Earnings Call: Q3 2012

Oct 18, 2012

Good afternoon. My name is Huey, and I'll be your conference operator for today. At this time, I'd like to welcome everyone to AMD's Third Quarter 2012 Earnings Conference Call. All lines have been placed on a listen only mode. After the speakers' remarks, you will 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, Huey. Welcome to AMD's Q3 earnings conference call. By now, you should have had the opportunity to review a copy of our earnings press release and CFO commentary. If you have not reviewed these documents, they can be found on AMD's website at quarterlyearnings.amd .com. Participants on today's conference call are Rory Reid, our President and Chief Executive Officer Devinder Kumar, Senior Vice President, Corporate Controller and Interim Chief Financial Officer and Lisa Su, Our Senior Vice President and General Manager, Global Business Unit and she will be present for the question and answer 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 of note for you. Lori Reed will present at the Credit Suisse Technology Conference on November 27 Devinder Kumar will present at the Raymond James Conference on December 10th. And our 4th quarter earnings quiet time will begin at the close of business on Friday, December 14th. Lastly, we intend to announce our 4th quarter and fiscal 2012 earnings on January 17, 2013. Dial in information for that call will be provided in mid December of this year. Please note non GAAP Financial measures referenced during this call are reconciled to their most directly comparable GAAP financial measures in the written CFO commentary posted on our website at atquarterlyearnings.amd.com. Before we begin today, let me remind everyone that today's discussions contain forward looking statements based 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 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 and queue for the quarter ended June 30, 2012. Now with that, I'll hand the call over to Rory. Corey? Thank you, Ruth. Our 3rd quarter financial performance fell significantly short of our expectations. We understand the dynamics behind the shortfall and we are taking decisive actions to address the core issues. To help return the company to profitability, we also announced a restructuring plan designed to strengthen AMD's competitive and reduce our expense structure. I will cover that plan in greater detail shortly. But first, I wanted to discuss our 3rd quarter results. Broader macroeconomic issues are impacting consumer PC spend. OEMs are also taking a cautious approach to managing inventory In advance of the Windows 8 launch and tablets continue to grow as a consumer device of choice. As a result, we faced a very challenging selling environment, especially in the lower end of the consumer Yet against this backdrop, we saw continued consumer adoption of our Trinity APU in the quarter. Trinity notebook unit shipments increased more than 70% sequentially and accounted for nearly 1 third of our total notebook shipments in the 3rd quarter. Although Trinity is targeted at mainstream price points, ultra thin notebooks featuring the low power APU are also competing effectively at higher system price points. As a result, we believe we gained share in the 6 More than 125 AMD based systems are expected to launch with Windows 8, including tablets and several new ultra thins. While we look forward to the introduction of Win-eight, The 4th quarter will continue to be challenging and we do not expect PC market conditions to improve for several quarters. Our graphics business performed in line with our expectations. Despite market softness, We continue to see improvements in our desktop discrete channel business and game console revenue increased. Our industry leading graphics technologies remain a cornerstone of our end to end product strategy And we plan to further invest in our graphics business to drive differentiation and Future growth across the entire product portfolio. Now let's turn to the changes in the market and how they are affecting our business and the steps we are taking to address them. Shortly after joining AMD, I talked about the fundamental changes occurring in the PC industry. These trends are occurring now at an even faster rate than previously anticipated. We underestimated the speed of change in our Industry and we expected to have several years to transform the AMD business, but we must implement We are restructuring our business and building a more efficient operating model. This reset will put in 2nd, we must diversify beyond the traditional PC market and become a leader in fast growing and adjacent markets where we can differentiate and create leadership. Our product development cycles without jeopardizing our ability to innovate or deliver products in a timely manner. We will do this primarily by building reusable IP blocks that will help lower development cost and We are resetting to a new business model designed to deliver breakeven results with approximately $1,300,000,000 of As we move through 2013, we will see the results of our work with a more efficient business and a portfolio of powerful new products. There is strong customer interest in our next generation offerings, Design win momentum is solid and we see opportunity to regain share in 2013. We already have working silicon for many of our new 2013 products in house, Including our next generation 28 nanometer Cabini APU, which is the successor to our highly successful Brazos platform and our first true SoC design. We are making good Progress with the bring up of Cabini, which remains on track to launch in the first half of next year. Our long term strategy will rebalance our business towards faster growing segments of the market. Today approximately 85% of our business is focused on the legacy PC portions of the market projected To have slowing growth over the next several years, we intend to drive 40% to 50% of our portfolio to faster growth markets where our IP is a key differentiator. The dense cloud market is one of the fastest growing parts of the data center market. Our long term path to success is in providing customers with disruptive technologies and choice, Just as we did when we brought 64 bit computing to the mainstream server market with AMD 64, We will look to leverage AMD's full suite of processor and graphics IP, 3rd party processor cores NC Micro's innovative super compute fabric to deliver differentiated solutions with industry leading performance per watt. We are focused on growing our share in targeted embedded markets. These include communications, Industrial and gaming, which will outpace the PC industry growth for the foreseeable future. Our semi custom APUs already have a number of confidential high volume design wins in place. We plan for our embedded business to comprise approximately 20% of our quarterly revenue By the Q4 of 2013, up from 5% today. And finally, as we noted earlier, we will APUs are ideally suited for these new products from ultra thins and tablets to a new breed of entry level notebooks that will drive growth in the emerging markets. So in summary, We are facing the challenges in the global IT market head on. We are resetting and restructuring our business to reduce Our cost base from earlier this year by 25%. We are targeting a $1,300,000,000 revenue PUs in 2013. And finally, we are aggressively pursuing fast growing adjacent markets where our IP provides differentiation and the opportunity for AMD to grow share. These include dense serving, new embedded markets and new lower power Together these actions will return AMD to profitable growth. With that, I'd like to I'll turn the call over to our Interim CFO, Devinder to discuss our financial results for the Q3. Devinder is an experienced financial executive with more than 28 years of experience at AMD. He has served as the company's Corporate Controller since 2,001. Devinder? Thank you, Rory. Revenue for the Q3 of and a 7% decline in the Graphics segment revenue. Gross margin was 31%, down 15% sequentially, partially due to the $100,000,000,000 inventory write down, which adversely impacted gross margin by 8 percentage points. This write down codename, LANO. 3rd quarter gross margin was also negatively impacted by weaker than expected demand in the quarter, And this contributed to lower ASPs for microprocessor products as well as lower utilization of our assembly and test manufacturing facilities. Non GAAP operating expenses were $516,000,000 8% less than prior guidance, primarily due to tight spending controls and lower bonus and commission expenses. R and D was $328,000,000 26% of net revenue, SG and A was $188,000,000 15 percent of net revenue. Non GAAP net loss was $150,000,000 and non GAAP operating loss Interest expense was $44,000,000 flat compared to the prior quarter. The tax provision for the quarter was 0 compared to a $6,000,000 tax benefit in the prior quarter. Non GAAP loss per share including the impact of the $100,000,000 inventory write down was $0.20 calculated using from the prior quarter due to an operating loss which resulted from lower revenue in the 3rd quarter as well as the $100,000,000 Inventory write down. Computing Solutions segment revenue was 927,000,000 down 11% sequentially due to lower ASPs driven primarily by weaker than expected demand as well as Lower Unit Shipments. Client product revenue declined 11% sequentially due to lower unit Shipments and ASPs in the 3rd quarter, especially for desktop processors. We shipped a record number of Trinity based progress in the desktop channel reducing LANO inventory in the 3rd quarter. Our server processor revenue declined from Chipset revenue declined sequentially, primarily due to lower unit shipments in the quarter. Computing Solutions segment operating loss was $114,000,000 down $196,000,000 sequentially, primarily due to lower revenue in the quarter and the previously mentioned $100,000,000 inventory write down. Graphics segment revenue was $342,000,000 down 7% compared to the prior quarter Due to lower GPU unit shipments to OEMs, partially offset by higher channel sales and royalties, game console royalty revenue was up Graphics segment operating income was $18,000,000 down $13,000,000 from the prior quarter, primarily due to a decline in revenue. Turning to the balance sheet. Cash, Cash equivalents and marketable securities including long term securities ended the quarter at 1,500,000,000 Cash declined $279,000,000 compared to the previous quarter, which was primarily the result of operational cash flows. Given the reduced size of our current business and OpEx reductions, we are adjusting our optimal cash Cash outflows that will occur in the Q4 of 2012 include a $50,000,000 cash payment to GlobalFoundries in the 4th quarter related With the final payment of $175,000,000 related to the waiver to be paid by December 31, 2012. Debt as of the end of the quarter was $2,040,000,000 In the 3rd quarter, All of the outstanding principal and accrued interest of the company's 5.75% convertible senior notes due 2012 or approximately $499,000,000 and issued a $500,000,000 aggregate principal amount down $61,000,000 compared to the end of the Q2 of 2012 due to lower revenue. Inventory was $744,000,000 exiting the quarter, down 89,000,000 primarily as a result of the $100,000,000 inventory write down. Now turning to the outlook. For Q4 of 2012, AMD expects revenue to decrease 9% sequentially, plus or minus 4%. Operating expenses are expected to be approximately flat sequentially. As Rory stated in his remarks. We are realigning our company with the business realities of today. We are reducing our workforce by approximately 15% in the 4th quarter And we will have a restructuring charge of approximately $80,000,000 in the Q4 of 2012, primarily consisting of severance charges. Cash expenditures related to the 4th quarter restructuring will be paid almost entirely in Q4 of 2012 and the Q1 of 2013. We are taking additional actions We continue to evaluate our cost structure and anticipate restructuring actions in the first half of twenty thirteen, which will result in additional restructuring charges. However, we are currently unable to quantify these amounts. Finally, as part of our financial reset, the company is targeting the breakeven at the operating income level At a $1,300,000,000 quarterly revenue and quarterly operating expenses of approximately $450,000,000 by the Q3 of 2013. With that, I'll turn it back to Ruth. Ruth? Thank you, Devinder. Operator, we'd I'd like to open the call to questions and answers, please. Yes, ma'am. Our first question in queue comes from the line of Ross Seymore with Deutsche Bank. Please go ahead. Your line is open. Hi, Rory. First a question on the restructuring What's the math or the thought process behind choosing the $1,300,000,000 revenue level get to breakeven, it seems about 20% roughly above the 4th quarter guidance. So it seems like you're baking in some pretty good news that's going to happen between now and then. Can you just Talk about how that revenue level was chosen? We basically looked at how the market was beginning to change and how We think by focusing to take down cost is the right approach here in the tactical timeframe because it's clear The trends that are reshaping the PC industry are clearly occurring faster than everyone anticipated. We'll continue to look at that Ross as we go through next year and make assessments as we see the year unfold, But we clearly wanted to set a breakeven point at a lower level than we've been running and to be able to consider I guess as The one follow-up, Devinder or Rory, whomever wants to answer it. How should we think about the OpEx trajectory to get to that total savings Number you gave next year, especially considering you said you're going to have costs lowered in the 4th quarter, but you're guiding OpEx to be flat. Yes. So Ross, what we've talked about is from earlier in the year, we've driven a set of programs Yes. So just to remind you, I mean, as Rory said, the cost structure, if you go back and look at the OpEx in Q1 It was right above the $600,000,000 level. We have taken it down to about $500,000,000 plus. To your Specific question about Q3 and Q4 being planned. There are some offsets, in particular in the engineering area related to some 28 nanometer product tape and other R and D expenses. There was some timing between Q3 and Q4. And in particular, given the holiday season that's coming up, We have some marketing campaigns for which we're going to go spend some money. So there were some offsets there. But if you read through the press release, We've said that with the restructuring actions that we are taking, we'll save about $20,000,000 this quarter. And then on a quarterly basis, that will be $40,000,000 On a going forward standpoint. And that will start in 1Q from an absolute perspective quarter over quarter? Yes. I'll start in 1Q on an absolute basis. And then as Rolly said earlier, we're going to continue to drive the cost structure down To get to the $450,000,000 OpEx structure by Q3 of 2013. Great. Thank you. Thank you. Our next question in queue comes from the line of Hans Moses with Raymond James. Please go ahead. Yes. Hey, Rory, you mentioned as part of your new strategy that you would be incorporating 3rd party cores. And if you can just clarify the 3rd party quarters, would that be for the server cloud market or is it more broad? We're clearly focused in terms of bringing those cores into the C Micro Freedom fabric, the super compute fabric. I think that's very important in terms of building that basis in which to lower the cost of those cloud compute environments Hans. Maybe Lisa, you want to add a little bit to that? Yes. Let me just add some color to that. I think we've said from our strategy all along that we believe we want to build into the larger ecosystems in the industry. So we'll continue to build X86 products, but as we've announced We also have a partnership with ARM in the trust zone security area and we'll continue to look at how we incorporate more third party IP over time to address some of these Okay. And then as a follow on, the timing for these types of products hitting the market, is that the end of 2013, 2014? It will probably be in the 2014 timeframe. Great. Thank you. Thank you. Our next was hoping perhaps you could help us understand how you accomplished 2 seemingly divergent goals, one being to accelerate the Transition to these new adjacent faster growing markets, while at the same time cutting your expense basis. And given all the recent cuts there have been at the company, It's really brought things down to some very efficient levels it would seem. It seems now you're going to be stuck cutting sort of more of the I'm just wondering how you're thinking about doing both at the same time, 2 things that seem kind of contradictory. Yes. Thanks, Joanne. I think what's important is to create the structure in order to streamline our development and also to lower our cost of that development. We believe with the work of many talented engineers across AMD, their focus is to really streamline that activity, lower that cost and deliver our base set of offerings. And then to build off of that with our reusable IP base In order to go attack those markets, they're adjacent, Joanne. They're not fundamentally different. These are APU graphics oriented opportunities that allow us to take solutions like Cabini and like our APU base into those segments At a lower cost base and across the portfolio. That's helpful. Thanks Rory. And then perhaps sort of related to that as you've talked about moving more into And you say you have some design wins in place now that you're not at liberty to reveal. But could you perhaps let us know what You have a target for something like 20% of the business. What how far along are you to that 20 How many design wins? What's the state of the design wins in place now that gives you visibility to are you halfway there, a third of the way there? How many more design wins you have to get in place? Because that tends to be a longer design in process. So I'm just wondering where you feel like you are there. Yes. Thanks, Joanne. From a standpoint of the market, today 85% of our core business is focused on the legacy PC market and that's Obviously, a slowing segment. And we believe those market trends that are affecting that are going to continue for the foreseeable future. This embedded opportunity is one we've been working on for some time. It's also around semi custom. These opportunities are areas that are going to be significantly higher growth for this foreseeable Those confidential design wins are in place. We have silicon in play already coming back To AMD that gives us the basis to execute those plans. We believe that those That we're on pace to deliver those objectives in the second half of next year. Okay. Great. Thanks a lot. Appreciate the help. Thanks, Joanne. Thank you. Next questioner in queue comes from C. J. Muse with Barclays. Please go ahead. Your line is open. J. Muse:] Yes. Good afternoon. Thank you for taking my question. I guess first question running through the numbers on your new breakeven of $1,300,000,000 $450,000,000 OpEx, it would appear that your target here gross margin wise is 35%, 36%. So curious, are we seeing a permanent reset on the gross margin side? Or how should we think about that? Let me answer that. That's not true. We are not giving guidance either and that's not a statement on either profitability or gross margin. It is really putting in place an expense structure that allows us to breakeven at the operating income level at $1,300,000,000 by Q3, 2013. Right. But you told us $450,000,000 in OpEx, so just doing the math suggests 35%, 36%. So I guess is there something that we should be thinking about in terms of Your agreement with GLOBALFOUNDRIES? Or what's driving that lower run rate? No. I think what you take away from that is at the $1,300,000 Revenue level, we will have an expense structure at the OpEx level of $450,000,000 Okay. Thank you. And if I could just Quickly follow-up on the gaming side, you talked about impressive wins there. Can you comment on what the margin profile Should look like in that business relative to the overall business? No. We're not going to give that kind of guidance at this time. Okay. Thank you. Thank you, sir. Next question in the queue comes from the line of Stacy Rasgon with Sanford Bernstein. Please go ahead. Your line is open. Hi, guys. Thanks for answering for taking my questions. One on the embedded growth. So you've got embedded at about 5% today in the ballpark of $1,300,000,000 Revenues, you think you'll be at 25 percent of revenues by Q4 of next year and in Q3 of next year you expect to be at the same revenue level about 1,300,000,000 I guess it implies 2 things. 1, is a pretty big ramp of embedded over that time frame. 2nd, it seems like a permanent haircut To your outlook for your own PC and graphics revenue, I just was wondering if you could comment a little bit on I guess the long are an outlook for your current business and the trajectory that you think you have on those embedded wins. Sure, Stacy. We talked About 20% in Q4 of 2013. There's no doubt that the PC market trends that are Obviously occurring are happening much faster than people had anticipated. And I think, it's our judgment To make sure that we put in place the structure and the game plan, that breakeven point that reflects Our understanding of the market as we see it today, that visibility is difficult at this point and we need to see how Windows 8 rolls out, How we enter into next year? The embedded that's in terms of this market step down, But we do see the PC market as one that will continue to be under pressure for the foreseeable next several quarters. In terms of the embedded and semi custom space, this is obviously a key area. It's an area that leverages the graphics and the APUs And allows us to move that technology, which we've invested a huge amount of effort on with the talented engineers across AMD into an adjacent space that has a better competitive profile for us. Lisa, did you want to add anything around the semi custom or embedded segment? Yes. I think to the question of Stacy, how long does it take? They really are different segments, whether you're talking about Consumer, you're talking about the communications and industrial. So as Rory stated, we were targeting about 20% of our revenue in the second And we'll continue to grow that business as we go forward. And I guess along those lines though, if you're going to get back to $1,300,000,000 by Q3, So Q4 is obviously pretty bad. Q1 would typically be seasonally down and Q2 usually not much better. That implies a pretty big healthy ramp seasonally into Q3 of next But at the same time, if you're talking about your presence in PCs, your focus on PCs declining and moving toward embedded, What is actually driving that big ramp into the back half of next year to get even back to your breakeven revenue? Well, let me take that question. I think you're That's not true. We have given guidance for Q4, right? As you heard, Rolly talk about the challenges in the PC market and some opportunities that we are pursuing. But we are not at this time giving any guidance on revenue either for Q1 or Q2 And definitely not for Q3 of 2013. What we are talking about is an expense structure whereby at the $1,300,000,000 revenue level, We have an OpEx structure in place at $450,000,000 1 is an OpEx statement and the other one is about a revenue Statement in terms of what you can do the math on the gross margin. I don't think the 2 are directly linked. But if you go and make some assumptions about the gross margin, You can draw your own conclusions in terms of either what the revenue levels would be or what the profitability levels would be. Got it. And one last quickly if I In terms of your expense cuts in OpEx to get to $450,000,000 how much of that's coming from R and D versus SG and A? Are you holding more of your engineers in place and cutting Sales and administrative are where are those cuts coming from? After the actions we take in Q4, we're obviously going to continue to assess But we're not going to give the granularity in terms of where the cuts are coming from. Overall, we're going to continue to assess. We're going to look at areas in particular with the reduced Labor based there might be some opportunities to do some consolidations at certain sites or facilities that may trigger some savings. Well, we're not going to go ahead and give granularity in terms of how much is R and D and SG and A. Well, just at a gross level, can you give Some feeling for at least is more of it coming from 1 category versus the other, if you don't want to give any specific numbers? It's across all functions and globally. Okay. Thank you, guys. Thank you, sir. Our next questioner is Joseph Moore with Morgan Stanley, please go ahead. Your line is open. Great. Thank you. As I've talked to your OEM and OEM customers really throughout the year, it seems like there's A fair amount of enthusiasm for the products, but it's also clear that the enthusiasm there's some reluctance to build product lines around some of the products. I mean Trinity Bring some unique capabilities to the market, but with a tough environment and maybe people who had Lano issues last year, they haven't been as fully committed as maybe I'd like to When I talk to IT people about Opteron, there's a lot of excitement around the product, but there's also issues of sort of is there enough OEM support. So there's not a Clear line on when they're going to implement Opteon upper end based servers even though it's good for a lot of the workload. So my question is how does that gap Get closed and is there a risk when you talk about restructuring and financial strains of cutbacks that situation of kind of getting that credibility It gets tougher. I'd like to talk a little bit about both segments. So if you look at the Client or PC market, we have had actually very strong product success with Trinity and we continue to believe that we'll see strong ramps as we go into the holiday We do have to continue to build our execution credibility and all of the focuses on executing both our current products as well as our 2013 products. So that is job 1 from the product side. On the Optron side, similarly, we continue to build stronger relationships with the OEMs as well So on the product side, I think there is a lot of focus on execution and we continue to build that momentum with the customer set. And Joe, we're interested to see the customer momentum around Win Additional space. I think that's a good reflection of the interest and the dynamics we have in place. Okay. And then second question in terms of to follow-up on Stacy's. I mean the cuts that you're making, you don't want to be specific about where they're coming from and I can understand that. Are there any Kind of of the major initiatives that you guys talked about at the Analyst Meeting and talked about through the year, is everything there still a priority? Or is there any kind of activities based things that you want to take out? Yes. From the perspective of what we've done in terms of our business plan and roadmap and technologies, This company is an engineering based company. There's no doubt about that. And our focus is to create those set of products that allow us to move forward. As I mentioned with Cabini, we already have all most of the silicon in house for our launches for 2013, And we believe that's a strong portfolio and positions us well. We've continued to identify and hire Great. Thank you very much. Thank you, Joe. Thank you, sir. Next questioner is John Pitzer with Credit Suisse. Please go ahead. Yes. Good afternoon, guys. Thanks for letting me ask the question. I guess, Rory, on the embedded target of going from 5 Today, the 20% by I guess the Q4 of next year. Can you just help me understand a little bit about the visibility around that? Is that just mostly gaming some of the rumored wins you guys already have? Or do you think by the time you get to 20%, you're broad based among many end markets? Or is it concentrated? If you could help me there that would be helpful. Yes. John, I think Lisa will kind of go into this in a little bit Detail, but the main point here is this is a segment, it's an area that we can leverage our IP and the APU and the graphics prowess that we have. This is important because this segment will grow faster. It's also got a better competitive framework. And we have the design wins in place On pace to deliver that objective in 4Q, we've got to continue to execute And continue to build that market, but we're not done there. We need to continue to grow that segment as we move forward. Lisa some additional thoughts? Yes, John, I think to your question of do we have good visibility into what needs to happen to ramp those design wins, I think the answer is yes. I think there's execution to be done on our side, but we have good visibility. Our goal is to broaden into more end markets Some of the other markets take a little bit longer in terms of developing, but we are creating vertical industry Teams to attack some of those other verticals as well. Great. And then you guys did a good job kind of explaining the Global foundry payments through the balance of this year. As we think about next year, if I remember correctly, if nothing happens, the From a Global Foundries perspective, John, we've seen an improving relationship and partnership with this Key partner across 2012. And we've also seen an improving environment around their execution and we appreciate that. As we've talked about previously, we're in ongoing discussions around the WSA both for 20122013. Devinder? Yes. So I can add, I mean, I've been involved as you might know with the WSA discussions for several years now Having worked on the deal from the inception when we formed GlobalFoundries in 2,009 and we continue to discuss with our partners And many times as you've seen over the last couple of years, we have worked through some difficult situations in the spirit of partnership, but also what is mutually Beneficial for both companies. The 2013 take off AWSA as well as the 2012 WSA as well as the 2013 WSA discussions are ongoing. We continue those discussions. They're not yet complete. But from my standpoint, they're going very well. Great. Thanks, guys. Thank you, sir. Our next question I'm from the line of Chris Hadley with JPMorgan. Please go ahead. Hey, thanks guys. Are there any plans to sell the written down inventory? When you go ahead and take inventory write down from an overall standpoint accounting wise, what happens is we have a product transition from Lano to Trinity. Trinity, as you heard Rolly say, up 70% quarter on quarter, doing well. And with the market conditions from an accounting standpoint, you also look at Evaluate the inventory against the future demand and in particular customer commitments. We did that in the early part of this quarter after Q3 ended And we took the incremental inventory write down. Typically in these situations, it's not a plan to go ahead and sell that inventory. Okay, great. And then if you could just follow-up on how you think gross margins can trend and can you get back to the 45% mark you hit a few quarters ago? We're not giving guidance at that level, but I can tell you from a Q4 standpoint at least and especially given the market conditions, there are some factors that could be positive or negative, Right. You have a weak macro environment. We are in a consumer base holiday season quarter. And then there is some low end competition from an overall stand And obviously those are negative factors. The Trinity product being accretive to the margin and especially being a higher mix of the product In Q4, it's going to be helpful. And then the other thing is the Win8 launch. But beyond that given especially the uncertainty, We are focused on our breakeven model as I discussed earlier, dollars 1,300,000,000 at the $450,000,000 OpEx number and not looking From a gross margin standpoint, I can add that just to explain that further, if you take the $1,300,000,000 to 450,000,000 If revenue is higher, then obviously we could do better than breakeven. If gross margin is higher, we could do better than breakeven, But we are prepared in particular with the trending that's occurring to assess the situation, work specifically on the cost structure And especially with the uncertainty that's out there, we want to stay nimble and be prepared to react as the case might be. This is not a guidance For Q3 twenty thirteen revenue, it is not a guidance for Q3 twenty thirteen gross margin. It is just an expense statement as to how we're going to drive The expenses from where we are today to the $450,000,000 by Q3 of next year. So just to be clear, Are you not telling us where your gross margins can go because you don't think they can get to 45% or you just don't want to tell us? I'm just not saying anything at this point. Got it. And then Thanks at this point. Got it. And then just for my last question, a quick clarification, I believe, on John's question on the embedded opportunity. Is it safe to say that by the end of next year most of that revenue will be coming from the gaming industry? Or what about between the comm and the industrial side? There's no doubt that this is a set of confidential wins and we can't get into any of those specifics. We're clearly targeting industrial, communications, gaming, those areas where the APUs and our graphics We make the most sense, but we can announce them. We'll announce them in due course over the course of the coming quarters. Fair enough. Thanks guys. Thank you. Our next question in queue comes from the line of Mark Lipacis with Jefferies. Please go To my understanding, the original miss in Q2 was driven in large part because you guys you had supply issues, You shorted the channel in favor of the OEMs and you kind of lost traction with the channel And I guess my question is, where do you think you are in winning back the channel? What do you have to do to win the back? And where do you think you are in that process. Thank you. Sure, Mark. We saw the channel stabilize in the 3rd quarter At the 2Q levels and we also began to work down the inventory that we discussed in that period. We saw an improvement in sales out velocity. That means the rate of sell through through the channel. And we're going to continue to work on improving that sell through rate and reducing that inventory in the coming quarters. As we mentioned last quarter, that was a multi quarter effort to go forward. But the progress and the stabilization of the channel And 3Q was a good step forward. Thank you. Thank you, sir. Next This is Dean Grommoulis calling in for Kevin. It seems that when you look at the PC industry lately, there's a number of moving parts, potential share erosion to tablets and smartphones, Windows 8 The general macro decline, as you talked to as you have talked to your customers around the world, could you please expand your views on how you may Allocate share, if you will, or blame amongst these various factors to what makes up the current declining situation. There's no doubt, Dean, that we're seeing 3 significant factors as we mentioned in our earlier remarks that Perfecting the overall PC industry. And these trends are definitely occurring at a faster rate than the industry had anticipated. You're right to note that the macro environment is soft and it's different across different geographies. That weakness is likely to continue for the foreseeable future. We also saw OEMs in the market Tay gave rather conservative approach to inventory in the lead up to Windows 8. This will be an interesting Q4 in terms of how Windows 8 moves forward. We think it's an interesting and important event, but this is one we need to see play out. And clearly, tablets Have taken an important point in the consumer's mindset, both in the experience that the tablet creates, But also becoming an interesting device of choice at that lower end of the consumer client space. I think all three of these factors have accelerated this fundamental shift in the PC market And we expect this shift and these pressures to continue for the next several quarters. When you look at the impact To smartphones and tablets, do you think this is temporary and can be reset by perhaps Portable Solutions or do you think this is a permanent shift in demand, particularly in the mature developed economies? A statement like that is clearly hard to predict out in time. I do believe the PC market It's a market that will be here for the next decade. I don't think there's any question about that, but the dynamics of it and its growth rate Are really fundamentally shifting right now. A lot of the historical forecast and trend lines have broken over the past 2 quarters And we need to see this reset stabilize and move forward. I think what's most important is to innovate to continue to create solutions that match The customers and the commercial markets needs all day battery life, touch, the right kinds of experiences with the graphical Capabilities that we deliver are all important in this segment. I think that's key. And at the same time, while this is somewhat unpredictable, Let's take our outstanding IP and engineering resources and focus those on areas we know will continue to grow Thank you, sir. Next question in queue comes from the line of Cody Herrick with Royal Capital Markets. Please go ahead. Your line is open. Thank you. Thanks for getting me in. And Rory, thanks for the details. It's been very helpful. Maybe we can maybe ask for So you've given this target of 40% to 50% of revenue from IP differential products. Can you maybe talk about a timeline? I think Lisa said that some of the new products probably wouldn't really be impactful until 2014. Is that correct? And can Can you draw a path between here and there? No. I think we've kind of laid out the basic concepts here across the Call, clearly in this tactical timeframe continue to build on the semi custom embedded market. This is a good opportunity. It's where our IP and APUs play well. It's near adjacent segment, so it's easy to move there. And I like the competitive market there much Better than the PC market, which is dominated by a single player in a big way. I think also as we move Forward, there's opportunities in dense serving. That market will continue to evolve as low power and cloud Serving becomes even more prevalent. This will be the fastest growing segment going forward. And I think the C Micro acquisition and the work Lisa and her team are doing To build that out will occur over the next 1, 2, 3 years. And at the same time, how do we take our deep Engineering capability into the new low power, ultra portable emerging form factors in the traditional client space. This is an opportunity that's already presenting itself with our next generation APU called Cabini, Replacing our highly successful Brazos and we'll follow that on with a series of other solutions. Lisa, would you like to add anything more? Yes. I think the towards the end of 2013 and then as we get into some of the dense serving spaces beyond that because it takes a little bit longer in those markets, but we're trying to build a portfolio to really enhance the growth prospects of our business. And Lisa, on the microserver side, it's pretty nascent for you and for everyone from an ecosystem standpoint. I guess, what are the hurdles? What are the, I guess some of the marks that you need to hit or that the industry needs to hit to get through to make this more of a mainstream product? Well, we continue to work with our differentiated IP base. So the C Micro acquisition has been helpful in terms of our work The large data center customers and then we continue to need to build out the ecosystem to really build broad based support. So I think it's It's a several year journey, but it's certainly one that we're very committed to and continue to build out all the aspects of the ecosystem. I guess, but Lisa, more specifically on that ecosystem, are there certain elements that need to be knocked over first that could start to see adoption, Knowing it's going to take several years to get it fully built out, but are there certain hurdles that may be met in the near term? Certainly, there are and they come with Both the hardware and the software ecosystem as well as the ODM ecosystem. So all of those are aspects that we are working on. And then lastly, on the pricing side, Intel was pretty adamant that they were actually seeing some stability in pricing, which Doesn't really seem to make a lot of sense given the backdrop. Rory, I think you were pretty adamant that pricing has been Competitive. What would you expect given what you're looking at the backdrop? As we talked about several times on the call, there The market dynamics that are occurring now are going to continue. Those macroeconomic factors, The Win 8 launch as well as the tablet phenomena will continue to impact the PC market. I expect the market to be competitive And I expect the market to continue to fall under pressure for the foreseeable future, the next several quarters. Thanks guys. Good luck. Thank you, sir. Our next question in queue comes from the line of Chris Caso with Susquehanna. Please go ahead. Yes. Thank you. Just returning to some of the discussion about the breakeven point And I understand you're not providing revenue guidance going forward, but could you talk perhaps in principle And given the uncertainty in revenue and some of the strategic changes that need to be made, what further actions can you longer than what you expect. Yes. Actually we are very focused on the free cash flow breakeven and actually trying to get back to positive free cash flow. The restructuring actions that were announced today in the call will help. The OpEx reduction on a go forward standpoint will help. I also referenced earlier about the continuing discussions of the WSA related to the 2012 take or pay and the 20 13 WSA discussions that are ongoing and that will obviously have an impact on the free cash flow on a go forward standpoint. So we are laser focused on getting to free cash Breakeven at lower revenue levels, but we're not giving guidance from a standpoint of the revenue on a go forward basis Except for the Q4 guidance that we have given. And as a follow-up to that, I mean, is there anything you could say about Cash flow over the next several quarters, I mean, should we expect cash flow to still come down as cost cuts are being implemented or what's your view there? I think related to the restructuring actions with the savings that we On the guidance for 2013, we're not prepared to talk about it right now because a lot of open items that we need to go through Hi, in particular as I talked about the WSA discussions that are going on. So it's really too early to tell. Once we can come back and give the guidance from a free cash flow standpoint and a go forward standpoint. Okay. Thank you. Thank you, sir. Next question A little bit of a follow-up from some of the other questions about pricing. I guess, what kind of pricing environment are you assuming in the restructuring actions And then both for yourself, in other words, how much leeway are you leaving yourself for your prices to come down and still hit these targets? And then What are you assuming in the way of pricing and aggression from Intel in that regard as well? I believe as we've talked about several times on the call, Jim, We believe it will be a competitive pricing market, not unlike what we've seen over the past several quarters. What we're doing is basically Structuring our cost structure to position us for breakeven at a lower revenue level. We'll continue to assess I mean, I guess, I had heard you said that before on the call, but I guess maybe with some granularity. I mean if you look at the pricing in the last couple of years has been abnormally high. And there's 2 ways to think about what's going on in the last couple of quarters. It's sort of the beginning of a resumption of a trend that would put us back on a trend line of lower pricing Or that was the new normal, the better pricing and what we're seeing these last couple of quarters is just sort of temporary. Which one of those do you think is the case as you begin to think about these restructuring actions? Yes. As we've talked about earlier, I think what's clear is the market Trends that are driving the PC market right now are have accelerated faster than we expected and clearly Affected the trend lines and forecasting. Visibility is difficult right now. And I think Jim what we have to do is look at how each of the next several quarters unfold. There's clearly pressure in the market and there will be competition. Thank you. Thank you. Our next question in queue comes from the line of Patrick Whang with Evercore. Please go ahead. Great. Thanks. Two quick ones and then A longer one. The first one, Rory, just a quick clarification. Can you help us understand which buckets are being defocused in your actions right now? Patrick from a standpoint is what we're trying to do with the restructuring efforts is to Reduce and simplify our development cycles and development processes across our portfolio as well as simplify our global structure. I think that's clear in terms of the focus we have in terms of reusable IP, how we're going to use the system, The Heterogeneous Systems Architecture, all of those strategies that we've talked about are reducing Exidy and shortening the development cycles. And we have to push for more efficiency on that. That's the basis of what we're trying to accomplish. Okay. So there aren't any particular product lines or anything that was ongoing that's getting killed or canceled? Nope. We're not changing anything on that activity at this point. Okay. And then just a second quick one, Devinder. Just some clarification on the wafer supply agreement. Can you disclose kind of or walk us through what's left of your commitments for the Q4? I think you guys Disclosed $700,000,000 or so for the second half of the year. The way I frame that is For 2012, we had a take or pay agreement for a certain number of wafers and what we disclosed is the total cost of that will be $1,500,000,000 We have paid Approximately $1,000,000,000 of that, so $500,000,000 remain. But the question is the time period at which we take those wafers, which is the basis of the discussions We continue to have with our partners. So I think you have to look at it in terms of the remaining 2012 take away, there's $500,000,000 left And what time frame is the are the wafers going to be taken and what time frame the cash is going to go out if that's what you're asking? Then The second thing we are discussing as we typically do on a yearly basis is go ahead and discuss the 2013 WSA and both of them taken Together is what we're trying to get to a conclusion to with our partners at GlobalFoundries. Okay. Got it. And then just last question, I guess, Rory or Lisa, Can you talk about the competition in this newfound embedded space? And maybe perhaps where you feel your key advantages with system on chip are? Thank you. Yes, maybe let me take that. I think the key differentiation we have is really in the high performance design methodology, the microprocessor technology as well as the graphics that we have. And we're really going after high volume opportunities that can really use this IP in adjacent markets. So I think it's very unique capability that doesn't exist in many other places and we really need to continue to build that model out over the next few years. Okay. Can you also quickly just mention a couple of the key competitors that are currently in that space today? I think you're familiar with many of our competition. I think our ability to be flexible and really put a semi custom approach In place is something that's unique to our capability. Okay. I'll go do some homework. Thanks so much. Thank you. Next question in queue comes from the line of Vivekara with Bank of America. Please go ahead. Your line is now open. Thanks for taking my question. I'm wondering how we should think about CapEx for next year. I think, Dovinder, you did describe How you expect to breakeven on an operating basis, but how do you breakeven on a cash flow basis? What are your CapEx plans? I think it's really too early to get into 2013 at this point. I think most likely if you come back in about a quarter at the call that we have For the Q4 results, we could probably give you some visibility into the early part of 2013 and then give you the guidance from that standpoint. Right. Maybe, Rohdi, one for you. What's going on, on the discrete graphics side? NVIDIA has had a strong Product with their Kepler architecture for a few quarters, is that a segment you think would be deemphasized going forward? Or is that Still a priority business for you? There's no as I mentioned in my earlier remarks, Vivek, That business performed in line with our expectations for the quarter and the graphics business remains a cornerstone for our technology portfolio Across AMD. But I think Lisa probably is the best person to take that question. Yes. Let me give you some color around the graphics business. The graphics 3rd quarter, we had the macro effects that affected the PC industry that also affected graphics, but we actually grew quarter to quarter in the discrete AIB Channel. So I think we believe that our products are quite competitive and we'll continue to invest in the graphics area to ensure that competitiveness. Got it. And then one last one, Rory, in case things stay soft in the PC area next year, Are there other is there a plan B? Are there other partnership or M and A arrangements that you can pursue or you substantially and you have a very large competitor with very significant competitive advantages. So beyond just breaking even, how do you position And how do you report shareholders going forward? Vivek, I think it's around what we talked about. There's 2 steps by lowering our breakeven point on lower revenue. And as we've talked about several times in the call, we'll continue to assess that as the market unfolds. And then second, take our IP and our differentiation in graphics and across our engineering portfolio and take them to the high growth segment. We talked about driving over the next several years 40% to 50% of our portfolio on those growth segments. We had planned this strategy. What we've seen now with the trends accelerating that we need to move in a more aggressive path to tackle that now, Both in the high growth, ultra low power new clients, that dense server space and then in course in the embedded semi Operator, we'll take 2 more questions, please. Sure thing. Next question in queue comes from the line of Steven Osborne with UBS. Yes, please go ahead. Yes. Thank you. I have a couple of questions for Lisa. First question, I'm trying to understand this reusable IP strategy. When I think about what that means from a P and L point of view, I just think of it as a shift of OpEx Into COGS because I just if you're going to cut staff, you're going to have compromises in terms of the IEP for some of the loss performance for those compromises that you're making. Can you help me understand if I'm thinking about that correctly or if I'm missing something. Yes. Let me describe it this way. I think what we mean by reusable IP is really getting to a much more infrastructure, so that we're able to spin products faster as well as customize them for the various markets. So I wouldn't see it as a shift from R and D to COGS, but more as building a foundation so that we can IP such as the graphics IP that we talked about as well as our microprocessor IP. So that part doesn't change. And as a second question here, just thinking more philosophically about your APU And you have differentiating graphics yet when look at the 3rd party market research data, you're Not getting paid for it, at least when we look at what was done with Lano. And trying to understand If there is something we're missing in terms of maybe you are starting to get some of that uplift on Trinity and you'll get more with Caveri or is there perhaps A basis for rethinking your strategy and focusing instead of higher performance GPUs on smaller die sizes that could Yes. I think The question around the APUs is a good one. We are very clear that the APU strategy is the right strategy for us. Now in terms of ensuring that we get the value for it, it's not just the piece of silicon, but it's also what we can do in the solutions environment. So we have been doing a lot of work to ensure that the applications can take advantage of all of the compute that we have on the silicon. And you can see that with some of the moves that we've made with the heterogeneous systems architecture, creating industry Consortium around the heterogeneous compute and we've had a number of new members. We talked about Qualcomm and Samsung joining as well as ARM and imagination. So I think it's evolution over time, but it's clear that the APU strategy is the right strategy And we need to get more of the applications taking advantage of the APUs over time. When do you As a final follow-up, when do you think that will show up in the average selling price data? We continue to work on sort of the APU evolution over time. Okay. Thank you. Thank you. And our final questioner for today comes from the line of Craig Verger with SBR. Please go ahead. Hey, guys. Thanks for taking my question. Just in looking at your core business, do you have any idea where end consumption is relative to what your relative to what your 4th quarter guidance is, is there channel inventory declines baked in? And Where is kind of a bottom for this business as you're down 35% year over year? Yes, Craig, from a standpoint, as I commented earlier on the channel business, we've That business stabilized in 2Q and 3Q at the levels that we saw there. That is also continuing to work off that inventory that I talked about in the previous earnings call that was down channel from a Sell out perspective and we're going to continue to work that. I think we're making good progress there. In the overall PC market, there's no doubt We're taking clear and decisive action to restructure our business, lower our cost structure to enable us to hit Breakeven at a lower revenue base, which we think is prudent given the market trend. Just as a follow-up on the gross margins, is it I guess we should be assuming that they continue to move lower from The normalized non inventory write down level that you printed in Q3, I mean is there a reason for the decreased transparency? We're just not giving guidance for gross margin at this point. The market environment as you observed and many have observed is uncertain. Okay. Thank you. Good luck. Operator, thank you. That concludes the call. Thank you. Again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.