business in the 3rd quarter. We expanded our current embedded SoC offerings and detailed our plans to be the only company We offer both 64 bit x86 and ARM solutions beginning in 2014. We have developed a Strong embedded design pipeline, which we expect will drive further growth for this business across 2014. We also continue to make steady progress in another of our growth businesses in the 3rd quarter, as we delivered our 5th consecutive Quarter of revenue and share growth in the Professional Graphics area. We believe we can continue to gain share in this lucrative Part of the GPU market based on our product portfolio, design wins in flight and enhanced channel programs. In the server market, the industry is at the initial stages of a multiyear transition that will fundamentally change the competitive dynamic. Cloud providers are placing a growing importance on how they get better performance from their data centers, while also reducing the physical footprint and power consumption of their server solutions. This will become the defining metric of this industry and will be a key growth driver for the market and the new AMD. AMD is leading this emerging trend in the server market and we are committed to defining a leadership position. Earlier this quarter, we had a significant public endorsement of our dense server strategy as Verizon announced a high performance public cloud that uses RC Micro technology and Oferon Processors. We remain on track to introduce new low power X86 and 64 bit ARM Processors next And we believe we will offer the industry leading ARM based servers. Now looking at our traditional businesses. In the Q3, our graphics business was in transition as our AIV partners prepared to launch new products based on our new R7 7 and R9 graphics chips. The transition is now complete and we are seeing Strong demand for our new products, which we believe will drive consistent growth in the coming quarters. A key innovation in these new chips is Mantle. Mantle was developed in conjunction with game developers to allow them to take better advantage of the capability of AMD's latest graphics cores, resulting in dramatically better performance And power efficiency. Masl also means the investments developers make to create great content For the Sony and Microsoft consoles translates into optimized experience for all And the APUs and GPUs moving forward. Turning to the PC business. The 300,000,000 plus unit market remains an important part of our business, but the market is clearly in transition As evidenced in the Q3 by consumer notebook softness, which we expect to continue for the next several quarters As tablet adoption increases and our customers' inventory levels remain lean, We expect PC Industry Unit shipments will decline approximately 10% this year And by a similar amount in 2014. We have the right product and IP and we'll continue to compete effectively in this market. We are well positioned to expand our channel business and strategic OEM partnerships around consumer notebooks and commercial products. Cabiti continues to ramp in support Of a number of high volume OEM platforms and Tamash adoption is growing. Toshiba and HP announced the first Hamash powered convertibles and we expect more designs from other OEMs to launch this quarter. Our work to strengthen our desktop business is gaining momentum. We delivered a 2nd straight quarter operator. Of channel revenue growth based on strong demand for our high end A8 and A10 APUs At EPYC's CPUs, we expect this trend to continue. We remain on track Back to begin shipping our next generation Khivarri APU for the channel this quarter and key motherboard Partners are already offering new products in anticipation of this launch. So in summary, We are successfully hitting key milestones of our 3 step strategy to diversify and transform our business. We have completed the first step restructuring AMD and stabilizing our business. We effectively managed cash At the optimal level and beat our $450,000,000 quarterly operating expense goal in the 3rd quarter. We are now in the 2nd phase, accelerating our performance by consistently executing our product roadmap and growing Our new businesses. Our success here drove 26% sequential revenue growth And returned AMD to profitability and generated free cash flow in the 3rd quarter. Our progress sets us up to ultimately transform AMD in the 3rd and final step as we leverage our IP and Design expertise from our traditional businesses to generate approximately 50% of Future revenues from high growth markets over the next 2 years. We are in the middle of a multiyear journey We outlined over a year ago to redefine AMD as a leader across a more diverse set of growth markets. I'd like to take this opportunity to thank Amders across the world who have pulled together to deliver on our commitment and successfully execute our plans. The job is not done, But we are making good and real progress. I look forward to the next steps of our strategic transformation. Now I'd like to hand the call over to Devinder. Devinder? Thank you, Rory. Our 3rd quarter results met For revenue, gross margin, operating expenses and cash, although inventory was higher than guided. We completed the first Phase of our 3 step plan to transform AMD, the reset and restructure phase and we are performing well in the 2nd phase Accelerating our business and executing on our 2013 product roadmap. In the 3rd quarter, We made progress towards our goal of diversifying our product portfolio as we successfully ramped our semi custom products. Specifically, our semi custom and embedded revenue accounted for more than 30% of total company revenue, Exceeding the target of 20% of revenue by the Q4 of 2013. Financially, we returned to profitability Both in operating and net income met our target of reducing operating expenses to $450,000,000 and generated positive free cash Significant change is underway at AMD as we continue to our transformation into 2014 and beyond. Now let me turn to the specifics of the quarter. Revenue for the Q3 of 2013 Was $1,460,000,000 an increase of 26% from the 2nd quarter and an increase of 15% year over year. This represents the highest sequential revenue growth in the past 5 years. The increase was driven by More than doubling of our Graphics and Visual Solutions segment revenue quarter on quarter, primarily from the ramp of our semi custom SoCs. Gross margin was 36%, down 4 percentage points sequentially and in line with our As we grew our semi custom business, which has lower than corporate average margins, but significant revenue and Power as volumes ramp. You will recall that the semi custom NRE operating model drives Significantly lower operating expenses for this business with the majority of its gross margin dollars Following through to operating income. The 3rd quarter result includes a $19,000,000 benefit or approximately 1 percentage point From the sale of inventory previously reserved in the Q3 of 2012 as compared to an $11,000,000 benefited by approximately 1 percentage point in the Q2 of 2013. Non GAAP operating expenses were $443,000,000 slightly below our targeted level of $450,000,000 Primarily due to the timing of certain marketing related expenses. Non GAAP operating income was 78,000,000 And non GAAP net income was $31,000,000 both of which exclude a gain of $22,000,000 from the real estate transactions in the quarter. Non GAAP earnings per share were $0.04 calculated using 764,000,000 diluted shares. Adjusted EBITDA was $153,000,000 an increase of $99,000,000 from the prior quarter, Primarily due to improved operating income. Now turning to the business segments. Computing Solutions segment revenue was $790,000,000 down 6% sequentially due to lower notebook and chipset unit shipments, Partially offset by higher desktop unit shipments. Computing Solutions operating income was $22,000,000 up from $2,000,000 in the 2nd quarter despite the sequential 6% decline in revenue driven by lower operating Graphics and Visual Solutions segment revenue was $671,000,000 more than double last quarter's level, Good afternoon. My name is Huey and I'll be your conference operator, driven by shipment of game console semi custom SoCs. Graphics and Visual Solutions segment operating income was 79,000,000 Compared to breakeven in the prior quarter, primarily due to the semi custom business. Operating margin For the semi custom business was in the mid teens, primarily due to higher revenue and a very smooth ramp in our 1st full quarter of production. Moving forward, we expect semi custom operating margin performance To continue to improve as the business gains traction, volumes increase and costs improve. Turning to the balance sheet. Our cash, cash equivalents and marketable securities balance including long term marketable Securities was $1,200,000,000 3rd quarter real estate transaction generated cash proceeds of 56,000,000 We remain committed to operating and funding the business appropriately and continue to have a number of liquidity bolstering opportunities available. Inventory as I stated earlier was higher than guided at $922,000,000 largely driven by next generation game console product in preparation for 4th quarter shipments of our new graphics products. Debt as of the end of the quarter was 2,000,000,000 Flat from the prior quarter. Accounts payable at the end of the quarter was 574,000,000 Up $172,000,000 from the 2nd quarter due to the timing of purchases and payments. Depreciation and amortization was $2,000,000 down $2,000,000 sequentially. And lastly, we generated positive free cash flow of $6,000,000 in the quarter. Now turning to the outlook. For the Q4 of 2013, AMD expects revenue to increase 5% sequentially plus or minus 3%. Non GAAP gross margin is expected to be approximately 35% As our semi custom business continues to represent a greater portion of our overall revenue, we expect We continue to maintain quarterly non GAAP operating expenses in the $450,000,000 range and expect to be profitable at the net income level. Inventory is expected to be flat from 3rd quarter levels and cash is expected to be approximately $1,200,000,000 Capital expenditures for the full year 2013 are expected to be approximately $110,000,000 down from our prior guidance of 150,000,000 In summary, our execution and product diversification strategy is showing results As evidenced by our return to profitability in the Q3 of 2013, we are pleased to have delivered on our financial commitment so far this year, operator. I'm ahead of schedule and expect to continue these positive trends in the Q4. With that, I'll turn it back to Ruth. Ruth? Thank you, Devinder. Operator, we'd be happy for you to poll the audience please for some questions. Sure thing. Our first question in queue will come from the line of David Wong with Wells Fargo. Please go ahead. Your line is open. Thanks very much. I think in your CFO commentary you pointed out that graphics would decline because of the transition to the new products. Now that and you also said that The new products have transitioned. So do we expect to jump in graphics revenue in the Q4? And also what does your guidance assume in terms of microprocessor Revenue sequential growth, is it up or down in the 4th quarter? Hi, David. This is Lisa. Let me take the graphics So first, we've talked about Graphics as a multi quarter growth strategy for us in terms of market share and we're Certainly seeing that we're executing on that path. When we look at the Q3 relative to the Q4 and where we're going, We have built a very strong product portfolio. We just announced our full lineup for the R7 and R9 series and those were Launched in September and shipping in October. So we did see a little bit of a transition at the end of the Q3, but we do expect to gain share in the Q4 with our graphics And from a CPU standpoint David, I think you'll see that the market continues to be in transition. There's no doubt for 2013, we There's no doubt for 2013, we see the market down 10%. We see that continuing As we manage our portfolio into Q4, we want to keep a long view operator. We know 1Q and 2Q are going to be seasonally light. That's just how it is. And we want to make sure we're managing inventory and positioning So I would expect we'll continue to see the market feel pressure down year to year and I would expect that we'll manage this and not lean into it to make sure we have a more consistent revenue path as we go into 2014. Okay, great. And one final one. I think you noted your semiconductor business operating margin was in the mid teens. So that was quite a bit better than you'd expected initially. Can you improve it from here? Or is this the right operating margin for us to think of for the current console semi customers business? I think David you're right. I mean the operating margin when we discussed this last quarter, I had said low double digits that Came in at the mid teens and really that's credit to the higher revenue that we had in the quarter and the successful execution of a very steep ramp in the product in the 1st full quarter of production. And as you know, as we gain traction and get more volume and cost improvement, the operating margin could improve from the mid teen level. I think it's also important to see the kind of execution that we delivered in semi custom in this ramp. This is one of the most complex ramps that we've seen with this set of SoCs. And what's really encouraging is how Customers are looking at this in terms of the innovation that we've created here as well as our execution. And that's driving some serious interest in terms of our Pipeline and opportunities in the semi custom space that are moving through at this time. Great. Thanks. Thank you. Thank you, sir. Our next questioner in queue will come from the line of Hans Mosesman with Raymond James. Please go ahead. Your line is now open. Thank you and congrats on the execution on the semi custom. Hey guys, can you provide a roadmap or Some granularity regarding process node transitions in 2014 2015 as it relates to FinFET by graphics and APU. Thanks. Hi Hans, thanks for your question. And relative to where we are in terms of process technology node transitions, We are typically at the leading edge of process technology nodes. We are fully top to bottom in 28 nanometer now across all of our products And we are transitioning to both 20 nanometer and to FinFET over the next couple of quarters in terms of designs. So we'll continue to do that across our foundry partners. And specifically to FinFET if you don't mind? We will do 20 nanometer first Hans and then we will go to FinFET. Okay. Thank you. Thank you, sir. And it looks like our next question in queue will come from Vivek Arya with Bank of America Merrill Lynch. Please go ahead. Your line is open. Thanks for taking my question. Rody maybe one more on the PC business now that Intel is starting to become more aggressive in the lower price Segments of the market also in the tablet category with Baytrail and these are segments where you have traditionally held larger market share on a relative basis. So if you are expecting the PC market to decline 10% next year and Intel continues to be aggressive in that Lower price segment of the market, how do you think your PC sales will trend next year? Just conceptually, I understand it's too early to make a for specific prediction. Well, from my perspective, Vivek, I think that we've created very interesting product set with the current products and the feedback I'm getting From our customers in terms of the design wins and the ramps, they look solid. Our volume is solid in that space. And the next generation products, the silicon is already in shop. So that's positioning us well to continue to compete in this segment. But make no mistake about it, the PC industry is clearly in transition and will continue to be in transition As tablet continues to attack particularly in the consumer segment, we think we can compete well and it will make a significant portion to Our business moving forward. But think about it, 2 years ago, we were 90% to 95% of our business centered over PCs. And we've launched a clear strategy to diversify our portfolio, taking our IP leadership IP and graphics and CPU And taking it into adjacent segments where there's high growth for 3, 5, 7 years and stickier opportunities, We see that as an opportunity to drive 50% or more of our business over that time horizon. And if you look at the results in the Q3, we're already seeing the benefits of that opportunity with over 30% of our revenue now coming from Semi custom and our embedded businesses. We see it as an important business in PC, but its time is changing and the GoCo era is over. We need to move and attack the new opportunities where the market is going and that's what we're doing. Got it. And maybe one for Devinder on the cash side. I think Devinder in the prepared comments you said that you expect to be at 1,200,000,000 at the end of Q4, so slightly up sequentially. And then you do expect to be at the 1.1 an optimal level by Q1. But given the $200,000,000 payment due in Q1, does it mean you expect to generate cash also in Q1, which is seasonally a weaker quarter. Thank you. Yes. Vivek, if you look at the last one year, I think that was exactly what we said about a year ago about maintaining cash at the $1,100,000,000 Well above the target minimum. And as we have seen despite a very challenging year that we have gone through, we have successfully maintained $1,100,000,000 of cash without by the way getting any external financing. And with the ramp in the business That we see here at the level that we came in, in Q3 and what we are projecting for Q4 and with any levels available to us if Wanted. I'm very confident we can maintain cash at best levels. Got it. Thank you. Thank you. Our next questioner in queue will come from the line of John Fitzer with Credit Suisse. Please go ahead. Your line is open. Yeah. Good afternoon guys. Thanks for Let me ask a question. I guess what I'm trying to understand a little bit better is where do you believe the trajectory of the gaming ramp Kind of flattens out. So you've got some benefits here in September December quarter with initial builds. As we look into the first half of next year, what's the right Steady state run rate. And I guess specifically now that you've kind of broken through the breakeven mark on the P and L, do Do you think you can stay above breakeven in what's usually a seasonally soft quarter in calendar Q1? Yes. So we won't be giving guidance It's not Q1 at this point, but clearly it's our objective to get back in black in Q3 and continue to deliver that in for Q4. And this year is the tale of 2 halves, the first half and improving second half. As we look to 2014, we need to look at the And drive a business that drives revenue growth and profitability for the full year. That needs to be the next step in our transformation. Now in In terms of the question about gaming, gaming is going to be an important driver of the business. And And if you think about consoles traditionally, that's a 5 plus year business and it generally peaks in the 3rd year. It will have some seasonality in the First half of the year, but we think there's strong demand and opportunity for us to continue to have a very good business. And we'll share the specifics of that as we give the guidance for 1Q next quarter. But I think it's important to think about it as we Continue to go after this pipeline in semi custom. We'll look to close additional deals over the next 2 years, 1 year 2 years that will allow us to Continue to fill out that business with this nice sticky flow of revenue both in embedded and semi custom. And while we're in the early phases of this transformation, as you move out and take the long view, you'll see the portfolio drive a much more consistent The level of revenue moving forward. But again, it's our objective as we stated before to get back in black, Which we did in Q3 and then to move forward in Q4 to continue to accelerate. And then for 2014 is to drive a business That's profitable for the full year and drives revenue growth for the full year. Thanks, Rory. And then as my follow-up, Devinder, do you have an inventory target For the December quarter and can you just bring us up to speed on where we stand with the wafer supply agreement with GlobalFoundries for this year relative to Your obligation that you had in Q3, Q4? Yes. As I said in my prepared remarks, I expect inventory levels to remain essentially flat from where we Recall that it's a steep ramp in the business. We introduced the semi custom products, the new products At least I referenced earlier the R7, R9 series. So I expect that in the Q4 timeframe when we report the results will be essentially flat to Q3. Talking about the WSA from GlobalFoundries, we are on track to meet the commitments for the 2013 WSA And on the 2014, if that's what you're referring to, we are in discussion to figure out the pricing and the wafer Volumes for 2014 and I expect those to close within the next 30 to 60 days. Thanks guys. Thank you, sir. Our next question in queue will come from the line of Ross Seymore with Deutsche Bank. Please go ahead. Your line is open. Hi. Thanks for letting me ask a question. One from the prior question. Do you expect seasonality in the gaming console business in the first half of twenty fourteen? Or is the early stage at Which we are in the ramp and the geographic distribution expanding for those launches something that could offset that seasonality. Yes. Hi, Ross. This is Lisa. Let me answer that So again, we do the game console business is consumer business, so we do expect some level of seasonality. You're absolutely right. It's the 1st year of launch and there's pent up demand. So we'll see some seasonality as we go into the first half of the year, but Yes, probably a little bit different than normal years. And one other clarification for Devinder. On the gross margin It's a 35%. What does that assume as far as sales of previously reserved inventory? Are you Let me get that one point again. Yes. We actually that's not included. I think as we have said earlier, we remain opportunistic. If an opportunity comes along, we go ahead And sell the parts, but there are no plans to go ahead and do that at this point. We have about $40,000,000 left of the Previously, there's inventory which we took in Q3 of 2012 to the tune of $100,000,000 And I guess the final question more of a structural one as we look forward into next year. You did a great job of getting down even under the $450,000,000 in OpEx that you've talked about. If we think about next year conceptually, how should we expect the company's OpEx to change alongside of revenues? Do you think $450,000,000 something you can hold throughout the year? Or what are the puts and takes from a kind of a bigger picture perspective? I think The key I would leave you with is we've been very disciplined from an OpEx management standpoint. We actually beat the target of 450 that we said And projecting to be around 450 for Q4. The thing you're going to see about AMD with the mix in the business and the changing model We're very focused on operating margin. So obviously, if revenue goes up significantly, there is a possibility that OpEx might go up. But I think you're going to see us been very From a viewpoint of how OpEx modulates against the revenue increase or decline. And Ross, I want to add a little something here to get on how we see this business evolving over time. Look at the semi custom business and how we're reusing IP in a series of high growth And semi custom is an NRE model where there's an investment around engineering. In the quarter, we drove $300,000,000 of Additional revenue up 26%. And at the same time, we had expense decline almost 10%, following a year we've driven down for 25%. Clearly, that says we're getting a strong leverage in that mop. And as we consider that In some of our core businesses, they'll continue to see pressure. They're at a different point in their maturity. We'll drive for higher efficiencies in those segments and at the same time look for opportunities to make investments to capture The new growth segments like growth businesses like Pro Graphics, Embedded in semi custom. But overall, I think it's fair to say we will look for more efficiencies as we move forward, but it will be balanced. Thank you. Thank you, sir. Our next questioner on the phone queue will come from Ramesh Shah with Nomura. Please go ahead. Your line is open. Hi, thanks for letting me ask a question. The competing results are my biggest concern looking At the quarter and Rory, you chalked up the weakness to just general softness in consumer notebooks. But if I look at your numbers, The computing business was down 6% sequentially. You said desktops were up, which means notebooks were probably down more than 10%. And I compare that to Intel, whose PC business was up, I think, mid single digits and IDC and Gartner were also up. So How do we reconcile the difference between AMD's consumer business, notebook business and Intel and just the general market? I think you kind of summed it up properly. The consumer market is feeling more pressure, but all parts of the PC market This market, this industry is down 10% and at rates it's never experienced before. It's going to continue. From our perspective, AMD is over indexed to client notebook. We've always been. We've had just like we have to diversify our Portfolio Cross High Growth segment, we need to diversify this core business. We need to move stronger into desktop. And as we've talked about a year ago, we worked on The inventory in the desktop segment and we built and repaired that and we've seen 2 quarters of consistent revenue growth in that segment. And we believe that we have the right products to act and continue to make progress and that's part of our But there is no doubt that the PC client segment, particularly at the entry level, will feel pressure from tablets and it's a competitive We're going to be in there and we're going to compete because we have very good product. But that is A key driver why we're moving in the direction of this transformation, this multi year strategic transformation. We'll invest in those gross markets and we'll attack these base businesses around efficiency and where we can diversify the portfolio and gain revenue. And I would And I would add from a financial standpoint just to level set with what we saw coming and what the reset and re Structure and the acceleration and transformation is all about. If you look at that particular segment from a revenue standpoint year over year, revenue is down about $140,000,000 profitability is up about $36,000,000 Quarter on quarter revenue is down about $51,000,000 and the profitability went from essentially breakeven to what we ended up in Q3 at $22,000,000 And that is essentially the power of the expense model, how we are deploying the resources from a transformation standpoint into what we call the growth businesses, Including the semi custom and the PC business, which obviously is under pressure. All right. That's helpful. And then Sorry if I missed this, but in Q4 embedded in the 5% sequential growth, are you assuming that computing is stable or growing? I think from a computing standpoint, I think there's no doubt that that market will continue to see pressure, I think at the industry level as well as in the consumer segment, we're planning not to lean into that, but to manage the inventory because we'd I much more like to see a consistent revenue through that weak part of 2014 where seasonality affects it. So we don't want to kind of get a bumpy move there. I think we'll see it continue to trend slightly down. But I think As we move into 1Q and 2Q, we can continue to build off that base as we add the new revenues as part of our strategy. All right. Thanks, Rory. You're welcome. Thank you, sir. And our next question in queue will come from the line of Joe Moore with Morgan Stanley. Your line is open. Great. Thank you. I wanted to go back to the wafer supply agreement question with GlobalFoundries. It looked like you were you used up 46% of that As of the 2Q, 10Q, the Computing Solutions business it looks like will be down in the second half and I think you've moved some of that business to TSMC. So I I guess just some further clarity on why you're confident that you'll use the entire amount of that? The total amount that we Committed to purchase in Q in 2013 is $1,150,000,000 And looking at the numbers that I'm looking at, we are on We're back to satisfy the obligation for the WSA for 2013. Okay, great. Thanks. And then the inventory building, why do you need to maintain inventory at this level if your revenues Going only about looks like about $75,000,000 in the Q4? Well, it's a timing, right? So you go ahead and have the build in inventory from a viewpoint of The steep ramp in revenue and you can have the timing from a viewpoint of when the wafers come in and then we have the parts. And what we are doing from a management standpoint is over Q3 and Q4 keeping the inventory flat while the revenue has gone up 26% from Q2 to Q3 and projected to go up again in Q4. So I think you need to take a longer view in terms of the 6 month period, how much the revenue has gone up from the first half to the second half and inventory essentially He has gone from $600,000,000 to $900,000,000 And by the way, the revenue is up significantly in both quarters compared to the prior quarters. Great. Thank you very much. Thank you, sir. Our next question in queue comes from the line of Chris Rolland with FBR. Please go Your line is open. Hi, guys. How are you? Back to the op margin, the incremental op margin in graphics, Probably implying mid teens maybe even a little bit better on the gaming console business. As we think about that going forward, once this product is really on cruise control, even if it's a couple of years from now, What sort of incremental improvements are we talking about when there's really not that much SG and A to support this R and D to support this? I mean, are we Maybe another 500 or even 1,000 basis points in op margin improvements at its peak. Without giving the granularity and I'll let Lisa comment, overall as you can see when you have a ramp in revenue for a New business like semi custom, there's certain amount of money you spend from an OpEx standpoint. The semi custom business and in particular the game console Business is built on an NRE model. The R and D costs have been incurred upfront. The gross margins as we've been very transparent are lower than the corporate average, But the majority of that falls to the operating margin line. In Q3 alone, thinking that we were at the low double digits when we Last quarter, we came in at the mid teens. As we gain traction, as we extract more efficiencies, as we go ahead And increase the volume and get cost improvements, the operating margin could go up from the mid teens higher than where we came in in Q3. I'll let Lisa comment from a business standpoint too. Yes, Chris. Just to give you a little bit more color on that. So the operating Margins did come in a little bit better than we had originally planned and that was primarily because the ramp was actually quite smooth and it went very well. As we look forward, again, this is a very nice product. It's one of those each of these products are high volume. They give us a lot of opportunity to optimize Yields and costs and other things. So we're going to be working hard to improve that operating margin over the next number of quarters and it's something that we believe There's leverage in. And Chris, one of the things you really got to think about in this business, these are just the first two wins in this semi custom space. We have a pipeline of additional products and it's our intention to win and mix in a whole set of Semi custom offerings as we build out this exciting and important new business. And also as you think about that NRE model, look at the expense to revenue ratio. When we historically ran this business at Expense to revenue ratio, when we historically ran this business at different margins, it was much higher, the high 30s even into the 40s. In this quarter, we saw a 10% reduction in E to R with that significant revenue gain and we're going to drive that efficiency moving forward. Think about building that business and how the power of this model continues to grow over time. Okay. Thank you, guys. Thank you, sir. Our next question will come from the line of Srini Bajuria with CLSA Securities. Please go ahead. Your line is open. Thank you. Maybe for Lisa. Lisa, I mean, Given that the product life in game consoles is quite long, I'm trying to understand how your own product refreshes work. For example, you're starting at 28 and will these products stay at 28 forever? Or are you going to switch to 20 at some point? And when that What happens obviously, the costs are going to increase. And I'm just wondering what happens to the margin side of the equation? Yes. Shrini, good question. So it is a long lifecycle product over 5 to 7 years. Certainly, when we look at cost reduction opportunities, one of the important ones Is to move technology nodes. So we will in this timeframe certainly move from 28 to 20 nanometer. And the reason to do that is both for pure die cost savings as well as all the power savings that our customer So I think we'll see leverage in the model as we continue to improve the costs and as the costs improve the volumes will also go up. So you actually expect the cost to go down as you move to 2020 not go up? Absolutely. On a unit basis, Yes. Okay, okay. Great. And then just a couple of clarifications. I think there was a mention about C Micro Windings and Designs at Verizon. Brian, just wondering if you could give us an update on that business. It's been a while since you acquired that, how that's tracking and if you could quantify how big that is that would be great. Thank you. Yes, absolutely. So the C Micro business, we're very pleased with the pipeline that we have there. Verizon was The first major data center win that we could talk about publicly, we've been working that relationship for the last 2 years. So it's actually nice to be able to talk about it. We do see it as a major opportunity that will give us revenue potential in 2014. And we continue to see a strong pipeline of opportunities See micro as more of the data center guys are looking at how to incorporate these dense servers into their new cloud infrastructures. Stifel, please go ahead. Your line is open. Yes. Thanks for taking my question. And just for a little more granularity on the Verizon, Are you only shipping C Micro product with A and B Optron? Or does it also have Xeon and Adam? Yes. So, the clarification around C Micro servers. As I said, the Verizon engagement has lasted over The past 2 years, so some of the initial deployments were with the Intel processors, but we do have significant deployments with AMD Opteron as well. Okay. And going forward, do you think we'll switch more to Optron heavier? We do see the percentage of Drone processors increasing because that's what we would like to do. Great. Okay. Thank you. Operator, we'll take 2 more questions Understood. Our next questioner in queue will come from Andresha Rocha with BMO. Please go ahead. Your line is open. Thank you, Lisa. Since you're on a roll, I'll just follow-up on the server roadmap. What's the timing for 64 bit and then with ARM? And then Specifically, give us some insights into to the extent you can on how you aim to combine C Micro, for X86 and ARM. Thank you. Thanks Ambrish for the question. So again, we're very excited about the server space. It's a very good market. It's a market where there's a lot of innovation and change. In terms of 64 bit ARM, You will see us sampling that product in the Q1 of 2014. That development is on schedule and we're very excited about that. All of the customer discussions have Have been very positive. And then we will combine both the 64 bit ARM chip with our C micro servers to have a full solution as well. So I think we view this combination of IP as really beneficial to accelerating the dense server market both on the chip side And then also on the solution side with the customer set. What would be the timing for that Lisa for C Micro Plus on? So you'll see that in 2014. There. And it will come from the line of Patrick Wong with Evercore. Please go ahead. Your line is open. Thanks for squeezing me in. I've just got Two questions. First, I guess I'm a little bit confused about the way to think about the consoles to make custom contribution in the 4th quarter. It sounds like you guys are saying that graphics with the R7, R9 launch is probably going to be up, CPU down modestly with the market. And then of course earlier this morning we heard TSMC also talk about an An expectation that console would be down a little bit in the Q4 in terms of wafer starts. So can you just kind of help us well, Maybe give a little bit more color in terms of what type of growth that we should be factoring into the 4th quarter? Yes, Patrick. So let me try to help with that. So if you look at the combined quarterly shipments for Q3 and Q4, they're very much On track with what we would have expected. If you look at the supply chain cycle, we buy wafers earlier to ship and the peak months are The October, November. So I think all of the data is consistent. We did ship a few more units in Q3 than we originally planned just because of The strength of the production ramp, but we will see game console revenue go up Q4 versus Q3 just as the both Microsoft and Sony are preparing for their holiday launches. Okay. So it sounds like it's more of a timing And just my second question for Zander. Hey, can you I know when I take a look at your guidance CFO commentary, you talk about positive free cash flow In the Q4, can you help provide us the timing of your payments to GlobalFoundries? I see liability on your balance sheet. And I know you've got $200,000,000 come up in the Q1. So how does that play out and how does that work with your positive free cash flow? I think there are 2 parts to it, right? So we have wafer purchase from GLOBALFOUNDRIES that we have purchased throughout this year. Earlier This year we did have some special payments that we made related to the limited exclusivity waiver that we got way back in 2012. And then we did have the termination payment. We made about $120,000,000 payment of that. There is another $200,000,000,000 of debt left to be paid in Q1, 2014. So if you relate that from a cash standpoint, we have as I Projected $1,200,000,000 of cash revenues can be up in Q4. And then when we get to Q1, we collect the cash for the revenue that we're going to have in Q4, Pay the $200,000,000 and that's where I'm projecting the maintaining at the optimal range of the $1,100,000,000 from a cash standpoint. I see. Okay. Thanks so much guys. Thank you. Thank you, operator. That concludes today's call and we'd like you to sign us off please. 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. You may now disconnect.