Advanced Micro Devices' (AMD) Presents at JPMorgan Global Technology, Media and Telecom Conference (Transcript)

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 |  About: Advanced Micro Devices, Inc. (AMD)
by: SA Transcripts

[No formal presentation for this event]

Question-and-Answer Session

Chris Danely - JP Morgan

Great. Good morning everyone thanks for coming. I'm Chris Danely, friendly neighborhood semiconductor analyst here at JP Morgan. Next up it's our pleasure to introduce AMD. AMD is pretty unique and is there one of the leaders in processing in three of the largest in those profitable areas out there whether it's gaming or computing or graphics you can be sure there is an AMD processor. And here today to talk about is Lisa Su, who is the Senior VP and GM of Global Business Units at AMD. First of all, what is the Global Business Units?

Lisa Su

Well, first of all thank you Chris for having us, really happy to be here today. And a Global Business Unit is a business unit that is global.

Chris Danely - JP Morgan

Great.

Lisa Su

Does that help?

Chris Danely - JP Morgan

And so that (inaudible) School in Boston here. So it's a nice oncoming for her. Anyway the start with the couple of I guess top ten questions. So I always hear about the ambidextrous strategy at AMD in and around the valuing with investors. Can you maybe just to explain that talk to us a little bit about it?

Lisa Su

Yes, absolutely, Chris. So just give you a little bit of history of AMD and we just celebrated 45th Anniversary just this month. And if you think about what we are good at we're really been focused on computing graphics, high level system integration. So when we really looked at the transformation of AMD going forward, we looked at what are the key areas that AMD can differentiated. And the ambidextrous strategy for us is really about adopting the best of the ARM and the best of the x86 ecosystems in sort of a unified way. That’s something very unique to AMD in terms of our ability to that and the thought process is if you look at processor TAM or revenue share over the last 10 years you will see that x86 is according anywhere from 40% to 50ish percent in terms of revenue share.

If you look at ARM it started out small but has been continuing grow at the expense of proprietary architectures. So being able to address a processor ecosystem ambidextrously with either ARM or x86 depending on what works best for that market is very unique to AMD and it happens to be if you look in 2014 it’s roughly about an $80 billion TAM. So by adding ARM to our portfolio it allowed us to double the addressable market for processors.

Chris Danely - JP Morgan

Great. And as far as the strategy goes, I mean you have had earlier in the past and you guys have a lot of irons in the fire. Is there any sort of milestones or I guess maybe two or three things that investors or shareholders can look at over the next few years that would be some sort of a milestone or a sign of success?

Lisa Su

Yes. If you think about our business where you joined about two and half years ago as did I and the thought process has been about let’s take the great technology that we have at a company in terms of our processors and graphics and technology and really address it to higher growth markets. And as we all know in the semiconductor industry it takes sometime to really get from initial concept into product lifecycle but some of the key pillars that we have put out there for our business are returning to profitability very, very important for us, in the second half of ‘13 we return to profitability. In terms of our product roadmaps and our product capability. If you look in 2012, our business was probably over 95% index to the PC market. And we know that the PC market has continued to have volatility, particularly on the consumer side. We have said that in 2013 due to our ramp in game consoles that we’ve been able to diversify our business, so about 30% outside of the PC business; 70% still in the PC business. And by the end of 2015 what you will see from us is that we’ll have about a 50-50 mix between PC business and growth markets. And for the markets that we think are high growth potential for both x86 and ARM, they include servers; embedded professional graphics as well as semi-custom as areas that we think that there are strong opportunities to grow and strong opportunities for AMD to differentiate in those areas.

Chris Danely - JP Morgan

Sure so let’s -- I guess let’s dig into the ARM part first. I think you guys first made this decision probably a couple of years ago or year and half ago or something like that. Can you just talk about what the puts and takes or advantages and disadvantages that you went through in the collective mind of AMD in deciding to go with an ARM license and then maybe give us a sense of what advantages you have over the other ARM server providers or ARM chip providers?

Lisa Su

Yes sure, absolutely Chris. So when we thought about ARM, it was really a long term strategy for us and it was to address that higher market growth segment. And it was kind of a very deliberate way of thinking about it. So back couple of years ago, there were several choices of where we could enter the business; 32-bit ARM is very successful in consumer applications in tablets. We decided not to go for that because we felt like that was not a place where AMD could uniquely differentiate. Instead, we were looking for inflection points in the ARM market. And I believe strongly that data center is one of the key inflection points, particularly for 64-bit ARM. So, bringing that in, our first incarnation of ARM was 64-bit in the data center. We started that development; we took a license from ARM; we started sampling that product, it's called the Seattle. We actually demoed a couple of weeks ago in San Francisco. And then we also announced that we have an architectural license to talk about our long-term commitment to ARM.

And so we will be doing a unique micro architecture in ARM in the 2016 timeframe, we call that core the K12 Core. But I think it gives you an idea of how we think about it. It's really a very strategic move towards ensuring that we are able to bring something to the ARM ecosystem that actually doesn't exist today in terms of the performance levels and the power levels that we think we can get into. In addition to that, we have a whole set of IP that we can integrate together with our CPU cores. And so that IP around graphics, multimedia and system integration gives us a very differentiated position in the high end of the ARM market.

Chris Danely - JP Morgan

And so, you are one of the like the PC gurus out there. How do you see ARM versus x86 fitting and do you see this being cannibalistic to your own business? Where -- I guess, where do you the see the overall server market going in the next say 5 to 10 years and then how does AMD fit in there?

Lisa Su

Yes. If you look at PCs and servers around ARM and x86, I actually aligned it more around ecosystems, right. So, if you look at Microsoft, x86 is going to be aligned fairly well with Microsoft. But if you look at some of the newer operating systems, whether you talk about Android or other Linux capability, I think ARM and x86 in some sensors an advantage to ARM, because there are more players in that ecosystem. So, the way we think about it is x86 is going to continue to be very important over the next 10 years, no question about it. In traditional PCs, in traditional enterprise whether you're talking about big ARM servers, x86 would be very important.

But ARM affords new opportunities. So when you're talking about new form factors in consumer devices today's PC is not going to be tomorrow's PC. I think that allows different market sectors. Today’s server is going to be very different from tomorrow’s server. If you look at what's happening in the mega data centers whether you're talking about big guys out there like a Google or Facebook or Amazon, their data centers are quite different than traditional enterprise data center. So that I think allows new opportunities for different architectures in servers.

Chris Danely - JP Morgan

Sure. And then obviously we see ARM and in this to every mobile application. So does this mean AMD could potentially get into mobile or can you just maybe talk about our ARM and mobile, does that fit in with your product line and then maybe address we hear the ARM camp talking about ARM getting into like your traditional PC applications, do you think that works or do you think your x86 will continue to down that there?

Lisa Su

Yes, good question. So I think to your question of could AMD go into mobile, we could. When you look at mobile though, we should distinguish let's called smartphones and let's call it higher end tablets two-in-ones notebook PCs. We're not selecting smartphones as a market for AMD. And it's a relatively crowded market and it's not a place that we can uniquely differentiate in a standard product. However, when you look at the higher end of new form factor notebooks, tablets two-in-ones, other mobile devices I think you will see AMD in those and you will us there with both x86 and ARM. I think, as I said earlier x86 has clear advantages with regard to the ecosystem and will continue to be very strong, ARM will have clear advantages in I would say newer form factors and sort of the new applications.

Chris Danely - JP Morgan

Great. And so to that extend you guys made an acquisition with SeaMicro can you just talk about why you chose SeaMicro? I am sure you looked at some other stuff out there and what sort of brought them to the forefront?

Lisa Su

Yes absolutely. We actually just celebrate not too longer ago the two year anniversary of SeaMicro being part of AMD. And SeaMicro was really a view of what markets do we think are important over the next five years. And data center and particularly the large mega data centers the use of dense servers we believe is going to be a continuous growth capability over the next 5 to 10 years.

SeaMicro brought some very, very interesting system IP for us; the fabric, the way we interconnect CPUs, the system design, the software design, it’s really allowed us to learn about the market. I think we designed better chips because we have SeaMicro as a systems ARM. We are also very clear that from our standpoint our view is how do we provide the best solution. So some customers want to buy chips, some customers want to buy systems and we work with that whole capability.

Chris Danely - JP Morgan

Great. And what do you see is the competitive landscape these days? (Inaudible) say that kind of got a business, some of those guys reform, how do you see that competitive landscape in ARM servers with SeaMicro?

Lisa Su

I think the way to think about the competitive landscape whether on the chip or the systems side is it takes scale to really be successful in microprocessor design. And I think that was true five years ago, that is going to be true five years forward. If not the first generation that is going to be sort of a big pop, it requires continued investment in the ecosystem. We made some very conscious decisions about when to enter ARM and servers and it’s because we were very clear that you needed 64-bits to really be successful. So I think we have demonstrated that. I think the system design that we have around SeaMicro, I mean it’s now third generation design that we have learned quite a bit about how to integrate that better.

We see a lot of opportunity not just in traditional servers, but sort of the intersection between servers, networking and storage and how that aggregation happens in the data center. So I think the combo of our ARM capability together with our system knowledge together with the relationships that we built with OEMs from the after on days really help us differentiate.

Chris Danely - JP Morgan

And your main competitor talks about the micro server market and they are increasing out of mechanic out that or get into that market. Do you view that as them just sort of putting up a wall or a fence to try and keep people out or do you think that they are actually trying to maybe open up the new market or how do you sort of see that, what’s the potential threat to a SeaMicro or something like that?

Lisa Su

Yes, I mean the more especially to think about it is there is going to be x86 in a lot of places. So we agree with that that’s a good thing for us but the idea of one chip or one provider is going to be able to service all of these heterogeneous solutions. I think that is very, very unlikely. And I think that’s the main difference; if the applications were all similar and everybody was using the same software provider, okay, got it, but the applications are different and by the way these guys are writing their own software. So they have a lot of choices in terms of how they choose your provider; what are the things that are necessary. So, again I think x86 will continue to be important, but you will have a lot more of a heterogeneous data center environment based on the application in the software environment.

Chris Danely - JP Morgan

Yes. And then last question before we switch gears. What would be your thoughts or what sort of percentage if you have a number in mind of the server market that you think could be ARM in say five years, is it 5%, 10%, 20%; and then where would AMD be in that number?

Lisa Su

Yes. So this is like a crystal ball that none of us -- whatever number we put out there is probably going to be wrong. But let's say our view is it could be 20%, 25% of the market in the 2018, 2019 timeframe. And very important for to be double digits, very important to get the early adopters to demonstrate the capability, but I think from everything that we see, from everything that I see talking to customers, there is a strong, both interest as well as desire to commit resources to making that software investment.

Chris Danely - JP Morgan

Yes. Do you think if anything we’ve seen like an acceleration in the last 12 months towards that?

Lisa Su

Yes, I wouldn't say it's an acceleration. I think the fundamental thing that we needed to demonstrate as an ARM ecosystem is we needed ARM server chips to be available. It's interesting to talk about it, but much more interesting if you have software developers developing on it. So, if you look at our own case, we started sampling the product at the end of March. And the first people we gave samples to were the software developers, because they needed to get the ecosystem and the software experience ready. So, I think it will take us as an ecosystem together with ARM and the other provider, sometime to get that software in place. But the thing that is very encouraging to me is the openness of the customer set to adopt the new architecture. It has always been the question of legacy versus new; and I think the application base allows the new adoption.

Chris Danely - JP Morgan

And like you mentioned, I know I said one last question but this is interesting. Like you mentioned, it seems like the Googles, the Facebooks, the Amazons are actively working on this. We now would expect any one of those would have some sort of product system, something like that, some sort of announcement before the end of the year; does that sound viable?

Lisa Su

I think it's -- again, I can't speak for the customer set, but I will say you should be hearing more over the next 12 months.

Chris Danely - JP Morgan

Yes. Okay, great. So switching gears, sort of your old volume products, the PC market.

Lisa Su

We'd like to call it core, not old.

Chris Danely - JP Morgan

There we go, core. So, but a lot of speculation out there about when those XP support ending last month and then the PC market falling off a cliff; any observations there, any take, what would you expect to happen?

Lisa Su

Yes. So from our view of the PC market, and I should start with AMD is a little bit different in terms of our exposures in PC, we tend to be very exposed on the consumer notebook side and less so on the commercial side. But from what we see, when we ended last year, we were actually planning for pretty conservative PC condition, so we had talked about perhaps down 10% in 2014. We recently updated that and we think it's a little bit better than that, maybe somewhere 7% to 10%.The big season for PCs is going to be the second half of the year as it always is. So from everything we see in the first half of the year, it's behaving as we would expect. Customers are building up now for the back-to-school cycle and looking at how the holiday season will perform. And so we have to see that play out. But for sure commercial is stronger than consumer. And that's a place where we're also putting more of our investments.

Chris Danely - JP Morgan

And I guess from a broad perspective, you mentioned it is the core business. So how do you -- how does AMD view sort of the PC processor market and how do you see this evolving going forward? And then what’s AMD doing to address, not address, what’s happening?

Lisa Su

Yes. So our, from a broad standpoint, our PC strategy is fairly clear. What we want to do with the business is it will continue to be a large piece of our business for the foreseeable future. We’ve built great customer relationships over the past couple of years deepening those customer relationships. It’s also important for us to -- share is important but probably more important to us is stability and profitability. So when we are looking at our long-term business model, we’re building a business model such that the PC business is a contributor. And we continue to improve operating profitability with that as we grow our new businesses.

Within the PC market, there are places where we think we can make significant strides. The channel is a place that we’ve traditionally been quite strong. We have very, very good channel relationships in the sort of the DIY type of market, particularly in China. So we focus there. Commercial is a place where we are quite underrepresented. And we focus with our key OEM partners on increasing our design wins, in 2014. So you will see new commercial both notebooks and desktops launch from us later this year. So, continue to really focus on how do we make this a good business for us in light of the fact that we have strong investments going into our growth businesses.

Chris Danely - JP Morgan

And I asked you on from a broad perspective, the top two or three things that we could look at for AMD, how about in the sort of your core business in terms of getting back to profitability; are there certain milestones; whether it’s revenue margins, new product introductions what have you?

Lisa Su

Yes. So we have stated that our goal is to be profitable throughout the 2014 and I think that’s a very much a important milestone for us to meet expectations what we like you to see from the AMD team is that we are predictable. So that’s extremely important. In terms of key product milestones and things that are going on, we have many, many of them but if I just name couple in the core portions of our business we just launched our entire 2014 portfolio and we will complete that at Computech. And so the strength of our new very (inaudible) [Molins] products are important as they ramp through the OEMs and through the channel.

In graphics very clear that we believe we can gain share in graphics discrete graphics is in our blood, we care deeply about this business, we had very successful product launches at the end of last year into the first quarter of this year. We have already seen strong signs in the Enthusiast for the high end of the market. We believe we can move our market share over the next couple of quarters in discrete graphics and that’s an important milestone.

In our new businesses, game consoles continue to be a good market for us. We are pleased if you look at just the numbers that our customers have talked about, our customers have talked about shipping over 12 million units in the first couple of months of launch. We will complete that cycle in 2014 we expect also in that semi custom business to announce one to two new confidential design wins over the next couple of quarters and we are on track for that. So those are some of the key milestones.

Chris Danely - JP Morgan

Great. Just to drill that on a few of those points. So your share in desktop is actually still pretty darn high on the notebook and server side had shrank a little bit between those two do you see either of them picking up sooner than the other, do you feel any better about other than notebook or the server market?

Lisa Su

If I kind of go back to each of the markets, desktop in area that we've traditionally done well and will continue to and we also believe the desktop market is perhaps somewhat stabilizing in the sense of just relative to notebook, desktops are continuing to be bought, they are continuing to be used in the enterprise and so on and so forth.

Notebook very much is a cyclical business, it depends quite a bit on the product portfolio as it comes out, I do believe we'll make progress in notebook. I think our 2014 products are quite strong. What you should look at from us Chris is not just the pure unit volume, but are we improving our mix. If you looked at the first quarter results that we showed, we actually saw ASPs really kind of hang in there, as a result of improving our mix. And I think that's a key factor of we're becoming more competitive, more stable, more profitable in the notebook business.

And then server, it's fair to say that server is a long-term play or it's at least a medium term play. And as we come out with our next products in both x86 and ARM, that would be the timeframe that you would see sort of our market share.

Chris Danely - JP Morgan

Sure. That's very helpful. And then just to touch on the graphics or GPU market, maybe give us a sense of your expectations for share gains there and is that more of a mixed issue or just a unit issue or just talk about the strategy and expectations there briefly.

Lisa Su

Sure. So, if you take the graphics market and parse it out into three pieces you have the add-in-board channel, you have notebook and then you have professional graphics. I think from what we have seen with our product competitiveness, we've made good strives in the channel particularly in the Enthusiast segment and that will continue. If you look at notebooks we have good visibility to design wins that are ramping in the second half of this year. So I think we feel good about making progress in notebooks. And then professional graphics for us, we're really quite underrepresented in terms of our share. It hasn't been an area where we have invested strongly in some of the software certifications that are necessary. So that has become much more of the focus over the last 12 months and that is not only good from a unit standpoint, but that's better from being margin accretive standpoint. So graphics is an area that we think we can make progress both from just units, but revenue share as well.

Chris Danely - JP Morgan

Great. All right. Can you talk about the hot stuff, gaming. Now maybe just take a step back. So we've seen couple of different suppliers in gaming over the years or was it that AMD brought the table as far as your advantage over the incumbents?

Lisa Su

Yes. So if you look at the gaming lifecycle over the last couple of cycles. It's really been about sort of technology, I mean the game consoles are probably if not the most, one of the most avid users of the technology. I think what AMD brought to the table and why we won those designs is the first and foremost reason is because of the intellectual property that we brought. So the ability to integrate graphics and high performance CPUs in a very complex system on chip, I don't believe there were many other companies that could do that. On top of that, I think what we were able to do is provide an environment where we literally give these companies their own teams.

So they have a team that they may have AMD badges but they are very much dedicated to the success of the partner. And that was true for both Sony as well as Microsoft, so we are extremely proud of the game consoles, prior to launch there was bunch of conversation of, hey our game console is going to be interesting and so on and so forth our cloud gaming, PC gaming going to take over. And I think the launch has been fabulous. And it’s really….

Chris Danely - JP Morgan

Yes. Congratulations for you guys.

Lisa Su

Well I think it’s exceeded the market’s expectation for game consoles. And that says a lot about sort of the pent-up demand for good technology. So at the price points that you see in those game consoles, you just have incredible technology package to them.

Chris Danely - JP Morgan

And what do you see you mentioned in another one to two design wins announced this year, what do you see is the sort of the long-term growth of this market for you guys and could this mean AMD for as into other custom, semi-custom markets as well?

Lisa Su

Yes, we believe the semi-custom business is it’s not just a one or two trick pony but it really is a business model. And if you think about the markets that are best for semi-custom it’s high volume customers who want to differentiate and who want to optimize their system, their chip, their software and their system as well as maybe their services model together. There are a number of opportunities that we are deeply engaged. These are not typical sales opportunities. So the cycle for wining a semi-custom design you might have to be engaged with the customer for up to 12 months as they are thinking through what they want to do in their business. So once we do that it’s a very sticky business and so like game consoles is a five to seven year business maybe seven plus, the other markets that we are looking at, gaming is very good for us, enterprise as well. So we were talking about servers and you can imagine for some of these large data centers having differentiated or customized server networking would be another area for semi-custom as well as living room and mobile applications. So the key aspect of semi-custom is if you can build a case that there is a high volume and customized engineering will give you a better product, then I think AMD is the best solution for those applications.

Chris Danely - JP Morgan

One last question before I throw it out to the audience. Obviously it’s a very profitable business for you guys. Do you see that profitability potentially changing at all going forward, either getting margins even higher or could the margins come down or should we just expect the sort of same sort of business model going forward?

Lisa Su

Yes. So the semi-custom model is going to be very much a product of the markets that they serve, right? So the game console market and we’ve talked quite a bit about the business model; the gross margins tended to be lower than the corporate average; the operating expense is quite low because the engineering costs are taken or are covered by the customer which leads to nice operating margins. I think that is one model. I think as you go into other markets, the margin structure will be a more similar to the market that were in. So if you are in an enterprise application versus consumer, I think you might see higher margins and consumer will tend to be on the lower side. But all of them have in common that from a operating profit, accretion standpoint, they are very good for our business model.

Our business is really built on investing in the foundation of the engineering, so our IP investment is very much whether you are talking about CPUs or graphics or multimedia or SOC designing and methodology, they are built to be world class from the markets that we serve and then semi-custom really overlays on top of that for specific applications.

Chris Danely - JP Morgan

Great. Now, I’d like to open it up to the audience for Q&A. Yes?

Unidentified Analyst

To servers, the x86 and the ARM servers, what developments in the software infrastructure are critical or ARM servers have reached that 20% penetration rate in core (inaudible).

Chris Danely - JP Morgan

I just need to repeat the question. So, the question was on ARM servers and what software developments are needed to get to the 20% penetration rate, the next five years?

Lisa Su

Yes. So it's important for us to get clear operating system support, so for example from our standpoint, Linux is very important getting the support of vendors like Red Hat and so and so forth are very important. Tools and compilers, some of those will be built by us; some of those will be built by third parties.

Another very important part of the ARM ecosystem is that the nice part about ARM is that you can differentiate, but we want to keep the software ecosystem the same. And so ARM has put out some standard specifications that all of us in the ARM community should follow, so that when you design software to one, you can make it applicable.

So, operating systems, tools, compilers having a [loose consideration] of the ARM server players in terms of some of those standards with regard to software, I think those are going to be quite important.

Chris Danely - JP Morgan

Okay, in the back? Thanks for using the mic.

Unidentified Analyst

Yes. What are your uses of free cash flow, what are your free cash flow projections for 2014, and how do you guys look at your balance sheet, your leverage?

Lisa Su

Yes. So, maybe Ruth, would you like to give a get a little bit of color here?

Chris Danely - JP Morgan

Ruth, would you like to take that question? You can use the mic here. This is Ruth Cotter the Director of Investor Relations.

Ruth Cotter

Hi, thanks for your question. So, we are very focused on reducing our debt profile. Our debt today is about $2 billion. Our optimal cash balance, just to keep cash about $1 billion dollar. But we have a minimum threshold of about $600 million. We've consistently kept it at $1 billion for the last five quarters. In terms of free cash flow generation, it’s our expectation that we’ll continue to generate free cash flow this year and incremental dollars above the $1 billion threshold, we would like to prefer that towards debt reduction and in time and that we'll continue to focus on the balance between our core and growth businesses as we think about attributing those incremental dollars towards [desk]. And longer term, I think the focus is really on finding the right debt-to-capital ratio in the long-term.

Unidentified Analyst

Do you have a leverage target?

Ruth Cotter

We haven’t stated leverage target yet. We have a CFO who has been in place for about 12 months now. And the primary goal was to show stability in the balance sheet in terms of cash maintenance and debt maintenance. And we've just pushed out some of our debt -- our near-term debt. We have $500 million due coming up. So we’ve pushed that out. In terms of the near-term debt maturities, now we’ve pushed to three years, in three years time. And as I say, I think as you see the stability that meets our reference to the overall business model and sustainable profitability and we'll then look at how we start reducing that $2 billion goal.

Chris Danely - JP Morgan

Great. I think we have time for one more quickie.

Unidentified Analyst

Some big firms with their own data centers such as I guess Google and Facebook, Amazon there is talk about them wanting to do design their own server chips. Can you describe what type of functionality would they add for those ARM server chips and then who would be the logical partners for them to work with or can they design it themselves?

Lisa Su

Yes, so good question. I think there is a lot of conversation about how does the data center evolve, do we see more people do vertical integration where they design their chips as well as their own systems. My belief is that it’s the following: It’s very expensive to maintain your own chip design team. If you think about chip design and manufacturing, there are few companies who can do that in a fully integrated manner. Apple and Samsung are two of them in the consumer space. I don’t think you see so many in the enterprise space. So I think the likely spectrum is there will be customization. And I think from our standpoint, we think AMD is a great partner because of the IP that we bring to the table. The customization could be in the avenue of special IP or could be in the avenue of special software or could be a fully custom chip. And I think the more flexibility that we can offer the customer set, the better they can make a trade off in their business model.

So I think it will be a while before you see enterprise customers do fully custom chips on their own.

Chris Danely - JP Morgan

Great, that’s all we have time for. Thanks Lisa.

Lisa Su

Excellent. Thank you, Chris.

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