Earnings Call: Q1 2017

May 1, 2017

Greetings, and welcome to the Advanced Micro Devices First Quarter 20 17 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to Laura Graves, Corporate Vice President of Investor Relations. Please go ahead. Thank you, and welcome to AMD's Q1 2017 conference call. By now, you should have had the opportunity to review a copy of our earnings release and the CFO commentary and slides. If you have not reviewed these documents, they can be found on AMD's website at ir.amd.com. Participants on today's conference call are Doctor. Lisa Su, our President and Chief Executive Officer and Devinder Kumar, our Senior Vice President, Chief Financial Officer and Treasurer. This is a live call and will be replayed via webcast on amd.com. Before we begin, I'd like to highlight a few dates for you. We will host our Financial Analyst Day on Tuesday, May 16, at our headquarters in Sunnyvale, California. Lisa Su will present at the JPMorgan Global Technology, Media and Telecom Conference on May 22. Jim Anderson, our Senior Vice President and General Manager of Computing and Graphics will present at the Stifel Nicolaus Conference on June 5. Mark Papermaster, Chief Technology Officer will present at the BofA Merrill Lynch Global Technology Conference on June 6th and our Q2 quiet time will begin at the closed business on Friday, June 16, 2017. Today's discussion contains forward looking statements based on the environment as we currently see it. Those statements are based on current beliefs, assumptions and expectations, speak only as of the current date and as such involve risks and uncertainties that could cause actual results to differ materially from our current expectations. Additionally, please note that we will be referring to non GAAP financials during this call, except for revenue and segment operating income or loss, which is on a GAAP basis. The non GAAP financial measures referenced are reconciled to their most directly comparable GAAP financial measures in the press release and CFO commentary posted on our website atquarterlyearnings.amd.com. Please refer to the cautionary statements in today's earnings press release and CFO commentary for more information. You'll also find detailed discussions about our risk factors in our filings with the SEC and in particular, DMD's Annual Report on Form 10 ks for the year ended December 31, 2016. Now with that, I'll hand the call over to Lisa. Lisa? Thank you, Laura, and good afternoon to all those listening in today. 1st quarter revenue increased 18% from a year ago to $984,000,000 based on growth across both of our business segments. Gross margin also improved, driven largely by the success of our recently launched Ryzen CPUs. I am pleased with our Q1 product execution and improved year over year financial results, which demonstrate the revenue growth and gross margin expansion potential with our strong set of new products. Looking at our Computing and Graphics segment, we delivered our 4th straight quarter of double digit percentage year on year revenue growth. Strong demand for Ryzen CPUs and improved GPU sales resulted in CG revenue increasing 29% from the year ago period. CG revenue declined 1 percent sequentially, which was better than normal seasonality as significant growth in desktop processor sales driven by the 1st month of rise in CPU sales largely offset seasonal declines in GPU and notebook APU sales. Solid demand for our family of premium Ryzen 7 processors, including our flagship Ryzen 7 1800X offering, which is the industry's highest performance 8 core CPU drove our highest desktop processor revenue in more than 2 years. Ryzen CPUs have been consistently ranked among the top selling processors at global etailers and retailers and press reviews and end user sentiment have highlighted the strong performance and value proposition. In early April, we launched our enthusiast class Ryzen 5 Processors and received overwhelmingly positive reviews that demonstrate our multi threaded leadership and unmatched value proposition. The Ryzen CPU partner ecosystem also continues to strengthen. We have seated more than 300 software developers to support their work optimizing for Ryzen CPUs and have already seen double digit performance gains across a number of top tier gaming titles. Last week, the 1st Ryzen based OEM gaming desktops were announced and we continue the rapid rollout of Ryzen powered systems with additional launches planned for major OEMs later this quarter. In graphics, GPU sales increased by a strong double digit percentage from a year ago based on growth across all of our product lines. The ramp of Polaris based notebook design wins drove increased mobile GPU sales, while our desktop growth was led by improved channel sales. In early Q2, we launched 4 new Radeon RX 500 GPUs featuring our Polaris architecture that deliver improved performance. These new mainstream GPUs provide a compelling solution for the millions of gamers looking to upgrade their PCs to support advanced display technologies and deliver optimal gaming experiences. We also saw higher professional graphics revenue from a year ago, driven by expanding channel sales and growing data center wins, as we continue to increase our GPU compute footprint with leading cloud service providers. We remain on track to launch the first products from our next generation Radeon Vega family later this quarter. Vega is a forward looking architecture that combines a revolutionary memory subsystem, next generation compute engine, advanced pixel engine and new geometry pipeline to dramatically improve performance and energy efficiency for the next generation of GPU workloads. Customer excitement is building as we focus on bringing significant competition to the high end GPU space across the PC gaming, professional design and GPU compute markets. Turning to our Enterprise Embedded and Semi Custom segment. Revenue quarter delivering year on year embedded revenue growth. We see solid demand for our latest FinFET based semi custom offerings in 2017, including the planned holiday launch of Microsoft's 4 ks focused Project Scorpio console featuring a new AMD SoC. On the data center front, in March, we demonstrated that our upcoming Naples server CPU would offer more cores, IO and memory bandwidth when compared to the highest end dual socket x86 server CPUs currently available, resulting in better performance across multiple workloads. Naples platform development work continued to in the final stages of preparation in advance of launch and are very pleased with the status of our silicon and customer engagements. We have now seeded thousands of naval processors across an extensive set of OEMs, end users and partners and remain on track for our 1st Naples products to launch this quarter. In closing, we started 2017 delivering significant year on year revenue growth and margin expansion based on solid product execution and strong market and customer reception to our new leadership products. Our focus in 2017 remains on launching our Naples server CPU with broad customer, partner and ecosystem support. Naples is the first step in our long term plan to deliver a leadership data center product roadmap. Complementing the success of our mainstream Polaris based GPUs with our high end Vega GPUs extending our Zen core into the mainstream desktop and premium notebook markets with the launches of our Ryzen 3 CPUs and Ryzen Mobile APUs in the second half of the year And expanding our participation in the fast growing market for GPU Compute with the launch of Radeon Instinct Accelerators midyear. 2017 is an important year for AMD, and we are well positioned for solid revenue growth and margin expansion based on bringing performance, choice and innovation to an expanding set of markets. I look forward to discussing more about our long term strategy at our Financial Analyst Day later this month. Now, I'd like to turn the call over to Devinder to provide some additional color on our Q1 financial performance. Thank you, Lisa, and good afternoon, everyone. We had a good start to 2017 as we expanded gross margin, increased revenue 18% year over year to $984,000,000 and reduced losses year over year. Computing and Graphics segment revenue increased 29% year over year, driven by the launch of our high performance Ryzen desktop processors and our strengthened GPU product portfolio. Our enterprise, embedded and semi custom segment revenue increased 5% from a year ago. Let me provide some specifics for the Q1 of 2017. Gross margin was 34%, up 2 percentage points year over year, driven by a higher overall mix of revenue from our Computing and Graphics segment and a richer product mix within that segment due to Ryzen desktop processor sales. Operating expenses were $364,000,000 compared to $332,000,000 a year ago. The increase is due primarily to R and D investments in graphics and our server business. Net licensing gain from our server JV with Tactic was $27,000,000 compared to $7,000,000 a year ago. Operating loss was $6,000,000 in the Q1 of 2017, a significant improvement from a $55,000,000 loss a year ago. First quarter net interest expense, taxes and other was $32,000,000 down from $41,000,000 year over year, primarily due to a lower overall interest rate and a lower debt balance. Net loss was 38,000,000 dollars or loss per share of $0.04 calculated using 939,000,000 shares of common stock as compared to a net loss of 96,000,000 dollars or $0.12 a year ago. Adjusted EBITDA was $28,000,000 compared to adjusted EBITDA of negative $22,000,000 from a year ago. Now turning to the business segments. Computing and Graphics revenue was $593,000,000 up 29% year over year and down 1% sequentially. The year over year increase was primarily due to higher Ryzen desktop CPU and graphics process sales. The better than seasonal quarter over quarter decrease was due to lower mobile and graphics process sales, largely offset by Ryzen desktop processor sales. Computing and Graphics Business segment operating loss was $15,000,000 a significant improvement from a loss of $70,000,000 year over year, primarily due to higher revenue. Enterprise embedded and semi custom revenue was $391,000,000 up 5% year over year, primarily due to higher semi custom SoC sales. Operating income was $9,000,000 down from $16,000,000 a year ago, due primarily to higher server related R and D investments, largely offset by an increase in the Tactic JV licensing gain. Turning to the balance sheet. Our cash, cash equivalents and marketable securities totaled $943,000,000 at the end of the quarter compared to $1,260,000,000 at the end of 2016. The sequential decrease was driven primarily by the timing of sales and cash collections, debt interest payments and increased inventory. Inventory ended at $839,000,000 compared to $751,000,000 at year end in support of the ramp of new products and increased semi custom SoC sales in the 2nd quarter. Long term debt on the balance sheet was $1,410,000,000 down from $1,440,000,000 at year end, primarily due to debt reduction activities. The principal debt amount was $1,730,000,000 down $34,000,000 from the prior quarter as a result of debt reduction actions. Turning to our outlook for the Q2 of 2017, which is a 13 week quarter, we expect revenue to increase 17% sequentially plus or minus 3%, non GAAP gross margin to be approximately 33%, non GAAP operating expenses to be approximately $370,000,000 licensing gain associated with our server JV to be approximately 20,000,000 dollars non GAAP interest expense, taxes and other to be approximately $30,000,000 and inventory to be down sequentially. For 2017, we now expect revenue to increase low double digit percentage on a year over year basis and CapEx to be approximately $140,000,000 including the capitalization of production mask sets beginning in Q1 2017. Additional 2017 guidance can be found in the CFO commentary document. In closing, we remain focused on continuing to improve our financial performance on the strength of new product introductions, continued financial discipline and ongoing strategic investments in the business. I look forward to sharing further details on our longer term prospects at our upcoming Financial Analyst Day on May 16. With that, I'll turn it back to Laura. Laura? Thank you, Devinder. Operator, we're ready to begin the Q and A portion of our call. Thank you. At this time, we'll be conducting a question and answer Our first question today is coming from Matt Ramsay from Canaccord Genuity. Please proceed with your question. Good afternoon. Thank you. Lisa, I wonder if you could spend a little bit more time talking about the Ryzen Desktop launch. How you would characterize that it's gone so far, maybe any kind of quantification you could give on revenue the 1 month you had in the Q1 and then for the Q2 guidance and then anything that might have limited sales in the quarter? We heard things about shortages of motherboard from a few suppliers, etcetera. So any kind of additional commentary around the Ryzen launch would be really helpful. Thank you. Yes, sure. Absolutely, Matt. So look, we're very pleased with how the Ryzen launch well went. It was a big launch for us. We did Ryzen 7 first in early March and then Ryzen 5 here in the middle of April. All of the feedback that we've gotten so far from both our customers and from end users has been very strong. I think the value proposition is very strong at both the Ryzen 7, 8 core devices as well as the Ryzen 5, 4 and 6 core devices. Relative to how it performed in the quarter, actually performed as we expected. So with the global launch, we were reaching many distributors and many channel partners and I think that's gone well. We did see some early shortages in terms of motherboards and that was our motherboard partners ramping their supply in line with our CPU supply. But that was really dissipated after the first couple of weeks. So nothing out of the ordinary there. So we feel really good about where it is. I think the important thing is as we go into the Q2, we not only have the channel sales, but we also have the major OEMs that will be launching their systems in the Q2. So I think that's the next piece of the Ryzen launch for us. But overall, I would say it went quite well. Thank you for that. And just as my follow-up question, I wanted to ask a little bit about gross margin. Lisa, you talked in your prepared remarks about, as the new product rollout across the different parts of the company through the year that margins should expand. Yet you're with a full quarter of Ryzen, you're guiding gross margin down slightly sequentially. I know the new gaming console business starts to ramp for the upcoming season in that quarter as well. So any kind of puts and takes around that gross margin? Because for some reaction I got from investors tonight that sequentially down gross margin surprised a couple of folks. So any clarification there would be helpful. Thanks. Yes, absolutely, Matt. So if you look at our gross margin progression, given the mix of our business, clearly, we made actually very nice progress year over year. So if you look at Q1 2017 compared to Q1 2016, we expanded margin by 2 points and that was really on the strength of Ryzen. When you look sequentially, because of the mix of our business, game consoles were at the lowest point in the Q1 and there will be a ramp of game consoles going into the Q2. So the relative mix of the business sees more game consoles in the Q2 relative to the Q1. So that's the reason for the sequential guidance. But again, if you look year on year, Q2 2017 to Q2 2016, you see again a nice margin expansion as a result of the strength of the products. Thank you very much. Thanks Matt. Thanks Matt. Yes. Our next question today is coming from Ross Seymore from Deutsche Bank. Please proceed with your question. Hi. Thanks for letting me ask a question. I want to follow-up on the Ryzen launch and not only in the quarter, but also in the guide. And specifically, any color you could provide on the channel inventory, how that exited the quarter and what your plans are for adding or boiling down some of that inventory in 2Q? Yes. So, sure, Ross. So as we go into the Q2, we certainly are adding both the Ryzen 5 in addition to the Ryzen 7. So if we look at the forward guidance up 17% quarter on quarter, that is driven by additional rise in as well as the semi custom ramp that I just talked about. We are early in the ramp. Everything that we see is we're getting a positive reception throughout the ecosystem and we're going to continue with go to market activities. And as I mentioned, the OEM components of that will kick in, in the Q2. And I guess as my follow-up, two quick ones for Devinder. The inventory went up sequentially by about 11%, 12%, and you had an explanation for that. But if I recall right, you thought it'd be flat. So I'm just wondering what changed there. And then with the share count, I think as you approach breakeven, the share count might change. So any color you could give us on the share count going forward would be helpful as well. Thank you. Sure. And you're right about the inventory. The ramp of new products and especially the ramp of the semi custom product revenue that Lisa just talked about was the main reason for the higher inventory. We also had the opportunity in the quarter to purchase wafers in Q1 ahead of Q2 sales and took advantage of the opportunity leading to the inventory at the $839,000,000 On the share count, you're right, As we go ahead and look at the share count on a basic share basis, we had 939, but there are 2 parts to it. If we were profitable, the warrants that were issued to Mubadala last year as part of the WSA, those get converted depending on the stock price and that would be in debt depending on profitability. And then the second thing is a convertible, obviously, as you know how that works is if converted, then obviously those will be included in the share count. Otherwise, it will depend upon dilution or not depending on the EPS. Thank you. Thank you. Our next question today is coming from Mark Lipacis from Jefferies. Please proceed with your question. Thanks for the opportunity to ask the question. Perhaps a question for Lisa and one for Devinder. Lisa, can you talk about the whether or not you're getting the right capacity and expected yields from your foundry as Ryzen launches? And for Devinder, as your customers take higher ASP processors in the game console business, I seem to remember when you originally launched, I thought that the maybe the initial yields or maybe the initial margins were not as good, but the margins improved over time. And I'm wondering if, assuming I remembered properly, if that's something else that we should be thinking about as your customers take the higher ASP game console processors? Thank you. Sure, Mark. So on your first question relative to the margins and how those look. I think they are the yields are as expected. So both the 16 nanometer and the 14 nanometer have done really well. And so in terms of the new product ramp, the yields are as expected and for our margin structure. Yes. On the semi custom, Mark, as far as the margins are concerned, we are referring to the operating margins. I think we are pretty pleased where we are, and it's a mix for us in terms of transitioning some of the products, for example, the Sony PlayStation Pro that we launched sometime last year and obviously the older game console that we launched in 20 13, the ASPs do come down over time, although we're able to manage the cost down too and therefore offsetting the ASP decline. Yes. And Mark, maybe just to finish off the comment. I think to your question, I think we feel pretty good about our cost structure. We're always going to continue to try to reduce the cost structure over time. But in terms of the margin expansion story, as we go through the year, it's going to be about the mix of business. And we get into the higher ASP, stronger product portfolio and that ramps to a larger piece of the business that will be the margin expansion story. Excellent. Thank you. Thanks, Mark. Thank you. Our next question today is coming from David Wong from Wells Fargo. Please proceed with your question. Thanks very much. Can you give us some idea of where Vegas is? Does it focus on the price points above Polaris or does it provide a refresh also within the lower price points where currently you have Polaris? Yes, absolutely, David. So Vega is really a new architecture. So it is focused on the price points above Polaris. We expect Vega to be a broad product for us that will go across the gaming segment, the professional workstation segment as well as GPUs in the data center. And we will be launching products across all of those segments with the Vega architecture in the next couple of months. So the Polaris refresh for us is the RX 500 series that we launched just a couple of weeks ago. And that is what we would use in sort of those mainstream price points in 2017. Great. And could you give us any specifics on when in the second half you expect to launch notebook and desktop processors Xencor and integrated graphics? Yes. So we are on track to launch the rest of the Ryzen portfolio in PCs. We'll launch Ryzen 3 sort of earlier in the second half, and then we will launch Ryzen Mobile towards the holiday cycle for the second half. Great. Thanks. Thank you. Our next question today is coming from Stacy Rasgon from Bernstein Research. Please proceed with your question. Hi, guys. Thanks for taking my question. For the first one, I'm a little surprised on the CSG business, you said I mean sales were roughly flat sequentially give or take. You said Ryzen sales made up for seasonally lower GPUs and notebooks, which have should have materially lower margins. I'm just amazed I'm just very surprised that the loss in the business barely got any better. Can you give us some indication for where Ryzen margins are today versus the products that they're replacing? And give us a little bit of color on why the C2 margins didn't actually get much better given the ramp? Yes, Stacy, maybe let me start and see if Devinder has some comments to add. I think certainly the rise in gross margins are substantially better than the legacy portfolio. So I think that is true. I think when you look at the sequential there was 1% sequential decline and there was a $7,000,000 or $8,000,000 sequential improvement in operating loss. There was also some additional R and D in that segment as we're ramping up both product expenses as well as some sales and marketing and go to market expenses in the quarter. So overall, it was as we expected. David, Devinder, do you want to add that? Yes. I think the other thing I'd add, Stacy, is on the Ryzen piece of it, the ASPs are better, the margins are better. And as you can see from a segment standpoint, we made some pretty good progress year over year from a viewpoint of the operating loss getting better or the results getting better year over year from a segment standpoint. Got it. For my follow-up, I guess maybe it hints at the OpEx a little bit, but it looks like you're capitalizing your masks now. You took your CapEx guide up by $60,000,000 for the year. You went from $80,000,000 to $140,000,000 Is that all the mask? And if so, were those mask costs actually in OpEx before? And if that's the case, have you actually taken your OpEx guide effectively up by $60,000,000 Peter? I think two parts to it. First of all, on the mask piece of it, you're right. The mask cost, as our product development becomes predictable and the mask costs have gone up, especially with the latest technology, we went ahead and decided to capitalize the production mask had cost. From a geography standpoint, the mast cost, whereas they would have been in R and D previously, would be sitting at the COGS side of the P and L and therefore amortized in the COGS side related to the production of the units. And the difference in the CapEx guidance $80,000,000 to $140,000,000 is primarily the mass cost. Got it. So what does that mean for, I guess, how you guys calculating gross margin now if they would have been directly in the COGS before and now they're being capitalized over time? Is that a margin, I guess, effective margin boost even though it's not anything on the cash side? And if so, I guess the same question, then why are margins down this quarter? Well, I think margins, as Lisa said earlier, year on year, we are pretty pleased with the progress, 2 percentage points up. Q2 is a mix of the business. And then as we get to the end to the second of the year, we'll see with the full impact of not just the Ryzen product, but also launch of the Staples product that's coming up at the tail end of Q2 and then again into second half of twenty seventeen. Yes, Stacy, maybe I just want to clarify because I want to make sure that we were clear. So the masks were in OpEx and now they're going to be capitalized as they go into production. So they weren't in COGS before. So you have effectively taken your OpEx up because it doesn't look like your OpEx is coming down by the same amount. So you're spending more? Yes, I think it really is a full year statement and I think it's a recognition of as we transition from 14 nanometer to 7 nanometer, 7 nanometer masks are substantially more expensive than 14. So I don't think you can exactly put it the way you put it. But I think overall, I think what we're trying to do is basically as the mask sets become more sizable on the production level to capitalize them. Okay. Thank you, guys. Thanks, Stacy. Next question, please. Thank you. Our next question today is coming from Ambrish Srivastava from BMO Capital Markets. Please proceed with your question. Yes. I actually wanted to just continue with the discussion on margins. So, would the margin profile then as we exit the year, should we expect margins gross margins to trend up for the second half versus what you reported I. E. Or what you're guiding to I. E. Would that be the lowest point for the year? And then I had a follow-up. Yes. So Ambrish, I think you should expect that we will expand margins as we go through the year. We do have this mix effect between semi custom and new product revenue. But certainly, our exit velocity, as we exit the year, we should see the when you compare year on year sort of Q4 2017 to Q4 2016, you should see the margin expansion. Okay. And then for my follow-up in your full year guide on the top line now you're giving a you're quantifying it versus what you had before. I just wanted to get a little bit more clarity or to the extent you guys can share on the assumptions that you have baked in there for the various segments. Thank you. Yes. So the full year guide is low double digit revenue growth 2017 to 2016. I think given our product portfolio being very much influenced by the PC, the Ryzen in PCs, Vega for GPUs, as well as Naples from a server standpoint. We expect that the Computing and Graphics segment will be will grow more so than the EESC segment overall on a year over year basis, just given some of the consumer markets move faster than some of the data center and server market. Okay. Thank you. Thank you. Our next question today is coming from Hans Mosesmann from Rosenblatt Securities. Please proceed with your question. Thank you. Lisa, can you give us a sense of the introduction of Naples into the second half and next year? Is that going to reflect or be similar to what you're doing with Ryzen 7 and then 5 and then 3? And I have a follow-up. Sure. So look, we're really pleased with where we are with the Naples program right now. Overall, from a performance standpoint of the product and the customer engagement is going as we would expect. We will launch here in the second quarter. So we'll start some low volume of revenue shipments here in the second quarter that will ramp gradually into the second half of the year. And so overall, I think that is how the server outlook will be. I think I have said before and I would still say that the server market has a longer design win to revenue conversion cycle. And so we would expect it to take a couple of quarters for us to ramp the Naples product over time. But you should see a number of customers announcing with AMD platforms over the next couple of quarters. Great. And then the follow-up on the server side, what's the strategy in terms of the positioning of the product? I think traditionally in most cases it's been more of a like a me too product at the low end of the market. What's the strategy here, if you can share that with us? Thanks. Yes. So we believe we're highly differentiated with Naples in the sense that we have more cores, we have more memory bandwidth, we have more IO than our competition. So for certain workloads, I think Naples is going to do very, very well, certainly in the cloud, as well as in certain HPC workloads and big data work loads that can use all of that memory and IO bandwidth. We will be talking more about the positioning of Naples and the key workloads as we go through the next couple of months prior to launch. But certainly, we feel that it's again like Ryzen on the strength of the Zen core, we have a very, very strong foundational product and now it's about making sure that we help our customers get to market. Okay. Thank you. Thank you. Our next question today is coming from John Pitzer from Credit Suisse. Please proceed with your question. Yes, guys. Can you hear me? Yes, John. Can you hear me? Yes, go ahead. Yes. Just quickly, sir, given that mix is now becoming quite important and trying to understand gross margin, I'd be kind of curious what percent of your compute business in the March quarter was based on Ryzen? And I guess if you assume that all of it transitions to Ryzen eventually, had that occurred in the March quarter, can you give us an understanding of how much better gross margins would have been? And then I have a follow-up. All right, John. That might be hard for me to answer very specifically, but let me give you the high level view. So look, we we started selling Ryzen on March 2 and a good piece of it was basically for us positioning into the distributors. We take revenue on a sell out model and so you should think about although we shipped a number of horizons, we didn't necessarily revenue them all in the quarter, just given that we're on a sell out model for our revenue recognition. In terms of where we are in the transition, Ryzen, non Ryzen, we still have a long ways to go. I mean, the way you should think about it is Ryzen 7 was at the very high end. We're going to Ryzen 5 has started. We have Ryzen 3 that will come next. And then we have the entire mobile portfolio as well. So it will take us through this year to really transition the majority of product over to Ryzen. I think everything that we've seen, the ASP uplifts are definitely very beneficial. And so we're pleased with sort of the pricing that we're commanding for the product and the reception for the product. So I think it's just that it will take us couple of quarters to transition the overall portfolio over to Ryzen. Well, Lisa, as a follow-up to that, I know you guys are coming up at an Analyst Day next month and some of these targets might change. But to the extent that your old gross margin target was sort of 36% to 40%, I'm just kind of curious to what extent can you get to that sort of 38% midpoint just by moving your current market share mix towards Ryzen? And to what extent does getting to 38% or above imply either market share gains in the compute business, on the desktop notebook side or on the server side? How do I think about that dynamic? So the long term guidance at 36% to 40%, I think we have multiple ways of getting there. Certainly on the PC side, it is not anticipating that we gain a significant amount of share over our historical numbers. So I think the idea on the PC side is, again, I think 2017, a large percentage of the margin story is around PCs. I think as you go into 2018, you'll see a larger percentage of that be in servers. But to the fundamental question, I think we feel good that the mix dynamics are there. The product is strong enough to command the right ASPs that we can get to the long term margin target several different ways. Thank you. Thanks, John. Thank you. Our next question today is coming from Vivek Arya from Bank of America Merrill Lynch. Please proceed with your question. Thanks for taking my question. Lisa, for my first one, back to Ryzen. When I look at your Q2 outlook, it's going up about $170,000,000 or so sequentially. And when I look at the last few years, generally Q1 to Q2, just the console side has gone up over $100,000,000 or so. So is it fair to assume that Verizon perhaps is contributing something in that 50,000,000 dollars 60,000,000 dollars 70,000,000 And if that is the case, how does that compare to your original expectations? Did they change throughout the quarter because of whatever pricing actions Intel might have taken? Just that this $50,000,000 $60,000,000 $70,000,000 if this is right, is this a run rate number for Ryzen? Or how should we put this in the context of what Ryzen can be as it becomes a bigger part of your portfolio? Sure. So without commenting on the exact numbers between semi custom and Ryzen, I think it's fair to say that the semi custom business will have a reasonable ramp in the Q2 as will Ryzen. In terms of relative to our expectations, it's actually very close to our expectations of what we expected the ramp rate to be as we're going into this new segment. As I think I mentioned on one of the previous questions, we don't expect to be at peak run rate in the Q2. I think we will be continuing to ramp Zen based product in the PC business throughout the year as we bring more and more SKUs online. And so, I think the Q2 is will certainly be higher than the Q1 and I would expect the second half to be higher than what we're seeing in the Q2 as we ramp more and more SKUs, as more OEM platforms come online. As you guys know, the PC business is tends to be a very back half loaded business. So as we get into back to school, the retail segments and holiday, you would expect that both channel and OEM PC sales to benefit from the stronger product portfolio. Got it. And as my follow-up, how do you feel about the PC gaming market for this year? I know just near term there has been some concerns about excess GPU inventory in China. Have you are those concerns based on facts or are they just perception? And have you seen anything abnormal in the demand or supply for PC GPU product in any region or any customer segment? Thanks. Yes. On the GPU side, we actually haven't seen anything abnormal. We normally see the seasonality going from Q4 to Q1 that sales go down. We saw something very normal to that. From an inventory standpoint, we think it's normal to maybe even slightly lean because we were going through a transition from our 400 series to 500 series. So we see the gaming segment as healthy. And any comments for the full year? Any last year last actually a couple of years have been quite strong in PC gaming. I know you probably may not quantify it, but just how do you feel about the overall PC gaming market? Do you think the trends persists in terms of both unit and pricing expansion this year? Yes. From what we see, I think we feel good about the gaming segment overall. Graphics continues to be a strong segment. For us, it's not just the channel business, but it's the ramp of our OEM business. So we have a number of new OEM systems that are also ramping here in the first half of the year. As it relates to ASPs, we are excited with the launch of Vega that we'll see a significant improvement in our ASPs just given our current presence in the high end segment of the GPU market. So yes, overall, I think we feel good about the market. Thank you. Thanks. Thank you. Our next question today is coming from Blayne Curtis from Barclays. Please proceed with your question. Hey, thanks for taking my question. Actually, 2 related ones. Just wanted to go back to the OpEx in terms of not only is it up sequentially, but then you're getting extra from the move of the mass that can you just talk about where that OpEx dollars are going? And if it's in fact servers, can you just talk about the spend required to get that to market? And then just I want to clarify on the expenses, it should hit gross margins. So can you just talk about 7 nanometer as a whole and timing as those would come through? Is it a back end is the CapEx back end loaded when you're doing the 140? And then just talk about the impacts to gross margin with the higher 7 nanometer than not hitting gross margin? Yes. Maybe let me start on the OpEx and then have Devinder comment on the second piece of the question. So on the OpEx, we are making targeted investments in several different areas. The key areas are in GPUs and server. And it's both on the R and D side as well as on some go to market. So from our standpoint, these are very strong products. We want to make sure that we have enough customer resources to help our customers ramp into production. So I think they're targeted investments. But as we've been in the past, we'll be very prudent with where the OpEx goes. And then relative to the I think the CapEx, you asked about the front end, back end. I think it's pretty balanced. Maybe it's about $40,000,000 $60,000,000 first half, second half to $140,000,000 but it's pretty balanced. Then just in terms of the impact to gross margin as the math sets roll through? Yes, they're all contemplated. I think we've had a lot of discussion on the gross margin improvement year over year and sequentially. And Lisa referenced about improving gross margins as we go through the year and the move of the expenses from the OpEx side related to the mass cost capitalization to the COGS side of which impacts gross margin is all contemplated within that gross margin improvement. Thank you. Operator, we have time for 2 more questions, please. Certainly. Our next question is coming from Joseph Moore from Morgan Stanley. Please proceed with your question. Great. Thank you. I wonder if you could talk about what the CPU mix looks like over the course of the year. And you've talked a lot about the rise in ramp, but what's happening to the older products? Do you see a long tail on that? Or is there a coexistence between the 2 product portfolios? Or are you sort of rotating everything to Ryzen on a faster basis? Yes. So, Joe, the way to think about that is for the Ryzen 7 and a good portion of the Ryzen 5, we really didn't have a competing product in that segment. So it's really additive. I mean, we've actually added SAM to our CPU market coverage. The legacy products will continue in the markets. They would certainly continue through this year. And that's all contemplated in the model. So we feel that the very complementary products and different geographies moved in different at different rates. We have still a significant installed base of motherboards out there from our previous generation. So we'll keep supporting both products. Okay, great. That's helpful. And then as you've talked about getting better rise in penetration over the course of the year, how do you think about Intel's new products in the back half? And they've talked about sort of a 15% performance per clock improvement on their new 14 nanometer product. Is that contemplated in your guidance and how are you thinking about the Ryzen product stacking up against that? Yes. So we're very pleased with where the Ryzen product is positioned now. We think from a value proposition standpoint, performance, performance per dollar, it's very strong. We obviously have other products are going to we're going to be launching throughout the year to ensure that we have strong positioning throughout the year. And I think the more important thing, Joe, and we'll talk more about this at our Financial Analyst Day is, we have a long term roadmap, whether you're talking about PCs or GPUs or servers to ensure that we continue to refresh our product plans and our product roadmaps over time. So I think we feel good about where we are positioned today and we're going to ensure that we continue to roll out products to strengthen that positioning over time. Thank you. Thank you. Our final question today is coming from Chris Rolland from Susquehanna. Please proceed with your question. Hey, thanks for squeezing me in there. I wanted to ask about the staggered launch to the major PC OEMs. Was that like just a modest supply constraint on the rollout? Or if not, then why not just launch to the enthusiast and the major PC OEM market together? And do you plan to do the same on Ryzen 53? Yes, Chris. So there was no particular supply constraint. I think it's more the ebb and flow of the market. When you think about the channel market or the DIY market, you can basically introduce a product anytime during the year. The OEMs have a very set cycle. They typically launch new products in Q2 for the back to school season. And so that was just the timing of of when the OEM platforms were ready. And then again, when you're launching so many different SKUs, I think launching Ryzen 7 first, then Ryzen 5, then Ryzen 3 was absolutely our plan to make sure that we hit all of the logistics and stuff on plan. But overall, like I said, nothing different than what we expected. I think we're pleased with where the overall launch is and we'll be rolling out many more products over the coming quarters. Great. Thank you very much. Thank you. Thank you, Lisa. Thanks, everybody. And thank you to everyone on the call who joined us today. We look forward to speaking with you again. As a reminder, our Financial Analyst Day will be Tuesday, May 16th at our corporate headquarters in Sunnyvale. We look forward to speaking with you again. Thank you. Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.