Earnings Call: Q4 2012

Jan 22, 2013

Good day, ladies and gentlemen, and welcome to the AMD Fourth Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ruth Cotter, Vice President of Investor Relations, please go ahead. Thank you, and welcome to AMD's 4th quarter year end earnings conference call. By now, you should have had the opportunity to review a copy of our earnings release and the CFO commentary. If you have not reviewed those documents, They can be found on AMD's website at quarterlyearnings.amd.com. Participants on today's call are Rory Reid, our President and Chief Executive Officer and Devinder Kumar, our Senior Vice President and Chief Financial Officer. Lisa Su, our Senior Vice President and General Manager, Global Business Unit 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'd like to take this opportunity to highlight a few dates for you. John Byrne, Senior Vice President and Chief Sales Officer will present at the Goldman Sachs Technology and Internet Conference on February 12 in San Francisco. Rory Reid will present at the Morgan Stanley Technology Media and Telecom Conference on February 26 in San Francisco. Our Q1 quiet time will begin at the close of business on Friday, March 15. And lastly, we intend to announce our Q1 earnings on April 18. Dial in information for the call will be provided in mid March. Please note non GAAP financial measures referenced during this call are reconciled to their most directly GAAP financial measures in the press release and CFO commentary posted on our website. Before we begin, let me remind everyone that today's Discussion contains forward looking statements based on the environment as we currently see it. Those statements are based on current beliefs, assumptions and expectations, Speak only as of the current date and as such involve risks and uncertainties that could cause actual results to differ materially from our current expectations. Please refer to the cautionary statement in our press release for more information. You'll also find detailed discussions About our risk factors in our filings with the SEC and in particular AMD's quarterly report on Form 10Q for the quarter ended September 29, 2012. Now with that, I'd like to hand the call over to Rory Reid, AMD's President and CEO. Rory? Thank you, Ruth. We made progress in the 4th quarter delivering on our commitments, Managing expense and cash and beginning to transform AMD for long term growth and profitability. However, full year results fell short of our expectations as the challenging macro environment resulted in a weaker than expected PC market. As I mentioned on our last earnings call, we are executing a turnaround that will take several quarters. We expect continued choppiness in the PC market in the first half of twenty thirteen and we will closely manage the business as we We reset, restructure and ultimately transform AMD. We have the right strategy and a new set of products coming to market in 2013. We continue to make the investments required To drive a larger percentage of our revenue in the high growth adjacent markets, then server, semi custom, embedded and ultra low power client markets. We are implementing 3 phases of our turnaround. 1st, Complete the restructuring of our business. This is a critical step in reducing our operating cost model to enable a return to profitability. 2nd, accelerate our business in 2013 by executing the delivery and launch of a new set of powerful product offerings and third, transform AMD to take advantage of High growth opportunities in adjacent markets where our IP provides a competitive advantage. As with any turnaround, it is critical we meet our commitments throughout each step. To that end, We effectively managed our cost, reduced our inventory and maintained our cash above our minimum acceptable levels In the Q4, revenue of $1,550,000,000 met our guidance, while Increasing 9% sequentially and by 32% from a year ago. For the The 2nd year in a row, we had a successful Black Friday as sales of AMD based notebooks in North America retail grew from a year ago. As a result, nearly 1 in every 3 notebooks sold in U. S. Retail in the 4th quarter We're powered by AMD. We also saw a sequential increase in desktop microprocessor ASP based on strong channel adoption of our new Athlon FX CPU and A Series APUs in the quarter. The value proposition of our latest processors drove demand and helped reduce channel inventory. Customers continue to embrace the differentiated value proposition of our We added VIZIO as a new customer based on the industry leading graphics performance and long battery life of AMD's APUs. VIZIO's first AMD based products will include 2 We recorded significant revenue growth for our C Micro dense servers, driven by large scale cloud data center wins. C Micro solutions are being deployed and evaluated by a broad variety of marquee demonstrating the value of our investment in dense server and setting the stage for continued future growth. Our graphics business performed well in the quarter as well, highlighted by record workstation and gaming revenue and the launch of the Nintendo Wii U game system powered by AMD graphics technology To help accelerate desktop GPU sales in the channel and reinforce our long term strategy to be a leader in gaming, We launched the Never Settle campaign in the quarter. This promotion was well received by partners and consumers As we bundled some of the season's hottest games with our highest performing graphics cards. In the channel, unit shipments and revenue for a high end Radeon Graphics grew, Driving a richer mix and increased ASP from the previous quarter. We will launch a follow on promotion this quarter, Pairing our highest performing graphics cards with some of the most anticipated game titles of 2013. Now I want to return to the trends impacting AMD and the industry overall and the steps we are taking to restructure, accelerate and ultimately transform our business. We are well on our way toward implementing a new operating model that will allow us to achieve lower operating expense and enable a return to profitability. In addition, the new products that will accelerate our business In 2013, we have passed several key milestones in the quarter as we began shipping Richland and secured solid design wins for the Brazos follow on Cabini and our new ultra low power Tamash APU. Both Cabini and Tamash are currently going through final internal validation in parallel with customer evaluations and anticipation of launches that are planned for the first half of this year. AMD's First, mobile GPUs based on our graphics core next architecture also began shipping in the 4th quarter. ASUS, Lenovo and Samsung have already announced plans to offer these low power GPUs. And we are seeing strong design win momentum for these GPUs because they deliver discrete level graphics performance Our longer term transformation to drive growth in adjacent high growth markets continues to gain momentum. In the server space, we will combine our extensive 64 bit design experience, x86 Processor IP and ARM Processor Cores with our C Micro Freedom Fabric To continue to drive leadership as the industry transitions to dense servers, We believe we already have significantly more dense server customer installations than any other competitor, Making our C Micro technology the most tried dense server solution available in the industry. Now in ultra low power clients, we bolstered our SoC design capabilities with new engineering talent, simplified our development processes to improve our execution speed and quality. Our Cabini and Tamash SoCs for notebooks, tablets and convertibles are exceeding our expectations. Expectations as well. Cabini will be the 1st industry quad core X86 SoC And Tamash is expected to be the highest performing tablet SoC available in the market, more than doubling the graphics performance of our current generation tablet offering. Finally, we have strong design wins for our embedded Semi custom APUs. Initial products based on these APUs are expected to launch later this year, Driving our embedded semi custom business to more than 20% of our revenue mix by the 4th quarter. So in summary, We have made good progress in the Q4 with our turnaround. We delivered on our financial and customer commitment, Effectively managed cash, reduced inventory and lowered operating expense in the face of a difficult market. We will complete the majority of our restructuring actions this quarter with a goal of reducing our overall cost structure by 25 percent from early 2012 levels by the Q3 of 2013. We are introducing Strong new APU and graphics offerings in the first half of twenty thirteen that will accelerate our AMD business with the ultimate goal of returning AMD to profitability and positive free cash flow In the second half of this year. We are also making good progress on the multi year transformation of AMD that will allow us to deliver 40% to 50% of our future revenues from high growth markets where Our IP is a differentiator. Our embedded semi custom APU business remains on track to contribute approximately 20% of our overall revenue by the end of this year. And our C Micro Dense Cloud Server business continues to gain momentum. We will remain focused on the steps we must take over the next several quarters to turn AMD around and deliver consistent Profitability and Growth. With that, I will now like to turn the call over to our newly appointed CFO, Devinder Kumar. Devinder? Thank you, Rory. 2012 was a challenging year in which we and began to take the actions necessary as part of our corporate and financial reset to position the company for designed to reduce our expense structure and help return AMD to future profitability and free cash flow generation. The restructuring plan includes a reduction of AMD's global workforce in the Q4 of 2012 and the Q1 of 2013 by approximately 14% and will result in operational savings of approximately $190,000,000 in 2013. By the Q3 of 2013, we expect to reduce operating expenses to 4 $50,000,000 per quarter, down 25% from the Q1 of 2012. As we ended 2012, we also successfully amended Our wafer supply agreement with GlobalFoundries to better align our wafer purchase commitments with current PC market dynamics, to strengthen our balance sheet and help us achieve our operating goals. Broader macroeconomic issues impacted consumer PC in the second half of twenty twelve as the challenges we faced in the second quarter continued through the end of the year. We faced a difficult selling environment, which negatively impacted our overall 2012 financial performance. Let me provide some details on the full year 2012 financial results. Revenue for the year was 5,400,000,000 down 17% year over year. Non GAAP gross margin was 41%. Non GAAP operating expenses were $2,200,000,000 lower than what we guided due to the restructuring actions and alignment of expenditures with business expectations. We achieved non GAAP operating income of $45,000,000 We managed capital The expenditures down to $133,000,000 in 20.12 below guidance of approximately $200,000,000 Tax benefit was $34,000,000 better than guidance due to a one time benefit of $36,000,000 related to the C Micro acquisition. Cash balance as of the end of the 4th quarter was $1,200,000,000 above the optimal zone of and well above the target minimum of $700,000,000 needed operationally. Let's turn to the 4th quarter results. Revenue for the Q4 of 2012 was 1,160,000,000 down 9% sequentially, driven by a revenue decline in Computing Solutions segment of 11% and a decline of 5% In the Graphics Products segment, revenue declined due to lower volumes across both segments. To derive non GAAP gross margin and other non GAAP financial measures, among other items, we excluded the impact of the lower of cost A market charge related to the GlobalFoundry stake or pay obligation of $273,000,000 discussed In more detail in my CFO written commentary, which has been posted online. Non GAAP gross margin was 39%, up 8 percentage points quarter over quarter. Gross margin in the Q3 of 2012 was 31% And this was adversely impacted by an inventory write down of approximately $100,000,000 or 8 percentage points. 4th quarter 2012 gross margin also benefited from sales of higher priced second generation Desktop APUs. Non GAAP operating expenses were $506,000,000 lower than guidance primarily due to Tight spending controls in the quarter. R and D expenses were $313,000,000 27 percent of net revenue. SG and A expenses were $193,000,000 17 percent of net revenue. Non GAAP operating loss Expense was $45,000,000 flat compared to the prior quarter. Tax provision for the quarter was 4,000,000 compared to 0 in the prior quarter. The non GAAP loss per share was 0 point Using 747,000,000 basic shares, adjusted EBITDA was 30,000,000 Better by $65,000,000 from the prior quarter's negative $35,000,000 excluding the LCM charge of 273,000,000 Now switching to the business segments. Computing Solutions segment revenue was 829,000,000 down 11% sequentially. Client product revenue declined 13% sequentially, primarily driven by lower microprocessor unit shipments. Server business revenue increased sequentially, driven by an increase in unit shipments of compute systems focused on dense servers. And chipset revenue Decline in line with Frankropaulcer unit shipments. Computing Solutions operating loss was $323,000,000 an increase of $209,000,000 sequentially, primarily due to the $273,000,000 LCM charge. Graphics segment revenue was $326,000,000 down 5% sequentially, primarily due to an 8% sequential decline in GPU revenue, partially offset by record Game console revenue and record workstation graphics sales. Graphics segment operating income was $22,000,000 Up $4,000,000 from the prior quarter, primarily due to the higher game console revenue. Turning to the balance sheet. Our cash, cash equivalents and marketable securities balance Including long term marketable securities, at the end of the quarter was $1,200,000,000 down $297,000,000 compared to the end of the Q3 of 2012. The decrease is primarily due to operating cash flow of $286,000,000 which include included a few specific cash payments as follows: Payments to GlobalFoundries of $130,000,000 comprising of $50,000,000 for the limited waiver of exclusivity actions taken in the Q4 of 2012. We exited the quarter above our target optimal cash level and well above the Target minimum cash level of approximately $700,000,000 Debt as of the end of the quarter was unchanged at $2,040,000,000 Accounts receivable at the end of the quarter was $630,000,000 down $53,000,000 compared to the end of the Q3 of 2012, primarily due to lower revenue. Inventory was $562,000,000 exiting the quarter, down $182,000,000 or 25% from the prior quarter due to a decline in MPU inventory, primarily as a result of the amendment of the wafer supply agreement with GlobalFoundries. Now turning to the outlook. For the Q1 of 2013, AMD expects revenue to decrease 9% sequentially, plus or minus 3%. Gross margin is expected to be flat sequentially. Operating expenses are expected to be approximately $495,000,000 And we expect inventory to increase sequentially ahead of new product introductions and technology transitions. For 2013, we expect operating expenses to be at $450,000,000 by the Q3 of this year. Capital expenditures of approximately $150,000,000 for the year, taxes of approximately $4,000,000 per quarter. We plan to be free cash flow positive by the second half of twenty thirteen and we expect to maintain cash balances in the Optimal zone of $1,100,000,000 for the year and well above the target minimum of $700,000,000 Overall, we have taken significant steps to align our business with today's PC environment and position the company to capitalize on new opportunities in adjacent high growth markets in 2013 and beyond. We expect our restructuring actions and our corporate reset to position us to return to profitability and free cash flow generation in the second half of twenty thirteen. I will now turn it back to Ruth for the Q and A. Ruth? Thank you, Devinder. Operator, we're now happy to pull the audience for questions, please. Thank Our first question comes from David Wong from Wells Fargo. Your line is open. Thank you very much. Embedded revenues, Rory, I think you said you're still on track to hit 20% of revenues by 4Q for the embedded revenues. Can you give us some idea as to How things will ramp in the first, second and third quarter? Will you get any significant embedded sales in those three quarters? Yes, David, we already have an interesting embedded business already in place. What we're going to see as we continue to invest in that area to leverage our differentiated IP and Our leadership APUs is a move into some of the higher growth segments. We've mentioned on previous calls that those are currently Confidential and they'll be announced as the year moves on. We should see us build that revenue starting in the Next several quarters and it ramps throughout the year to that 20% level. Okay, great. And My other question is, over the last several quarters as you've been since you've been at the company and you've been forming your long term strategic goals, Has your thinking changed on how AMD should be transformed? Are there new segments you now think AMD should address or alternatively Areas that you've decided AMD should exit. Yes. It's interesting David. Over the past 16 months of being here at AMD, It's clear that this company has a deep base of intellectual property. It has a huge asset pool in terms of the Our strategy is remained basically fundamentally consistent throughout this. The only thing that's really changed It's the time period that we need to execute that change and accelerate into that. First, it's a 3 phase turnaround. 1, reset and restructure the company. And I think here in Q4, you see us making that kind of progress where we're delivering on that commitment. We're executing and managing our expense. We're managing our Cash properly and we've improved our inventory position significantly. With that, we're on a drive to get to $450,000,000 by 3Q. Then we need to execute and accelerate in 2013. That's where we hit the top of the curve of this restructure and reset phase And begin to move into the launch of these powerful new products that we have in place. At CES, Lisa and I spent a lot of time with customers and they were excited about Richland which is now launched and they were excited about Cabini and Tamash. Cabini, the follow on to our most successful Brazos platform and then Tamach into the low power segment. These are very interesting products and we're going to continue our industry leadership into the graphics segment. And then dense server had its best quarter ever and showing the foundation for future growth. But ultimately where we have to take This company is we need to transform AMD to take advantage of where the market is going, the high growth segment, those areas where we can supplier innovation to lead. That's where we have to take the 3rd part of our step. And we're making those investments now. In dense server, we're already seeing the early progress with the micro that I mentioned. And then moving into embedded semi custom, This year will be 20%, but our ultimate objective within the next three years is to move to 40% to 50 Then of revenue in those segments. And then obviously the opportunity for us to build on our long heritage In the client segment around low form new form factors in the low power segment, these are areas where AMD can create leadership, diversify its portfolio, build on its long history of success And it's differentiated IP for leadership. Dave, I think that's the 1, 2, 3 step approach that we need to take. Great. Thanks very much. Thank you. Our next question comes from John Pitzer from Credit Suisse. Your line is open. Hi. This is Patrick Walshev calling in for John Pitzer. I just had a quick question relative to some of the charges. So in the Q4, it looks like you guys took a larger than expected to Charge. How should we think about these kind of one time charges going out through 2013? I think if you look at Q4, you're right about the one time charge. Let me just take a moment to Lane, Dan, we had previously said a $165,000,000 one time charge and $110,000,000 of our termination fee related The WSA would be spread over Q4 and Q1. As we completed the analysis from an inventory standpoint, It was more appropriate to record almost the whole charge in Q4 and we went ahead and did that and that is $273,000,000 At this point in time, Even with the restructuring charge that has been taken in Q4, we do not anticipate anything significant happening in the 2013 timeframe. There are some actions that might be taken that would lead to it. But at this point, I don't think anything is anticipated. Okay, great. Thanks. And And then just another question on the embedded segment. Just curious if you could give any color kind of how that mix could look over time in terms of What percentage of that is gaming versus I guess other type other embedded revenue? Yes. Patrick, this is Lisa Su. Just to comment on the embedded revenue. So we put embedded and Semi custom designs in 1 bucket and we would certainly see the embedded business tends to have a long design in cycle and then a long life cycle as well. We have very good visibility in terms of execution for the target that Rory mentioned, 20% of our revenue by The Q4 of this year and then as we go forward, we would expect to add additional high volume design And it's interesting as we mentioned in the earlier comments, those parts are already in their The validation phases here, we're working through those tracks and that protects those key design wins that drive that 20 In terms of the revenue objective by 4Q. So we're on track and making solid progress in terms 3 of those key new solutions. Great. Thank you very much. Our next question comes from Hans Mosesmann from Raymond James, your line is open. Thanks. Hey Rory, a couple of questions. You're going to end up being about 6, maybe 9 months The competition in a quad core type of SOC, what are the skill sets that you're bringing forth to do that? And the second question is, Any commentary about the capacity additions that your rival is going to be making for next year and subsequent to that? Thanks. Yes. No problem Hans. So Hans from a standpoint, we are working to create strength in our core businesses at the same In time working to capture those new opportunities outside of the traditional space. And over the next 2 years, you're going to see us We rebalanced that business where we have a more even split across the non PC portions and the PC portions. What's Kind of interesting as you talk about the leadership in that quad core space of the SoC, that's a powerful Product with Cabini that's launching this year. Again, it's in its final phases of test. I'm sure Lisa will comment in just a second. What we're trying to do in this segment is again to create the leadership that we've done in the past with Brazos and then to Apply that same kind of knowledge into Tamash, which brings us down into the fanless tablet segment. Now from a talent standpoint, What we've really focused on is a mix of industry knowledge across the semiconductor space. And you've seen us bring in interesting players across the past 12, 15 months, players that are from the They know the semi custom space. They know microprocessor design. They know semi And of course embedded. These talents also you can see with the Keller's and that Mark Papermasters and obviously Lisa Hsu, the experience to deliver that history leading microprocessor design. And that's why I think you're seeing some of that progress around Cabini. Lisa, you want to add a thought or 2? Yeah, Hans, just to answer the question about the tablet category, we're very excited about our Timosh Tablet because it really is satisfying a new space in terms of performance tablets that's separate From what today's consumption and sort of the higher power tablets that are out there, I think it is an opportunity for us to lead. I think from a mobile standpoint, this is where we think there's a sweet spot for full Windows 8 capable tablets and extending from down to quad core to very low PowerPoint. So as we build out this part of the roadmap, It's about system on chip designs, getting much more flexible and how we reuse IP and getting products out to market at the right So having these products out the first half of twenty thirteen, very, very important to catch the strong back to school cycle. Thanks. And the follow-up was that comment on capacity? Hans, what in terms of capacity, what were you curious about? Yes. Your competition across the way there is going to add a lot of capacity it seems. Our focus again I think is Clear and very focused. We've got to stay on this reset restructure, get that done and behind us. I think we're moving through that Well, in terms of getting the cost model, then getting into the execution of the acceleration, that's the key. It's about getting those Products and market, Lisa just talked about it in terms of Cabini and talked about it in terms of It's around the embedded segment. That's the key for us. And the customer acceptance, whether it's in the industrial segment, the gaming segment, Our traditional OEMs or ODMs, they're very interested in the products that were created in 2013. That's the key for us. We do that. We correct the turnaround. We get to the lower operating model and we return to profitability and growth. At the same time Hans continue to focus on where the market is going around dense server and around the areas of that tablet mobility Segment as well as continue to expand into the embedded semi custom opportunity. I think we have to focus on what we're good at and getting the products Executed. That's key for us. Thank you. Thanks, Aon. Our next question comes from C. J. Muse from Barclays. Your I guess first question on gross margin guide of flat despite revenues down 9%. Can you walk through the drivers there between mix, any sort of moving parts with the WSA with GF or any other drivers that we should Be thinking about and then how we should think about the trajectory post Q1? I think all the factors you mentioned come into play from Product mix standpoint, the WSA is behind us. We renegotiated that and amended that as we announced in December. So it is in effect for 2013. We see a stability from a gross margin standpoint even though the PC environment continues to be dynamic. And from that standpoint, we are projecting in Q1 of 2013 that we'll be able to maintain approximately flat Gross margin at 39%. Okay. That's helpful. And I guess given what you've seen and what you're guiding to here on the gross margin side, Is there an update in terms of what you expect breakeven wise in terms of top line on an operating level basis? I believe Few months ago, you had said $1,300,000,000 I think Sorry, go ahead. Yes. Rather than focus on that, I would just like to reiterate and maybe Add some color on the guidance we're providing for 2013. The PC market as Rolly said earlier, we see it as challenging for the next couple of quarters at least. And therefore, we're not providing any guidance from a revenue standpoint for the year. From an OpEx standpoint, we have a trajectory to get to 4 $50,000,000 by Q3 of 2013 CapEx as I said earlier in my remarks $150,000,000 for the year and then finally free cash flow positive And profitable by the second half of twenty thirteen. So that's the guidance we are providing for the 2013 from a viewpoint of the And then last question for me. In terms of the cash outflows in Q1, can you confirm what those Positions are I believe you owe $175,000,000 for C Micro and another $175,000,000 to GF. Is that correct? And are there other moving parts there? You are correct. Luckily, just for 1 of the 175 that you mentioned, the C Micro acquisition happened early part of 2012. We paid for that. That was all done as part of last year. But you are correct about the $175,000,000 to GF to be paid in Q1 of 2013. And the other payment that we have, which I mentioned in my remarks is the $31,000,000 for the severance charges for the actions we are taking from a restructuring standpoint. But those are the 2 specific payments that will occur in Q1, 2013. And then from our standpoint, as I've said several times. From a cash standpoint, we have a target minimum of $700,000 but we plan to maintain A cushion between the $700,000,000 and actually maintain closer to the $1,100,000,000 which is what we call the optimal cash balance. Thank you. Our next question comes from Joseph Moore from Morgan Stanley. Lee, your line is open. Great. Thanks. First just a quick follow-up on the last question. Have you where do you stand on the sale leaseback of the headquarters? It's in progress and we are targeting to complete that within this quarter and we should net somewhere between 150200 For the sale leaseback transaction, the only clarification I'll make there is this is the Austin campus. The headquarters are still in Sunny In California. Okay, great. Thank you. And then with the R and D, I mean, you've taken a lot out of R and D spending already. You're going to take that down further by Q3. But it seems like there's more On your plate now with the ARM Server Roadmap C Micro the embedded opportunities. Is there something coming out of R and D to let you make those cuts and feel like you're not cutting back? Or is there a risk that You cut too far in any one area. No. The focus around expense management in terms of driving that op Expense line is really across all parts of the business. We've tried to focus those areas where We thought there was efficiency and productivity to begin. For example, there's opportunities for us to dramatically reduce the number of different process technologies we're running in our various foundry. That drives all the IP to be written to multiple libraries. We're very much focused in terms of efficiency to drive the number of metal layers, the way we reuse our IP, The IP development process that Mark Papermaster and Lisa Tzu have implemented through our technology board, We are seeing efficiencies and productivities through that. At the same time, we're driving to improve Our focus in terms of the types of design wins we go after, we don't it's really not the best business practice to go after just a Gigantic number of design wins. We want those high runners, those design wins that drive volume. Every design win drives cost, Verizon, execution, testing resources. When we drive hundreds of design wins, some of those are 25,000, 50000 units. Those are not efficient. We've been focusing with Lisa's business unit teams and John Byrne's sales team to really Those design wins that get the volume and get to the most efficient usage. That's how we're driving that kind of focus in terms of efficiency and productivity and those are just a few. We've implemented the financial transformation system on the back end. John, Doctor. D on the supply chain has an intense focus across each of his processes to drive that efficiency to improve our execution. And what's interesting, while we had some schedule challenges in the middle of summer last year, the second half of the year, the progress That the business unit teams and the technology teams have made on our 2013 roadmap part has been very consistent and on schedule. So I think we're making the right moves to push for that efficiency, look for the reuse of IP, create Architecture that's reusable and to drive efficiencies across the portfolio. And in fact, we announced the new Senior Vice President, Akib, of course, who is driving that transformation and efficiency focus across our entire business as a full time job. If I may add, I'll just add one comment to that. If you look at our OpEx in Q1 2012, we're closer to And in Q4, we've ended close to the 500 level. So we've already taken out approximately about $100,000,000 of expenses. And the restructuring actions that we took from headcount and some facilities actions that we are putting in place happened very late In Q4 and obviously we have some going on in Q1, 2013. So those benefits obviously as you know lag The actions and we'll see the full benefit of that expense reduction in Q2 of 2013 and that should help us while protecting the R and D investments that Rory We talked about to get to the $450,000,000 by Q3 of 2013. And again, at the end of the day, our company hinges on the products that we create. 2013 roadmap looks strong. It's across the board in terms of the execution, the schedules and the launches Our tracking right to the schedules that we laid out. We're working on 2014, 2015 2016 in terms of How to transform our business in terms of those high growth segments and how do we continue to leverage our leadership in the client space and the graphic space to We continue to deliver that product focus. We have protected through this process of budgeting Those areas where we know the highest growth will come over the next several years. Great. Thank you very much. Thanks, Joe. Our Our next question comes from Joanne Feeney from Longbow Research. Your line is open. Hi, thank you. I wanted to go back to Discussion about gross margin. So in the last quarter, desktop was stronger. I was wondering, first of all, if you could clarify whether that was Surely a mix shift within desktop, say, on lower volume shipments or if you actually saw an increase in units Sequentially in the Q4, in addition to it sounds like an ASP rise. So that's sort of number 1. And then number 2, what are you thinking about Thanks for 2013. Do you see more lower end PCs and tablets? And then how are your margins across those different kinds of products? And What do you think could drive either gross margins stay where it is or perhaps to expand in 2013? Okay. Joanne, this is Lisa. Maybe let me take some of the comments on sort of the mix on the gross margin in the 4th quarter. So In the Q4, I think we took a very balanced approach to managing the margins. I think we saw some positives and some negatives in the desktop We did see an increase in desktop ASP, primarily because we introduced our higher end AthlonFX Series as well as the new A Series Trinity APUs into the channel and that drove ASPs up a little bit on the desktop side. There were some competitive pressures on the notebook side. So all in all, very balanced approach to the margins. I think as we go forward for 2013 mix, we're not talking about full year gross margins. Devinder mentioned our guidance into Q1. When you look at the mix there, we would expect That as we get into the second half of the year, we will have the higher end of the A Series, The A8s and A10s, but there's, of course, a balance with what happens in the market. So all in all, I think that's where we Okay. And then a quick follow-up. How much are you, I guess, Well, let me back up. The changes that you have been talking about, you and Rory and Mark, on simplifying the manufacturing process, Reducing the number of wafer processing steps, for example, adopting a more standard process, presumably is expected to do 2 things: 1, lower unit costs and 2, speed your time to Okay. I guess from our perspective of trying to understand where gross margin might go, can you give us any sense of the quantitative impact that you foresee From those simplifications on the cost structure? Well, from a cost structure, that's how we're driving to part of the way how We drive to the $450,000,000 That's one piece of it as I kind of highlighted Joanne. The idea Across the development process, the way we interlock now, the focus that we have, in the past, Custom hugely long complex designs were the way the PC market moved. In the future, it's going to be quicker, low power, more efficient design. What also you get from this approach, obviously, Until we get time to market, you get lower cost, you also get better yield, which is also important in terms of really managing the business. So it has benefits Across the board and speed of execution as we move forward in a model where you're going to see a consortium based model and the based model and the proprietary control points of as some of X86 break down, These kinds of models are going to be key. So we're going to stay the course on that. That's helping us on the 450. From the gross margin, I think we've given the guidance in 4th quarter. We need to focus on Executing Q1 as we've given the guidance, excuse me, on Q1 and then from there we'll go forward. Okay. And then just one quick follow-up. So So it sounds like the simplification in manufacturing is doing both. It's reducing OpEx and potentially improving your gross margin. But perhaps you could just give us an update on how the spread is on gross margin across your different products from your mainstream Trinity Richland to your lower end, Tamasch and Convenis, is that something that's widened or narrowed? Or can you really not talk about that yet? Yes, Joanne, we wouldn't get into that level of detail. I think we've given a good outlook in terms of the guidance for 1Q. Okay. Thanks. Thank you, Joanne. Our next question comes from Glenn Young from Citi. Your line is open. Hi, everybody. Hi, can you hear me? We can go right ahead, but you're not Hi. And I know Glenn's voice. Yes. It's Adeline for Glenn Young. Can you discuss your Gaming Councils, which is a potential market for you. And we just want to know when can we expect revenue to ramp? And is That part of the inventory build that you've discussed in your CFO remarks. And I have a follow-up. Okay. Well, Devinder, why don't you touch on inventory, how we focus and manage it and how it progresses from here? And then we'll touch on Our embedded strategy, which we covered before for Adalyn. Yes, I'll do that. Hey, Adalyn. Inventory, as you observe, down 25% quarter on quarter, But that's largely in the MPU inventory space and part of partly and largely due to the WSA amendment. From my standpoint, if you talk about inventory going forward, it's more in the $650,000,000 $700,000 range is what I would call it about 2013. And in particular, as you can imagine, as new business opportunities arise, new product introductions take place. And in particular, when you have process technology transition, that is going to lead to some increase in inventory and that's where it will be. But I'll let Lisa, I'll already answer the other part of the question. Okay. So Adeline, on the gaming revenue, I think we talked about the Nintendo Wii U that was announced in the Q4 and that was part of the revenue that was reported in the Graphics segment. In terms of going Forward, what we've said is the embedded and the semi custom business will ramp over this period in 2013. And we are on track for that 20% revenue target by the 4th quarter. So there will be more second half than first half. Can I make that assumption? Embedded our embedded business will continue to grow toward the 20% in the second half. Okay. And the follow-up is that, now that you are seeing some success in the dense servers market, do you have an opinion about ARM versus x86. And also, by the way, did you see did that strength at C Micro that you saw came with Intel or AMD So the dense server market is where we believe the growth is in the server business. So we were pleased with the progress Of our C Microsystems in the Q4. I will say that in the Q4, we started shipments of AMD based C Microsystems as well as As well as Intel based. And they've gotten a good reaction. I think as we go forward, We are committed to both ARM and X86 in the appropriate markets. And clearly, we've stated that we will be doing Arm based server chips and that will be in the 2014 timeframe. And we continue to offer a strong lineup of X86 As we go through both our clients and our dense server business. Yes. And this is all consistent with our focus To drive reusable IP, an SoC true SoC methodology and an ambidextrous architecture, This is an area that where AMD can clearly differentiate and create leadership in the marketplace. Great. Thank you. Our next question comes from James Covello from Goldman Sachs. Your line is open. Great. Thanks very much for taking the question. This is Mark Delaney calling on behalf of Jim Covello, I was hoping first you guys could talk a little bit about your guidance on the revenue for the Q1 and why you think it is that you're guiding below your biggest competitor? From my perspective, as I look at the PC market, Mark, that market is going to continue to be choppy in 2013, particularly in the first half. Remember, if you go back to 1Q last year, there was a lot of concern about the flood that affected Thailand and the hard disk file. And it was quite surprising as we kind of suggested that supply chain would be Quite resilient. The numbers were quite strong out of 1Q. We think there'll be continued chop and pressure in that first half of 2013. And this market is a bit dynamic right now. We do think Win-eight is a very important event in the industry. And I think that impact or effect will build over the course of the year. We expect The second half to be stronger than the first half from my perspective. And if I looked at the overall year, weaker in 1st half stronger in the second half probably a net flat to slightly down. That's our view of it And in terms of the revenue line. And that's how we came to the conclusion. That's helpful. Thank you. As a follow-up question, the mobile space in In particular in tablets, there's been a lot of new entrants, companies that don't historically participate in the PC market that have been introducing products. And now that you guys are closer and farther along with some of your products for that space, I was hoping you could help us understand to what extent you guys are working closely and partnering with some of these new companies that you traditionally haven't worked as closely with? And with some of these new companies that you traditionally haven't worked as closely with? Well, I think what's important Is that we see that same high growth opportunity in those new form factors. And you can see it with the introduction of our relationship with VIZIO Just here at CES and that introduction of those 2 ultra thins and obviously in the tablet space. You're going to see us continuing to work Across OEMs, in the embedded space, new partners and across the ODM segment to get that expansion and begin to build that market. But again, our focus is to build that over a 2 to 3 year period to drive that to 40% to 50% of our revenue across those high growth segments. Lisa any additional comments you'd like to add? No, I would agree. I think that the key with the mobile space is that there are a lot of new innovations happening both in the traditional OEMs As well as in some of the new entrants as you mentioned. So yes, we are working across the board with a number of customers with these new products. Thank you very much. Thanks, Mark. Our next question comes from Steven Ellesku from UBS. Your line is open. Yes. Thank Actually I want to regarding the last question, I want to take Glass half full approach. This quarter with your guidance, it appears you're going to lose a lot less market share to your Ed, is this about Richland ramping or is this just about clearing excess inventories that you had on Lano and the channel last year. I think we've had a clear focus for the past several quarters to improve Our channel execution from a push model to a velocity model where I have sell through tracking And the relationship and data all the way through the channel, I think we're making steady progress in 3Q, 4Q and as we move forward there. I I think that inventory and our finished goods position, Devinder touched on it with our WSA work and the focus We at the end of 2Q and even into 3Q were seeing pressure in terms of potentially building more inventory. And while we did have to take A charge in 3Q to address some of that, I think we've done a strong job in terms of focusing on that inventory. That positions us for the new product introductions that we talked about at CES Richland, Cabini and Tamas. And I think that's what positions us to move forward and begin to build this turn and acceleration in 2013 With the objective to get to profitability in the second half and positive free cash flow at that time And as I think that's helpful. Thank you. And As a follow-up, you lost a lot of graphics share in Q2 and Q3 and want to You get back to a level you were in earlier in 2012 or is this just about stabilizing share since Your competitor isn't standing still either. Yes, Steve, let me take that on the graphics business. So look, the graphics business is very Strategic to our overall strategy. I will say that we have lost some share over the last couple of quarters. I do believe we're at the low point in our graphic Share based on what we can see in terms of new design activity. We have a very strong approach with our Never Sell bundle that we talked about last quarter, and we will be building upon that this quarter. And we also launched our new HD8000 at CES that's now shipping in a number of mobile OEMs. So I think the share is indicative of decisions that were made 12 months ago, what we're looking at is really a strong portfolio as we go forward in graphics. And I'll make just a brief comment from the standpoint of my experience as I joined AMD. The graphics team here that we have is Leadership, the kind of IP, the kind of engineering skill, the ability for them to innovate and drive I don't know if you had a chance to walk through, Stephen, the CES work that we showed there. This team yes, and I thought you saw some really interesting application of how you could create a sound a surround compute environment Leveraging the graphics capability and imagine that kind of solution moving forward. Say they're building a brand new building and That building is not even built. You could create with our technology a sales room that created the windows and the graphics representation. You said, well, what's this building On the 22nd floor look like at night and all of a sudden the graphic engines fire up the windows. You can see that world and you could apply that kind of Surround Compute that we see emerging, this new trend of conversions that the cloud is fundamentally driving and it's our graphics IP that's going to be a To the past that standalone data and application on a singular device protected by a couple of proprietary control point That era is ending. The era in front of us is an interconnected world where there's almost a tsunami of new devices that begin to emerge. And they're all graphically linked because the data and information, the applications are running on cloud dense servers and these mega data centers. And they're distributing information across the whole set of client devices. They're efficient. They're low power. They're across embedded devices. This is the opportunity Steve in front of us to really Get after it and where we can see graphics taking the business moving forward. Thank you. Operator, we'll take 2 more callers, please. Our next question comes from Raved Shah from Nomura. Your line is open. Amit, are you there? Hi. This is Rody, this is Sanjay for Rumi Shah. Excellent. Perfect. The question I wanted to ask is if you could share some updates on 28 nanometer progress at GlobalFoundries As it relates to some of the issues you faced last year at 32 nanometer? From our perspective, our supply chain has focused with our foundry partners across 2012 and improving execution. And as I've commented several times before, The work that we've done with GlobalFoundries and across the foundry supply chain environment has significantly improved with that Kind of a disciplined approach. We introduced last year the First, 28 nanometer graphics products and leadership. And now as we move forward, we're positioning ourselves with that Refocus, better executing supply chain to move forward in 20 28. Yes. And Sanjay, just to Your question about 28 nanometer and global foundries, we are pleased with our overall 28 nanometer bring up in all of our foundries. So from a 28 nanometer standpoint, we feel very good about where the technology is and what it's delivering for us from a product standpoint. And one of the things Sanjay that we're focused on is to make sure that those parts are delivered to time to the market, the 2C launches and that we get the Parts in volume as we ramp through it, so that it's not just an announcement of back end. These are focused in terms of The execution of the supply chain to build through the ramp at the beginning of the launch. So that's something we focus very hard Not to repeat the Lano kind of events of 2011. Okay. Thanks. And as a follow-up, I wanted to go back to the gross margin question. And I was wondering if you could give us a sense on your embedded and semi custom business. What's the gross margin of that Product lines relative to your PC business, is it lower? Is it higher? If you could give us any color there. No, we don't get to that level of granularity Sanjay. All right. Thank you so much. Our last question comes from Vivek Arya from Bank of America. Your line is open. Hi. This is Ashish Rao for Vivek Arya. Thanks for squeezing us in. Question for Lisa. Could you provide an update on when you Expect Piledriver Architecture, Optron servers to come out. I mean, and related to that is could this refresh Your server business or do you think long term growth is more a function of C micro dense servers as well as the ARM based servers? Yes. So when we talk about our server business, we are definitely focused on increasing our investments in the dense server portion of the business. So we recently announced our Abu Dhabi lineup in Q4. We also announced Earlier this month, an open compute reference platform that was based on a system that we call Roadrunner, those are both based on the PolyDriver architecture. As we go forward, as we said, we are going to ensure that we double down in the dense server business And that includes our C microfabric as well as our chip technologies with APUs and CPUs. Okay, cool. Devinder, let me try asking you the semi custom embedded business Question in a different way. I mean, you have noted that you expected to represent about 20% of sales exiting the year. I mean directionally how should we think about gross and op margins both on a percent as well as on a D. Moriarty:] Yes. I think as I said earlier, the PC environment It continues to be dynamic. Our business model based on what we observe with the 20% obviously is evolving. We are providing guidance for gross Margin for Q1, 2013 and we're not providing guidance beyond that time period. Okay. Thanks. Operator, that concludes today's earnings conference call. We'd like to thank everybody for participating and