Earnings Call: Q3 2016

Oct 20, 2016

Greetings, and welcome to the Advanced Micro Devices Third Quarter 2016 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 introduce your host, Ruth Cotter, Chief Human Resources Officer and Senior Vice President of Corporate Communications and Investor Relations for Advanced Micro Devices. Ms. Cotter, you may begin. Thank you, and welcome to AMD's Q3 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 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. I'd like to highlight a few dates for you this afternoon. Lisa Su will present at the Credit Suisse PMT Conference on November 30 in Arizona. I will present at the NASDAQ Investor Program on November 30 in the U. K. Sivindra Kumar will present at the Barclays Global Technology Media and Telecommunications Conference in December in San Francisco and our Q4 quiet time will begin at the close of business on Friday, December 16, 2016. Before we begin, let me remind everyone that Q3 2016 was a 13 week quarter, and we expect to record our extra week in the Q4 of 2016. 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 figures during the call except for revenue, 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 at quarterlyearnings.amd.com. Please refer to the cautionary statements in today's earnings press release and CFO for more information. You'll also find detailed discussions about our risk factors in our filings with the SEC and in particular AMD's quarterly report on Form 10 Q for the quarter ended June 25, 2016. Now with that, I would like to hand the call over to Lisa. Lisa? Thank you, Ruth, and good afternoon to all those listening in today. Our strong Q3 results highlight the progress we have made across AMD this past year as we improve our financial performance by delivering great products. 3rd quarter revenue of $1,300,000,000 increased 27% sequentially and 23% from the year ago period, driven by upside demand for our graphics products and record semi custom sales. In addition to the significant revenue growth, we also achieved several financial and operational milestones in the quarter. We strengthened our balance sheet and improved our P and L through a series of capital markets transactions that re profiled and reduced our debt. We also signed a strategic amendment to our wafer supply agreement with GlobalFoundries that provide sourcing flexibility and financial predictability. Most importantly, we delivered non GAAP net income in the quarter based on strong execution of our product roadmap and growing momentum across our business. Looking at our Computing and Graphics segment, we had solid growth in the quarter. Revenue increased 9% sequentially and 11% from the year ago period, driven by improved sales of mobile APUs and discrete GPUs. Mobile processor revenue and unit shipments increased for the 4th straight quarter as 7th generation APU shipments continued ramping, highlighted by the launch of our new Pro Series APUs earlier this month with HP. Customer and partner excitement for our Zen based desktop product Summit Ridge is growing as we successfully passed several key engineering and design win milestones in the quarter. We provided our first competitive performance preview of Summit Ridge in the quarter and believe we will have a very competitive offering for the $4,000,000,000 high performance desktop processor market. We are working closely with our infrastructure partners and customers in preparation for the launch in early 2017. In graphics, we had a very strong quarter with discrete GPU revenue and unit shipments growing by double digit percentages sequentially and year over year. The launch of our expanded family of Polaris Desktop GPUs and our 1st full quarter of RX 480 sales drove our highest quarterly channel GPU revenue and ASP since early 2014. Radeon RX GPUs now account for more than 50% of our channel GPU revenue. Polaris GPUs continue to gain traction based on their leadership performance in Doctor and on the rapidly expanding number of software titles that feature the latest generation of APIs like DirectX 12 and Vulcan. Our progress in the quarter was punctuated by Oculus announcing a limited edition Oculus ready PC powered by an AMD FX Processor and Radeon RX 4 70 GPU that brings the cost of entry for VR ready system down to $500 for the first time. This is a meaningful milestone for consumers and I am excited that AMD is enabling the ecosystem and driving broader adoption of for our professional graphics products. In for our professional graphics products. In addition to solid workstation sales growth, we expanded our presence in the server GPU market as HP announced availability of multiple Radeon options across their traditional and blade server offering. And just last week, we announced the collaboration with Alibaba Cloud, China's largest cloud provider to deploy Radeon Pro Server GPUs across their data centers to expand the scale and services of their global cloud offering. We now have material server GPU engagements with multiple cloud data center providers, demonstrating that our strategy to grow our presence in this profitable market by delivering superior performance with Radeon Pro hardware in conjunction with industry standard programming tools and APIs is beginning to pay off. Now turning to our enterprise embedded and semi custom segment. Revenue increased 41% sequentially and 31% from the year ago period, driven by record semi custom sales, which included the ramp of 3 new FinFET based products, powering the Xbox One S, updated PlayStation 4 and our new design win in the Sony PlayStation 4 Pro. We are on track to grow semi custom unit shipments and revenue for the 3rd straight year, demonstrating our leadership in high performance gaming technologies for the very successful game console market. We expect 4th quarter revenue to be down seasonally as we transition from our annual semi custom sales peak in the Q3. Our embedded product sales grew sequentially as our newer design wins reach production. In server, our Zen based high performance processor remains on track for introduction in the first half of twenty seventeen. We successfully passed several silicon and platform technical milestones in the quarter and have secured multiple new design wins across OEM, enterprise and cloud providers. In closing, as I complete my 2nd year as CEO of AMD, I am pleased with the solid progress we have made across the company on multiple operational, products and financial fronts. We are executing our long term strategy and a set of near term priorities that I believe provide AMD with significant opportunities over the next 18 months to 24 months to drive top line revenue growth, operating margin expansion and free cash flow generation. We have strengthened the core of the company by clearly defining the markets where we have technology and expertise to win, bringing a laser focus to our product execution around our graphics and microprocessor roadmap, creating deeper, more lasting relationships with strategic customers, monetizing our assets and valuable IP with 2 joint ventures in China and reengineering our balance sheet to increase our cash balance and reduce debt. I want to thank the thousands of AMDers whose determination this past year has allowed us to put in place the financial and operational foundation to drive growth and profitability. In 2017 with Zen and Vega, we are focused on delivering our strongest product portfolio in over a decade, capable of unlocking multiple growth pillars for our business across the data center, gaming and high performance graphics and PC markets. I am proud of what we have accomplished and I believe that the best is yet to come. Now I'd like to turn the call over to Devinder to provide some additional color on our Q3 financial performance. Thank you, Lisa, and a very good afternoon to everyone. In the Q3, we achieved another milestone in our progress as we return to non GAAP net income profitability. The Q3 financial performance was driven by strong demand for our semi custom SoCs, higher graphics revenue and positive free cash flow. We executed a series of capital markets transactions that have significantly improved our balance sheet and firm debt profile and will reduce interest expense beginning in Q4. We also finalized a long term strategic wafer supply agreement with GlobalFoundries. 3rd quarter revenue was $1,300,000,000 up 27% sequentially driven by higher sales of our record semi custom SoCs and higher graphics processor sales. The year over year revenue increased 23%, driven by higher sales of our semi custom SoCs, client mobile processors and graphics processors. Non GAAP gross margin was 31% flat from the prior quarter driven by a richer mix of PC and graphics product offsetting lower margin semi custom product. Non GAAP operating expenses were 353,000,000 dollars up $11,000,000 from the prior quarter due to increased R and D investments. We recognized $24,000,000 of net licensing gain associated with our server JV with Tatiq. Non GAAP operating income was $70,000,000 this quarter, up $67,000,000 from the prior quarter. 3rd quarter other net expense was $63,000,000 mostly consisting of a $61,000,000 loss related to debt retirement. The equity loss in the ATMP JV was $5,000,000 based on our 15% JV ownership stake. Non GAAP net income was $27,000,000 with earnings per share of $0.03 Non GAAP EPS was calculated using 865,000,000 diluted shares of common stock, which includes 12,000,000 shares associated with the equity offering that closed late in the Q3. Included in our GAAP operating loss and GAAP net loss is a $340,000,000 charge associated with our 6th amendment to the WSA with Cobalt Foundry. Adjusted EBITDA was $103,000,000 compared to $36,000,000 in the prior quarter. Now turning to the business segment. Computing and Graphics revenue was $472,000,000 up 9% from the prior quarter and up 11% year over year primarily due to increased sales of GPUs and client mobile APUs. Computing and Graphics segment operating loss was $66,000,000 compared to $81,000,000 in the prior quarter, primarily due to higher revenue. Enterprise embedded and semi custom revenue was $835,000,000 up 41% from the prior quarter and 31% higher year over year, driven by higher semi custom SoC sales. Operating and Turning to the balance sheet. Our cash and cash equivalents totaled $1,300,000,000 at the end of the quarter, up $301,000,000 from the end of the prior quarter, including $274,000,000 remaining from the proceeds of our capital markets transaction. Excluding this amount, the cash was $984,000,000 as compared to $957,000,000 last quarter. Free cash flow was a positive $20,000,000 in the Q3. Inventory was $772,000,000 up $29,000,000 or 4 percent from the end of the prior quarter in support of holiday season GPU and semi custom product sales expectations in the 1st part of Q4. Total wafer purchases from GlobalFoundries in the 3rd quarter were $168,000,000 and we continue to expect overall wafer purchases of approximately 650,000,000 dollars in 2016, including $155,000,000 purchase in early 2016 as part of the 5th Amendment to the WSAs. Debt as of the end of the quarter was $1,600,000,000 down from the prior quarter due to our significant debt reduction effort. During the Q3, we raised approximately $1,400,000,000 in cash as a result of issuing 690,000,000 dollars of common stock which includes the exercise of an underwriters option to purchase 15% or $90,000,000 of additional common stock and the issuance of $700,000,000 in 2% and 1.8% convertible notes due in 2026. We used the majority of these funds to redeem outstanding term debt through cash tender offers and we paid off the outstanding ABL balance of $226,000,000 In addition, early in the Q4 another $105,000,000 of convertible notes were issued as part of the exercise of an underwriter's option bringing the total principal amount of the 2026 convertible notes to $805,000,000 We also redeemed the remaining principal debt balance of $208,000,000 of the 20 20 senior notes, which was our most expensive debt. This debt has now been fully paid off. The debt reductions and issuance of the new convertible notes due 2026 that occurred in the Q3 and early in the Q4 will result in approximately $55,000,000 of annualized cash interest savings beginning in the 4th quarter. Please refer to today's CFO written commentary for further details of the capital market transactions and debt on the balance sheet. Free cash flow in the Q3 was a positive $20,000,000 compared to a negative $106,000,000 in the Q2 of 2016, primarily due to increased revenue, improvements in working capital and a reduction in capital expenditures. Now turning to our Q4 2016 outlook, a 14 fiscal week quarter as it has an extra week. We expect revenue to decrease 18% sequentially, plus or minus 3%, primarily driven by a seasonal decline in our semi custom business and an improvement in our CG business. Revenue at the midpoint of guidance would be up 12% year over year. Non GAAP gross margin to be approximately 32%, non GAAP operating expenses to be approximately $350,000,000 IP monetization licensing gain to be approximately 25,000,000 dollars to maintain non GAAP operating profitability, non GAAP interest expense, taxes and other to be approximately 32,000,000 dollars cash and cash equivalents to be up in line with our guidance of ending 2016 with positive free cash flow excluding cash from capital market transactions and the net proceeds from the ATMP JV. Inventory will be down to approximately $660,000,000 basic share count to be approximately $930,000,000 including 115,000,000 shares related to the Q3 equity issuance. And we now expect full year revenue growth to be up approximately 6% from 2015 based on the midpoint of 4th quarter revenue guidance. In closing, we are very pleased with the progress we made in the Q3. With focused execution, we continue to build a solid financial foundation for the company. In just the last 3 months alone, we achieved non GAAP net income profitability, amended the WSA with GlobalFoundries across multiple years and deleverage and de risk the balance sheet with our capital markets transaction such that over the next 5 years there is less than $200,000,000 of term debt due. We look forward to continued execution and further improving our financial performance. With that, I'll turn it back to Ruth. Ruth? Thank you, Devinder. Operator, we would be pleased to poll the audience for questions, please. Certainly, we'll now be conducting a question and answer session. Our first question today is coming from Matt Randi from Canaccord Genuity. Please proceed with your question. Thank you very much. Good afternoon. Obviously, a lot's going on in the last quarter. I figured I would ask a couple of things about ZEN since that's been one of the things that's most comparable in my conversations with investors. Lisa, you talked about in your prepared remarks there, multiple OEM engagements and design wins for desktop and also the same on server. Maybe you could do a little bit to expand upon those, I guess the timing of launch of each and in particular in the server market, the focus, whether that be enterprise or whether that be cloud based? Thank you. Yes, absolutely. Matt, thanks for your question. And as you said, it's been a very busy quarter for us. As it relates to Zen, we are on track to launch in the first half of the year for both our desktops and our servers. The desktop launch will go first and it is on track for the Q1 and then the server launch will go in the Q2. We've had a wide amount of sampling that's gone on in the Q3. We have multiple customers on both the PC side as well as the server side who have working hardware now in their labs. They're bringing up their Our focus on servers is really across, Our focus on servers is really across the OEM business, including enterprise as well as the cloud data centers. And I think the key for us is we're getting a lot of interest from our partners and we continue to work with them to bring up their systems. But I think we are optimistic about where we are in the ZEN bring up and the ZEN launch cycle. All right. Thank you for that. That's helpful. And then I guess as a follow-up there in the server market, I think, obviously your GPU primary competitor has had some very stellar traction with server acceleration around GPUs. And you highlighted in the prepared remarks some wins and engagements that you've had on Polaris and I assume on Vega for server acceleration. Maybe you could expand upon that commentary a bit, what you're investing there, how the GPU open or the OpenCL environment is developing relative to the CUDA environment in server acceleration and just what proportion of your GPU business to be driven by that server opportunity in the long term? Any commentary there would be great. Thanks. Yes. So, let's talk overall about our graphics business. So when you look at our graphics business, certainly we're very pleased with the progress that we've made on the consumer side with Polaris. But we've also mentioned that we've made good progress on the professional graphics side, including both workstations as well as server GPUs. I think the market is certainly very receptive to growth in the server GPU area. I was just at the Alibaba Cloud Computing Conference last week where we announced our collaboration with them. They're actually using parts that are pre Polaris and pre Vega. So, yes, we were demoing a GPU based cloud server based on some of our Fire Pro technology using hardware based virtualization. And I think the main feedback that we've gotten from them as well as multiple other cloud engagements is the hardware looks very good. We're working with them on sort of the overall infrastructure and software to bring that up. And we believe that the products are very competitive in this market. And the market is nice because it's certainly margin accretive to the consumer side of the business. So we do expect as we bring out Vega in the first half of twenty seventeen that that will certainly strengthen the product portfolio. But there is a lot of interest in the cloud space around what we're doing with Radeon Pro and on the server GPU side. All right. Thank you very much. I'll get back in the queue. Appreciate it. Thanks, Matt. Thank you. Our next question today is coming from Ross Seymore from Deutsche Bank. Please proceed with your question. Perhaps your phone is on mute, Mr. Seymour. Please unmute your phone. Mr. Seymour, your line is now live. Please pick up your handset if your phone is on mute. We can go to the next caller operator. Thank you. Certainly. Our next question is coming from Mark Lipacis from Jefferies. Please proceed with your question. Thanks for taking my questions. I had two questions. First one, on the Alibaba deal, so this is not a new set of products you're developing, it's products you already have. And can you talk about to the extent this is like a cloud services offering versus like deep learning applications that they might be doing with your products? And I guess when I think about the architecture, I normally think about having an X86 processor sitting next to GPU. And I was wondering, is it logical to assume that Zen is the natural X86 pairing with your GPUs in the Alibaba deployments? Sure, Mark. So again, I think on the Alibaba deployment, it is the beginning of what we expect to be a long term collaboration. So the work today is being done on a pre Polaris base, but we do expect that that will upgrade as we go forward. I think the key is there are many, many applications, but what we're starting from is a GPU based cloud server application. So in virtualized environments, you can imagine cloud gaming or remote workstation type environments, which need a lot of graphics horsepower, as well as virtual desktop environments. And I think as we go forward, certainly we view the opportunity to expand that into a broader set of workloads as well as obviously on the CPU side as well. So I think overall, we think the cloud is a very important market for us to focus on, on both the GPU and the CPU side and we're ramping up our efforts there. Great. A follow-up if I may. Last night Tesla announced that it was using NVIDIA for their self driving car. But on the conference call, Elon Musk, I think the expression he used was that it was a tight decision between NVIDIA and AMD, which suggests that your father along in solutions for deep learning and neural networking than most, including myself thought. And so I was wondering if can you talk about your efforts in deep learning and artificial intelligence? How big is that business now? Do you have anything in that business now? And how do you grow that going forward? Thank you. Sure, Mark. So look, there is a lot of interest in the deep learning space overall. And certainly, our GPUs are very applicable to that space. So when we look at competitiveness and all that stuff, we think we can be very competitive there. We will be talking more about our strategy in the coming quarters. So maybe let me refer to that, Mark. But I think suffice it to say, I think we looked at GPUs as overall secular growth, whether you're talking about consumer, professional workstations, server GPUs or any this machine learning area. And so we're going to continue to invest and lean in, in those areas. Thank you. Thanks, Mark. Thank you. Our next question today is coming from John Pitzer from Credit Suisse. Please proceed with your question. Good afternoon, guys. Thanks for letting me ask the call. And Lisa Devinder, nice job on the quarter. I guess, Devinder, first, just going to the December quarter guidance, you're kind of characterizing it as seasonal. I kind of know the trappings of talking about normal seasonal because there's so much variance around it. But it does seem like in prior quarters where you had a 14th week, that extra week actually did help revenue a little bit. So I'm just kind of curious within the context of the December quarter guidance, how you're thinking about that extra week both on the revenue line and on expenses? Yes. I think if we look at the 14 week quarter, I think, John, you're right. It depends upon many factors. Our 14 week quarter is in the Q4 timeframe, which is this quarter we are in. On the revenue side, I'll say looking at it overall, there's not much of an impact as the extra week falls during the holiday season when a large portion of our operations or our customers are in shutdown mode. There is an impact on the expense side, but that's already contemplated within the guidance of OpEx that I gave at the $350,000,000 due to the extra week. That's helpful. And then Lisa, a little bit longer term, I mean over the last kind of several quarters, you've been somewhat forced to try to manage profitability level to that breakeven line given the lack of revenue growth. Now that you're sort of on this path of more sustainable revenue growth, I'm just kind of curious as you think about R and D specifically, how should we think about kind of your desire to want to invest at higher rates as revenue begins to grow from these levels? Because clearly, as Mark talked about on the last question, you've got a lot of potential new areas and opportunities to go after. Can you give us a sense as to what so to what degree you think you've been under investing in R and D and how we should think about R and D investments over the next several quarters as revenue growth kind of resumes? Yes, absolutely, John. So I think it's fair to say that we've been very prudent in how we've invested overall. If you look at our operating expenses 2016 to 2015, although we've been relatively flat overall, we've actually increased R and D relative to other elements of the P and L. But as we see revenue growth and as we've seen progress over the last couple of quarters, I think you've also seen us increase our R and D spend. I think there are several areas that we see as very large opportunities. And we talked about some of the graphics areas in the previous question with Mark. I also think in the data center, I mean, there's a large opportunity for us on the CPU side as Zen fully comes to market. So I think we have an opportunity to invest a bit more in R and D as our revenue grows, but we're still going to be very prudent with how we do that. And I think the key metrics there in terms of being net income profitable this quarter, ensuring that we get free cash flow positive from operations for the full year, are all important metrics for us and we're going to continue to manage very diligently. That's helpful. Thank you guys. Congratulations. Thanks John. Thank you. Our next question today is coming from David Wong from Wells Fargo. Please proceed with your question. Thanks very much. Do you expect GPU sales will grow sequentially in the December quarter? And what about computing revenues? Yes. So, David, I think we would expect overall that the CG business or the Computing and Graphics business will grow in Q4. The EESC business will be down. And then within the computing and graphics business, I would expect growth on both the graphics as well as the computing side. Great. And do you have any new semi custom wins you can tell us about or at least give us some idea of what the momentum is in the pipeline? Yes. I think on the semi custom side, David, I will say that we previously announced 3 and that's the number that we'll talk about today. 2 of them are now known and they're both in the game console area, one is outside of game console. I will say that we have some very good active discussions on future products and applications and we'll update more as we get further along. Great, thanks. Thanks, David. Thank you. Our next question is coming from Blayne Curtis from Barclays. Please proceed with your question. Thanks very much. And this is Chris Hemlibarne on for Blayne. It was Summit Ridge launching in Q1 of 2017. I guess, how would you expect the channel to ramp that? I mean, did you see it ramping pretty fully in 1st couple of quarters of the year? Or are you looking for more normal PC seasonality? I would expect that there will be a relatively good initial demand for Summit Ridge that may be not quite at the seasonal patterns. From where we see Summit Ridge is playing in a space in the high end desktop that we currently aren't offering a product. So we believe we'll be competitive certainly with Core i5 as well as Core i7 and we will be launching in those areas. Thanks very much. I guess then looking at the GPU side of things, you guys saw some pretty nice share gains in the first half of this year with the legacy portfolio. Any metrics you can give to help frame how the business did in the 1st full quarter with Polaris? And any further color you can provide on how you see kind of the share situation progressing into the year end? Yes. Look, we're very happy with how Polaris ramped in Q3. The customer demand across all geographies was very strong. Q3 was primarily a channel based quarter, so with our add in board partners. And as some of you noted, in the early part of Q3, we actually had some supply constraints given the customer demand. We did catch up towards the end of the quarter. So very pleased with how that's ramped. I think it's a very competitive market. We've leaned into VR and we've leaned into sort of our work with CX-twelve. And I think you can see in some of the benchmarks that we're doing very well there. As we go into Q4, in addition to the channel partners continuing to ramp, you should expect some OEMs launching in Q4 more broadly. And so Polaris is off to a very strong start. Thanks very much Lisa and congrats on the strong quarter. Thank you. Thank you. Our next question is coming from Stacy Rasgon from Bernstein Research. Please proceed with your question. Hi, guys. Thanks for taking my questions. I first wanted to ask about the second sourcing ability embedded in the new wafer supply agreement. So you've said that you're going to be doing some second sourcing, I guess, starting in 2017. I wonder, did that push to actually seek out that supply diversification come from you? Or was it from specific requests from your customers? And given that, how do you guys make the decision on which products to manufacture at GLOBALFOUNDRIES versus manufacturer somewhere else? Sure, Stacy. So let me start with that. I think relative to our 2nd sourcing or our supply sourcing flexibility, I think we make it on a product by product basis based on where we are in the business. So we will have multiple products in 14 nanometer and 16 nanometer that will be sourced across foundries. And similarly, when we talked about the wafer supply agreement, we mentioned 7 nanometer as being a target node for that. Relative to how we make the decisions, I mean, I think it's a combination of factors. It includes the complexity of the product, it includes the timing, customers, all kinds of things. So I think that's Got it. But Got it. But did the customers themselves have a hand in driving you to make that push to 2nd source? I think that's one element. But frankly, I think what's more important to me is, I need to commit a strong 5 year product roadmap to the customers. And so we want to make sure that we have all the flexibility to ensure nothing happens. I mean, I'll give you just a little bit of context Stacy because I think you know our business well. In this past 6 months, I mean, we've ramped 5 new FinFET products. I mean, it's the fastest transition we have ever made in a process node and it's gone really, really well. And I think what's helped us with that is the fact that we've had 2 sources ramping at the same time. Got it. And for my follow-up, I just want to get some timing of the Summit Ridge and ZYN launches. So you said Summit Ridge launches obviously in Q1 2017. You had said before that you were going to be shipping at least some product in Q4 of this year. Is that still true? And around the server launch in Q2, does that mean the volume is actually in Q3? So I think our expectation is, we may ship some production samples in Q4, but the volume launch for desktop will be in Q1. And that's consistent with everything that we have we planned into the business. And as it relates to server, I think it's little early to tell. I mean, I think we'll go through our process and our customers' processes and then we'll have more color on that as we into next year. Got it. Thank you, guys. Thanks, Jason. Thank you. Our next question today is coming from Ambrish Srivastava from BMO Capital Markets. Please proceed with your question. Hi. This is Kulin Patel calling in for Ambrish. Thanks for taking my question. In the prepared remarks, you mentioned semi custom to decline and competing graphics to be up. So it implies that you'll have a pretty rich mix for Q4. And why is GM guided up only 1% given the what looks like to be really strong mix for 4Q? If you look at from an overall standpoint, let's talk about Q2 to Q3, 1st of all. Q2 to Q3, we had a significant ramp in the semi custom space, which led to significant revenue on the EESC side and we're able to manage the margin flat quarter on quarter, which we are pleased with. Going to Q4, essentially with the computing and graphics business as what Lisa said, ramping and then the ESC business, in particular semi custom coming down, the gross margin is up a percentage point primarily due to the mix in revenue between the two segments. Okay. And for a follow-up, a question on the cash balance. It looks like you're guiding cash to be up in 4Q. And it looks like you have some excess cash after the transactions you've done in the quarter. And it looks like you might be up over a year $1,000,000,000 target balance. How do you plan on using the excess cash? Where would you reinvest that cash? I think right now as you observe, it's true. At the end of Q3, we did have some remaining net proceeds from the capital market transactions. After completing what we did in the early part of Q4, we have about $162,000,000 of remaining net proceeds. What we plan to do with it, I think from a long term strategy that hasn't changed. Our plan is to continue to delever the balance sheet, reduce debt towards our longer term targets of getting to the net debt cash neutral that I've talked about previously and getting the leverage ratio down to about 2 times from a longer term standpoint. Great. Operator, we'll take 2 more questions, please. Certainly. Our next today is coming from Joe Moore from Morgan Stanley. Please proceed with your question. Great. Thank you. Lisa, you talked about a $4,000,000,000 performance desktop opportunity. I guess, what's your thinking in terms of what you can eventually attain of that? Just how are you thinking about your potential for market share? And can you give us some sense for when you have a chip like this that you have enthusiasm about how quickly it can ramp into that segment? Thank you. Yes. So I think you look at our PC market share, as it's published by Mercury or so, I mean, we're talking about somewhere around 10% plus or minus. I think we view that historically we've been higher than that in the PC market and certainly the desktop market, especially the desktop channel market, we're fairly well known by that customer set. So we're enthusiastic about Summit. We think the performance is right on the mark with what we wanted to achieve. And we're hopeful that as we launch into the Q1 that there will be a good solid ramp in that business. Okay, great. And then how are you thinking about as you think about bringing that chip to market, when will you make it available for 3rd party benchmarks and sort of get a broader marketing program beyond the launch that you've done? Yes. Yes. No, I would expect certainly there are a lot of confidential benchmarks at the moment, but in terms of 3rd party benchmarks, you would expect that in the Q1. Great. Thank you very much. Thank you. Our final question today is coming from Chris Rolland from Susquehanna International Group. Please proceed with your question. Hey, guys. Congrats on a great quarter and nice to see it all coming together. We don't have September sell through data yet and it's kind of hard to predict the holiday season, what it's going to look like for consoles. But perhaps the past 2 quarters growth in EAS might be outpacing kind of expectations for consoles. So I guess my question is, first of all, is that right? Is there something that's helping your guys' units here, like initial channel stocking for the PS4 Slim or the PS4 Pro? And how should we think about the size of the benefit that you're going to get from initial channel stocking there? Yes. So Chris, I think the game console shouldn't be really looked at on a quarterly level when you're looking at sell in and sell out because it's so different from the other markets. I would say on an annual basis, everything crews up. And the thought process is in Q2 and Q3, there is a bit of build ahead, as the customers are really building for the holiday season. And the customers do so much of their business in the last 6 weeks of the year, that's when all of the inventory is drained. So my view is that, if you look on an annual basis, the game console business is doing quite well. And so we expect units to be up. We expect revenue for the business to be up for us. And the quarterly transitions are less important. It's more we want to ensure that we're meeting our customers' build cycles so that they get to build everything that they want and get it into their channels. But from my standpoint, I think it's a very well managed system. Great. Congrats on a great quarter. Thanks, Chris. Operator, that concludes today's call. If you could wrap it up, please, that would be great. Certainly. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We do thank you for your participation today.