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Advanced Micro Devices (NASDAQ:AMD)

Q1 2011 Earnings Call

April 21, 2011 5:00 pm ET

Executives

Ruth Cotter - Director, Investor Relations

Richard Bergman - Senior Vice President and General Manager of Products Group

Thomas Seifert - Interim Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

James Covello - Goldman Sachs Group Inc.

David Wong - Wells Fargo Securities, LLC

Cody Acree - Williams Financial Group, Inc.

Glen Yeung - Citigroup Inc

Christopher Danely - JP Morgan Chase & Co

Stacy Rasgon - Sanford C. Bernstein & Co., Inc.

Ross Seymore - Deutsche Bank AG

JoAnne Feeney - Longbow Research LLC

Christopher Caso - Susquehanna Financial Group, LLLP

Vivek Arya - BofA Merrill Lynch

Ambrish Srivastava - BMO Capital Markets U.S.

Timothy Luke - Barclays Capital

John Pitzer - Crédit Suisse AG

Doug Freedman - Gleacher & Company, Inc.

Srini Pajjuri - CLSA Asia-Pacific Markets

Operator

Good afternoon. My name is Huey, and I'll be your conference operator for today. At this time, I would like to welcome everyone to AMD's First Quarter 2011 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, Huey, and welcome to AMD's first quarter earnings conference call. Participants on today's conference call are Thomas Seifert, our Chief Financial Officer and Interim CEO; and Rick Bergman, Senior Vice President and General Manager of AMD's Product Group. This is a live call and will be replayed via webcast on amd.com. 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 1522169. The telephone replay will be available for the next 10 days starting later this evening.

This is the first quarter AMD is accounting for GLOBALFOUNDRIES under the cost method, and AMD's ownership of GLOBALFOUNDRIES on a fully diluted basis decreased to approximately 12% as of the end of the first quarter. Reconciliation for all non-GAAP financial measures discussed today is included in the financial tables accompanying our earnings release available in the Investor Relations section of amd.com. Written executive commentary, which contains additional information regarding AMD's result is posted on AMD's website at quarterlyearnings.amd.com.

I would also like to highlight a few dates of interest for you. Thomas will present at the JPMorgan Global Technology, Media and Telecom Conference on the 17th of May in Boston. Our second quarter quiet time will begin at the close of business on Friday, June 17. And we will announce our second quarter earnings on Thursday, July 21.

Before we begin today's call, I'd like to caution everyone that we will be making forward-looking statements about management's expectations. Investors are cautioned that those statements are based on current beliefs, assumptions and expectations, speak only as of the current date and involve risks and uncertainties that could cause actual results to differ materially from our current expectation.

The semiconductor industry is generally volatile and market conditions are particularly difficult to forecast especially in light of the current state of the economy. We encourage you to review our filings with the SEC, where we discuss the risk factors that could cause actual results to differ materially from expectations. You'll find detailed discussions about such risk factors in our most recent SEC filing, AMD's annual report on Form 10-K for the quarter ended December 25, 2010.

With that, I'd like to hand the call over to Thomas.

Thomas Seifert

Thank you, Ruth. AMD's performance in the first quarter of 2011 were solid. We launched the first of our revolutionary AMD Fusion APU platforms based on our low-power Brazos processors, and we're pleased to report excellent OEM adoption and sell through to end users. In the first full quarter of availability, roughly half of our notebook shipments were based on Brazos, a product rapidly gaining credit for redefining the user experience in both the Netbook and Thin & Light notebook segment.

We also began shipping Llano for revenue on the first quarter, and it is very simply, the most impressive processor in history, featuring a modern graphics architecture. Llano gives mainstream PC users something they've never had before, a brilliant digital experience coupled with AllDay battery life. It delivers a better end-user experience than anything else on the market and our customers have told us that.

You should expect to see Llano-based systems widely available in this quarter. Beyond its unique performance characteristics, Fusion is also a key part of our overall profitability strategy. We delivered on our top line guidance. We were right on target with our non-GAAP gross margin guidance at 45% and we managed operating expenses carefully. As a result, we delivered solid free cash flow in the period.

In the commercial market, improving performance in our Embedded and Professional Graphics segments was masked by continued softness in our overall Server business. While disappointed with our top line trajectory in the Server business, we've taken a number of steps that we believe should lead to improved results in the second half of the year.

First, we have on-boarded a larger team of experienced customer account engineers who are now engaged with customers. In addition, we are working more closely with our OEMs and ODMs to drive the new AMD-based systems into the hands of key cloud virtualization customers. And finally, we continued on track to ship Bulldozer-based server platforms towards the end of the summer. Our new Bulldozer core delivers substantial improvements in floating-point performance in a platform featuring superior memory utilization and I/O throughput.

In Graphics, we continued to advance our leadership in a number of important ways. First, we launched the HD 6990, truly the world's fastest graphic card. Second, we set an all-time record for mobile discrete revenue. And third, we are now the exclusive provider of discrete graphics solutions for Apple's iMac and MacBook Pro platforms. In short, we believe that we continue to gain market share in the mobile GPUs in the quarter. Our continued leadership in discrete graphics and our exciting new Fusion APUs prove the world's best PCs have AMD Radeon graphics on board.

Turning to our first quarter financial summary. First quarter revenue was $1.61 billion, a 2% sequential decline and within the guided range for the quarter. Non-GAAP net income was $56 million or $0.08 per share calculated using 740 million fully diluted shares. Among other adjustments, it excludes a noncash gain of $492 million related to the dilution of our equity interest in GLOBALFOUNDRIES.

Non-GAAP operating income was $92 million. Non-GAAP gross margin was 45% and flat quarter-over-quarter. Lower than anticipated 32-nanometer manufacturing costs and the ramp of margin-accretive APUs offset the negative impact of seasonally lower game console revenues, lower ASPs and the weaker product mix in legacy microprocessor products. Operating expenses for the quarter came in below the guided range of approximately $650 million due to tight expense management. R&D was $360 million and SG&A was $261 million. Adjusted EBITDA was $198 million, down $43 million from the prior quarter.

Now switching to the business segments. Computing Solutions segment revenue was $1.2 billion, down 2% compared to the fourth quarter of 2010. We are excited about our APU platforms, which are gaining traction in the market. We tripled unit shipments over the prior quarter. In addition, we started shipping Llano, our high-end APU late in the first quarter. Computing Solutions operating income was a $100 million, up $9 million from the previous quarter primarily due to improved gross margins from a higher mix of APU sales compared to the prior quarter.

Graphic segment revenue was $430 million, down 3% compared to the fourth quarter of 2010, primarily due to a seasonally driven decline in game console revenue. Graphic segment operating income was $19 million, down $49 million from the fourth quarter of 2010 primarily due to seasonally lower game console revenue.

Turning to the balance sheet. Our cash, cash equivalents and marketable securities balance at the end of the quarter was $1.75 billion. Accounts receivable at the end of the quarter was $797 million, down $171 million, primarily due to the timing of sales during the quarter.

Inventory was $648 million exiting the quarter, and long-term debt as of the end of the quarter was $2.2 billion. Non-GAAP adjusted free cash flow was $154 million, up $143 million from the fourth quarter of 2010 due to higher non-GAAP net cash provided by operating activities.

Turning to the outlook. The following statements concerning AMD are forward-looking and actual results could differ materially from current expectations. For the second quarter of 2011, AMD expects second quarter revenue to be flat to slightly down sequentially. Operating expenses are expected to be $620 million.

As mentioned in the last call, our priorities remain clear. I said, we would stay the course of execution and we continue to do so, bolstering our discrete graphic leadership, tripling unit shipments of our first APU Brazos and shipping Llano for revenue in the quarter. I said we would increase our pace, and in addition to meeting or exceeding all of our major engineering commitment, we've launched a number of key cross-functional initiatives designed to improve productivity and scalability, optimize our go-to-market activities, improve R&D productivity and generate greater supply-chain efficiencies.

To close, we know we have the best IP portfolio in the Processor business, and with our new Fusion APUs and Bulldozer on the way, with our strongest product portfolio in the company's history and we have a business model tuned for agility and profitability. I would like to thank our employees for their continued dedication, creativity and commitment to delivering on our commitment.

Before we turn it back to Ruth for the Q&A, I would like to make a brief comment on the state of the CEO search at AMD. The Board is very happy with the interest we have received and is actively interviewing candidates. And we are pleased with our progress to date. Ruth?

Ruth Cotter

Huey, we'd be very happy for you to poll the audience for questions now, please?

Question-and-Answer Session

Operator

[Operator Instructions] Our first questioner in queue is JoAnne Feeney with Longbow Research.

JoAnne Feeney - Longbow Research LLC

I have a question about your interpretation of the aggregate situation in light of the results of your competitor. Did it cause you to change your assessment of sort of the global PC environment? Do the results sort of match your views? Is this truly a timing issue between you and Intel? Or perhaps, you can give us a sense of your visibility to the second half, given what we're hearing regarding the global PC situation.

Thomas Seifert

Yes, very good questions. I think, I said in the last couple of calls that our expectation is around 11% for PC growth for this year. And to be very honest, at this point in time, we don't see a reason to deviate very much from that opinion. And actually, data is moving more towards the feel we had on the market for some time now. You can discuss, whether it's now 10.5% or 10.7% or 11%, but we don't see any reason to deviate from that expectation for this year.

JoAnne Feeney - Longbow Research LLC

Okay. And then perhaps, as a follow-up, on Llano, where we understand the volume is coming in the third quarter, one question that comes up a lot is how compelling to the consumer will your advantage in graphics be? And I'm just wondering if you can fill us in on your efforts with the OEMs and other resellers to help them understand the difference in graphics and whether they are able to translate that to customers in your view?

Thomas Seifert

Yes. Rick, do you want to take that question?

Richard Bergman

Sure. So just to be clear, the volume is actually coming in Q2. So certainly, we expect to ramp the production in that platforms launched on Llano. I think the best answer to your question is the success we've seen with our Brazos platform. It was just fantastic success in Q1, and our OEMs are now really onboard with bringing even a better, more-compelling, higher-performance solution with Llano. And to a certain degree, we hear the reception around, that great visual graphics video experience even from our competitor, and how important that is in the marketplace. So we think we're right on target with our value proposition.

JoAnne Feeney - Longbow Research LLC

Great. Thanks. And maybe to elaborate on Brazos, where are you seeing the greatest success? Is it Tier 1 players? Is it white box? Is it mostly notebook, or are there some desktop activities?

Thomas Seifert

To be very honest, what excites us the most is that we see the success across the board. We have seen very strong OEM adoption across the whole customer portfolio. We've seen great traction in the Embedded segment and also in emerging markets and the white box arena.

JoAnne Feeney - Longbow Research LLC

Okay. Great. That's it for me.

Operator

Our next questioner in queue is Glen Yeung with Citi.

Glen Yeung - Citigroup Inc

Thomas, I think, I heard you say that half of your notebook shipments in the quarter were Brazos. So I guess, the first point is, is that accurate? But if it is then, when we think about second quarter, what proportion of your notebooks sales, do you think, will be a combination of Brazos and Llano? And what are the implications of that for gross margin and ASP?

Thomas Seifert

Yes, very your good question. So you heard right, 50% was the share we had in the first quarter. I think the implication for gross margin in the second quarter are that gross margin is going to be up quarter-over-quarter. And we will see a balanced impact on ASP performance because, as you know, while highly margin-accretive, Brazos ships at a lower price point, and we have to see how the mix is going to balance itself out flat as today, a very good assumption, but with gross margins moving upwards.

Glen Yeung - Citigroup Inc

Interesting. That's great. And then I want to ask another question, which is, you sort of talked about some progress you're making or some growth you saw in emerging markets. I wonder if you can address what you're seeing in the corporate market just from an industry perspective, and then perhaps more importantly, how you feel AMD is doing in the corporate market and whether or not these new products, you think, will help your chances?

Richard Bergman

This is Rick again. Obviously, we have much greater success in the consumer market and to a certain degree, our focus. However, the value proposition on Llano is strong as an example in the corporate market as well. Now certainly, video playback, video conferencing, all those factors are becoming more and more important in the corporate environment. In addition, of course, as we're seeing, consumer devices and notebooks and desktops and so on are increasingly being also used in the commercial marketplace. Certainly in SMB but even in enterprise. Now they are adopting those consumer platforms.

Glen Yeung - Citigroup Inc

Actually, one last quick one, if I might. Just with respect to Bulldozer, I know, you guys have deployed some field application engineers into the market. And I'm wondering if you can give me a sense of what the initial response has been as you sort of prep the market for Bulldozer?

Thomas Seifert

So the first feedback is very positive and welcoming. People appreciate, of course, that we have significantly higher visibility in the marketplace, not only in terms of feet on the street, but also in terms of trying to get the lion's share. The product is exciting on a platform level, as I said before, the value proposition is exciting, especially for cloud and virtualization applications. And that allows us to be optimistic for the second half.

Operator

Our next questioner in queue is John Pitzer with Credit Suisse.

John Pitzer - Crédit Suisse AG

Tom, can you talk a little bit about what the ASP trends were in the quarter in the core client business? And I guess, given that the server continues to be an area of weakness, I wonder if you can help you understand the relative size of servers in the revenue line and the profit line, and what you think the trend will look like going into the second quarter? And I guess, more importantly, at what point will Bulldozer start to be a positive impact? Is it really a this-year event or do we have to start thinking about 2012?

Thomas Seifert

Yes. So I'm not going to get more granular in terms of the revenue lines. But I think it's fair to say that we pretty much -- I think, we stabilized market share in the first quarter on the Server segment. And we will see Bulldozer impact in terms of revenue in the second half as early. We said we would start to ship product in the summer, and that means that we see revenue in the third and, of course, in the fourth quarter.

John Pitzer - Crédit Suisse AG

And then I guess, Thomas, as my follow-up, on the Graphic side, you guys have done a great job on the market-share side over the last several quarters. How do you see that trending going forward? And I guess, with kind of the APU coming out, is there any change in your view of sort of discreet attach rates on the client side?

Thomas Seifert

Yes, very good. So, of course, we are really proud that we are able to keep this technology lead. Moving forward, we have climbed to a high level on the market share side. The focus is now to make sure that profitability moves in the right corner too -- I think, that is going to be the focus moving forward. For this year, we expect attach rates not to change. Early, there was indications that in the first quarter it might have even gone up, which is also partly reflected in our strong mobile GPU shipments. Moving forward, we'll see that at least at the low end of the graphics pack level, there will be some replacement because especially in our side, the APU performance is really compelling. But for this year, attach rate seemed to be holding up or maybe even ticking up slightly.

Richard Bergman

And just to elaborate a little more on that, obviously, our Llano processors have truly discrete level graphics performance. So in some cases, the market just won't need to add an additional GPU. But on other platforms out there, certainly, if you're buying a $600, $700 notebook, you want the latest and greatest GPU architecture, which today, is defined by DX11 solutions. And so in that case, you're going to have to add discrete graphics. And that's actually pulling up the attach rate on the other platforms. So for the summer 2011, we see it as basically seeing the same.

John Pitzer - Crédit Suisse AG

Great. Thanks, guys.

Operator

Our next questioner in queue is Tim Luke with Barclays.

Timothy Luke - Barclays Capital

Just to clarify, Thomas, when you suggest down, flat to down slightly, is that about 1 or 2 percentage points? Is that how we should think about it? And when you articulate that you believed that the gross margin will be improved in the calendar second quarter, is that sort of 100 basis points? Is that how we should think about that? And just how'd you get it -- to tackle that to you?

Thomas Seifert

Yes, a good question. So at the box [ph], we would draw around a flat to slightly down, 0% to minus 5%-ish, probably. It's the right range. And I think, you're very much on target with your gross margin expectation. We think it's going to be up around 100 basis points.

Timothy Luke - Barclays Capital

Thank you. And then just on the ramp of Llano, can you give us a feel for the availability of product, and really, what's sort of metrics we might be able to sort of frame in terms of thinking about how that ramp is likely to progress now?

Thomas Seifert

So we achieved -- we made great progress, which allowed us to ship for revenue. We think we have ample product available in the second quarter. On the other side, we saw on Brazos that once the product was out and available on-shelf, demand really went up significantly, and we'll try to prepare for such a situation.

Richard Bergman

And again, our key for Llano is to hit the critical cycle in the industry, which is the 2C [ph] or the back-to-school cycle. So we have broad-based OEM platform adoption for that timeframe, and we're well-positioned to take advantage of that cycle.

Operator

Our next questioner in queue is Srini Pajjuri with CLSA Securities.

Srini Pajjuri - CLSA Asia-Pacific Markets

Thomas, just one more clarification to the previous question. On the OpEx, you said it's going to be about $620 million. Just wondering if that's going to be a temporary decline or if that's the range that you expect going forward.

Thomas Seifert

So we obviously, work hard to keep our OpEx under tight control. In the second quarter, we see some -- a couple of 28-nanometer tape-outs hitting R&D costs. But the $620 million at this point in time seems to be a good indication on the cost level, moving forward.

Srini Pajjuri - CLSA Asia-Pacific Markets

Okay, great. And then a couple questions on the ASP front. Obviously, Brazos looks like it impacted the ASPs. I mean, should we expect ASPs to increase in the next few quarters as Llano ramps? Or is that a function of the Server business coming back at this point?

Thomas Seifert

Fair question. So I think for the second quarter, it's fair to expect that -- or at least, we expect that the both ramps equal each other out, so to speak. And the second and the third and fourth quarter then, ASP performance should go up, higher share of Llano shipments and then the additional impact of the server shipments.

Srini Pajjuri - CLSA Asia-Pacific Markets

Okay. And then on the Server business, in general, Thomas, at this market share, I think, you have about 5% or 6% market share. Are you profitable? Are you profitable, that's my first question. And then if not, what sort of market share you need to justify the investments longer term?

Thomas Seifert

It's a fair question. So we are sitting today at 6.6% market share, profitability at such a point is borderline. But we feel comfortable that the market share lift we need in order to reach profitability in the segment is actually very small.

Srini Pajjuri - CLSA Asia-Pacific Markets

And is it double-digit, single digit, or would you like to give us a bit more color on that?

Thomas Seifert

It's very close.

Srini Pajjuri - CLSA Asia-Pacific Markets

Okay, great. Thank you.

Operator

Our next questioner in queue is David Wong with Wells Fargo.

David Wong - Wells Fargo Securities, LLC

Can you tell us what proportion of Brazos sales in the March quarter one Ontario versus Zacate. And it doesn't look like Ontario is being used primarily in netbooks, while Zacate goes into value notebooks.

Richard Bergman

I don't know if we have an exact split on the two parts. Good adoption on both. We are seeing Ontario, it's a very exciting Thin & Light form factors, but adoption in a whole variety of different platforms from netbooks up into desktops.

David Wong - Wells Fargo Securities, LLC

Okay, great. And when you expect to bring Bulldozer platforms out at the end of the summer, do desktop and server platforms come out at about the same time? Or does server come out later than desktop?

Richard Bergman

So in the last call, we indicated early summer for desktops and late summer for servers. And that's still where we're at.

David Wong - Wells Fargo Securities, LLC

Great. Thanks very much.

Operator

Our next questioner in queue is Jim Covello with Goldman Sachs.

James Covello - Goldman Sachs Group Inc.

Could you guys just go by segment, desktop, notebook, server, and talk about what your share expectations are for the year?

Thomas Seifert

Well, as you know, we don't give market share guidance for the year. And I'm certainly not going to start here now. I think, we always said at our Analyst Day, we expect our desktop market share to stay about flat slight gains. Long term, we don't -- there's no reason why our notebook market share should be materially different from our desktop share. And from where we are today on the server-side and with the optimism we have on the Bulldozer platform, I think, it's fair to say that we expect market share gains in the second half.

James Covello - Goldman Sachs Group Inc.

And so if I look at -- so the issue is from where you are today, because if we look at the full year, it will be tough, just because Intel -- of Intel shipments growth and ASP growth in the first quarter versus yours. But from here is where you would expect to gain the share, kind of mark-to-market for the end of Q1. Is that the idea?

Thomas Seifert

I think that's fair.

James Covello - Goldman Sachs Group Inc.

Okay. And then can I just -- on the foundry side, obviously, there's been a lot of discussion. Obviously, you're aligned well with several foundry partners. Can you give us a little bit of an update on who you think you're going to use for what going forward and what the different parameters are there?

Thomas Seifert

Yes. So I think we were quite open on our last call, so our foundry strategy has not changed. We are pleased with the progress we see. As I said, we expect several 28-nanometer tape-outs during the current quarter. And we balance our loading according to risk performance and price. But we also said that there is, of course, a natural incentive for us at this point to work closely with GLOBALFOUNDRY, and that is, of course, something we continue to do.

James Covello - Goldman Sachs Group Inc.

Thanks very much.

Operator

Our next questioner in queue is Ross Seymore with Deutsche Bank.

Ross Seymore - Deutsche Bank AG

Thomas, could you talk a little bit about in your Computing Solutions group, the difference between what happened in MPUs and chipsets? You've done a great job of gaining share in chipsets. I just wonder if that's continued in the first quarter?

Thomas Seifert

Our Chipset business in the first quarter was -- we are pleased with the performance we had. Let's put it this way.

Ross Seymore - Deutsche Bank AG

How do they compare versus the Computing Solutions group as a whole, better or worse?

Thomas Seifert

Better.

Ross Seymore - Deutsche Bank AG

Okay. And then the gross margin, when you talk about that going up roughly 100 basis points sequentially, is there anything driving that other than the positive mix of more APUs?

Thomas Seifert

At this point in time, it's very much mix driven. The cost impact is there but slightly, in the current quarter.

Ross Seymore - Deutsche Bank AG

Got you. And then my last question, you had an extra week in the first quarter. Any impact either in what happened in the first quarter or your guidance into the second quarter that we should think about? And more so, how your guidance would be different if you weren't losing that week?

Thomas Seifert

No. To be very honest, the additional week was part of the guidance for the first quarter, and we took that into account. And the guidance for the current quarter takes into account that it's one week less.

Ross Seymore - Deutsche Bank AG

So absent that, you would actually have grown nicely in your guidance in the second quarter?

Thomas Seifert

Yes, I think that's fair to say.

Ross Seymore - Deutsche Bank AG

Okay, great. Thank you.

Operator

Our next questioner is Vivek Arya with Bank of America.

Vivek Arya - BofA Merrill Lynch

Thomas, I just wanted to revisit this PC unit growth expectation for the year. I think, you mentioned the 11% unit growth reasonable for the year. Could you perhaps, give us some more color on where you are seeing the positive sell through? Is it consumer? Is it corporate? Is it developed market? Is it emerging market?

Thomas Seifert

Yes. I think our opinion here doesn't end the visibility we have, does not differ materially from what you hear from others. North America and Western Europe was weak, and we don't expect that to change materially. We saw strong demand in emerging countries all over that spectrum, China, India, especially Latin America for us. We've been putting resources into those regions. I think we mentioned that of several calls in the past that we ramp up our infrastructure in emerging markets. And of course, our exposure to this Consumer segment is significantly higher than to the commercial sector. We have been seeing that the products and the price points we hit, especially with Brazos are right on the spot of what those market segments demand. And yes, that's pretty much it. Very strong channel business.

Vivek Arya - BofA Merrill Lynch

Got it. And as a follow-up, Intel recently raised their CapEx, and they're planning to be very aggressive at the next generation 22-nanometer and 14-nanometer nodes. How do you look at that, Thomas? From a competitive point of view, what are the implications on AMD? What do you need to do to respond to that, if anything?

Thomas Seifert

Well, the good thing is we don't have to invest. So from my CFO perspective, I think, that it is very positive. No, joke aside, you saw that our partners, GLOBALFOUNDRY and TSMC, spend an aggregate amount of money that I think even outperforms the Intel investment. I think it's $8 million on both sides, so $8 million and $7 million. Don't quote me here, but significant amount of money. And of course, we work with our partners in terms of the technology we need to be competitive. But I think, we have also reached the point, competitiveness in this market segment as defined by more than just the technology roadmap. We just have seen that on Brazos. And I think moving forward, we see a lot of more levers that help us to differentiate ourselves and bring highly competitive products into the market, but just take into account, the business model we have and the skills that we have, the IP we have and especially the agility that this business model offers us.

Vivek Arya - BofA Merrill Lynch

Got it. And just one last question, if I may. I think in the past, you have given long-term targets of getting to 50% gross margin, perhaps, better than that. What about the APU gives you better margins? What are really, the main drivers from here on to get to that kind of target?

Thomas Seifert

Yes. So we said that this pretty much comes from different levers for the low end of our APU strategies, the Brazos product that we're shipping currently that are still hugely successful. For those products, it's much more a cost optimization. They're highly gross margin accretive because of good design and chip size efficiencies. On the APUs, or the spectrum that is covered by the Llano products, that is a much more a margin-accretive gain through price performance and price points at which we can play now.

Vivek Arya - BofA Merrill Lynch

Thanks, and good luck.

Operator

Our next questioner in queue is Christopher Danely with JPMorgan.

Christopher Danely - JP Morgan Chase & Co

So we asked your main competitor, might as well ask you, it seems as though the commentaries flash on the business from you guys that Intel differs somewhat, with some other companies in the PC food chain, as far as some of the OEMs and the drive companies go. How would you guys explain that discrepancy?

Thomas Seifert

I don't think our -- in that case, our arguments are so much different from our competitor. As I said before, we have seen strong demand patterns out of the emerging markets. We're seeing good demand out of the Channel business, and I think, we saw some uncertainty in some market research that came out early. I think, those numbers will be corrected as we move forward. We saw early numbers from Mercury Research that are going to be published soon that also would support that trend that we have been seeing and move more as the numbers in the directions that we have been talking about now for four quarter.

Christopher Danely - JP Morgan Chase & Co

Great. Thanks. And then on gross margin, you talked about your expectations for Q2. Could you may be give us your thoughts on gross margins in the second half of the year and what would be the drivers either way there?

Thomas Seifert

So I'm not going to give more granular guidance on gross margins than what we gave for the overall year. But of course, we are looking forward to see a higher mix of Llano-based products in the second half. And of course, we're looking forward, to see stronger shipments into the Server segment and getting our Bulldozer-based product into the market. And this would have substantial impact on gross-margin development in the second half.

Christopher Danely - JP Morgan Chase & Co

Sure. And can you guys give us your take on sort of the tablet market or any kind of tablet strategy that AMD has? Or will you wait until the new CEO comes?

Thomas Seifert

No, we cannot support because of that and I hope you saw that we work hard delivering on our promises. And that's an exciting form factor for us, and I think we have a lot of IP, and that is going to play nicely in this field. We are working with multiple OEMs on platforms. And once we are at a good spot to talk about it, we will become more specific on the products and the wins we have.

Christopher Danely - JP Morgan Chase & Co

Sure. And the last question, you gave us an update on the CEO search. Any rough estimate on the timing of that?

Thomas Seifert

Well, it's in the hand of the Board, so the management -- it's under management topic. But I think, Bruce, our Chairman was explicit that finding the right candidate is important, more important than hitting a specific time window. And they are happy with the progress they have been making and they're actively interviewing.

Christopher Danely - JP Morgan Chase & Co

Great. Thanks.

Operator

Our next questioner in queue is Chris Caso with Susquehanna Group.

Christopher Caso - Susquehanna Financial Group, LLLP

I wonder if I could ask a bit about the Graphics business going forward and specifically, your market share assumptions there. One of your competitor in that space has made some claims that they're attempting to gain some share, specifically in the notebook space this year. I'm wondering if you could talk about your assumptions?

Richard Bergman

Certainly. As we mentioned in the first quarter, based in our shipments, it appears, actually, that we gained some share. We'll see here at the end of the month, when Mercury Research numbers come out. You also heard that we picked up the Apple business as well, which we're thrilled about. And of course, in light of their success in the marketplace, that's a big boost for our business as well. And we'll see how it plays out. We feel like we can win in the notebook section in a very interesting way, both with our APUs, which is going to bring an entirely different kind of value into this platforms, as well as our GPUs. And in some platforms, they actually play together, where we can actually use dual graphics. So we feel real good about our position in the overall graphics market.

Christopher Caso - Susquehanna Financial Group, LLLP

Okay. And if I follow on with a question on servers, and understanding that you're talking about late summer for Bulldozer. But obviously, customers move more slowly in that segment. What's the timeframe when we could expect to see some, I guess, some more meaningful share moves or volume moving in that segment, given the amount of time customers need to qualify the product and update their own platforms?

Thomas Seifert

Yes, so we -- of course, we don't start working with the customers in the summer. We've been engaged with the customers now over significant period of time, even on the new product. I said before that we expect significant shipments in the second half, third and especially fourth quarter. And while your statement in general is right, there are specific applications, where the design end time and lead time is shorter, for example, in the Cloud segment.

Christopher Caso - Susquehanna Financial Group, LLLP

Okay. Thank you.

Operator

Our next questioner in queue is Ambrish Srivastava with BMO.

Ambrish Srivastava - BMO Capital Markets U.S.

Just a couple of quick ones. Thomas, what is the -- and I didn't catch it if you did give it, I do apologize, the expectation for graphics, units and ASPs in the second quarter? And then the second question on the quick side is what should we expect for the APU percent mix as we head into the back half of the year? And lastly, on the server side. Is it a matter of just your share is so low that it's going to go up? Or architecturally, can you help us understand what your offering will have an advantage over Intel's?

Thomas Seifert

Do you want to start with server?

Richard Bergman

Sure. I will start with the back half here on the server question. So one important point to keep in mind is we have a two-year cadence on our platform, where the processor can be used in the same platforms as the prior year. So as we move into the Bulldozer-based solutions, they're going to leverage that platform capability. So that allows us a shorter time-to-market, as well as a broader platform availability right out of the gate. And then some of the key advantages that we have with Bulldozer certainly are our floating point, our memory bandwidth. And then obviously, performance-per-watt, performance-per-dollar is very compelling with these products. And we've been sampling for multiple months now with Orochi, or the Bulldozer-based products and the reception is fantastic. And on the former part about graphics, do want me to take that? Okay, on the graphics portion, we're not going to give you anything -- exact guidance on the units, but on the ASPs, roughly flat. No big change in our product line going forward there.

Ambrish Srivastava - BMO Capital Markets U.S.

I'm sorry, the Graphics business is expected to be flat in the second quarter?

Thomas Seifert

In terms of -- so with ASP, yes.

Ambrish Srivastava - BMO Capital Markets U.S.

Okay. And then what about the third question I had on the APU as a percent of total mix that ended the year?

Thomas Seifert

I'm not sure I want to give guidance to that granularity.

Ambrish Srivastava - BMO Capital Markets U.S.

Okay, fair enough. Thanks, guys.

Operator

Our next questioner in queue is Stacy Rasgon with Sanford Bernstein.

Stacy Rasgon - Sanford C. Bernstein & Co., Inc.

I just want to revisit the PC unit growth outlook just briefly again. So I know you said, there may have been some issues potentially with the market data, but if you just take it as it is -- and I'm just trying to figure out what's wrong with the data? Is the data just like massively negative versus reality? Or are you anticipating a hugely above-seasonal Q2? I mean, it kind of would take that sort of a profile through the year to get anywhere near double-digit PC shipments could be. I'm just trying to get a better feeling for where you think the discrepancies in the data are and what do you think kind of Q2 seasonality for PC shipments to actually be in order to get the kind of unit guidance that you're talking about?

Thomas Seifert

Yes, I mean, the guidance we gave for the second quarter is still as consistent with where we think the market is going to go for the year. And our own model has been rather stable around this value now for a significant period of time. I think that a significant discussion came out about what really was expected for PC shipments to happen in the first quarter. And part of that negative sentiment came from an expectation that year-over-year, the first quarter will be negative. And I think the numbers that we start to see now are not reflecting a negative growth year-over-year in the first quarter.

Stacy Rasgon - Sanford C. Bernstein & Co., Inc.

So sequentially though, in the first quarter, that data showed it down 10 to 13. So you're saying it was actually maybe down five sequentially? Or was it flat? I mean, literally, the way it is, you need to have PC growth up 10% in Q2 from the numbers in Q1 to get anywhere near, even close to a double-digit growth. I'm just trying to get a better feeling for where the discrepancies are, because it's just either the bigness...

Thomas Seifert

Parts of the numbers I have in my head now are year-over-year. So let's just see how we align that. And I think the negative expectation was that it would be down by minus 3%, minus 4% year-over-year on the first quarter. We've seen now research that will, I think, come out more in the next days that now will change that into a probably up 7% range. Our own expectations, I think, are somewhere in the middle between plus 3% to 4% of shipment growth in the first quarter. And I think that is, if you put that on a line, and keep our guidance of Q2 in mind, that is a consistent statement.

Stacy Rasgon - Sanford C. Bernstein & Co., Inc.

So you're saying that you think the market data shows a 10 percentage point discrepancy in the year-over-year PC unit growth versus the data that was published, up 7 versus down 3?

Thomas Seifert

That is what the indication is currently, yes.

Stacy Rasgon - Sanford C. Bernstein & Co., Inc.

Wow, okay. For my follow-up, quick question for you. In terms of the Wafer Purchase Agreement [ph] range for this year, $1.1 billion to $1.5 billion, can you give me some feeling what drives the variance in that? Is it that just strictly a demand-driven thing? Is that a cost-driven variance? What is actually driving that $400 million range for this year?

Thomas Seifert

It’s a demand-driven statement primarily, and maybe some incentives-driven adjustments to that.

Stacy Rasgon - Sanford C. Bernstein & Co., Inc.

Can you elaborate on that, incentive-driven? It's up [indiscernible] 2012?

Thomas Seifert

Yes, we said on the call, when we went through our WSA agreement that we have some arrangements in place that incentivize GLOBALFOUNDRIES to outperform current plans and targets. And of course, we will benefit in more volume or better yield.

Stacy Rasgon - Sanford C. Bernstein & Co., Inc.

I thought that came on in 2012. I thought that was the $400 million between the $1.5 billion and $1.9 billion as for '12.

Thomas Seifert

Yes, but there are also some light parts and some flexibility in the first year. But primarily, it's a demand statement.

Stacy Rasgon - Sanford C. Bernstein & Co., Inc.

Got it. And I guess, one last question for you. In terms of that wafer supply, my understanding is you give them a fixed wafer forecast. And you're on a dye by this, you go to a cost plus in 2012 [ph]. What that means is if the yields are badder or bad in 2012, you get fewer good dyes, but you don't make the fixed payment. If yields are really good, the same way, because you get more good dyes, so your dye cost goes down. But you make for fixed payments. So it's sort of a buffer to you. You don't benefit from yield upside, I mean, 2012 versus the way you would in 2011. I'm just trying to figure out -- so that sort of implies if yields are very good, you get a lot more good, you have to be able to sell all the good dyes that you actually receive. Are you sort of baking any kind of -- what sort of, I guess, cautions or anything else in your wafer forecasts are you giving them to make sure that no matter what the yield situation at GLOBALFOUNDRIES is in 2012, you'll be able to actually sell everything that you get?

Thomas Seifert

Yes, I think this sounds more complicated now than it really is. I think, in 2012 we move more towards a normal foundry relationship. We also have the forecast wafer and product demand with TSMC, right? I mean, that is not significantly different. And also, in normal foundry relationships, you have situation especially when you ramp up new technologies and new products that you start with a dye buy, a dye-based purchasing agreement and convert to a wafer-based agreement once the yield is up or the product has matured. So there's nothing that dramatic different from what we do with GLOBALFOUNDRIES. We've extended the period of the dye buy for this year to protect, when we originally started, as I said, to protect our downside with the progress they have been making, it's really a more downside protection at this point in time. We are not worried at this point in time by overforecasting demand. I think, we have a degree of sophistication with which we handle such processes that -- and have learned to handle such processes is well established within the company.

Stacy Rasgon - Sanford C. Bernstein & Co., Inc.

Got it. That's helpful. Thank you, guys. Appreciate it.

Operator

Our next questioner in queue is Doug Freedman with Gleacher & Company.

Doug Freedman - Gleacher & Company, Inc.

Thomas, if I could ask, you have a little bit of a conversation with yourself since you're wearing two hats of the CEO and CFO. How do we think about you setting the goals for the company financially here? We're running into -- this is sort of the first quarter year-on-year where we didn't get earnings growth, and it's largely because of growth in OpEx. Can you discuss with us what actions you would take on the OpEx side to return to sort of a year-on-year earnings growth type of scenario? Or how many quarters, how long do we need to search for that revenue growth, and how we should think about you trying to make some of those challenging decisions?

Thomas Seifert

Yes, they are quite straightforward to be very honest, and you saw some of these accelerating in the first quarter. And we provided a guidance of $650 million, and we've been really tough on ourselves and on how we manage operating expenses. This allowed us to come significantly under the guidance we originally gave. I mentioned that we have a significant amount of cross-functional activities started in the company across our core processes to redesign them for scalability, but especially also for productivity across R&D, across sales and marketing and also supply chain, and we expect significant productivity levers out of those initiatives. And I think, you also see it already partly reflected in the guidance we gave for Q2. I said it's going to be around $620 million for operating expenses in total, but it includes, as I said, the first couple of 28-nanometer tape-outs already. So we will be tough on operating expenses. And I think, the discipline that we try instill in the company is something we will keep our grip on.

Doug Freedman - Gleacher & Company, Inc.

So I guess, another way for me to think about this, is it possible for you to have revenue growth in excess of your operating spending growth this year? Or is this a year that we need to think about you're investing a little faster than the revenue growth?

Thomas Seifert

I would very much expect that our revenue outgrows our operating expenses.

Doug Freedman - Gleacher & Company, Inc.

Great. Thank you.

Operator

And our final questioner for today will be Cody Acree with Williams Financial.

Cody Acree - Williams Financial Group, Inc.

Going back to an earlier question about kind of your comparison of order rates versus what Intel had seen. Intel definitely got some atypical seasonality heading into their product launch. A big burn in the channel and then a big restocking. What are you seeing as far as typical seasonality of order patterns ahead of both Brazos and Llano?

Thomas Seifert

Even if there's a point to, I cannot give you a much different argument to be very honest. We feel very strong channel demand, partly driven by the products that we started to ramp, also in part, restocking and of Q4 burn down. The visibility we have into their inventories does not indicate any alarming things. Inventory seem to be lean and in line with what you expect for the business at this time in the cycle. And we had a couple of emerging markets where our products or our platform-based products were sold out on the shelf. So not much more to add to that.

Cody Acree - Williams Financial Group, Inc.

Well, yes. Did you see a material burn that now is -- that had a benefit of a replacement in the first quarter for Brazos? And do you expect in the June quarter, maybe June and into September, a similar restocking benefit with Llano?

Thomas Seifert

We are optimistic about our Llano launch.

Cody Acree - Williams Financial Group, Inc.

Great. Thanks, guys. And one last thing here, gross-margin trends into the second half is you get the mix of Llano coming in and then Brazos -- or excuse me, Bulldozer uptake in there, what kind of trends could we expect to see from the mix shift?

Thomas Seifert

You see, I'm not going to get more granular. We gave guidance for the complete year. And with those trends, I think we move generally to the high end of the gross-margin guidance we gave in the second half.

Cody Acree - Williams Financial Group, Inc.

All right. Great. Thanks, guys.

Operator

Thank you. That concludes our time for questions and answers. And this also concludes today's program. Attendees, thank you for your participation, and have a wonderful day. You may now all disconnect.

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