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Executives

Rory P. Read - Chief Executive Officer, President and Director

Thomas Seifert - Chief Financial officer, Principal Accounting officer and Senior Vice President

Ruth Cotter - Director

Analysts

Cody G. Acree - Williams Financial Group, Inc., Research Division

John Pitzer - Crédit Suisse AG, Research Division

Glen Yeung - Citigroup Inc, Research Division

David M. Wong - Wells Fargo Securities, LLC, Research Division

Uche X. Orji - UBS Investment Bank, Research Division

Ross Seymore - Deutsche Bank AG, Research Division

JoAnne Feeney - Longbow Research LLC

Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division

Advanced Micro Devices (AMD) Q3 2011 Earnings Call October 27, 2011 5:00 PM ET

Operator

Good afternoon. My name is Huey, and I will be your conference operator for today. At this time, I would like to welcome everyone to AMD's Third Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today. 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 Third Quarter Earnings Conference Call. By now, you should have had the opportunity to review a copy of our earnings release and CFO commentary. If you have not reviewed these documents, they can be found on AMD's website at quarterlyearnings.amd.com. Participants on today's conference call are Rory Read, our President and Chief Executive Officer; and Thomas Seifert, our Senior Vice President and Chief Financial Officer.

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 1554016. The telephone replay will be available for the next 10 days starting later this evening.

I'd like to take this opportunity to highlight a few dates for you. Thomas Seifert will present at the Barclays Global Technology Conference on the 7th of December in San Francisco. Rory Read will present at the Raymond James Annual IT Supply Chain Investor Conference on the 13th of December in New York. Additionally, our 2011 Financial Analyst Day has been deferred to February 2, 2012. And lastly, our fourth quarter quiet time will begin at the close of business on Friday, December 16, and we'll announce our fourth quarter earnings on Thursday, January 20, 2012.

AMD's ownership of GLOBALFOUNDRIES on a fully diluted basis decreased to approximately 9.6% as of the conclusion of the third quarter. The 2-year time period after which we no longer have the right to designate a representative to the GLOBALFOUNDRIES' Board of Directors was triggered in September of this year when our ownership interest in GLOBALFOUNDRIES decreased below 10% on a fully diluted basis.

Reconciliation for all non-GAAP financial measures discussed today is included in the financial tables that accompany our earnings release available in the Investor Relations section of amd.com.

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 and 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. 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 our expectations. You'll find detailed discussions about such risk factors in our most recent SEC filings, AMD's quarterly report on Form 10-Q for the quarter ended July 2, 2011.

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

Rory P. Read

Thank you, Ruth, and thank you, all, for joining us on the call today. AMD's third quarter revenue was $1.69 billion, up 7% from the prior quarter and up 4% year-over-year. And AMD's non-GAAP operating income grew by 28% quarter-to-quarter and was flat year-over-year.

In my first 60 days at AMD, I'm excited by the energy and resources I see here and I'm encouraged by what I hear from our customers and partners. AMD clearly continues to play an important leadership role in the industry but there's more to do.

There is a lot of interest in our products, and customers are looking for us to improve our execution in order to help them to grow even faster.

Third quarter demand for our new AMD platforms was strong, particularly in the mobile processor space, where we saw revenue grow 35% sequentially and 20% year-over-year, clearly outpacing the market in a significant way. Additionally, in the server space, we saw a solid 27% gain in revenues sequentially with solid customer demand for our next-generation Opteron offerings.

However, we also had our challenges. We saw both 32 and 45 nanometer supply challenges in the third quarter. No doubt, we must improve our execution and we are taking action to improve our ability to consistently deliver our products on time, day in and day out. We are working with our key partners to improve the processes, disciplined to deliver on our commitment to our customers. We have more to do, but we are clearly making progress and we are on the right path.

Now let's take a deeper look at the mobile segment. In the third quarter, we saw a record AMD processor shipment and revenue in the mobile space. Over 90% of our mobile units were Fusion APUs, which are uniquely suited to meet the advanced processing needs of today's mainstream and entry-level mobile PC buyers. For example, we believe AMD's worldwide share of the $200 to $600 retail price bid is now over 28%. These bands make up 45% of the retail notebook volume across the planet, and we believe AMD gained consumer notebook share in the key emerging markets year-over-year, particularly in China, where our microprocessor revenue grew 23% quarter-on-quarter.

We also set another record for Brazos shipment in the quarter, up 36% quarter-to-quarter, and our mobile AMD processor unit sales in total are now up over 50% in the last 2 quarters alone. We clearly outgrew the market in the mobile segment and we believe we took share in the quarter.

Now for our server business. The third quarter was the beginning of a move in the right direction, with server revenue up 27% sequentially. Initial production shipments of our new AMD Opteron products gained traction in the high-performance computing space, where with the help of our key partner, Cray, and some of our most notable customers which included the National SuperComputer Centers in Stuttgart, Germany, in the U.K. and in Switzerland, as well as the United States Department of Energy Titan project at the Oak Ridge National Laboratory. This project, in fact, is likely to be one of the world's fastest supercomputers. We are excited about our key partners, including HP and Dell, who are launching new products based on our new Opteron platform this fourth quarter, and we are confident they will do well against competition, particularly in key workload areas like the cloud and virtualization.

Now let's turn our attention to the graphics business. AMD's graphics segment continued to be a solid business for us. Segment revenue was up 10% quarter-over-quarter and up 4% year-over-year. This growth was driven largely by strong seasonal revenue increases in the AIB channel. Our AMD Radeon HD GPU was also recognized as the world's fastest mobile product in the most recent quarter. This continues to show outstanding graphics innovation from AMD. We also publicly demonstrated our next-generation 28 nanometer GPU product during the third quarter, and we look forward to building on our performance leadership position in the graphics area throughout 2012 and the years ahead.

Now let me take a moment to focus on execution. From an execution standpoint, you know and we know, we faced significant manufacturing challenges in the quarter. Having said that, demand was strong and interest in our products is significant. We will continue an aggressive effort with our foundry partner to improve manufacturing performance at this important 32-nanometer technology, and we have already seen steady improvement day after day, week after week, but we are not out of the woods yet.

In the last few quarters, you've also heard Thomas describe our initiatives to streamline our business processes. We will continue to explore ways to accelerate this effort, both to unlock these efficiencies and productivity to better compete in the current marketplace and also to enable our organization to better capture the trends for which our technologies are so well suited, namely the move to low power platforms, the continued rise of the emerging markets and the emergence of cloud and mega data center computing.

So in summary, our exciting new AMD Fusion architecture is a unique and differentiated approach and we are seeing strong interest from the marketplace. It is particularly well targeted to lower power form factors and a high-volume price bands. And our new Opteron server technology is well tuned to increasingly important workloads, like virtualization and cloud-based servers. We are seeing a nice uptick in our server business, which is in fact long overdue. Customer demand is strong and momentum is clearly there. And while we face challenges in supply and execution, we are making steady improvements with a maniacal focus on execution across the entire company.

In short, I believe AMD is uniquely positioned to take advantage of today's largest and fastest-growing market opportunities. Through better execution, we will accelerate our growth. Through innovation, we will lead in this changing technology landscape and capture the emerging inflection points already underway.

With that, I'll turn it over to Thomas, who will cover the financials for our third quarter.

Thomas Seifert

Thank you, Rory. Revenue in the third quarter was $1.69 billion, up 7% compared to the second quarter of 2011. Revenue growth in the third quarter of 2011 was adversely impacted by 32-nanometer and 45-nanometer product supply constraints. The sequential revenue increase was driven primarily by record mobile processor revenue and unit shipments, partially offset by lower desktop revenue due to lower 45-nanometer supply and seasonally higher graphics segment revenue. In addition, since our preliminary third quarter results announcement in September, we saw unanticipated sales strength in the channel through the end of the quarter.

Gross margin was 45%, down 1 percentage point quarter-over-quarter due to lower than expected supply of 45-nanometer products, lower than expected supply of higher ASP and higher margin 32-nanometer products and therefore, a higher percentage of revenue in our lower margin GPU business.

Operating expenses were $610 million, less than guided due to lower than expected revenue in the quarter and ongoing discipline in expense management. R&D was $361 million and SG&A was $249 million. Non-GAAP operating income was $146 million and non-GAAP net income was $110 million. Interest expenses declined by $5 million compared to the prior quarter. Additionally, we repurchased $150 million of our 6% convertible notes in the quarter, which will result in over $2 million of quarterly interest savings moving forward. Non-GAAP EPS was $0.15, calculated using 741 million fully diluted shares. Adjusted EBITDA was $239 million, up $34 million from the prior quarter due to higher operating income driven by higher revenue.

Now switching to the business segments. Computing Solutions segment revenue was $1.3 billion, up 6% sequentially, driven by record mobile processor revenue and unit shipments partially offset by lower desktop revenue, and double-digit growth in server processor revenue driven by significantly higher ASP.

Computing Solutions operating income was $149 million, up $7 million from the previous quarter, primarily due to a higher mix of APUs and improved server microprocessor ASPs.

Graphics segment revenue was $403 million, up 10% compared to the prior quarter mainly due to seasonal strength in the add-in-board market, strong demand for mobile discrete graphics at OEMs and an improved product mix.

Graphics segment operating income was $12 million, up $19 million from the prior quarter primarily due to higher GPU shipments and ASP.

Now let's turn to the balance sheet. Our cash, cash equivalents and marketable security balance, including long term at the end of the quarter, was $1.86 billion, down $4 million compared to the end of second quarter of 2011. Accounts receivable at the end of the quarter was $908 million, up $149 million compared to the end of the second quarter due to higher revenue and the timing of sales. Inventory was $540 million exiting the quarter, down $102 million from the prior quarter due to a decline in 45-nanometer inventory driven by a transition to 32-nanometer products and deficiencies in the back-end manufacturing. Long-term debt as of the end of the quarter was $2.1 billion. The non-GAAP free cash flow was $131 million.

Now turning to the outlook. AMD expects revenue to increase 3%, plus or minus 2%, sequentially for the fourth quarter of 2011, and operating expenses are expected to be approximately $620 million.

APU traction in the marketplace and demand for AMD's leading-edge technologies dropped. And while we exited the quarter recognizing we could have done better, we continued to deliver to our business model, improving profitability and free cash flow, and we fully expect our strategy to be successful and deliver improving shareholder value going forward.

With that, I'll turn it back to Ruth.

Ruth Cotter

Thank you, Thomas. And operator, we'd be happy for you to poll the audience, please, for the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first questioner in queue comes from Glen Yeung with Citi.

Glen Yeung - Citigroup Inc, Research Division

My first question is about gross margins. Thomas, in your comments, you indicated ASPs were up. It sounds like quite noticeably in the quarter and obviously, gross margin is impacted by yield. But how should we think about the recovery of gross margin as yields improve, particularly given the ASP trends you have. And then specifically, how should we think about gross margins for Q4?

Thomas Seifert

Yes. Thank you, Glen. A very good question. So as we said in the script, in the third quarter, we had to fight a couple of headwinds, mainly on 32-nanometer supply impacting really the product mix we had in terms of high ASP and highly margin accretive 32-nanometer product. And we also had to make some trade-off decisions on 45-nanometer capacity that hit us from a cost of goods sold perspective. And then we had to deal with a higher relative share of graphics product in the overall revenue picture. So how is that going to change moving forward? So a couple of trends you have to keep in mind, headwinds and tailwinds. There are tailwinds, certainly there are. We will recover gross margin by shipping a higher share of Llano products and we will increase gross margin, of course, by increasing our server revenue. And we will face some headwinds in the current quarter. 45-nanometer supply is still going to be not where we want it to be because we continue to trade off capacity towards 32-nanometer. We also will see some ramp-up costs from a 28-nanometer technology perspective, and then we will have a one-time effect in the fourth quarter just cleaning up manufacturing start-up costs around 32-nanometer to make sure that it's clear. And that alone, that one-time effect, is going to hit us probably with just under 1%. So if you add up all the headwinds and tailwinds, we think we're going to be about flat moving into Q4, but continuing to execute to our model, if you keep the one-time effects out of the picture.

Rory P. Read

And think about it, Glen, from a standpoint, one of the key drivers that you can see, and we clearly have more work to do, is around execution. As I've started my first 60 days here at AMD, when I've met with customers, partners across the planet, they told me that they're really interested in the products that we're creating and the solutions that we're making here at AMD. And they also want to believe and trust more and make bigger investments to grow with us. But we have to focus not only just on the margin items that Thomas said, but across execution. Improving our execution and improving our supply position has to be one of our top priorities. And we have more -- much more still to do in that space. You heard in Thomas' comment that impacted our margins and our results, and we're not out of the woods yet, but we're making steady and clear progress day after day, week after week. And we're working with some really outstanding technical leaders from here in AMD, our partners like GLOBALFOUNDRIES, but also key partners like IBM and PDF. And we're going machine by machine, step by step to improve that activity and our yields. That, I think, will help improve, over a longer period of time, our margin performance. And that's really a little bit more background on that item, Glen.

Glen Yeung - Citigroup Inc, Research Division

And maybe just a follow-up question here. So just based on the comments, again, it sounds like what fell short must have been desktop. And I wonder as I think about the execution issue: One, do you sense that there is a longer term impact from that? Did you just turn some customers off forever because you screwed up on the execution side? And the reason I bring up desktop is I wonder if that's less impactful when it's in desktop than it would have been were it to be seen more in your notebook results. Because I think that's where your customers are probably depending on you more.

Rory P. Read

Well, it's kind of interesting. I've had the opportunity over the first 2 months here to really meet with just about every major partner across the planet, and the feedback has been very consistent. They really believe in this AMD APU kind of strategy based on the Fusion architecture. It's not a surprise that we saw our revenues increase 35% sequentially based on the strong APU demand in the mobile space. And think about it, to date, we've already shipped 20 million Brazos in that area. And clearly, from being a customer in my past job, it's about building trust, trust in execution, trust in technology. We have to continue to focus on that. That is Job 1 from my perspective. If we execute better, we'll enhance that trust. I don't think we've irreversibly damaged that trust at this point, but we eroded some of it. And we need to make sure that we execute every day to our commitment. You're right. In the desktop space, there's a little less pressure, but we had to choose where we did our manufacturing capacity in order to support our notebook growth and to make sure that we try to deliver on the commitment that we made to our customers. And they felt some of that pain in the third quarter because we weren't able to execute as cleanly as we would like. In the notebook space, we're making progress. In the desktop space, I think we know how to manufacture in that space. We just need to be able to move more of the wafers in that direction. So net-net, I don't see it as an irreversible trend. I believe this is a trend we can build from, but it's all about execution. We need as a company, AMD, deliver on our commitment, whether it's a roadmap, our features, our supply. That's the first lift to creating shareholder value in this market. Then we can go tackle in parallel how to intercept the very interesting inflection points going on in the industry, inflection points around low power, around the cloud, around emerging markets. These are real opportunities. Sorry, Glen, but I got fired up on that one.

Operator

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

Ross Seymore - Deutsche Bank AG, Research Division

Continuing on the comment around the topic of the gross margin and more specifically the manufacturing problems, can you just give us an idea, the good die contract that you signed with GLOBALFOUNDRIES in the first half of this year. I just want a little clarity on how the yield issue impacts your gross margin considering that you did have that agreement going forward.

Thomas Seifert

Yes, a very good question. So keep in mind the good die agreement we have is an agreement we have on the 32-nanometer process. It's not an agreement we have on the 45-nanometer process. And I think I described it in the last -- the first quarter conference call pretty much as a downside protection. And this is how you have to look at it. It's when yields fall to lower a certain level, the downside is protected, and we built it from there. On the 45-nanometer side, it's a different picture. We pick up the cost for that capacity and pretty much in the old model, and since we have allocated 45-nanometer capacity towards 32-nanometer capacity, we got some margin impacts there.

Ross Seymore - Deutsche Bank AG, Research Division

Great. And I guess 2 somewhat housekeeping issues, I guess. The first one is a little more, I guess, general. On the flood side of things over in Thailand, any commentary on what you think that would do to impact you? And then one housekeeping one. On the interest expense, are you more or less seeing that the $2 million benefit per quarter is what you'll see in the fourth quarter so that we can just model that down $2 million?

Thomas Seifert

Yes. Let's start, I mean, with the second question first. That's the easier one. Yes, that is exactly as you described it. It's a $2 million benefit on a quarterly basis moving forward, and that's what you'll see then in the fourth quarter to 100%. The floods, I think the supply chains in the industry have become rather efficient for maybe the wrong reasons with all the disasters we had to deal with. So overall, the reaction time, finding out where their bottlenecks could be, worked out really well and the information flow across the supply chain seems to work rather well too. So from this point, in perspective, we don't see an impact in the fourth quarter, to be very honest, at least after discussing with our customers. We'll have to see how this is going to impact the supply chain moving forward and into 2012. It depends on a lot of things, how long this situation is going to continue, and then how much damage needs to be repaired. But short term, not much of an impact.

Rory P. Read

Yes, and Ross, I'll add a little bit of color on that. As I've been meeting with the key partners in the OEM space, their feedback is, "Well, that's a challenge." Thomas is spot on. Those supply chains are quite resilient. They're working hard to work around that and make sure the mix is there. The feedbacks and signals that I've gotten from each of the major players is they're looking for us to improve our execution and deliver more product to them. They see opportunities to continue to deliver and execute, and the flood doesn't appear to be a major factor at this point. We're going to continue to monitor it, but all indications at this point that this shouldn't be a major impact.

Operator

Next questioner in queue is JoAnne Feeney with Longbow Research.

JoAnne Feeney - Longbow Research LLC

I was hoping we could get into the Brazos and notebook side of things a little bit more. You remarked a little bit about the channel strength picking up towards the end of the quarter and that's why it ended up a little bit higher now. Was that due to some of the value end of the notebook market perhaps? Or was it due to something else entirely?

Rory P. Read

What we've seen in the Notebooks segment, JoAnne, is we've seen a strong uptake in the APU demand, whether it's in the Brazos area, in low power and more in the entry bands or into the Llano segment where it's a little bit more into the mainstream. $200 to $600 retail price bands, where we believe the worldwide share now, is up to 28%. And since 2 quarters ago, we were already up 50%. So there is clearly a couple of major factors that are going on in the marketplace, one around consumerization at the PC market and also around convergence and around the cloud. The APU strategy that we put in place with the Fusion architecture, with the Brazos and Llano chipset, really takes advantage of the idea of the CPU and GPU together. And the idea of delivering the graphical -- the user experience from the cloud is very well positioned. And customers are clearly reacting to that in the mobile segment in terms of those entry to mainstream price bands. And I think that's a reflection that we've been listening to the marketplace and we've been reacting to it. At this point in the third quarter, the APU mix of our total client business is up to 90% of that client mix, and I think that's pretty telling. We're going to continue to double down there, focus on building out that APU strategy, continue to drive for low power. These are the trends that the customers in those segments are saying, and we're seeing it across the planet.

Thomas Seifert

And let me follow up on that, JoAnne. So the description you gave is pretty much correct. So it's retail strength in terms of sell-through. It was primarily emerging markets and it was primarily around Brazos APU platform.

JoAnne Feeney - Longbow Research LLC

Can I ask one follow-up, please, about the future of Brazos? Everyone expects that the success of this line will continue. It's been very appealing. We understand that the next generation coming will use more advanced manufacturing. And there are some concerns about the readiness of one of your foundry partners to contribute to production of the next-generation Brazos, Krishna and Wichita. And I'm wondering if you have plans for dealing with those challenges your foundry partner may be facing and whether you still think you'll be able to tell the same sort of time zone for releasing the new Brazos at the beginning of the year, like you did last year. Do you think you need a new revision to capture the same interest in the market? And what your strategy is there?

Thomas Seifert

Yes. So let me get started here. Sorry, I don't want to make -- give any specific statements on roadmap and launch dates for 2012. But I think in general term, of course, we are pleased with the success of the low-power version of our Fusion product and we're excited by the prospective and the opportunities that it creates throughout in the marketplace. And I think the first big follow-up on that is actually the second generation of Llano products, Trinity, that is going to launch very early next year and where we pretty much cut the core performance in half. And of course, we'll try the Brazos and Bobcat based high-end products further down and then have a big focus on that. And I think we mentioned it also in our last call that moving forward, we think we've found a way our risk profile in terms of manufacturing and foundry partners. And this also, I think, will help us to better mitigate the ups and downs that are just part of this business model.

Rory P. Read

And JoAnne, as we look at that segment, clearly, that Brazos family, we're going to continue to extend that. And as we're tracking execution each week across AMD, we're looking at the design win activities with our key OEMs. We're looking at the momentum of sell-through. And the buy-in around the product continues to show strong interest, strong demand. They're counting on us to improve these execution items that allows us to move forward. And I think what we're seeing with the progress that we're making since late September, it's slow. It's steady. We clearly have much more to do, but there are those signs of clear improvement and the demand and interest in this architecture and solution is spot on. And Thomas mentioned the emerging markets. Think about it. Both in China, India, we saw very significant growth. And this product set should play very strongly there and continue into 2012.

JoAnne Feeney - Longbow Research LLC

Yes. So it seems like both you and your main competitor are launching products earlier in the year than it's been traditionally the case. Do you see the seasonal pattern for sales really shifting earlier in the year?

Rory P. Read

I think what we're going to see is -- from our perspective in AMD, the key is understand the customer. We're spending just an intense amount of time across our business units to really understand the market data. Where are the customer paying points? What's the feedback we're getting from the key retailers? What is the feedback from the customer sets that are interested in the product? And what we're trying to do is take that and combine it with where we believe the puck is going, right? We want to skate not where it is today but where it's headed to. And if you think about that, in this set, I really think that we're building on that same set of success. And what we're trying to do is to continue a nice drumbeat of products throughout the year and to make sure that we're keeping a fresh set of improvement that allows us to improve the experience for that customer. The customer is telling us low power. They're talking about faster boot times. They're talking about a better experience in terms of the graphical representation and the experience on the screen. That's what they get with AMD's Fusion architecture and the APU set. That's why we'll bring it to market as we have those solutions and make sure that we're hitting the customer. We're going to try and get there first. We have work to do, but we're going to do that.

Operator

Next question in our queue is Uche Orji with UBS.

Uche X. Orji - UBS Investment Bank, Research Division

Rory, can I just pull up little bit into the strength you saw in the China post the pre-announcement? I'm still not sure I'm convinced as to what drove that. I mean, if an equal asked whether that's a case of customers trying to get what they can given the announced manufacturing problems or are you convinced it's really end demand? And if so, what were the real catalysts that drove this sudden strength in demand soon after the pre-announcement?

Rory P. Read

What I think, Uche, is it's very important. When we took a look at the data throughout the quarter, it was clear that we were going to miss the original guidance. And there's no doubt that was the case. It was our prudent decision that we needed to represent that to our shareholders, to our investors and to the marketplace. And that's what we did. I think, as you looked at it, we had the impact that we saw in terms of the margin down 1 point quarter-over-quarter and we saw us outside of the range of guidance on revenue. We did see some activity that quite frankly surprised us a little bit in the channel at the very end of the quarter in terms of some sell-through, of some channel inventory, that was a little bit higher. But there's no doubt that was the prudent decision given we were going to miss the guidance that we had shared. And think about it, take a look at our inventory position. Our inventory position hasn't been in a better position in a long time, and that's a reflection of a maniacal focus on improving productivity but also we've got that bit of surge of channel sell-through at the very end that kind of pushed us a little bit higher on that. But in no way you look at it that was the right call, the prudent decision.

Uche X. Orji - UBS Investment Bank, Research Division

Can I have a quick follow-up? In terms of -- we knew what happened with the cycle time and the yield issues, how better controlled is that now? And specifically, what lessons have you learned with this that you think can apply to Trinity? And from the early signals we've seen with Trinity, are you comfortable with where you think that yield could be within a few months of launch? And then also, the same question would apply to both of the -- just kind of get a sense of what you learned from this and how we should be able to feel comfortable when you give us a good guidance around Trinity in the future.

Rory P. Read

Sure. From a standpoint, clearly, we were disappointed with the execution around the yields in the 32-nanometer space, and that occurred over a sustained period of time. And as I mentioned in my comments and earlier questions, we're not out of the woods yet. We're making progress and we're focused on it every single day, and we're seeing progress. But again, we are focused at a machine-by-machine levels, step by step, and trying to improve both our sort yields, our total yields across the board. This is something -- based on some strong results here from your perspective, you might get the wrong read on this. We have work to do in the execution space, and while we're making progress, we need to continue that progress. I think we're seeing that steady improvement and step by step, machine by machine, we'll make that progress in 32. And clearly, we'll shift significantly more 32 nanometer product in the fourth quarter than we did in third quarter. And then what we're doing is to apply the learnings to 28 nanometer. The difference between 32 and 28 nanometer quite frankly isn't gigantic. And the experiences that we're learning there, in terms of the machine-level data, the flow through the recipe, those we're applying in the 28 nanometer space. Again, we have much more work to do, but we are -- we believe that we're making steady progress day after day. We have more work to do, but we're on it and this is really Job 1 from my perspective. We must execute better as a company. In my experience as a customer of AMD for 5 years, this is an area that we must improve on, whether it's on the roadmap, features or supply. Our customers have been telling me that in the first 60 days every single day, and we cannot let them down. We need to improve. Not out of the woods yet, making progress, and 28 nanometer very close to 32, we're taking the learnings and applying them.

Operator

Our next questioner in queue is Cody Acree with Williams Financial.

Cody G. Acree - Williams Financial Group, Inc., Research Division

Maybe for both Rory and Tom, I guess, given that this goes back to the July conference call. I'd like to get maybe a bit of quantification on where are you starting with the yield curve as you're coming into that July call that gave you confidence with a 10% growth, what happened to that yield trajectory, to what degree of quantification can you give that. You talked about execution, but I think we need some degree of what exactly the progress has been and what kind of ramp are you on for the next few months?

Thomas Seifert

Yes. I assume -- let me try to give you some color on that and of course, you will understand that we will not disclose specific yield figures. But then, going into the quarter, we were, based on the information we had and the data we looked at, pretty confident that we could outperform the ramp of the Brazos product line. And if we look back today, then we did not really achieve that. We are pretty much on the same slope, but we could not outperform our -- that slope as we have previously expected. And it's not so much only a matter of, "here's a product issue and we have product yield issue." It's really -- it was much more a matter of how do you get a significant and very steep capacity ramp handled at our foundry partner. A lot of new tools had to be brought on place, had to be ramped, had to be qualified and how disciplined and how successful the steep ramp up process was handled gave us a lot of headache over the quarter and a lot of volatility. So not so much only in terms of, did we lose good product on the wafer but just not getting enough wafers out the door, so to speak.

Cody G. Acree - Williams Financial Group, Inc., Research Division

And Thomas, I guess if we look at where that real yield curve is today versus where you expect it to be, is it a matter of just, I guess, a push out of that same type of ramp? Or is it a reduction in that ramp so that you hit the endpoint further out rather than just maybe a gap of the correction being put in place?

Thomas Seifert

I would say it's a matter of both, to be very honest. But at least, the volume we lost from -- it's a pure volume and capacity bring in place perspective that will be recovered without any doubt and without any gap. And once you have a little delay on your on yield curve, on the product yield curve, that obviously leads to a time delay. But we saw steady improvement. You heard Rory talking about that we will see significantly more output in the fourth quarter compared to the third quarter. So we see the trends being reversed but we also have some work that still needs to be done.

Rory P. Read

And, Cody, from a standpoint of that curve, we're not where we want to be yet. That's the bottom line. We have more work to do on it. We had to shift volume away from 45-nanometer and away from desktop in order to get the yield and to try in to fill as much of the customer demand as we possibly could. Well, that's -- we're seeing some improvements. We're still not at the right levels, and we need to make more progress. And I think what we're doing with -- I think what we've done with our key partner there, I've spent a lot of time with their executive team, and they're bought in just as significantly at GLOBALFOUNDRIES as AMD to work with us and to find the right path here. And then bringing of the other key partners, like IBM and PDF, as I suggested earlier. These things are the things that will help to lift that honest, sustainable base. Again, we are not where we need to be yet and we'll have to make choices to get the best outcome to satisfy as many of our customers as possible, but we have more work to do, Cody.

Cody G. Acree - Williams Financial Group, Inc., Research Division

And I guess, can you give me just a comment on the health of the overall PC market, I guess not your share gains outstanding or the current manufacturing constraints. Can you kind of talk about what the backdrop is versus where you would expect it to be seasonally?

Rory P. Read

As I look at it, I look at some of the same data you look at, whether you go look at IDC or any of the other industry reports out there. Well, I believe the PC market is going to continue to grow, and it is going to grow for the foreseeable future. I think there's going to be hundreds of millions of new PC customers over the coming years, and I think there is going to be a lot of them in the emerging market. And that's why I'm so pleased with the progress that we're beginning to see in our emerging market focus. So we're going to double down in that space. We need to continue to build momentum in the emerging market. We know that a lot of that growth, a huge portion, is going to come in those entry and mainstream price points. This is right smack where we can reach with the Brazos and Llano technologies that APU is a value proposition that works. And you look at that combination, emerging market, right technology, even as it moves to more delivery of content, you're going to see the importance of the APU and the GPU built into that APU become even more critical. So I believe that the market, the PC market as represented by IDC, is a fair representation. There will be growth and it will continue the growth and grow and it will continue to grow consistently over the next several years. Now if there's some huge macroeconomic event, I can't predict that. But clearly, the market, I believe, is solid. It's growing and it has opportunities for us, particularly with the products and technologies that we have.

Cody G. Acree - Williams Financial Group, Inc., Research Division

And Rory, lastly, I know it's early, but I'd like to get your thoughts on AMD's eventual participation in the tablet market and maybe eventually in the smartphone market. I guess, what are your initial thoughts on pulling their architecture down into those lower power envelopes or is it something you would consider moving to bring an encore for that usage?

Rory P. Read

Yes. I think it's a fair question but remember, I'm here 60 days. We'll have an Analyst Day in February. But I think you're on the right trend here in the idea that low power is a trend that's here to stay. Thin and light, convergence, consumerization, those are core trends. They're not going to change. We're listening to the customer. We want to focus on what that customer needs, how we can create leadership and then drive that through. You're going to see us, as I mentioned, double down in those key areas around low power. That is a trend Thomas mentioned next year, and the kind of power envelope productions that we're driving in the Brazos and Llano family. You think about that the work that we'll do across the APU and how to continue to extend that architecture and the Fusion architecture so that, that customer experience is even better. Low power is definitely the right trend. I also think the trends in the emerging market, where I think low power, thin, light, a bit longer battery life, those are trends that are going to play. Customers like them. They're going to want them, and they want them in a value proposition that works. I can promise you that we're going to look at the market data and make sure that we're understanding it and fill the areas that give us the return and the benefit that leverage the capability across AMD. And you think about it, across 60 days, I've been very impressed with the technical capabilities of AMD. We just announced Mark Papermaster joining our team as the Senior Vice President of Technology and Engineering, our CTO. He comes from a background of some of the most innovative companies in the industry. I think that -- a teammate like that, coming on board and who's focused in this segment, there are a lot of very important inflection points. You talked about tablet. I'm not sure the tablet just in the form factor itself is the real game in hand. I think the impact in terms of proprietary control points and chips in the marketplace that's going to occur both in client server over the coming months and years are going to be exciting opportunities. And for us, in AMD, with the capability we have, the first focus on execution, execution, execution, deliver on our commitment, then focus on innovation. Where is the pot going? And those areas, get the right technical team. We have thousands of engineers that we've created the capability to tackle this. How many companies have that capability? And the status quo is going to change. That's an opportunity for us. We're at a market share position where the upside is in front of us. We have to embrace those changes and move forward. We'll get into a little more detail around the specifics in our February session, but clearly, our capabilities, the kind of talent that we have here that we're developing that we already have and the talent that we're beginning to attract into the team are the kinds of solutions to react to the marketplace. And you're right. Low power is right. Emerging market is right, and that trend is going to continue.

Operator

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

David M. Wong - Wells Fargo Securities, LLC, Research Division

Your guidance for growth in December, just a clarification, did you say that, that won't be driven by an increase in output of Llano so there will actually be a fair increase in revenue from Llanno rather than a shift back to more output on 45 nanometers?

Thomas Seifert

So we guided the revenue up quarter-over-quarter with a midpoint of 3%, and we also said that this will include a significant increase of our shipments on 32-nanometer and Llano. Yes, that is true.

David M. Wong - Wells Fargo Securities, LLC, Research Division

Okay, great. And when might we hope to see the first product on the power driver core?

Thomas Seifert

One of the first product we launch will be Trinity. And we have not released an official launch date yet but it will happen early in the year.

David M. Wong - Wells Fargo Securities, LLC, Research Division

Okay, great. And could you give us a rough idea of how many Llano chips did ship in the September quarter and what you'd expect in terms of unit shipments in December for Llano?

Thomas Seifert

No, but I said you can deduct that from what I said before. Our original intent was to really outperform the Brazos brand in terms of steepness of the slope. And we were, for the reasons we've discussed now at length, not able to achieve that. But we are on a similar trajectory than what we had on our Brazos line on a quarterly comparable level.

Operator

Next questioner in queue is John Pitzer with Credit Suisse.

John Pitzer - Crédit Suisse AG, Research Division

Tom, just a clarification on the negotiations with GLOBALFOUNDRIES around good die versus cost plus, how long is that agreement in place? And if it's going to sort of grandfather here, do have the leverage to go back and continue down a good die kind of contract with your foundry partner, GLOBALFOUNDRIES?

Thomas Seifert

Yes, a fair question. So the agreement that we have in place is around 32-nanometer and it's pretty much limited until the end of the current calendar year, and then we would default back to the original agreement. I think I also said already on the last call that we have started negotiations with our partners and they are progressing well. And as soon as we have an update and something to announce, we'll talk about it. But we are in the process and -- as I've said, this is a very firm -- it's a very committed partnership and it's moving along.

John Pitzer - Crédit Suisse AG, Research Division

And then, Rory, as a follow-up, you mentioned Mark's name earlier. When you look at his resume, he's very strong in PowerPC, a very rich ARM history, not necessarily a rich x86 situation. So I'm just kind of curious if this is a subtle signaling that perhaps you're moving to a multi- architectural strategy. And if it's not, I guess, what core skill set does Mark bring to the table that you think are a good fit with the challenges at AMD today?

Rory P. Read

Sure, no problem, John. From the standpoint of what I've seen here over the first 60 days, I really have been impressed with the technical capability. And when you look at the technology industry in this silicon space, there is very few players that can match the capability that AMD has in terms of its engineering capacity, the talent that we have on board. We have some great leaders and we have a large contingent of just super-talented engineers that are fighting everyday to find out what the customer needs and how to tackle it. And there was an opportunity to go out and work with Mark, and he saw the same kind of excitement around AMD that I did and that Thomas has shared over the past several quarters. I think the marketplace is -- definitely has a very interesting inflection points, whether it's architectural, whether it's form factor base. There's things that are occurring in the marketplace that will change the status quo, and I said in an earlier question, I believe that it's key for us to embrace, be the innovative disruptor, to make sure that we continue to build on that. We have a long track record in x86, and we're going to continue to build on that. It just makes sense. And from a standpoint of Mark, what he brings to the table? Innovation, leadership. He knows the market. He's been a customer. He knows about architectures. And you combine them with the talent that we have in place, which we keep in, and the leaders across the engineering teams. This is an opportunity for us not only to leverage our existing businesses but to see where the puck is getting next. Where is the next evolution of APUs? What -- how do we take that further? We're on the right track there and the right kind of execution. How far can we go on power? How can we leverage these kinds of solutions into server? We're a design organization, a design company, and we need to take those actions to move this ball forward.

Operator

And we have time for one final question. Our final question for today's event comes from Hans Mosesmann with Raymond James.

Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division

A couple of questions. In terms of Q4, what would your sales outlook be if you had unconstrained supply issues and if you were unconstrained?

Rory P. Read

We will not comment on that. That's not a normal idea. Obviously, it would be higher, but that's about the only thing I'd say about it.

Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division

Well, perhaps in terms of seasonality, would it be seasonal? Like you commented on your graphics business in Q3.

Rory P. Read

I think we've given the clear guidance of where we think it's going to settle in. You can see the IDC kind of information. I think we've represented that data and we've shared it clearly.

Hans C. Mosesmann - Raymond James & Associates, Inc., Research Division

Okay. And then as a follow-up, it looks like your yields are improving but you really haven't figured out the root cause. It looks like it's an iterating process. Do you have a Plan B in place or on the table? Perhaps using your other foundry to kind of fix the problem because it seems they have no issues whatsoever with Brazos and the Llano would be just a continuation of that kind of architecture.

Rory P. Read

Yes. I think it's unfair to kind of suggest that we don't have an understanding of the root cause. The analysis that we're doing is machine by machine, step by step. We're making those changes as we speak, and we've begun to see over the past several weeks with this kind of intense maniacal focus on execution with starts of improvement across that set. So I don't want to leave anyone with a feeling that we aren't working that, understanding the issue and have our hands on the rudder and driving this boat. We have work to do. I'll for sure share that, and you know it and I know it. We have to improve our execution. But we have the experience, the expertise that's getting underneath that, that we believe will drive further improvements as we go through the quarter. Thomas, do you want to add anything?

Thomas Seifert

No, I think that is fair to say. I think it's a every important correction to make. It's not like this is an -- it's a risk process where we don't know where we go. It's a complex situation. It takes a maniacal focus, that's what we already said. We put lots of teams on this problem, from our partner, from our company, from outside, from the ecosystem. And we work hard in that direction. We see the improvement. It's a steep growth. But we know the direction and we know the path.

Ruth Cotter

Thank you, operator. If you would like to conclude the call, please.

Operator

Yes, ma'am. Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Thank you for your participation and have a wonderful day.

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