Earnings Call: Q1 2013

Apr 18, 2013

Good afternoon, ladies and gentlemen. 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 First 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 the 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 Cotter, Vice President of Investor Relations for AMD. Please go ahead. Thank you, and welcome to AMD's Q1 earnings conference call. By now, you should have had the opportunity to review a copy of our earnings release and the CFO Commentary and PowerPoint slides. If you've 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, for Global Business Unit, who 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 highlight a few dates for you. Mark Papermaster, our Senior Vice President and Chief Technology Officer We'll present at the Jefferies Global Technology, Internet Media and Telecom Conference on the 7th May in New York Andrew Feldman, Corporate Vice President for the company's conference operator. Thank you, Hui. Welcome to the J. P. Morgan Technology Media and Telecom Conference on May 15 in Boston. Our Q2 quiet time will begin at the close of business on Friday, June 14. And lastly, for today. We intend to announce our 2nd quarter earnings on July 18th this year. Guidance information for the call will be provided in mid June. Please note non GAAP financial measures referenced during this call are reconciled to their most directly comparable GAAP financial 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 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 annual report on Form 10 ks for the year ended December 29, 2012. Now with that, I'd like to hand the call over to Rory. Rory? Thank you, Ruth. First quarter revenue was $1,090,000,000 slightly better than our guidance. We managed operating expenses in line with guidance And maintain cash balances above our optimal levels. We continue to make good progress on our 3 step turnaround. Step 1, restructure to reduce operating costs and improve efficiency. 2, Execute our 2013 product roadmap to accelerate our business and return to profitability. And 3, ultimately transform AMD to take advantage of high growth opportunities in adjacent markets where AMD's IP provides a competitive advantage. At this point, we have largely completed our restructuring activities And we will now focus on the 2nd step of our transformation, executing our 2013 Product roadmap and returning to profitability and positive free cash flow in the second half of twenty for 13. Our strategy to gain share in the traditional PC space is based on winning the most important designs across each customer by region, price point and form factor. This year, we will have the broadest range of mobile processors In our history spanning from sub-four watts to 35 watts, we have introduced our newest A Series Richland APU for the mainstream client for the stream client market and have secured innovative and premium design wins. In AMD's sweet spot, we have started volume shipments of Cabini in the Q1 and have a strong portfolio of high volume entry level design wins based on its substantial performance And battery life improvements. As part of our strategy to win new client form factors, we are ramping production of for Tamash in support of the ultra low power and fanless designs. Tamash beats the competition and is Ideal for tablets, hybrids and convertibles. We have a strong portfolio of customer offerings coming And we expect this will spur demand in the back half of twenty thirteen and provide us with an opportunity to grow share. Many of the new design wins are touch enabled and will bring the full Windows 8 experience More broadly to mainstream and entry price points, our server business revenue increased sequentially as Our high performance Opteon 6,300 Series continued to ramp. Now turning to our graphics business. In the Q1, we saw a strong revenue growth for our desktop GPUs in the channel and record workstation revenue. We also have a strong pipeline of design wins in the notebook discrete market, which we believe will drive mobile share growth in the second half of twenty thirteen. Our graphics business momentum is a result of our strategic decision to double down on being The gaming industry leader. As a result, desktop GPU channel sales are accelerating. We believe we regained share based on our industry leading GPUs and the Never Settle, Reloaded campaign, which bundles our graphics cards with many of the industry's biggest games. The program also cements tighter connections With AMD and the leading game developers, we are leveraging our position in PC and in discrete markets Combined with our recent game console wins as we drive to make AMD Silicon the de facto for game developers across the globe. Graphics IP remains critical to our success, Increasingly providing differentiation across our entire product portfolio and we remain committed to further investing in this business to extend our leadership IP. The PC market will remain an important business for AMD for years to come With more than 300,000,000 PCs expected to ship annually for the foreseeable future across a variety of form factors, The PC is far from dead. Our industry leading APUs and GPUs provide the Opportunity to deliver share gains in this traditional AMD market. As the PC era rapidly Evolves into the new cloud era, we continue to march into high growth markets like dense server, ultra low power client, Embedded and semi custom solutions as we transform our business to capitalize on emerging trends reshaping Our design approach to leverage reusable IP blocks allows us to use the same foundational technology from our PC and server offerings to quickly attack these new opportunities. As a result, We remain on track to deliver more than 20% of our revenue from semi custom and embedded markets by the 4th quarter And 40% to 50% of our revenue from these and other high growth markets in the next 2 to 3 years. A large part of the momentum this year will come from our game console wins. The game console industry We expect to ship more than 40,000,000 game consoles in 2013. That number is expected to grow as game consoles further evolve Into broader entertainment devices that serve as home media hubs and local cloud distribution systems. Sony's PlayStation 3 is already one of the most popular platforms for streaming online video. And Microsoft announced last That the Xbox 360 is now used more for watching videos and listening to music than it is for playing games. Our graphics win in the Nintendo Wii U set the foundation for this growth, which we have built upon With Sony's announcement that the PlayStation 4 will feature a semi custom AMD APU. The PS4 integrates a combination of X86 Processors and advanced graphic IP, which is unique to AMD. This single chip APU features our low power Jaguar cores and next generation AMD Radeon graphics. We are excited about our semi custom pipeline and the large opportunity for AMD to deliver semi custom silicon With ASPs at the higher range of our client offerings, in the embedded market, we'll introduce the industry's 1st, quad core X86 SoC this quarter. Our low power single chip embedded SoC Delivers more than 2 times the compute and 4 times the graphics performance of our competitors' offerings. We are well positioned in the embedded X86 market, which is projected to grow to more than $7,000,000,000 by 2016. So in summary, we continue to make good progress in our 3 step strategy designed to Restructure, accelerate and transform AMD, while returning the company to operating profitability by the for the second half of twenty thirteen. We have started shipping a powerful set of new products that provide strong opportunities for share growth In the traditional PC market and our semi custom and embedded design wins continue to Accelerate as we transform AMD for the new cloud era and attack these high growth markets with our differentiated IP. We look forward to continued strong execution in 2013 as we enable our customers to innovate across a diversified set of markets based on our differentiated and tailored technology solutions. And with that, I'd like to turn it over to Devinder. Devinder? Thank you, Rory. As Rory mentioned, AMD continues to execute on our 3 phase turnaround and transform our business model to changing PC market fundamentals by diversifying our for the portfolio. Phase 1 reset and restructure is largely completed with most of our restructuring behind us. We are also on track to lower our expense base by approximately 25% by the Q3 of 2013 compared to the Q1 of 2012 And I've already reduced operating expenses from $592,000,000 in Q1 of 2012 to $491,000,000 in Q1 for 2013. Revenue for the Q1 of 2013 was $1,090,000,000 The 6% sequential decline was driven by a 9% decrease in the Computing Solutions Segment, which was partially offset by a 3% increase in Graphics segment's revenue. Non GAAP gross margin was 41%, an increase of 2 percentage points sequentially and better than guided due to a $20,000,000 benefit from an opportunistic emerging market sale of certain previously reserved Lano products. Excluding this benefit, gross margin would have been flat sequentially at 39%. Non GAAP operating expenses were $491,000,000 in line with guidance as we continue to push towards our operating expense $450,000,000 by the Q3 of this year. Non GAAP operating loss was $46,000,000 and non GAAP net loss Was $94,000,000 Non GAAP loss per share was $0.13 Calculated using 749,000,000 basic shares, this loss per share includes the $20,000,000 benefit from sales Previously reserved products. Adjusted EBITDA was $40,000,000 an increase of $10,000,000 from the prior quarter Segment revenue was $751,000,000 down 9% sequentially due to lower desktop, notebook and chipset unit shipments, Primarily driven by seasonality and a weak consumer buying environment. Client product revenue declined 9%. Our server microprocessor revenue increased from the prior quarter, mainly due to higher ASPs for our higher Microprocessors. Chipset revenue declined sequentially, primarily due to lower unit shipments. Computing Solutions operating loss was $39,000,000 an improvement from an operating loss of $323,000,000 in the previous quarter. The prior quarter loss included the impact of an LCM charge of $273,000,000 related to the reduction of vapor purchases Require in the 2012 wafer supply agreement with GlobalFoundries. Graphics segment revenue was $337,000,000 up 3% compared to the prior quarter due to higher channel sales, game console royalty sales and workstation graphics sales. Workstation graphics had a record quarter and we continue to make progress in that business. Game console Royalty revenue was up sequentially driven primarily by a large milestone payment in the quarter. Graphics segment operating income was $16,000,000 down from $22,000,000 in the prior quarter, primarily due to lower GPU sales to OEMs. Turning to the balance sheet. Our cash, cash equivalents and marketable securities balance including long The marketable securities at the end of the quarter was $1,200,000,000 flat compared to the end of the Q4 of 2012. We exited the quarter above our target optimal cash level of 1 point We made a $175,000,000 payment related to for Dave. In addition, we bolstered cash with net proceeds of $164,000,000 from the sale and leaseback of for our Lone Star Campus in Austin, Texas. In the Q2 of 2013, we will make a $40,000,000 cash payment to Foundries related to the reduction in vapor purchase commitments for 2012. The remaining $200,000,000 Balance related to this item will be paid in the Q1 of 2014. Debt as of the End of the quarter was $2,040,000,000 unchanged from the prior quarter. Inventory was 613,000,000 Up $51,000,000 sequentially as we prepare for new product introductions. Now turning to the outlook. For the Q2 of 2013, AMD expects revenue to increase 2% sequentially plus So minus 3%. Gross margin is expected to be approximately 39%. Quarterly operating expenses To be approximately $480,000,000 and inventory is expected to continue to increase sequentially ahead of new product introductions And approach more normalized levels of $650,000,000 to $700,000,000 The First quarter was a good start to the year in terms of executing to our commitments. The improvements we are making to our cost structure And liquidity management serve as a strong foundation upon which we can build throughout this year as we refresh our product line, accelerate our execution and return to operating profitability and positive free cash flow generation Thank you, Devinder. Operator, we'd be now happy for you to pull the audience. Thank you, Devinder. Operator, we'd be now happy for you to poll the audience please for questions. Yes, ma'am. All right. And it looks like our first question in queue comes from the line of John Pitzer with Credit Suisse. Please Go ahead. Your line is open. Yes. Good afternoon, guys. Congratulations on the good quarter. Thanks for letting me ask the question. I guess the first one for Devinder. Devinder, as you think about the OpEx guide for The June quarter and then the target for September, you're going from $490,000,000 to $4.80 to $450,000,000 Just kind of curious The incremental $30,000,000 from June to September, is that actions that have already taken place and it's just a timing issue or More actions that need to come and if you can help me understand the drop from June to September that would be helpful. Sure, I can do that. As Rory and I said in the prepared remarks, the reset, restructure is largely done. But as you probably know, there's a time lag in realizing the full benefits of restructuring. For example, some of the headcount departures are staggered. We have ongoing savings from building related expenses that can only be realized After the employees leave and we continue to consolidate at various sites to a smaller footprint in terms of space And those savings get realized as we get out in time and in particular starting in Q3, 2013. The other thing I would add is as you probably heard From Rolly's remarks, a lot of new product introductions occurred in the first half of twenty thirteen. And therefore, with those products, there's always some costs that are associated With new product introductions that we think will go down as we get to the second half of twenty thirteen. So really it's Time lag in terms of realizing the full benefits of restructuring, but also as we transform the company and accelerate into for 2019 some of the reduced expenses related to the new product introductions. And then guys as my follow-up just for Rory. Rory as you think about The launch of Tamasch, how much of revenue do you think could come from this product category in the back half of the year? Can you give us a sense Kind of the incremental TAM it might open up for you and kind of the incremental revenue you would expect to see? Well, I think the overall product The portfolio, John, looks pretty strong from where we are at this point. Cabini in that sweet spot of the market, I think where you've seen us do well with Brazos for the past. I also think you're going to see the market begin to shift in that direction. There's no doubt ASP Buying patterns will continue to move into entry and into mainstream pricing. So I'm excited about the Cappini offering. Then Tamas, What I like about Tamash is it's really a very credible solution in that convertible fanless space. This is An area where we need to make progress, and I believe with this chip, which clearly beats competition both on compute and graphics performance positions as well. There is no doubt Cabini will be a much larger component as will Richland, but this is a very nice opportunity with this With this leadership part of Tomaj to get into tablet and then to build it into all of the fanless form factors. Lisa, any additional thoughts? Yes. So John, I would add to that. On Tamas, we think that it does have the opportunity not just Tablets for full Windows 8 performance tablets, but also into convertibles and hybrids. And we see a lot more of those form factors Coming out from the OEMs in the second half of the year. So I think as Rory said, Cabini and Richland will be the larger volume plays, but Dimash will be a very interesting growth play, Especially with Windows 8 as we get more adoption. Thanks, guys. Appreciate it. Thank you, sir. Our next question comes from the line of David Wong with Wells Fargo. Please go ahead. Your line is now open. Thank you very much. Can you help us understand a little bit the accounting for the game console revenues? You noted a milestone payment in the Quarter just reported, what gross margin is this carried on? And at and does the June quarter guidance assume further console related milestone payments? I think if I can take that question and I'll let Lisa chime in on a couple of pieces there. But basically the milestone payments are predetermined based on Our pre determined based on volume of sales relative to the game console units that are sold by our customers, in particular with One customer that we have already got engagement in on the Nintendo side, we hit that milestone and that milestone payment came in the Q1, twenty I'm not prepared to give details in terms of gross margin for that level of granularity, but suffice to say obviously It benefits us from a viewpoint of hitting the milestone with the volume and getting in the cash from the customer. I'll go first and then pass to Lisa. From David, from the standpoint of the overall strategy to diversify the portfolio, this is a very interesting opportunity for us To build off of the semi custom solutions that we're creating, building that base of reusable IP and then applying that IP that we've built out across our discrete Graphics business and core PC business taking it into embedded and into semi custom around gaming is a huge opportunity for us. And what I think you're what we would say is that we're very much on track to deliver over the 20 Percent or better in terms of the revenue by year end 2013 from semi custom and embedded and we see this as a Very important opportunity to diversify the portfolio. Great. Thanks. Thanks, David. Thank you, sir. Our next question comes from the line of Joseph Moore with Morgan Stanley. Please go ahead. Your line is open. Yes. Just following up on that. The How should we think about the gross margins of the embedded opportunity as it ramps? And over the life of the consoles, I mean, I tend to think of this being very expensive GPUs at the The launch and then sort of 3, 4 years later being less expensive like just how should we think about the dynamics of that? I know you can't get into the specifics of any one arrangement. But just over the life of the agreements Selling silicon instead of royalties, what types of margins do you think that you would achieve over the full life? Yes. I think that's pretty complex. I think if you look out to the future, our business This is in transition. Our transformation continues. Our mix of revenue is going to change pretty significantly even with the 40% 20% Embedded semi custom revenue mix in Q4 and then going to the 40% to 50% from the high growth markets. We are penetrating as you've heard us speak over the last year or so adjacent markets whether it's embedded, semi custom, dense servers, Ultra low power client product and all of that has its own gross margin from a mix standpoint. So it's really hard to predict from a viewpoint of What the longer term gross margin is? We are not providing guidance for 2013 from an overall standpoint except for Q2 at the 39% Now as far as the longer term interplay between the prices and how the business So Zivald, I'm going to let Lisa here comment on that. Yes. I would say, if you think about the entire business as a semi custom business, it has several different business models, Including IP model as well as silicon model. So I think as we get further into the year, we'll talk more about the various interplays there. Okay. But should we think of it even this year as being a business that has gross margins below kind of your traditional CPU And just any kind of magazine that you can give us would be really helpful since this is such a big part of the revenue stream. Yes, Joseph. So where we're guiding is flat for 2Q and we'll give further guidance as we move through the year. But we do expect to, As we said, drive to that 20% of the revenue mix by the year end, and that's where we are at at this point. Okay. Thank you very much. Hey, Joseph. Thank you, sir. Our next question comes from the line of Stacy Rasgon with for Raskin with Stanford Bernstein. Please go ahead. Your line is open. Hi, guys. Thanks for taking my questions. I had a question on where is first of all, where the gross margins end for this quarter. I'm a little confused. If you take the $20,000,000 inventory benefit out, they were flattish. That was in line with guidance. But you had He's up basically across the board, across client, across servers, across graphics and you had apparently a much higher royalty payment in the quarter as well, which as far as I understand falls directly through. So can you give me some feeling why gross margins were only flat? It would seem to me that they ought to Was there something else going on or was this just a volume effect or what? I think it's a combination of factors, Stacy. I mean, you got the different He says from a viewpoint of as we talk about unit shipments and mix of revenue, but there are a lot of factors that come into play from Gross margin as you probably know from a business standpoint at least in our back end factories, we still have assembly, test mark and pack Trees where utilization coming out of the Q4, Q1 time frame with the revenue that we have obviously affects our COGS piece of VIN and that's one factor that's Kind of a headwind from a gross margin standpoint. Product mix, we have introduced new products, Cabini shipping in Q1 and Tamar shipping in Q2. And obviously that will be a positive from a viewpoint of going with the gross margin. So you're right. We see ourselves having operated over the last few quarters in a stable gross margin situation, despite the fact that The PC market has been very dynamic and we are projecting to the 39% gross margin in Q2. But if I were to follow-up on that then, So you've been operating in a stable gross margin environment, but that stable gross margins are quite a bit lower than what you were running previously. Again, you've got Tamash and some other things launching, Which should be gross margin accretive, but then again you're guiding flat for next quarter. And I guess the reason I'm asking is I think one of the big drivers for keeping cash balances in line has to be Your gross margin trajectory in the back half. So I was just wondering if you could give us a little more color, if not to go directly in the guidance or at least what are some of the things we should Thinking about into the back half of the year that can give us confidence that the gross margin trajectory can be enough to keep the cash balances up at the level where you think they can be. So Stacy from a standpoint of the second half, the overall PC market we think remains choppy Clearly in the first half, a little bit more difficult than what people had thought. We think second half is better than first half as we As you said, it's probably down low to mid single digits overall for the year. But if you look at our business and you say, this is a very interesting set of Products that we've introduced from Tomache, Cabini, Richland, the graphics products, I think we're in a very good position to Generate and spur demand in that second half. We're looking to build on those strong products to add share. And from our standpoint, we want to return to profitable growth in that second half. Then you mix in the new businesses as we Start to create this diversified portfolio and the combined mix as we manage expense It's a good model for us to create profitability and sustain profitability over time. So I think the net is PC market should be better in the second half from our perspective than the first half. We have the stronger set of products in 2nd half that should allow us to go after share opportunity. And then from the standpoint of graphics, Same position, strong products moving into it and then bringing in some very interesting new products like the PS4. This should open up a nice This opportunity for us to move back to profitable growth in the second half. And Stacy to your comment on the cash, as you can see, we've essentially Finished flat quarter on quarter at the $1,200,000,000 level of cash above our target optimal of $1,100,000,000 that's well above the target minimum cash that I think is acquired from the company under the current business model at about 700 And as I've stated before, we have a lot of levers that we can pull without accessing the public for markets to continue to maintain cash at the $1,100,000,000 level through 2013. Got it. That's helpful guys. Thank you very much. Thank you. Thank you, sir. Our next question in queue comes from the line of Christopher Danely with JPMorgan. Please go ahead. Your line is open. Thanks guys. Not to beat the dead gross margin horse. So I mean do you think that they can get back to the mid-40s? And what will be sort of the timeline of the milestones that they can get there? Are we just going to look at like gross margins in the low 40s as the gaming console starts to ramp up? And then if you can also comment on will you be selling any more written down inventory and how much you have left? Chris, on the gross margin one, I think we've been Very clear, we've given the flat guidance for 2Q. That's what we're prepared to talk about today, talked about what we like about The market and our portfolio moving forward, but clearly our guidance around margin is we're consistently managing that the past Several quarters and it's our plan to do that again in 2Q. Devinder, do you want to comment on the second question? Yes, I do. Chris, what's your question about the inventory write down that We took in Q3, 2012 just to confirm. Yes. Are you guys going to be selling any more written off inventory? And if so, how much? Yes. At that time, we wrote down the inventory in Q3 of 2012 to the tune of $100,000,000 because we could not we did not think we could sell the We had a specific opportunity that arose as I mentioned in my prepared remarks. We still have some of that And if specific opportunity arose, we would consider it and then take it from there. Okay, great. Thanks guys. Thank you, sir. Our next question comes from the line of Glenn Young with Citi. Please go ahead. Your line is open. Thanks. I wanted to ask a question about the gaming market kind of on a long term basis. I understand that these game Console guys don't change the game console all that often. But if they're doing work on new functionality in game consoles and they're also rewriting the software, do Do you guys think of this as a business that's more than one generation of game console long I. E. This is a new endeavor for Angie for the last tens of years types of things. Yes, Glen, this is Lisa. Let me try to give you some color there. So the game console is a very, very exciting for the market. Its lifecycle usually lasts 5 to 7 years, and it's an opportunity to both take leading edge hardware out there as well as continue to enhance the software. So I do view it as an opportunity of growth over the medium term and certainly as we ramp new console generations Yes, that's a direct opportunity for growth. There's a lot of conversation about where cloud gaming goes in the future and where that sits and that will have to play out over the next for Rishi. And Glenn from a standpoint of a strategic strategy here and why we went after this market so strongly is From our perspective, I think we're building on a strong base in the PC space and the discrete graphics space. Now we go after the console and with The work that we've done at Nintendo Wii U and now with the Sony PS4, these game developers spend a lot of money as they move to the next generation. And with the consolidation of the game console wins that we've announced, You can see that this would allow them to develop in a more effective way, a more cost effective way and And you'll see us leverage our technology across that base from a strategic standpoint. It lowers the partners' time to market. It lowers their cost to for development. So it speeds that. And additionally, as they tune now to our development technology, which they're going to be able to do, it's going to Perform better on our hardware and software both from a PC, from a discrete graphics and then from a game console I think that sets a very nice foundation to continue to build that. And then Glenn, you saw us double down in this space where we focus to Really go after those game developers with the Never Settle, Reloaded campaign. We went after those biggest and most important games in Industry and showed that partnership again. I think this is all part of a longer term game plan to really create a differentiated experience that that creates a solution for the partners, for our customers and ultimately the better experience for the customer. Thanks for that, Roy. That's helpful. Maybe a follow-up, Rory, just sort of drawing on your past experience with the OEM or at least just your experience in the market. And thinking about what you're seeing in the second half, I know you guys aren't making heroic assumptions for PCs In the second half. But I think Lisa you said you think Windows 8 will adopt better and Rory you did suggest second half better than the first. Is there anything that you see today that Give you any kind of confidence about that whether that's demand from your customers already or indications of any kind that suggests that second half twenty thirteen better than first half unlike for what we saw last year. Let me try Glenn and then I'll let Rory comment. I think it's fair to say that the PC market is still choppy given some of the The data that came out recently, from our perspective though, what we do see is that the OEMs are being fairly aggressive in their adoption of new form of factors. I would say more so than last year in terms of the realization of where the growth has to come in terms of on innovation. So much more in ultra thins, much more in lower price points. As we get to $5.99 and below, you'll The $2.99 $3.99 price points, and that is traditionally AMD sweet spot. That's where we've designed these products. So that gives us The opportunity to hopefully gain share in the second half of the year, but certainly we have to watch how the market evolves over the next couple of quarters. For you. And Glenn from a standpoint if you look at this market and how it will unfold, there's no doubt Windows 8 is an important event. I know it's gotten a lot of pressure recently, but this it is clearly going to continue to build momentum. The uptake will improve as for more of the form factors touch, the experience becomes better known, you're going to see that activity. And based on what we're Seeing from our partners, we're seeing in terms of the global design activity that we mentioned in the earlier remarks Around the PC space, there's a lot of interest in the low power parts of Tamach and Cabini and then some of the premium form factor wins that we got with Richland. So I think the foundation is definitely there. WinA will be better understood. It will be in terms of its adoption and its uptake. I think that second half is generally always stronger than the first half and that I do think that we're seeing the design activity. And it's important, Glenn, from the standpoint, We specifically target it with our products to understand the price points, the form Factors by region, by partner, so that we go could go after those most effective and Higher volume design wins that would yield the proper return and help us lower our overall expense. Thank you very much. Thank you. And thank you, sir. Our next question comes from the line of Mark Lipac with Jefferies. Please go ahead. Your question please. Yes. Thanks for taking my question. Apologies if I missed this. Did you discuss how the C micro business did relative to the server for Microprocessor Business. Yes, let me talk about the C Micro business. So if we look at The C Micro business quarter over quarter, we had we were coming off a strong Q4 and we were actually lower in Q1. This business tends to be a very Deal driven business, so it's a little bit lumpy. As we look out through 2013, we see dense server as a very good growth opportunity for us and into the coming years as well. And the when you talk about the semi custom and embedded operator. Can you give us a sense of how you're thinking about the relative split? Is it mostly semi custom for this year and then embedded ramps more next year? There's no doubt that the semi custom business is a strong business. We're Seeing very good activity there. The design win activity in embedded, well, that's going to be a $7,000,000,000 market by 2016, we see good activity there. They tend to be a bit smaller in terms of their overall size. But when you're going to go semi custom, those tend to be much larger. We target that pipeline. And interestingly Enough Mark, we've been working and building that semi custom pipeline. We're tracking double figure types Of opportunities across industrial and in terms of home, living room, Several key areas that we see semi custom and then you mix in that nice embedded business where I think our APUs Are going to play a very important part where you see the graphics, the gaming space, the industrial, the medical. It's a nice combination and this is clearly where the market is going as we move into this cloud era. Last question. Thank you for that. The last question for me is the quad core SoC that you just started shipping, did you have you talked about design wins for that product? Can you talk about the target? Thank you. You're talking about Mark in the embedded space? Yes. Yes. We're tracking right on course as we've talked about to hit the objectives for the full year. The pipeline build has been Very positive and embedded the new product introductions like that product which is 2 times competition on performance and 4 times on graphic. I think it's really Really put us in a position where we can build on that. And this is around the strategy, a hit on them where they're not, right? Move and take our IP where it's Differentiated where we can make a difference with the customer. And we're focused on being that partner with these customers To create the long term solutions to help them win. I mentioned the cloud environment, the cloud era. This is a shift from this kind The proprietary controlled commercial environment where PCs were controlled by a couple of proprietary architecture and rule holders And they gathered all of the profit in a single set of pools. What I think is the cloud era begins to break that as data and application move to the cloud, We're going to see an explosion, a tsunami of devices that are going to emerge. And our customers are looking for silicon Solutions that are differentiated that allows them to create not just a commercial solution, but a really specific Differentiated solutions that they can win in the market and they are looking for a partner that's willing to work with them in a very productive, proactive, Flexible way to create that solution. Isn't that kind of the AMD history to take on next to go against The disruption and really focus on going forward. Thank you. Thank you, sir. Our next question comes from the line of Franz Moshebron with Raymond James. Please go ahead. Your line is now open. Great. Thank you. Hey Rory, a clarification. You implied or said that the PC market was going to be down mid to high single digits for this year? Low to mid single digits. Okay. And then the other clarification, for the Sony game console, the ASPs for that APU Are going to be at the high end of what? Was it high end of APU pricing or CPU? What we talked about was client ASP. Okay, perfect. Now the question that I have is the way to position your lineup versus Intel as the year progresses, Should we look at it as Cabini going head to head with atom based clover trail like devices from Intel And that the Timas would go after Haswell or go head to head? Is that the way to interpret your positioning? Yes. Hans, let me perhaps help with that. So if you look at the positioning today, Cabini really goes up against Pentium, Celeron up into The Core i3 lineup and Dimash is really, I would say above where Clover Trail sits today and the Adam lineup and It goes into the sort of the low end of clamshells. So that's the way we're setting it up. The good part about it is All of these products have started shipping and so we're strongly in the 2C cycle. So that gives us a good position relative to time to market. Perfect. Thank you. Thank you, sir. Our next question comes from the line of Jim Covello with Goldman Sachs. Please go ahead. Your line is open. Great. Thanks so much. Just following up on the PC forecast for the year, do you have any thoughts or reconciliation for us So on the difference between your view and Intel's view on the PC market, which is that it will be up a little bit? I think I've been, Jim, pretty consistent on that. I thought that the market was going to be choppier than some of the other competitors have felt And I think that's playing out. I think the first half is going to be weaker than the second half. I think that's going to play out. And I do think the adoption of Win-eight will Continue to improve as the year goes on. I think there's a lot of work around improving form factors, price points and I think The kind of products that will lend itself well to that second half. So I think it's been pretty consistent where we think the market's going And I think that's where it's going to kind of settle in. I don't think there's I think that's pretty straightforward. Helpful. I know the commentary on the cash was that the cash flow generation would return in the back half of 2013. I don't think you commented on an explicit cash burn in the Q2 of 2013. Yes. I think if you do the math, you can probably come up with the numbers. But from our standpoint, as I've said previously, We have levers available. If you look at Q1, 2013, I talked about the payment to GlobalFoundries to the tune of $175,000,000 paid. We did a sale leaseback transaction to almost entirely offset that and actually a little bit more and maintain cash flow from last quarter. The optimal zone is at $1,100,000,000 and I have no reason to believe that we couldn't exercise some of the levers needed without exercising accessing the Capital Markets and coming in the $1,100,000,000 zone for Q2 of 2013. So I'm sorry just I don't think I understood all that. Is the idea that you'll have some operating cash burn in Q2 and then you'll pull some of the levers or you're not going to need to pull the levers? I think there will be some cash burn in the Q2 timeframe, less significant than what we have had. And I'll be able to put some levers if needed To keep the cash at the $1,100,000 level. Got it. I need to. Okay. I appreciate it. Thank you. Thank you, sir. Our next question comes from the line of Steven Ellicchio with UBS. Please go ahead. Great. Thank you. First question around the semi Some business raises a potential concern on cash flow if there isn't Good sell through on the your customers' game consoles. Can you give us some assurance that there's some that you'll get paid for your deliverables in a timely fashion and not get left holding the bag. Yes. Stephen, I think there's a historical set of data that shows the uptake with the Introduction of new game consoles. We have a very reasonable commercial relationship with all of our business partners and customers And we believe that we'll execute within the optimal cash range throughout the 2013 year. Yes. It's More concerned in 2014 if beyond the holiday season the game consoles peter out? From a standpoint, we're really talking about 2Q and from a strategic standpoint going forward, I'd really go do my modeling based The historical trend rates of consoles, they tend to build out and accelerate over a 5 to 7 year period and there's a curve. There's our expectation will follow some assemblance to that curve. Understood on that. I have a follow-up question for Lisa on The comments that on Richland and Compeedie and Tomas are encouraging and also saw that VIZIO is using your products pretty well across their new product line. However, as you look into next year, Intel is going to be ramping its 14 nanometer processors through the year. And at that point, you're going to be for the most part 2 nodes So without getting into the details of your roadmap, can you at least help us understand in terms of the merchant market, some of the market Some of the market opportunities that you believe you will have to differentiate in PCs and tablets. Yes, absolutely, Steve. I think it's fair to say that we have to be very diligent in executing our product Our value proposition isn't necessarily based on technology nodes and CPU performance. It's really on user experience And how we turn our graphics and visualization advantages into something that could improve the end user experience. So this year we have as you stated the Richland, Cabini and Tamas launches all very successful in executing in the first half of the year. We've also talked about our Caveri APU in the second half of the year. We're on track for that, and that Gives us an opportunity to bring in our heterogeneous systems architecture, which really brings the microprocessors and the graphics capability together. So we're going to continue to push that. We believe that APUs are the future, and that is where we can really get the performance. And we've gotten some validation of that with some of the game console discussions. So just one last question here As a follow-up on that, so if you give us one example of something as you look with Kaveri that You will be able to enable that the competition won't be able to do. Can you give us an idea of what that would be? Yes. We believe that Kaveri and the heterogeneous systems architecture will allow us to do things like natural user interface Processing much more efficiently, especially in low power environments. So things like facial recognition, speech recognition, Those types of sort of graphics intensive types of applications we'll be able to do at a lower power with higher performance. Thank you. Thank you. Our next question comes from the line of Patrick Wong with Evercore Partners. Please go ahead. Hi, guys. I'll ask you Mike on for Patrick. Thanks for taking my question. Just a quick question on what's the difference between the $379,000,000 payable at GLOWFoundries and The $240,000,000 remaining that you talked about? That includes the $240,000,000 that we owe. We owe that in the Q1 2014 timeframe and because there's a related party, we go ahead and disclose all the payables To GlobalFoundries that are due to them over time. So if you look at the $379,000,000 within the Balance sheet ending March. There is the payables for the wafers that we have purchased over the last quarter. There is a $200,000,000 payable that's due in for Q1 of 2014. And then there is the $40,000,000 that I talked about which is going to be paid in Q2 of 2013. Okay. So it relates to the wafer. And then also the payable went down by $75,000,000 but you made a payment of $175,000,000 What was the delta there between the Delta is really the $175,000,000 is the primary delta that was due As of the end of 2012, we paid that in the early part of 2013. So that obviously comes down. And the wafer purchases is kind of in and out. You You have ongoing purchases of wafers. We pay based on the payment terms and depending on the timing of when you buy the wafers that balance sheet cut off, you can have an increase or decrease From a payable standpoint. Okay. Got you. All right. And then looking at the second half, you guys talked about gaining share. What segments do you see the most opportunity in for you guys? Well, I think there's definitely from the standpoint the product portfolio that we've introduced, I think there is definite strength in the low power segments and the entry. We've talked about Tamach in terms of that area, Cavini and then of course in Grafik. We have the opportunity now to go after share with a very strong portfolio. I think those would be the traditional spaces. And then of course in the embedded semi custom, we talked about how that portion of our revenue will significantly change year over year and exit the year at the 20% of total revenue. Okay. Sounds good. Last question. On the inventory build in the Q1 and the outlook in Q2, what's the composition of the inventory? It's a new product introduction primarily as we Get ready to introduce the new products that Lisa and Rory have been talking about. We're getting ready for the launches, and you had the slight increase in inventory from Q4 for Q1. And if you recall, I did say when we had the earnings call for the Q4 quarter that we expected and planned for the inventory to go up as we Accelerate into the second half of twenty thirteen. And Mike, it's important around that comment in preparation for launches. The work that we've done around execution and the supply chain is very important as we reach these ramps and enter into these new markets. We've done a lot of work to improve our Foundry relationships or foundry performance has significantly improved and the supply chain activity has Significantly improved since over the past year and a half. So that is all around an idea to Have the parts be ready, launch in volume and be able to ramp effectively. That's something that the company struggled with in the past And that's something that we've worked very hard around execution to improve. Sounds good guys. Thanks for taking my questions. Operator, we'll take 2 more questions from participants, please. Yes, ma'am. Our next question comes from the line of Serena Bajore with CLSA Securities. Please go ahead. Thank you. I have a question on a clarification. First the clarification embedded, you said it's going to be 20% of sales exiting this year. Could you give us an idea where it is today or in Q2? It's substantially less obviously. It's Our market is fundamentally changing as we move through the year, but we don't get into specifics in terms of Our mix or a segment breakdown, path, compute and graphics. Okay. Fair enough. And then Rory, maybe for you. Obviously, the PC market has been quite weak, but both Intel and you have reported pretty solid ASP trends even in the PC segment. I'm just trying to understand What's going on given the weak PC, how would you expect that ASPs to at least see some declines? I think what you're seeing is that from our perspective and I'll comment on that is I think you're seeing an improvement product And product mix and in terms of our product portfolio, we've worked to focus on meeting this cloud era and in In terms of the graphics around the APU to create that differentiated experience that Lisa was talking about. From our perspective, That's really important and we're reaching into those low power segments. And in terms of Richland, I think we've seen some good uptake in terms of the premium wins and in terms of those interesting form factors going forward. So it's a choppy market Srini. There's no doubt and we've We've got to continue to stay focused on the execution and on the cost side of it. But this is a good product portfolio. We've worked hard to get here. And now we're looking forward to build on that throughout the year. Thank you. Thank you. And we do have time for one final question. Our final question will come from Chris Caso with Susquehanna. Please go ahead. Hi, thank you. Thanks for squeezing me in. I wonder if you just Comment a little bit about the workstation graphics business. You talked about that as an area of strength in the quarter. That's an area where you've had some relatively low market Could you share in the past, could you talk about that a little bit? Yes, absolutely. So if we look at our overall graphics business, we were pleased Looking at professional graphics in particular, it is a place where historically we've had relatively low share. We have a very good product. Certainly from a hardware standpoint, we've improved our relationships with ISVs and some of the pull through. And so And we believe that will continue to be a growth opportunity for us in graphics. And I'll also say, if you look at the overall graphics business, we also made some nice Progress in the desktop channel particularly in the AIB channel. And those 2 help to pull the graphics revenue slightly up in the Q1. Just as a follow-up to that. What's your view within terms of the graphics business particularly discrete graphics Over the longer term, it obviously requires a fairly sizable commitment in terms of R and D resource. Do you think looking at the market going Going forward, is there still a return on investment for providing that R and D resource? Or do you need to be a little more selective on it going forward? Yes, it's very important. I mean, the graphics business is basically core to our entire portfolio. And from a discrete From a graphics standpoint, we think we have opportunities to gain share. I talked about the Pro Graphics as well as the AIB channel. The graphics IP also Touches throughout our entire client semi custom embedded server portfolio. So it's really core competency for the company and we'll continue to invest heavily in it. For the group. Thank you very much. Thank you, operator. This now concludes our Q1 earnings conference call, and thank you to everybody for participating. Thank you, presenters, and thank you, participants. This does conclude today's conference. Thank you for your participation, and have a wonderful day. Attendees, you may now disconnect.