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Advanced Micro Devices (NYSE:AMD)

Q4 2013 Results Earnings Call

January 21, 2014, 5:30 p.m. ET

Executives

Rory Read - President and CEO

Devinder Kumar - Senior Vice President and Chief Financial Officer

Lisa Su - Senior Vice President and General Manager of Global Business Units

Ruth Cotter - Vice President, Investor Relations

Analysts

David Wong - Wells Fargo

Hans Mosesmann - Raymond James

Chris Rolland - FBR

Stacy Rasgon - Sanford Bernstein

John Pitzer - Credit Suisse

Romit Shah - Nomura

Patrick Wang - Evercore Partners

Srini Pajjuri - CLSA Securities

Operator

Good afternoon. At this time I would like to welcome everyone to AMD's fourth quarter 2013 earnings conference call. [Operator instructions.] I would now like to turn the conference over to Ms. Ruth Cotter, vice president of investor relations for AMD. Please go ahead.

Ruth Cotter

Thank you, and welcome to AMD's fourth quarter and year-end earnings conference call. By now you should have had the opportunity to review a copy of our earnings release and the CFO commentary and slides. If you’ve not reviewed these documents, they can be found on AMD’s website at quarterlyearnings.amd.com.

This is a live call and will be replayed via webcast on AMD.com. Participants joining us on today’s call are Rory Read, our president and chief executive officer; Devinder Kumar, our senior vice president and chief financial officer; and we’ll also have Lisa Su, our senior vice president and general manager of global business units, who will participate in the Q&A portion of the call.

There will also be a telephone replay. The number is 888-266-2081. Outside of the United States the number is 703-925-2533. The access code for both is 1485779. The telephone replay will be available for the next 10 days, starting later this evening.

I’d like to highlight a few dates for you. Devinder will attend the Goldman Sachs conference on February 12. Our first quarter quiet time will begin at the close of business on March 14. And lastly, we intend to announce our first quarter 2014 earnings on April 17. Dial-in information for that call is expected to be provided in mid-March.

Please note that the non-GAAP financial measures referenced on this call are reconciled to their most directly comparable GAAP financial measure in the press release and CFO commentary posted on our website, quarterlyearnings.amd.com.

Before we begin the call today, let me remind everyone that today’s discussions contain forward looking statements statements based on the environment as we currently see it. Those statements are based on current beliefs, assumptions, and expectations, speak only as of the current date, and as such involve risks and uncertainties that could cause actual results to differ materially from our current expectations.

Please refer to the cautionary statement in our press release for more information. You’ll also find detailed discussions about our risk factors in our filings with the SEC and in particular AMD’s quarterly report on form 10-Q for the quarter ended September 28, 2013.

Now, with that, I'd like to hand the call over to Rory. Rory?

Rory Read

Thank you, Ruth. We made good progress last year in executing our three-step strategic turnaround to restructure, accelerate, and ultimately transform AMD. We completed our restructuring, creating a more efficient business model with significantly lower operating expenses.

We also accelerated our business, generating strong revenue growth and a return to profitability in the second half of the year by successfully ramping our strong and diverse set of new products. As we move forward, we will continue to strategically transform AMD as we diversify our portfolio and drive a larger percentage of our revenue from the semicustom, ultra-low power client embedded dense server and professional graphics high growth markets.

In the fourth quarter, we delivered revenue of $1.59 billion, an increase of 9% sequentially and 38% from the year ago period, while increasing profitability. We exceeded the goal we set for the semicustom and embedded businesses to generate 20% of our revenue by the fourth quarter of 2013.

We believe this validates the strategy we outlined two years ago to embrace the trends reshaping the industry. We remain on track for our growth businesses to generate approximately 50% of our revenue by the end of 2015.

All of this work is underscored by the improved execution across the AMD company, as we hit our key product, IP development, supply chain, and financial milestones in 2013. Our flawless semicustom production ramp propelled the business in the fourth quarter and allowed us to meet the strong demand for Sony’s and Microsoft’s game consoles.

Combined, Sony and Microsoft reported selling more than 7 million units in less than two months. This is more than double the number of prior generation consoles sold in their first quarter of introduction. We expect this momentum will continue as we increase game console SOC shipments for the year and pursue new wins from our semicustom design pipeline.

Our embedded business achieved sequential revenue growth increases throughout 2013. We have secured design wins to drive further growth and expect continued momentum as we begin offering both X86 and ARM-based solutions in 2014.

In dense servers, we remain on track to launch one of the industry’s first 64-bit ARM server SOCs in 2014. Our unique position offering both X86 and ARM solutions, combined with our years of experience in the server market and industry leading fabric technology differentiates us as we bring an expanded set of solutions to this important market. We remain on track to begin sampling our new ARM-based SOCs later this quarter and we are seeing strong interest from both traditional server OEMs and end customers like cloud providers.

Our professional graphics business set a record for the full year revenue in 2013. We believe we can drive additional growth based on incremental focus and investments we are making to further strengthen our product offerings, expand our work with key software developers, and secure more design wins. Apple’s new Mac Pro desktop, with dual AMD FirePro GPUs, is a perfect example of our momentum and this margin accretive market.

Now turning to our traditional businesses. As we said during our last earnings call, we expected GPU revenue to rebound as we accelerate the transition to our new R9 and R7 graphics chips, and that is what happened. Strong demand for our latest graphics chips drove a significant sequential increase in GPU revenue and ASP.

Our strategy to attack the desktop at [unintelligible] channel worked well in the quarter and we expect this trend to continue. We believe we are well-positioned to gain graphics market share in 2014 based on continued channel momentum, secured wins for our new R7 and R9 discrete mobile GPUs, and strong adoption in the professional graphics space.

We also delivered our third straight quarter of desktop processor revenue in the fourth quarter, largely driven by increased shipments of our higher end APUs and FX CPUs. We also began shipping the desktop version of our newest APU, Kaveri, in December, and we believe it will fuel future growth by delivering a significant performance advantage versus competitive offerings.

Kaveri supports our mantle API for better gaming experience and is the industry’s first product to integrate HSA features that can improve performance and power efficiencies when running modern workloads.

The consumer notebook market remained soft in the fourth quarter. We focused on improving mix and reducing downstream inventory with our customers. We have secured a number of premium notebook design wins for Kaveri and also have solid adoption of our next generation low power Mullins and Beema SOCs, which deliver twice the performance per watt of our previous offerings.

We believe we are taking the right steps to create a more predictable and balanced PC business moving forward by continuing to drive a richer product mix, by focusing on parts of the market where we are underrepresented and have significant growth opportunities. For instance, we have secured a significant number of new commercial client design wins with tier one OEMs which will launch in the second half of the year.

We continue to believe that the PC market will be down for the year. As we discussed during the last earnings call, our planning assumptions are based on a 10% decline in the market. Since that call, we are seeing some signs that parts of the market may be stabilizing.

Given where we are in the quarter, it is too early to know if these signals will continue or not. We are managing the business to the base assumption, but we are ready and poised to take advantage of any upside as it materializes.

So in summary, for 2013 we hit key milestones in our multiyear strategic turnaround. We completed our restructuring, creating a more efficient operating model. We accelerated our business by ramping a strong set of new and diverse products across both traditional and new growth businesses.

Our semicustom embedded offerings delivered more than 20% of our revenue in the fourth quarter, and we returned AMD to profitability and positive free cash flow in the second half of the year.

Now, in 2014, our next objective is to achieve revenue growth and profitability at the net income level for the full year, as we leverage our differentiated IP and products to further expand our growth businesses, participate across a broader part of the traditional PC market, to create a more balanced and consistent revenue stream and to continue to pursue efficiencies in our business model that will further reduce operating expenses.

We are midway through our multiyear turnaround and feel very good about the progress we have made to date and our abilities to continue to meet our commitments. We have built a solid foundation from which we can continue to transform AMD into a more diverse company, delivering consistent revenue growth and profitability.

Now I’d like to turn the call over to Devinder. Devinder?

Devinder Kumar

Thank you, Rory. 2013 was a year of many accomplishments for AMD, as we completed the first two phases of our three-phase transformation plan. We completed the corporate reset and restructuring, and had solid execution in the second half of 2013.

At the beginning of 2013, we laid out a number of key financial goals as part of that plan, specifically the return to profitability and positive free cash flow in the second half of the year to reduce our operating expenses by more than 20% from Q1 2012 levels and to generate more than 20% of our revenues from our semicustom and embedded products.

I’m happy to report that we achieved and exceeded all of those goals. In addition, we maintained cash balances above our optimal balance of $1.1 billion throughout 2013, and stabilized the business with solid execution and financial discipline. All of this provides a good foundation as we enter 2014 and continue our strategic transformation.

Let me share some specifics for 2013. We achieved revenue of $5.3 billion; gross margin of 37%; non-GAAP operating expenses of $1.9 billion, down 14% year over year; non-GAAP operating income of $103 million, up from $45 million in 2012; capital expenditures of $84 million, down significantly from $133 million in 2012; and finally, we exited 2013 with cash balances, including marketable securities, of $1.2 billion, and increased available liquidity by $500 million through establishing a secure revolving line of credit.

Now let me turn to the specifics of the fourth quarter of 2013. Revenue for the fourth quarter of 2013 was $1.59 billion, an increase of 9% from the third quarter and an increase of 38% from the fourth quarter of 2012. The increase was driven by very strong performance in our graphics and visual solutions segment, driven by increased revenue from the semicustom SOCs and our new R7 and R9 series of GPU products, which more than offset the decline in revenue in our computing solutions segment.

Gross margin was 35%, down 1 percentage point sequentially, in line with our expectations, as sales of our semicustom SOCs grew significantly and formed a larger mix of overall revenue. The fourth quarter financial results include a $7 million benefit from the sale of inventory reserved in the third quarter of 2012, as compared to a similar $19 million benefit in the prior quarter.

Non-GAAP operating expenses were $462 million, above our targeted level of $450 million, primarily due to higher expenses in sales and marketing during the holiday period and employee related performance related programs.

Non-GAAP operating income was $91 million, and non-GAAP net income was $45 million, both of which exclude a net benefit of $48 million from legal settlements in the quarter. We delivered non-GAAP earnings per share of $0.06 and adjusted EBITDA of $165 million, excluding a net $48 million benefit from legal settlements.

Now turning to the business segments, computing solutions segment revenue was $722 million, down 9% sequentially, primarily due to decreased chipset and notebook unit shipments. Computing solutions operating loss was $7 million, as compared to an operating income of $22 million in the third quarter, primarily due to decreased levels in revenue and higher marketing and employee related performance plan expenses.

Graphics and visual segment revenue was $865 million, up 29% sequentially, driven by increased shipments of game console semicustom SOCs and of our R7 and R9 series of GPU products. Graphics and visual solutions segment operating income was $121 million, up from $79 million in the prior quarter, primarily due to higher revenue.

Turning to the balance sheet, our cash, cash equivalents, and marketable securities balance, including long term marketable securities, was $1.2 billion, in line with our expectations and flat from the third quarter. Inventory was $884 million, down $38 million sequentially, primarily due to higher shipments of products in our graphics and visual solutions segment.

Our total wafer purchases from GlobalFoundries in 2013 were approximately $960 million, lower than the previously estimated $1.15 billion, due to lower third quarter purchases. There were no penalties associated with this reduction. We are actively working on our 2014 wafer supply agreement with GlobalFoundries based on our full year demand expectations, with a goal to manage inventory flat to down year over year.

Also, in the first quarter of 2014 we paid GlobalFoundries a final $200 million payment related to the reduction of our [unintelligible] wafer obligation commitments in 2012. That, as of the end of the quarter, was $2 billion, flat from the prior quarter.

During the quarter, we repurchased approximately $50 million of our outstanding 6% 2015 convertible senior notes in the open market, and these purchases were funded by utilizing our secured line of credit revolver.

Now turning to the outlook, for the first quarter of 2014 AMD expects revenue to decrease 16% sequentially, plus or minus 3%. We expect computing solutions segment revenue to be down in line with seasonality and we expect graphics and visual solutions revenue to be down coming off of a strong Q4 for our semicustom SOCs.

Non-GAAP gross margin is expected to be approximately 35%. Non-GAAP operating expenses are expected to be approximately $420 million, driven by lower sales and marketing expenses, accelerated IP reuse, and rebalancing of resources in some of our businesses.

Inventory is expected to be approximately flat from fourth quarter levels and cash, cash equivalents, and marketable securities are expected to be approximately $1 billion. On cash, we have had two important cash reference points over the past year: one, our optimal cash balance target of $1.1 billion and the other, our target minimum cash level of $700 million.

In light of the progress in the transformation of our business model, with a more predictable revenue stream from our growth businesses and the availability of $500 million of liquidity available under our secured revolving line of credit, we are revising our optimal cash level to be approximately $1 billion and our target minimum cash to $600 million.

For the full year 2014, we expect revenue to increase year over year; non-GAAP operating expenses to be in the range of approximately $420 million to $450 million prior quarter, depending on the timing of R&D expenses and the revenue profile; taxes of approximately $3 million per quarter; to be net income profitable for the year; inventory to be flat to down year over year; capital expenditures of approximately $120 million; to be free cash flow positive for the year; and finally to maintain cash, cash equivalents, and marketable securities balances in the optimal zone of $1 billion and above the target minimum of $600 million.

In summary, we achieved critical milestones in the first two phases of our strategic transformation during 2013, and delivered solid financial performance in the fourth quarter. We remain focused on maintaining the operational and financial discipline that we demonstrated in 2013 as we embark on the third phase of our strategic transformation, with the goal of transitioning 50% of our revenue to high growth markets by the end of 2015.

With that, I’ll turn it back to Ruth. Ruth?

Ruth Cotter

Thank you, Devinder. Operator, we’d be now pleased for you to poll the audience for questions.

Question-and-Answer Session

Operator

[Operator instructions.] And it looks like our first question will come from the line of David Wong of Wells Fargo.

David Wong - Wells Fargo

Your microprocessor APU ASPs have been doing very well recently. What do you expect going forward in the March quarter? Does Kaveri help ASPs to rise?

Lisa Su

Let me answer that question. We have been working hard on the mix of our product portfolio in both desktop and notebook, and we saw a nice uptick in Q4. I think going forward we do have a strong set of products. We’ll have to see how 2014 unfolds, but Kaveri, we’re very pleased with the performance and the launch in the desktop channel. You’ll be seeing that in the notebooks, and we’ll also be introducing our new Mullins and Beema products later on in the year as well. So we’ll continue to work on the mix of the computing solutions ASPs going forward.

David Wong - Wells Fargo

And my other question, Devinder, you did very well on the profitability in the December quarter. Will you be able to keep net income flat or positive as you go into the seasonal [low]?

Devinder Kumar

I think as we gave the guidance for Q1, if you do the math, that’s how it comes out. And our goal is obviously to be profitable for the year, and for Q1, with the revenue and the gross margin and opex profile that we have, our goal is to be breakeven or better from a profitability standpoint.

Operator

And it looks like our next question in queue will come from the line of Hans Mosesmann of Raymond James.

Hans Mosesmann - Raymond James

Question on your ARM strategy and Seattle. Based on what you’ve seen over the past quarter, has the opportunity in servers in that particular area increased? Has it been the same, or is it less?

Lisa Su

On the server strategy and the ARM strategy with our Seattle product, I think our view is that the opportunity is definitely there. We’ve always said that ARM is a longer-term opportunity in terms of how it folds into the server market, but what we’ve seen is continued interest in our ARM product portfolio, not just from traditional server vendors, but also from some of the cloud vendors. So we’re very pleased with the progress with that, and we’ll continue to work hard with that strategy.

Rory Read

And also remember that we really want to continue to leverage ARM, not only across the server space, but also into embedded, and potentially into the semicustom space, as it gives us increased capability. We think that ambidextrous part of the strategy, and our leadership in 64-bit compute will give us a significant opportunity and an expansion in [TAM] that will give us long term opportunity to expand revenue.

Hans Mosesmann - Raymond James

If I may, a follow on. The Beema and Mullins APUs seem to go right up against Bay Trail from Intel. I asked the question last time, and I’d like to ask it again, because I didn’t get the proper answer, I suppose. What is the competitive advantage of Beema and Mullins versus Bay Trail?

Lisa Su

Let me try to answer that for you. Mullins and Beema are really targeted at the low power APU space. We just showed the latest performance metrics at CES, and what you’ll see is that on graphics performance, it’s substantially better. We’re talking about 250% better in the comparable Bay Trail products. And what’s different is on the computer performance, where we have traditionally been not a strong, we see significant performance improvements. So I think we feel very good about our positioning versus Bay Trail. We’re continuing to be very aggressive with how we position our products in the space, and we will look for a balanced business going forward there.

Operator

And our next phone question will come from Chris Rolland with FBR.

Chris Rolland - FBR

Perhaps you can talk about the staggered geographic launch of the PS4 in Japan in February. I thought this might have made the GPU business a little less seasonal than normal, than we might have expected. And then also, I know you guys don’t guide two quarters ahead, but given that staggered launch, what does that do for second quarter seasonality as well? Maybe we could get some color there.

Lisa Su

Let me start, and then maybe Devinder and Roy can add. When you look at the game console market, it is a five, seven year market. When you look at the first year launch, there are those different components as you talked about in terms of the staggered launch. If you look at how it’s progressed, Q4 was a very strong quarter.

When you look at the launch quarter and the number of units sold that our customers have reported, double what you have seen in previous launches. When we look into Q1, we do expect a strong quarter as well, and looking into 2014, you would expect that the second half will be stronger than the first half.

But I would guide you to look at when the major titles are released for the various game consoles to see when you’ll see a little bit of, I wouldn’t call it seasonality, but I would call it a little bit of uptick, as that happens. So I think expect strong momentum in 2014 off of the 2013 console launch.

Chris Rolland - FBR

And if you look at PC [unintelligible], let’s say in 2012, you guys were down. Last year you guys were about breakeven on an operating profit basis. So even though you guys had PC units down, how are you looking at profitability for that PC [unintelligible] division in terms of operating profit for ’14?

Rory Read

Clearly, Chris, our focus is to continue on the next phase of this multiyear strategy we laid out two years ago. In 2014 our next goal is to drive full year revenue growth and profitability at the net income level for the full year. As we look at that, we think it’s a combination of our expansion into the new growth markets, like embedded, professional graphics, semicustom, low power client, etc., dense server.

But also, it’s about the opportunities we see in the PC market. We believe the PC market will continue to be down in 2014, but we see an opportunity for us to continue to move into areas where we’re underrepresented. Historically, we’ve dominated that lower entry point of consumer notebook.

Where we see opportunity is to continue to build on the momentum we’ve seen in the revenue of the desktop channel, and then continue to expand into the commercial client segment. These are two key areas where we can provide leadership and we have been underrepresented in the past. These will give us an opportunity to expand and they’re also areas that tend to have better growth performance than consumer notebook, because clearly consumer notebook in the entry space has been affected by the tablet.

But that commercial area in desktop has been stronger and more resilient. We think that, as we mix up the stack, will continue to give us opportunity to produce profitability. In terms of A8s and A10s, it was a record, record quarter, in terms of A8s and A10s, up the stack, which is a perfect example of what we’re trying to do, and why we saw the expansion on ASPs.

Devinder Kumar

I can add on top of that. Rory talked about the products and the business execution. From a financial standpoint, our business is in the midst of a transformation. And our focus is that each standalone business has to be profitable and we will adjust resources and assets from time to time. And that’s why you have seen, even in the computing solutions business, despite the fact that they were down from a revenue standpoint over the quarters, essentially for that segment we were close to breakeven, and that’s the way we’re going to manage in 2014 as we go forward.

Operator

And our next phone question will come from the line of Stacy Rasgon of Sanford Bernstein.

Stacy Rasgon - Sanford Bernstein

I wanted to dig in a little bit first into the cash balance. So for this quarter, you were at $1.2 billion, but you didn’t take about $190 million in wafers you were due, and you also cut your capex versus your guidance, which would have dropped you well below $1 billion had all that come through. Now you’re dropping, I guess, your optimal target and your minimal target, and you’re sort of attributing that to a better outlook on the business.

But how can we read that as anything other than cash balances are coming in lower than what you thought, and so you’re guiding down your targets in order to adjust to that reality? What’s the confidence we have on the cash balance going forward?

Devinder Kumar

I think if you look at it from the standpoint of where you started, first of all, and the lower wafer purchases in Q4, taking those wafers in Q4, the cash we have been paid in Q1 would not have affected the Q4 cash balance. So that’s where we ended up from a Q4 standpoint, with the $1.2 billion dollars. And I know you’re familiar with the GlobalFoundries piece of it. We had $200 million due to GlobalFoundries in Q1 2014, and that money has been paid.

And our business model has transformed, with more predictability of revenue, as I said in my prepared remarks, in particular with the semicustom game console business. And therefore, I’m very comfortable from a viewpoint of resetting the cash balance to the $1 billion for the optimal range and $600 million minimum.

On top of that, as you’ve probably read, we closed a secured revolver line of credit, what we call the ABL in Q4, of which we have $500 million available. So when you take our cash balances at the end of Q4 2013, look forward to our profitability on the full year basis for 2014. I’m confident we can free cash flow positive for the year, despite having paid the $200 million to GlobalFoundries, which we did in the early part of January.

Rory Read

And Stacy, if you take a look at what a difference a year makes, at the end of 2012, our cash balance is basically exactly the same a year later, at the end of 2013. And arguably, probably the most difficult PC market in history. And I think we executed the plans that we laid out quarter by quarter to deliver that, and now we’re moving into the next phase, as we continue to accelerate our business based on the new products we’ve identified, the new growth markets. That’s our objective to deliver free cash flow positive for 2014 as we deliver net income positive for the full year, and revenue growth for the full year.

Stacy Rasgon - Sanford Bernstein

For my follow up, I wanted to just verify something on the GlobalFoundries. I guess it looks like they forgave some of the commitment. You said there were no penalties from the reduction. Does that mean there were no penalties, there weren’t any, and there won’t be any forthcoming? Or are you negotiating that as part of 2014, because the last time you couldn’t take the wafers, you wound up still paying for them, you just had a little bit more time to pay for them. Are we basically done with the 2013 commitment at this point?

Devinder Kumar

The 2013 WSA is completed. There are no associated penalties with the reduced wafers we took in Q4.

Operator

And it looks like our next question in queue will come from John Pitzer of Credit Suisse.

John Pitzer - Credit Suisse

I had a quick question about your seasonality for computing solutions. You said Q1 ’14 revenue is expected to be down, partially being driven by seasonality of computing solutions. Do you view seasonality as [unintelligible] with that particular business?

Rory Read

Our view is that we see seasonality in line in Q1, and I think that’s good improvement from what we’ve seen over the past several quarters as we move through this transition. We’re looking for our compute business to deliver at seasonal trends, historical trends, in Q1. And if you remember, I said in the last earnings call that we weren’t going to lean into Q4. We took that opportunity to prepare and control and burn down inventory, as well as position us for 2014. And I think what you’re going to see based on our guidance is that compute will fall back into line with the historical trends. And I think that’s good improvement.

John Pitzer - Credit Suisse

I think I wasn’t clear with my question. I just wanted to get a better sense of how you view seasonality of your computing solutions for Q1. I guess is that somewhat like [unintelligible] mixing with [unintelligible] quarter over quarter? I just wanted to get how you view seasonality for the [unintelligible] business.

Lisa Su

It varies from year to year, but let’s say around 7-8% or so.

John Pitzer - Credit Suisse

And as my follow up, you said you expect revenue to be up year over year in ’14. Do you expect both business segments to perform, and if so, do you expect one part of your business to outperform the other?

Rory Read

We’re in the transformation year of a multiyear transformation. We’ve given the guidance for the quarter, and we’ll lay that out. We do see an opportunity for us to deliver revenue growth for the full year, and that net income profitability for the full year, but generally we do not break that out at this point as we move through this transformation.

Operator

And our next question in queue will come from the line of Romit Shah with Nomura.

Romit Shah - Nomura

Rory, I realize it’s January, but I was hoping we could get some more color on the revenue target for 2014. You’re guiding for growth, but being that the Street is modeling north of 15% growth, I think we’re hoping for a little bit more color. Are you thinking more single digit growth, or are you a little bit more optimistic than that?

Rory Read

From my perspective, I think as we’ve gone through a very difficult and unprecedented 2013 from a market perspective, I continue to believe the PC market will be down in 2014, a similar amount. And as we discussed in our last call, we’re basing our planning on that assumption. We see some parts of the market stabilizing for sure, in this early part of the year, but as we got to CES, we got kind of a mixed story there.

So I think that from our perspective we’re going to manage our business to that 10% base assumption, and if we do see upside, we’re going to take advantage of it. Given we’re in this very unpredictable stage of the market, and we’re also in this transformation, I think it’s prudent for us to give the guidance quarter by quarter as we move through this transformation. We’ve shown our ability to deliver and execute quarter by quarter, and I think what we’re saying is we see the opportunity to drive that revenue growth for the year.

Let’s get a couple more quarters under the belt, we’ll lay that out as the year goes on, and see how the industry begins to unfold, and we’ll lay out the year as we go. I think that’s the prudent way to handle it.

Romit Shah - Nomura

I agree. On PCs, which subsegments would you say are showing the highest degree of stabilization today?

Rory Read

I think there’s early parts of that. I think there’s no doubt that the XP expiration has driven some activity in the commercial segment. It’s one of the reasons Lisa and John Byrne and their teams have targeted the opportunity. You’re going to see a substantial increase in the number of SKUs that we have, the number of models that we have, in the commercial segment. And I think that’s done better over the past several quarters. I think it will continue to do better.

I think the component channel has continued to do well. The area that’s been the most difficult, and obviously most affected by the tablet migration, has been entry level consumer notebook. And clearly, we were way over indexed in that space. Part of our strategy, diversify to the high growth markets, and within the traditional market, diversify into the segments within that PC market where we see future growth.

Lisa, you want to add anything else to that?

Lisa Su

No, I think that covers it.

Operator

Our next phone question will come from the line of Patrick Wang with Evercore.

Patrick Wang - Evercore Partners

For my first question, I wanted to see if you could talk a bit more about the semicustom business console. Lots of moving pieces out there, very, very strong ramp through the first couple of months here. How do you see the inventory situation? How much more demand do you think there is? I know you talked about expectations for growth year over year, but can you just help us kind of frame some of your expectations there?

Lisa Su

Let me try and give you some color on that. So from everything that we see, the semicustom launch has been very successful, very strong uptake, both in sell in as well as sell through, on the inventory. Of course you’ll see more of that from our customer data. From the visibility that we see into 2014, we see also strong uptake, and usually, as you know, these consoles tend to increase in numbers of units through the third and fourth year of console launch. So we see 2014 as a strong year for the overall games console market, in both the Sony and the Microsoft consoles.

Patrick Wang - Evercore Partners

And can you talk a little bit about the profitability? I think a couple of quarters ago, you guys set a lower operating margin target. But how’s the progress on that going, and how should we think about ASPs trending over the next one to two years as [NRE] comes off?

Devinder Kumar

I think the operating margin, you’re right, we had given, at the Q3 timeframe, and we were just starting to ship the product, margin guidance in the low double digits. [unintelligible] in the teens, as I said, for Q3, and in Q4, really we continue to improve. And over time, we believe that we can continue to increase the operating margin within that business. And that obviously benefits the operating margin of that business and the company.

And you can see the evidence, if you go look at the GVS segment results for this particular quarter, Q4, and the $865 million in revenue. We had about 14% operating margin, and that’s really good. You know, I’m not going to provide granularity of the operating margin for that particular part of the business on a go forward standpoint, but more looking in the operating margin trajectory between the businesses on the computing solutions, on the one hand, and GVS, the graphics and visual solutions, on the other.

Lisa Su

And on your question on ASPs and that trend, I think what I’ll say is that the ASP reductions are well understood, and they’re in our model. And with that, as Devinder said, we still expect over time to be able to improve the operating margins based on the execution of the products.

Patrick Wang - Evercore Partners

And if I could squeeze in just one last question, just on the dense server business, it’s probably my favorite one that you guys have. Could you talk a little bit about your go-to-market strategy? Do you think you’re going to see an uptick from OEMs first? Do you expect early success with direct customers? Just any color you could give on [basic] penetration, things like that?

Lisa Su

Let me try to do that. In the dense server business, last quarter we announced Verizon as our first mega data center win with our Sea Micro Systems, and that was a big deal. And we see that as really a cloud customer going forward. As we look forward, our dense server business has both chip and system sales, and so I think on the system side, you’ll see more of the cloud customers and there’s certainly a number of trials in progress. On the chip side, we’re seeing interest from both traditional OEMs, and they expand their dense server focus as well as cloud customers and others looking to expand into the data center. So I would say on the chip business, it’s more mixed, on the system business, we are very focused on those newer workloads.

Operator

And we do have time for one final questioner. Our final question for today will come from the line of Srini Pajjuri with CLSA Securities.

Srini Pajjuri - CLSA Securities

Just one clarification, Devinder. Given your guidance, you’re guiding at I guess PC down seasonally, which I think implies graphics to be down about 20% or so. I would have thought gross margins would improve a bit, just given the gross margin profile. I’m just wondering why they’re not improving. And then as the business rebounds in Q3, how should we think about gross margins?

Devinder Kumar

I think if you look at it from the viewpoint of the computing solutions, we said down in line with seasonality, and Lisa mentioned earlier the 8%. On the graphics side, it’s really a combination of the businesses in graphics and then obviously the semicustom business that obviously is going well from where we executed in Q4, and our customers continue to do well, even in Q1.

The mix of the revenue obviously is going to [bleed] to that 16% guidance that we gave, and that’s where the gross margin comes out, given the mix of within the computing solutions and the graphics on the discrete [business] and the semicustom business.

Srini Pajjuri - CLSA Securities

Given that semicustom is lower gross margin, my question is, as the business comes back in Q2 or Q3, is there further downside to your 35% forecast?

Devinder Kumar

I’m not going to go further out in the year, because it’s really going to depend, and when you get into the later part of 2014, how our growth businesses do, how the semicustom business evolves, given the launches that our customers are going to do in other parts of the world. And finally, obviously on the PC market, we have the transition going on.

We are in the midst of a transformation, the business world is evolving. We’ve done, as you probably have tracked, over the last few quarters, given the guidance for the gross margin, and meeting the gross margin guidance, and in Q1, the gross margin of 25%, and we’re going to continue to manage that as we go through the year in 2014.

Rory Read

It’s clear that we’ve been on this multiyear journey, and clearly focused on positioning ourselves for this turn. I think 2013 is going to be remembered as a significant turning point in our history as we define this multiyear transformation to create a stronger and more profitable AMD.

And as we look forward, I think you’re seeing us target those segments that are going to have growth, look for those areas where we can expand our ASP, where we have opportunity to get new business, and to choose those businesses that are going to produce the profitability long term. Additionally, we’ll manage the operating expense to deliver that.

And you need to look at this as a body of work over the next two years. We’ve done the first two years. Think about where we were just a year ago, and where we are today, and think about where we can get to this year, because the next goal is growing the revenue for the full year and that profitability and net income for the full year, and then by the end of 2015, 50% of our business comes from the new growth segments. That’s a different AMD, and that’s how we’ll manage, quarter by quarter, step by step, through this strategy.

Ruth Cotter

Thank you, operator. This concludes the call.

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