Earnings Call: Q2 2012

Jul 19, 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 Second Quarter 2012 Earnings Conference Call. All lines have been placed on a listen only mode at this time. After the speakers' remarks, you'll be invited to participate in the question and answer session. As a reminder, this conference is being recorded today. I would now like to turn the conference over to me is Ruth Carter, Vice President of Investor Relations for AMD. Please go ahead. Thank you, and welcome This is the Q2 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 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 and Thomas Seifert, Our Senior Vice President and Chief Financial Officer. For the Q and A portion of the call, we will be joined by Lisa Su, our Senior Vice President and General Manager, Global Business Unit. 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. Rory Reid will present at the Citi Technology conference on the 4th September in New York. Our 3rd quarter quiet time will begin at the close of business on Friday, September 14. And lastly, we intend to announce our 3rd quarter earnings on October 18. Before we begin today, let me remind everyone that our discussion contains forward looking statements based on the environment as we Those statements are based on current beliefs, assumptions and expectations, speak only as of the current date, and as such involve risks And uncertainties that could cause actual results to differ materially from our current expectations. Please refer to the cautionary statement in our press You'll also find detailed discussions about our risk factors in our filings with the SEC and in particular AMD's quarterly report on Form 10 Q for the quarter ended March 31, 2012. Now with that, I'd like to hand the call Over to Rory. Rory? Thank you, Ruth. Clearly, our performance in the quarter was disappointing and did Not meet our commitments. When I joined AMD last year, we laid out a set of priorities to improve our execution And transform the company to sustain our long term growth potential. This has not changed. In spite of the setback in the quarter, we continue to move forward confidently and we are taking the right For the Q2, our revenue of After a reasonable start, we saw business velocity slow in the later part of the quarter Driving this revenue miss. This 2nd quarter revenue shortfall was largely driven by 2 key factors. 1st, Weak sales of desktop processors in the channel, primarily in China and Europe. And secondly, a soft consumer PC market that impacted OEM notebook processor sales. We reacted quickly to this revenue softness by focusing on maintaining margin and effectively managing Our expense position. As a result, we reduced expenses sequentially and maintained margin at approximately 40 6%, generating a net income of $37,000,000 in the quarter. Looking at the specifics of the desktop business, sales to OEMs increased sequentially based on their Continued adoption of APUs. However, our desktop channel revenue declined significantly As our Lano product did not experience the same uptake it had with our OEM customers. Looking back, when we were significantly 32 nanometer supply constrained last year, We prioritize shipments of Lano to our OEM customers. As a result, channel partners saw a Dramatic change in supply linearity and a misalignment with motherboard availability. This Clearly impacted Lano sales and built inventory in the channel. Correcting our channel Ensure proper supply linearity and more effectively position Lano's value proposition in this area. It is clear that the overall PC market experienced softness in the Q2, particularly in the consumer space. This impacted our notebook processor business. As the slowdown accelerated late in the quarter, OEMs responded Quickly, in an effort to reduce their inventory exposure at retailers and limit their on hand inventories, We made the decision to protect our notebook margin and not chase lower margin business As the environment weakened at the end of the quarter, while our notebook processor business did not meet our revenue expectations, We did see mobile processor revenue and unit shipments increase from the year ago period. And Trinity notebook shipments more than doubled sequentially and we have no supply constraints. We are also seeing good response to the recently launched Trinity systems, Including the 1st ultra thins from HP and Samsung that hit the mainstream price points, We expect a second wave of UltraThins will launch in the second half of the year aligned around the Windows 8 introduction. Also the introduction of Brazos 2.0 helped drive the 6th straight quarter of notebook share gains In the $4.99 and below retail price band globally, this is a good indicator that our products continue to At compelling price points that represent nearly 1 third of the overall retail notebook market. We expect That the notebook softness that began in the second quarter will continue in the second half of the year. And while overall notebook market will grow, We anticipate it will be at a lower rate due to 3rd quarter softness in anticipation of Jose, the macroeconomic conditions and overall inventory build in the PC ecosystem from the first half. Our record number of design wins remains intact and will help fuel Our notebook business through this challenging environment. Now turning to our server business. Revenue increased from the year ago period, but declined sequentially and was below our expectations. With the introduction of our Bulldozer based Opteron Processors at the end of last year, we saw strong initial adoption in the High performance compute and market. In the second quarter, we experienced a pause in our server business and our Focus has to be on building similar acceptance with mainstream IT buyers. Bulldozer is a solid technology. And as we have discussed previously, our growth opportunities are in the portions of the market where our products deliver clear performance Advantages. Based on the competitive landscape, we believe Bulldozer can drive modest share growth in the near term. In the server space, we also see market expansion opportunities with the growing adoption of dense We have a differentiated leadership position in this market as a result of our acquisition of C Micro. Our IP foundation allows us to deliver disruptive server products and a technology roadmap that strengthens our Long term competitiveness in this emerging market. Our graphics business executed well And our results were within historical seasonal patterns. We continued expanding our AMD Radeon 7,000 Desktop Notebook Discrete Graphics Solutions in the quarter and we recaptured the title of world's fastest graphics chip It is clear that global economic activity is slowing and this is impacting the PC market. For the first time since 2000 and Sequentially for 3 consecutive quarters and have been below historical averages for the last the 7 quarters, we expect macro headwinds will continue for the Q3. We also believe the PC The industry may be resetting to a new baseline and that full year industry growth estimates will be reduced. For the year, we now expect AMD processor unit shipments to grow in the low single digits. While managing expenses and driving future growth, we have made progress in building a better AMD. In the second quarter alone, we formed the HSA Foundation with other industry leaders. We announced a technology partnership with ARM To drive the adoption of an end to end security ecosystem, we also introduced the world's fastest graphics chip. We released the successor to our most successful platform ever with Brazos 2.0 APU And we launched our next generation Trinity APU for the mainstream and ultra thin notebooks. Still, there is much more work to do. We remain steadfast in our efforts to improve our execution and capture The growth opportunities in the changing market landscape around low power, disruptive server technology and cloud based computing. As we control our expenses, we will protect our investments and our customer facing activities And innovations that produce our next generation of relevant competitive products that will drive growth. There is no doubt that the Q2 was disappointing, but we have the determination and the commitment to deliver improved results. With that, I will turn it over to Thomas, who will cover the financials for the Thank you, Rory. Revenue for the Q2 of 2012 was $1,410,000,000 Down 11% sequentially, driven primarily by a 13% decline in the Computing Solutions segment. Graphics segment revenue was seasonally down 4%. Non GAAP gross margin was 46%, flat Sequentially, non GAAP operating expenses were $557,000,000 8% less prior guidance primarily due to lower bonus and commission expenses as well as discretionary spending cost controls late in the quarter. R and D was $345,000,000 24 percent of net revenue and SG and A was $212,000,000 15 percent of net revenue. Non GAAP net income was $46,000,000 and non GAAP operating Interest expense was $43,000,000 flat compared to the prior quarter. Tax provision was a net credit of $6,000,000 in the quarter compared to $32,000,000 in the prior quarter. The difference was primarily a one time tax benefit of $36,000,000 in the prior quarter related to the C Micro acquisition. Non GAAP EPS was $0.06 calculated using $755,000,000 fully diluted shares. Adjusted EBITDA was $173,000,000 down $48,000,000 from the prior quarter due to lower non GAAP operating income, which resulted from lower revenue in the quarter. Computing Solutions segment revenue was $1,050,000,000 down 13% sequentially, Driven primarily by lower channel sales in China and Europe as well as a weaker consumer buying environment impacting sales to OEMs. Client product revenue declined 13% sequentially, primarily due to lower ASPs. Units also decreased in the Q2. Both were primarily driven by lower demand for desktop processes Primarily due to lower ASPs. Computing Solution operating income was $82,000,000 down 42,000,000 Sequentially, primarily due to lower revenue. Graphics segment revenue was 3 67,000,000 down 4% compared to the prior quarter due to seasonally lower unit shipments in the channel. GPU revenue was also down seasonally. Game console royalty revenue was flat sequentially. Graphic segment operating income was $31,000,000 down $3,000,000 from the prior quarter primarily due to seasonal Turning to the balance sheet. Cash, cash equivalents and marketable securities including Long term securities ended the quarter at $1,760,000,000 In the quarter, we made a $50,000,000 cash Payment to GlobalFoundries related to the 28 nanometer product limited wafer of exclusivity. Accounts receivable at the end of the quarter was $744,000,000 down $218,000,000 compared to the end of the Q1 of 12 due primarily to lower revenue. Inventory was $833,000,000 exiting the quarter, Debt at the end of the quarter was unchanged at $2,020,000,000 Now turning to the outlook. AMD expects 3rd quarter revenue to decrease 1% Sequentially, plus or minus 3%. Gross margin is expected to be approximately 44%. Operating expenses are expected to be approximately $560,000,000 in the 3rd quarter. We are working to match revenue and expense strategic product and road map investments. Our goal for the 3rd quarter inventory is to be approximately flat sequentially. However, we'll need to carefully manage and focus on this as we transition throughout the quarter and monitor how our latest generation of softness in our business late in the Q2 and are now focused on stabilization and recovery. Protecting the value proposition of our new and refreshed Despite the ongoing challenges our general business faces, the choppy macro environment and some lackluster PC demand, I'm confident We will succeed and be ready to capitalize on the Windows 8 launch, better inventory management and realize the ongoing value proposition of And with that, I'll turn it back to Ruth. Thank you, Thomas. Operator, if you could now poll the audience please for the question and answer session. Our first questioner in queue Hans Mosman with Raymond James. Your line is open. Please go ahead. Yes, thanks. Hey, Rory, do you mind going through the mechanism that occurred in channel in terms of the mismatch between motherboards with the LANO, I got a little confused in terms of what may have happened and how You can fix that here over the next several months. Thanks. Sure, Hans. From a standpoint, this originated back in last year when we had that first And of course, you know Hans that we had to target our supply To our OEMs and that was the right thing to do. As we introduced Lano late in the year to the channel that those Motherboards had been there for some period of time and really damaged linearity and pricing wasn't at the right levels As we exited the year, as we move forward into 2012, the up position in this key segment and to make sure that we make deliver on this momentum in the desktop channel around linearity With our channel partners. Does that help Hans? Yes. Just to confirm, so the uptake In the channel was due to a sudden availability of LANO or had the motherboard been already kind of No. The mismatch occurred early in the cycle as we went through this In terms of they were introduced to the channel earlier in the cycle. Then as the Lano product came in late in the year of 2012, there was a miss Match in terms of the pricing etcetera. This impacted linearity and then we didn't enjoy the same uptake that we saw around Lano that we saw with our OEMs. I see. Okay. And then as a follow-up, in terms of market, you've very likely lost market share as a result of that. But do you I believe that we lost market share In the quarter, I don't think there's any doubt about that. In the channel, we've talked about in the earlier comments about how we're going to focus To improve that going forward, in the OEM space and the notebook space, our value proposition, our product set is strong with the APUs. I believe that in that segment, we've got to continue to focus on building that momentum with the key OEMs and We believe it will have. We've seen Trinity APUs double sequentially in terms of its volume. We've seen our early releases And then around Brazos 2.0, the next generation to our most successful platform ever of Brazos, we've now Pat again for the 6th quarter in a row, the leadership growth in terms of the $4.99 and below Price band across the planet. That shows that those products are competitive. They're compelling and we're going to continue to stay the course on that set. Okay. Thank you very much. Thanks, Hans. Thank you, sir. Next questioner in queue is Glenn Young with Citi. Please go ahead. Your line Hi. It's Adeline for Guang Yang. Can you tell us a little bit about what your debt reduction plans are regarding Yes. Let me take this question. It's Thomas. As I have said previously, we are very comfortable paying the debt off using cash from our balance sheet. Paying the debt off using cash from our balance sheet on the August maturities. But in addition, we continue of course now to monitor the markets It has allowed us to invest both organically and via acquisitions, and we want to maintain such a strong balance sheet Moving forward, especially given the uncertainty in the macroeconomic environment and ensure that way that we are in a And a follow-up. Can you tell us a little bit about how you can retake share in the server market? From a server standpoint with the introduction of the Opteron Bulldozer product, We saw a good uptake in the initial launch around the high performance compute segment. There is no doubt that That success is a good foundation and showed our early progress there. We've communicated before that we need to leverage Our Optaron Bulldozer solution, which is a solid technology on the key workloads and the key customer segments Where we enjoy a performance advantage. This is key and we will continue to build that where we can add modest share gains C Micro positions us with strong IP and a strong offering in the new emerging dense server computing And I think this is a very important opportunity as I believe this will expand the market As we move forward, Lisa, do you have any comments on how C Micro is going so far? Yes. No, just to add to Rory's comments on the server So, the Seamarine Crowe closed that acquisition at the end of the Q1 and they've been part of us for For the Q2, I would say the integration has gone very smoothly and we've been pleased with the capability and the talents that the team We continue to have very positive conversations with customers of the technology and we view this as a long term growth In addition to obviously the near term work on our optron base series, which we believe as Rory said has the opportunity to Thanks. Thanks, Irene. Thank you. Next questioner in queue is David Wong with Wells Fargo. Please go ahead. Your line is open. Dave, thank you very much. What do you expect to be the ratio of Trinity versus Lano sales in the September quarter? We wouldn't get into those specifics In terms of communicating, but clearly we've already launched the Trinity activities with our notebook OEM partners and We'll continue to build that. That doubled sequentially. Lano is an important product throughout the balances this year and into 2013. It's very Relevant to leverage both of those solutions as we move forward, and we'll continue to do that. Okay, David. Okay. Thanks. Thank you, sir. Next questioner in queue is Uche Hordje with UBS. Please go ahead. Mr. Oraje, your line is open. Uche, are you on? Hello. We'll double back to Uche. I'm right here. Can you hear me? Yes, sir. Oh, we can. There you are, Uche. Please go. Hi, Rory. How are you? I'm well, sir. Just real quick, I just wanted to clarify the weakness in desktops. Was it just CPU, was it also important with graphics in desktop products? Graphics enjoyed Had a solid quarter. It was within seasonal expectation and history. We saw a good performance out of our next generation 28 nanometer products and we have strong supply there. We did not see issues in terms of the graphics space in terms of that, where the big issue in terms of the quarter and that is largely in our control is around the desktop Business in the channel around CPUs and around the APU product. We did not see the same uptick as I talked about earlier uptake that we saw with the OEMs. And it's interesting Uche, in the OEMs we've done very well with Lano in terms of notebook and in desktop at the OEM. So I believe that we've not done a good job in terms of linearity and managing our supply to our partners, communicating the strong value proposition deeper into the channel And to ensure that our promotions are focused on sell out to drive this launch and that's what we're going to focus on in 3Q and 4Q. Okay. That's helpful. Just very quickly, if I were to look at how you if we look ahead into Intel introducing Zinc Haswell Products. And one of the things we expect from that product is much lower power From the architecture, there are two questions I have. One is, how do you position Trinity and Coveri out there? But what's even more worrying for me is, How do you think that as Ivy Bridge or even as Sandy Bridge today rolls into the N-one Both companies, do you think that the way you position yourself that you can actually compete in What I think is an interesting change from your competitor in terms of product rollout. Uche, I want to emphasize that I believe firmly that we're on This execution in second quarter is disappointing and we will correct But I firmly believe that we're on the right strategy around our APU technology, around cloud computing and enhancing our low power solutions. This is the right strategy and the right differentiation for AMD. AMD is going to continue to deliver interesting The APUs are our strategy and we're very pleased with the value proposition that we have there, especially in notebook And especially as you go into the low power space. So when you look at any of the comparisons on Trinity and the battery life And as we go into the next generation APUs similar focus on getting longer battery life, thinner, lighter those areas. So The APUs were our initial strategy and they continue to be where we believe we're going to be able to differentiate going forward. Also, OJ, it's very important to take Part of our strategy that we've talked about and we've talked about with you is the idea to expand and take the APUs into adjacent segments Around the embedded areas, we think that offers a very attractive opportunity for us moving forward and I believe this is the proper focus. That's great. And just one last question. Your engagement with mega data centers in terms of your server business Has been an area where I'm a little not clear what the strategy is. Some of the products you've rolled out recently have had fairly good reviews. Are you starting to how do you think you might start to change or shift the perception from those kind of and engage those kind of customers, especially given that today that seems to be the only category that seems to be spending a lot of money now. U. K. This is certainly a very good We like the mega data center market. It is the fastest growing market in the server business. As we've discussed before, the server business is one that takes a little bit longer You actually see product adoption, but we're very focused with both our Optron product line as well as our C Micro products with the fabric based Technology and attacking those mega data centers and lots of customer conversations in those areas. Great. Thank you very much. Thanks, Uche. Thank you, sir. Next questioner in queue is Joanne Feeney with Longbow Research. Your line is open. Please go ahead. Yes, thanks. I had a question about the gross margin dynamics. Thomas, could you explain the moving parts for the 2nd quarter, Given that ASPs were down on I assume lower channel, must be a yield improvement, I suspect. And then Q3, what's happening there? Yes. So let's start with the Q2. So we guided for 46% to slightly up and we ended up right there, mainly driven by The right product mix, good share of gaming royalty revenue and very good improvements on the productivity side in In terms of cost of goods sold, yield and other measures beyond yield that helped us to end up in a good space Despite the challenges we saw on the revenue side. If you look at guidance now for the Q3, there are certain headwinds and tailwinds you have to Keep in mind, I think we are going to continue to see productivity improvements. We also will see tailwind by a higher of Trinity products getting into the market. And then we will see some and say some headwinds. We will have lesser royalty income in the Q3 from a gaming perspective. We see additional cost in terms of having the full impact Our 28 nanometer portfolio hit us from a ramp up perspective. And we will see some pressure from a pricing perspective, in those parts of the business that Rory has been talking about where we have to show velocity in order to move And I think this is getting us in the space that I have guided for. Okay. And then as a follow-up with regard to inventories, can you describe a little bit the mix of inventories? Is Is this because of a shortfall in Lano sales, primarily Lano based? And if so, what gives you confidence That the channel is going to continue to be enthusiastic for Lana when they know Trinity Desktop is right around the corner. Is that really part of it that the channel just doesn't like to second place to the OEMs in terms of getting the new products and really just want to wait for Trinity at this point? Yes. So let me start with the inventory mix first and how we look at that and then Lisa and Rory can comment on the velocity in the channel. The inventory build comes really in 2 parts. We to be very honest, we had planned for certain inventory Anyway in preparation for the second half. So I think about half of the increase is really only attributable The good news is that the inventory is pretty much all current products. And the part where we saw demand shortfall is pretty much driven by Lano. We feel confident and our Aim, of course, is as I said before in my script that we try to manage inventories Quarter over quarter, but we have to carefully manage the transition of the new products and how the demand environment is going to change. And regarding Velocity, Lisa? Yeah. Let me make a couple of comments on that. So, Lono is a good product. If you look at where we're selling, it's selling into both notebook and desktop OEMs as well as the channel. We got ourselves a bit out of position admittedly and that's a big reason for our shortfall. But when we look forward, it's really the focus on sell out velocity and getting the We're all positioning correct with both the CPUs as well as the motherboards and we think we're doing that. Trinity will also be an excellent product that will go into the channel I think you will run with both products for some time in the channel. Okay. And When you refer to positioning being a bit off, is this a mismatch that you and Ori have talked about referring primarily to pricing Or to the allocation of different qualities of 1 in a different particular channel partners? Yes. It's really the where we had Motherboard supply relative to CPU supply and the resulting non linearity in the channel. Okay. And then sorry, I picked up something Thomas said. You said Trinity is expected to be a greater share of revenues in the third in this quarter. And is that relative to Brazos or relative to both I'm not going to go into that detail. It's going to have a it's going to We have increasing volume and as part of a higher share overall of Trinity as part of our product mix, We will have a tailwind in the gross margin development. Okay, got it. Thanks very much. That's very helpful. Thank you. Thank you, Next questioner in queue is Christopher Nolan with JPMorgan. Please go ahead. Hey, thanks guys. So it Sounds like we're going to get a little more aggressive on price to clear out the inventory at AMD and in the channel. How long do you think it will take to clear it out? And If you could just talk about gross margin plans beyond Q3 and the impact that that would have on it as well. We've seen a slowdown obviously in the overall consumer spending and global marketplace and that's impacted the PC segment. I believe we'll see, forecast from IDC and Gartner continue to be reduced In the second half, based on that, we have to make sure that we're positioning our products properly and that we So I believe that macroeconomics will cause some slowdown and obviously will Make us focus on executing that business more assertively. In the desktop channel, I believe that's more around our control. I We executed not as effectively as we could have and I believe that we did not enjoy that same uptake in that channel space. We will make sure that our promotions and our incentives are focused around sales out and that our marketing communications help build the understanding deeper into Tier 2, 3 and 4 in the channel to Getting deeper into Tier 2, 3 and 4 in the channel to make sure that we get that velocity. With respect to margin, we're here today to talk about And I'm not going to provide guidance on Q4 margin. With that being said, we gave guidance for the full year in the range of 44% to 48% and we are well within this range at this point. And can you just give us an estimate on how long you think It'll take to get your inventory and the channel inventory back to a level where you feel comfortable? We're going to work on that in 3Q And in the second half of the year, we believe that that's the right focus and we'll work through that in each of those next two quarters. We believe that we'll track that week on week and ensure that we have that right focus. Great. And then just as my quick follow-up, When do you think we can start to see the you guys regaining share show up in the numbers like Q4? Or do you think we're looking at it next Our objective is to gain share in every quarter and that's going to be our focus going forward. Obviously, there's Headwinds in terms of the macro environment, our channel development, but we have interesting products that hit the right point with our customers and value propositions That makes sense. We have to focus our entire team across AMD to get that Great. Thanks guys. Thanks Chris. Thank you sir. Next questioner in queue is Stacy Rasgon with Sanford Please go ahead. Your line is open. Hi, guys. Thanks for taking my questions. First a question on your take or pay arrangement with GlobalFoundries. How does the lower demand outlook that you're looking at now actually affect that take or pay given I thought that you were supposed to give them a forward 12 month What impact has that actually had on your inventory build? What impact will that have going forward? And what impact is that actually having on your gross margins given that you've already Committed to those forward purchases. First, I'd like to comment on our relationship With GlobalFoundries and I want to personally acknowledge the progress they've made over the past several quarters in improving their execution. We're building a stronger partnership. Every week we're in ongoing dialogues with them in terms of How to improve yield, how to add deliver the supply and improve our businesses going forward. We've seen Significant progress from GlobalFoundries and their execution has improved dramatically year So with that being said, Stacy, the commitment is pretty much a 2012 commitment and not so much a from here on 12 months moving forward And not so much a from here on 12 months moving forward commitment. And both companies are very focused on making ensure that we have a mutually successful business arrangement. And in light of a weakening PC environment, we are in discussions Of course, not only with GlobalFoundry, but with all of our foundry partners and with all of our suppliers as a matter of fact in order to make sure that we Manage inventory correctly in the light of the weakening demand environment to be very honest. This is not so much A matter of gross margin, it's much more a matter of inventory and cash, how you have to look at this Yes, but if you have too much inventory eventually if you got to discount it to get rid of it, it hits gross margin. So are you still going to be committed to accepting your 2012 forecast as you gave it to them in the beginning of the year under the way the agreement is currently written. As I said, we are in discussions with All of our foundry partners to make sure that we manage inventory responsible and working capital responsible In light of the demand environment as it has developed late in Q2. Got it. And for my follow-up, Just two quick ones. OpEx at what point or what revenue levels do we start to see OpEx start to grow again? When do bonuses and everything else start to come back? And how does the I guess the weaker outlook right now temper or not your investment needs as you ramp into more of the HSA products into 2013 and beyond? And one more quick one. Do you think you'll be free cash flow positive in Q3 and Q4 of this year? So let me start with I think we have shown a very disciplined approach over the last quarters how we can manage our operating expenses. And this is Of course, an approach that we continue to exercise as we move forward, especially in light of a weaker demand environment. And the controls and the Processes that we have put in place so far have allowed us to react fast and swift to the shortfall in demand in the Always keeping in mind that we protect and safeguard the investments from a roadmap perspective that secure our future. There's no doubt that we protect those Investments and we've been talking a lot in the past on the initiatives we have started that allow us To generate this productivity in order to realize those benefits. So very disciplined moving forward, very strict moving forward, but Our future. And operating expense guidance for the Q3 is that it is and we We'll take it from there depending where the demand environment is going to take us. And free cash flow in Q3 and Q4 positive? For Q4, I'm not going to provide guidance. For the Q3, our free cash flow is Through the course of the current quarter, we are not far enough into the quarter to see how that is developing yet and that's why it's difficult Make a statement in that perspective. Of course, we are running a tight shift. You could see that in the Q2, not only on a cost from a cost perspective, but also from a free cash flow perspective. And we'll try to maintain this, of course, as we move through the current quarter. Thank you, guys. Thanks, Stacy. Thank you. Next questioner in queue is Mark Lipacast with Jefferies. Please go your line is open. Thanks for taking my questions. Did you quantify how far above normal you thought channel inventories Had gotten or how far above normal they are now? No, we didn't get into those specifics. We as I mentioned earlier in my comments, We believe that the expectation in the PC market was across 2012 at the beginning of the year was to be And as you could see in 2Q, the macroeconomic headwinds have obviously slowed that PC growth. We believe that will continue in The second half and based on that we think there's pressure in the entire ecosystem of the PC environment moving forward. We believe that the right focus is to be very disciplined in our execution around that channel management But we did not give any specifics. But it's fair am I fair to assume that they're above normal right now? Yes. Absolutely. We said that. Yes. Okay. And then the you're talking about channel marketing programs, your OpEx is flat. So is this does the increased budget in the channel programs that Come from an increased improved efficiencies or you just shift marketing programs from OEMs to the channel. Is that how that works? Yes. I'm we are not going to go in that much detail. But of course, we generate productivity and we are flexible And how we allocate dollars with under the umbrella and within the boundaries that we have guided for. Fair enough. And last question, 28 nanometer APU, I guess, my understanding was that this would you would start production this year and start shipping next year. Does that still sound reasonable? Yes. So on 28 nanometer, we are shipping 28 nanometer graphics this year and we will be shipping 28 nanometer APUs next year in 2013. Thank you. Thank you, sir. Next questioner in queue is Cody Agree with Williams Financial. Please go ahead. Hi, guys, and thanks for taking my Laurie, if we could take a step back. So we've got about a 14% differential from the original guide. Could you give as much color as you can as maybe the rankings to whatever weight you can give? You've got several things impacting everything from inventory corrections to share loss to And just shifts in the macro to how that 14% came about? Yes. From my perspective, as I've shared earlier, there's really 2 key drivers around that. Obviously, the soft PC market that impacted processor Sure. In terms of the impact and the revenue impact late in the quarter. And then obviously the weak sales of desktop The processor in the channel, which again manifested itself first in China late in the quarter and then it spread across the globe. I think that The channel impact had more of an impact in terms of the revenue in the quarter, but obviously both were significant. From a pricing standpoint, do you and to what extent Trailblaz outside of the channel do you think that that had an impact in those sales? Cody, can you repeat it? You got muffled on that part. Didn't hear you clearly. Yes. Just from a pricing competition standpoint, how much did that factor into this? Just Maybe a soft and to what is sitting out in the channel. From our perspective, we saw These impacts in terms of linearity, the channel situation and then softness in the market that rippled through the entire market. You've seen Feedback from some of the players in the ecosystem communicating that. We As the quarter deteriorated, we made the conscious decision to not chase those bad deals late in the quarter and I think that was the right decision. I guess, Rory, as you look forward then, to what extent do you think that that pricing The decline continues and maybe accelerates, I guess, when you look at what Intel is doing as they're making a transition from one process to the other. What do you expect from a pricing environment not just this quarter but as we finish the year? Yes. I don't think there's any doubt that the market will face headwinds in terms of the macro impact. I think it will be more centered around consumer than other parts of the market. Given that, I do think the market and PC The notebooks will expand in the second half, although at a muted level. I Also think that everyone remains excited about Win-eight. It's now been documented when that launch will be. That's important because We'll introduce those products into Q3 and get those shelves ready to go as we go into 4Q and that should offer Some opportunity. But clearly that overall softness and weakness is part of the focus that Thomas talked about We gave the guidance around 3Q and the actions we'll take to move forward. I guess, then lastly, are you prepared to Get more aggressive to chase product maybe you weren't ready to take at the end of Q2? Our focus has to be around profitability and profitable growth. Profitability allows us to continue to invest in the company and the areas that help us grow and build the company over time. We're going to focus on profitability. Of course, we need top line and a combination of that. But again, We made the conscious decision to manage the expense, run a tight ship, make the decisions around those activities. And while we're taking actions To improve sales velocity in the channel to make sure that we capture the notebook growth in the second half, Our primary focus is to continue to deliver a profitable engine moving forward even in this difficult environment. Great. Thanks guys. Thank you, sir. Next questioner in queue is Kevin Cassidy with Stifel Nicola. Please go ahead. Your line is open. Hello. This is Dean Grumlows calling in for Kevin. Thank you very much for taking my call. Looking forward on Manufacturing strategy, could you please explain your thoughts around your options and choices of fab Stability versus optimizing performance, meaning to what degree will you need do you believe you'll need to commit to a very small set of foundry partners in order to achieve competitive performance. Today, we have a foundry relationship with 2 industry leaders in the space. And as I mentioned earlier, GlobalFoundries has done a very strong job They've delivered across 2012, addressed the challenges they had last year and The partnership that we're building with them is very positive and I feel optimistic of that relationship and the improvement As I mentioned earlier, we've also seen strong work out of our other foundry activities around graphics. That 28 nanometer implementation has allowed us to deliver a solid quarter in our graphics business again. So we believe we have the right mix At this time. And we also said in the past that the number of foundries we can support us is also a function of the overall size the company has. With the size we have to that we have today, it's difficult to see that we could add a third partner. Thank you very much. Thank you, sir. Next questioner in queue is Vivekara with Bank of America. Please go ahead. Thanks for taking my question. I'm wondering how discrete graphics market share trended. Your competitor did launch a new product, you also had new products. So how did market share evolve in the last quarter? And how do you see it evolving in the second half of the year? From our standpoint, I think it's important to acknowledge again we recaptured the position of the world's fastest this graphics chip, and again within the quarter, a solid quarter within seasonality. Lisa, any comments you'd like to offer around graphics? So I would say that we are pleased with our graphics performance from a competitiveness standpoint. We did launch In the last couple of weeks, a very strong offering to get to the gigahertz level with our Radeon series. So we continue to believe that this is a very strong product portfolio I see. Any comments on market share? Do you have any sense for that now? Or I think we'd have to wait until the numbers come out. Got it. And a different question. Rody, I'm curious what you think about how close or far Is the ARM ecosystem in becoming a real threat to you in the low end of the PC market? It's interesting, Vivek. Based on my Experience in the marketplace as a leader in the OEM segment, we've looked at That for a long time in my previous experience as well as in this current one. And as I look at the velocity of the business and I look at the market as it's evolving here, I think ARM in the client space will be muted for some period the time, I believe that the performance out of the X86 offerings as well as forward and backward compatibility offer an intriguing value proposition at very attractive price points. And I believe we'll be able to continue to build on that marketplace as we go forward. Do I think ARM will make progress in the PC segment over time? I do. But I think that's in the 3 plus year timeframe to really see it Got it. And just lastly, Rory, do you think Windows 8 Tablets changed the game in any way or Windows 8 RT specifically, do they change the game the end of the year. Sure. So from a standpoint, obviously, we've seen softness in the Q2. It's driven primarily by Macroeconomic issues, we've seen it manifest itself more assertively in the consumer segment. But there's no doubt in some of the mature markets that tablet had some impact. It is not the significant portion, And I do believe that Windows tablets will make progress over the next 1, 2, 3 years And ultimately could enjoy as much as 20% market share in that time period. Got it. Great. Thank you. Thank you, sir. Next Srivastava, your line is open. Hi. Hi. Hello. This is Gabriel for Enbridge. Yes, we're here. Go ahead. Ask your question, please. Thank you. I'm just wondering, what is the ASP trend for the NPU for the discrete profits? This is the first question. For For the desktop as president of the notebook. In the second quarter, in the third quarter? In the Q3 and going forward. We wouldn't break out that level of detail All around those specific numbers are ASPs. Okay. And next question would be, do you have any comment on the channel? Actually, do you have some sense of what kind of like finish good in terms of nano or chimiti Where is this your competitor? Well, as I've covered several times around the channel, I I think we've articulated where the issue is around the uptake around the Lano business In the channel and I believe that our focus around the 3 core actions to improve linearity. As you know, The channel partners make money based on their turns of their business and return on capital. You must have Strong linearity. 2nd program, make sure we focus on the promotions that drive sale out lower into the second and third tier of the channel. And then finally, make sure we're educating and training the channel on the value proposition we offer. It's interesting because Lano has enjoyed a strong uptake with our OEM customers and in both notebook and desktop. And we've seen a sequential improvement of our Lano desktop business with OEM, which says we need to do a better job of articulating that in the channel. Okay. Thank you. Thank you. Operator, we'll take 2 more questions, please. Yes, ma'am. Next questioner in queue is Craig Verger with FBR Capital. Please go ahead. Hey, guys. Thanks for taking my question. I guess one of my questions is, when is product that you feel you've had a heavy hand in developing Going to be coming to market. All of the products we develop are Part of our technology team here that's in place, if you're referring to based on new leadership Semiconductor development occurs over a 24 to 30 months time period, but all of the products here Our products that we are delivering from AMD. Thank you. And then Can you just go over the timing of cash payments to short term debt and So as I said before, we We have made $50,000,000 payment the current quarter. So there remains 2 And $25,000,000 to go. And this will be paid completely down by the end of the first And Is there a short term debt due in the next year also? Well, short term debt in the sense of the maturities That are going to be due in August, dollars 485,000,000 that is what I referred to with the earlier question, how we want to handle this. And then the next maturity tower is coming up in 2015. Perfect. Thank you so much. Thanks, Greg. Thank you, sir. And we have time for one final question. Our final question comes from Mike McConnell, Pacific Rim. Please go ahead. Yes. I was just curious with the outlook for Q3, will both computing and graphics both be down commensurate or will one be Will there be growth in graphics relative to a larger decline in computing? Clearly, Mike, Again, we're disappointed with the performance of the business in Q2. And as we look forward, there's no doubt that The macroeconomic headwinds will dampen the second half progress in the overall PC market. Having said that, I do believe that notebook will expand, in the second half, and that's an opportunity for us to target Our differentiated next generation APUs to capture that growth, while I expect it to be muted and lower than Future design wins and future generations of our technology. So units up And both and ASPs will be the reason for the decline? No, I would We normally don't provide guidance on this level looking forward And I don't want to go into such a detail at this point in time. Okay. Thank you. Operator, this concludes our call today, and we'd like to thank everybody for participating. Thank you, ma'am. Again, ladies and gentlemen, This does conclude today's program. Thank you for your participation, and have a wonderful day. Attendees, you may disconnect at this time.