Advanced Micro's (AMD) Management Presents at Credit Suisse Technology Conference (Transcript)

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Advanced Micro Devices, Inc. (NASDAQ:AMD) Credit Suisse Technology Conference December 3, 2014 11:00 AM ET

Executives

Devinder Kumar - SVP and CFO

Analysts

John Pitzer - Credit Suisse Securities

John Pitzer

Good morning. Why don't we go ahead and get started. It's my pleasure this morning to introduce Devinder Kumar, who is the Chief Financial Officer of Advanced Micro Devices. We have a fireside chat here for the next 20 to 25 minutes. We'd like to - try to make this as interactive as possible. If you're burning to ask a question, just raise your hand and we will get you a mic, but with that Devinder first thanks for joining us this morning.

Devinder Kumar

Thank you, John.

Question-and-Answer Session

John Pitzer-Credit Suisse Securities

Kind of the first obligatory question to ask in a fireside chat, just in case there are some new investors in the room, it's really try to help position AMD as a company and clearly you guys have been in the industry forever. I think most people know what core markets you address, but I think it will helpful to talk a little bit about your core IP and more importantly, over the last several years, the company is going through some major strategic transformation. Maybe you can just ground us and remind us what those transformations were?

Devinder Kumar

Sure. I think if you look at AMD as you said, we've been around plus 40, 45 plus years. I've been with the company for 31 of those 45 years. I joined the company just when the PC was taking off in the early 80s. And you are right, AMD was a very different company up until 2, 3 years ago. We were essentially getting most of the revenue from the PC sector, whether it was client, notebook, desktop or in the graphics space after the acquisition of ATI in 2006. And we put in place the strategy in the 2011 time frame that we need to transform business model and get more efficient with the IP as you said the core IP that we have, and try to reuse the IP across many market segments, different customers and different businesses. And that's exactly how it's playing out.

The PC market has made it a little bit more challenging in terms of transformation, especially with what happened in 2012 and then our revenue has gone down in 2013 over 2012 and 2014 again is going to be down over 2013. But we stick with the transformation strategy and that's exactly what we're doing. So if you look at just the last 5 quarters, we've been profitable, we've diversified our revenue base, especially with the semi-custom game console product, whereby today 35%, 40% of the revenue is coming from the non-PC sector. We've reshaped the segments for those folks that are tracking us in terms of the traditional Computing and Graphics business in one segment, although it does include professional graphics. And then we have what we call the EESC, which is the Embedded, Enterprise and Semi-Custom business, which is really the news for the day.

We've done well with the semi-custom business, the game consoles with Sony and Microsoft are selling well. That obviously bodes well from 2014 over 2013 time frame, and the IP is the key. We have become a design house that is focused on core IP, offloaded the fabs, became fabless with the transaction with GlobalFoundries. Rory Read joined the company about 3 years ago, brought in a new management team, including Lisa Su, who has IBM, Freescale pedigree, Mark Papermaster, and that team is really taking AMD to the future and Lisa now in a role as the CEO lays the focus on finishing this strategy over the next 2 to 3 years. I think still another couple of years, but our next target point is by the time we get to the end of 2015 to have at least 50% of our business coming from the non-PC non-traditional sector, and then we'll see what happens after that.

John Pitzer-Credit Suisse Securities

Extremely helpful. Maybe we can start off a little bit by talking about the traditional core business of kind of compute and graphics. On the compute side, Intel had their Analyst Day about 2 weeks ago. They kind of gave initial forecast for 2015 and they kind of talked about sort of a flattish PC market. How are you guys kind of viewing the industry right now from a unit perspective in PCs?

Devinder Kumar

I think overall if you look at the overall PC market what the competitor said is obviously true. It is flattish, but you got to look within the segment in terms of where we are over-indexed. For example, we're definitely over-indexed in the consumer space, but things have become very competitive, especially with a flattish PC market and the competitor wanting to share revenue.

In the emerging geographies, again we're over-exposed. For example in China, things are mixed right now, so the channel business for example that impacts us more than it does our competitor. And our revenue, as I said earlier, has gone down 2013 to 2014. If you look at the first 9 months, the revenue is down somewhere 15% and 20% in the computing and graphics space. However, if you look at profitability or losses actually in that case, we lost about $90 million in the Computing and Graphics segment in the first 9 months of 2013. Those losses are down $20 million.

While how we're doing that, we've collapsed the computing and graphics business units into one. We put one General Manager in charge. There's a lot of duplication that happens in those businesses because in the end, the customers that we sell to and the market that we participate in are essentially the same. And therein lies the actions we took from a restructuring standpoint that we announced in October and we feel we can expect more efficiency from that. On the IP side, the IP for the company is still very much developed within the computing and graphics space. The division develops the IP. But over the last few years, we've told our engineers, hey you need to design a product such that it uses standard process technology, such that the cost can be reused across a whole host of market segments.

So today, when you look at products that AMD is introducing, whether it's client, notebook or desktop or the embedded space or even the server space and the semi-custom space, which is an area of growth for us. All of these use the same costs that are developed as opposed to the custom costs we used to develop long time ago. And if you make it, you make it big, if you don't make it, the call and the money that you put in there is wasted. And I think the discipline has improved in terms of being able to reuse the costs across a whole host of market segments and customers as we see it.

John Pitzer-Credit Suisse Securities

You rightfully talked about kind of the mix that's going on within PCs today, how that might impact you and clearly when you look at the tops down data, this has not been the best of market share years for AMD. How much of that do you think is mix related versus sort of losing out on a socket to socket headwind? And more importantly can you talk a little about the product roadmap from here within core PCs and at what point do you think you can start to reverse that trend?

Devinder Kumar

Having diversified the revenue model, and having the profits come from the EESC segment, it gives us some flexibility to go ahead and not chase every deal just for the sake of market share. We don't have to go and fill fabs, right? So we can go and be very selective from business standpoint. To enter the market shares gone down, but our focus, and Lisa and Rory before that from a CEO standpoint is very much focused on profitability.

And so we're managing the company for profitability from a computing graphic standpoint. If you look at the segment as I said, we do make quite a bit of money on the EESC side. We just need to stabilize, strengthen and then grow the business and where is the growth going to come from? Well, the growth is going to come from some products we have introduced recently are going to be doing well in the commercial space, which is the market within the PC sector that is actually stable and actually growing. The consumer space is still very challenged, very price competitive from that standpoint. And we're not going to chase every business as we did in the parcel and the AMD of the all] where market share was everything, and we're not going to chase that if it doesn't make financial sense.

John Pitzer-Credit Suisse Securities

Pivoting into the graphics part of the business, the core discrete graphics business is - the history of that market has been sort of ebbs and flows in the market share, shifts between yourself and your main competitor. Where do you think we are on those ebbs and flows, and kind of what's your outlook for AMD share going over the next 12 to 18 months?

Devinder Kumar

For us, where we are right now from a viewpoint of where we started the year and if you go back in Q1 time frame, we had the cryptocurrency phenomenon. We benefited from that in the Q1 time frame, and then you know the exchanges kind of collapsed and we kind of got hurt in the Q2, Q3 time frame. But in the notebook space, if you look at it from a graphic standpoint, we're actually doing pretty well. The last 3 quarters, Q1 to Q2 to Q3, we have gained shares.

And the products we've introduced are very much, customers want those products. In the channel part of it and in particular in the AIB business, it's been down for us, the last couple of quarters. We see that kind of playing out a little bit in Q4. Q4 coming in at expectations, seasonally is typically a strong quarter and then we get into 2015 and see how the market unfolds. But right now I think if you look at market share from that standpoint, it's a little bit disappointing to my standpoint as to where we are versus where we thought we would be in the graphic space.

John Pitzer-Credit Suisse Securities

Part of the discrete market that's very lucrative is the professional graphics market, can you just talk a little bit about your prospects in that segment of the graphics business?

Devinder Kumar

So as part of the strategy, I talked about in terms of transforming the business model, one of the areas that we said we would focus on, because we have the technology frankly in professional graphics. It's a longer time period to gain the revenue, so if you go back and look at last quarter, we had about 24% market share in the professional graphics space, the TAM there's about $1 billion.

We feel we have still legs to grow that business, and for example if you look at Apple's announcement recently with the Mac desktops, they are using AMD dual FirePro in those devices and I think that's going to benefit us both from a technology standpoint and the halo effect that comes from you know being an Apple product, we have seen it or if you haven't seen it, you should go see it, it's really, really very good in terms of the visuals and the displays that you can get with those desktops and I think that benefits us as we get into 2015.

John Pitzer-Credit Suisse Securities

Helpful. One of the pivot into the embedded part of the business, which is kind of the new venture. Clearly, I think the gaming console cycle that began the end of last year has been a home run for AMD, you've kind of run the gamut on all 3 of the big guys. I think one of the concerns that the investment community has is just how that typical gaming cycle unfolds over a 3 to 5 year period, you have sort of the first year of introduction, the first full year of introduction tends to be the peak, which would be this year. We're trying to figure out what we should be expecting for unit growth and part of the guidance for your December quarter was the expectation that Q3 was kind of a peakish build quarter in gaming and that would fall off in Q4. How do we try to handicap growth from here in that segment?

Devinder Kumar

Yes. So if you look at the game console business and the history we have you know 6, 7 years, so when the previous game consoles were introduced 6, 7 years ago, technology has changed, consumers have changed in terms of how gaming is being deployed today, but if I just look at this cycle, you are right, in 2013 we had the ramp, but was half year. 2014 is up significantly from unit volume standpoint over 2013. But we're not ready to call 2014 as the peak.

And you know we need to see the data coming out of the holiday season and the sales. We work pretty tightly with our customers because the time period to go ahead and place the orders, get the wafers and give them the parts on the APU and [indiscernible] assemble the boxes is pretty long. So it could be, it could be that 2015 from a unit volume standpoint is still higher because there's some replacement happening for some of the older game consoles overall. And then when you talk about seasonality, typically first half is lower than the second half. We are offset by about a quarter in terms of our customers wanting the parts and having the lucrative position as you called it you know the grand slam or the home run as you call it is really good because in the end, how many units are sold out, the PS4, Xbox One and even the Nintendo Wii U, we have full visibility in terms of what those units are because 100% of those products are using the AMD technology or AMD products and that is a really good position to be in, and I think bodes well as we extract more efficiencies and further benefit our operating margin because of some operating margin play in the semi-custom game console business.

John Pitzer-Credit Suisse Securities

It's a good segue. I want to talk specifically about the margin profile within the gaming section of embedded, help us understand kind of the targets when you initially talked about it? Where we are today and ultimately how we kind of bridge the gap from that op margin sort of today to where you think this business could actually (multiple speakers)

Devinder Kumar

I famously said in one of the earnings call when we introduced it, I said low-double digit. So we came in actually at the mid-teens and I can tell you that over the last few quarters, we have actually been able to extract more efficiencies from the business, working with our foundry partners in particular. We have backend facilities where we make the product in-house assembly and test bases, extract more costs, what I will say to you is they're up from the mid-teens from operating margin standpoint and that can only get better as we move through the cycle.

John Pitzer-Credit Suisse Securities

And that's an important point I think because one of things that I think is advantageous about the gaming cycle is, it tends to last over a multi-year period and so as you think about the long tail of gaming, could you get op margins in this business north of 20% over time?

Devinder Kumar

Yes, we could.

John Pitzer-Credit Suisse Securities

And the long tail defined 3 to 5 years, 3 years, 5 years?

Devinder Kumar

I think for the game console product that we talk about, you know, if you go back and look at the last few cycles, it's 6, 7 years, although it gets the peak in the third or fourth year after introduction. And I think this will probably play out somewhat the same way, but it's too early to tell. Customers, we're working very closely with them on what happens next, but I think it's at least four, 5 year cycle that you're talking about here and we are owning the kind of the first full year as you said in 2014 for the game console business.

I do want to differentiate when we talk about the embedded business, the game console is more semi-custom, high volume, larger revenue dollars. In fact, we announced in our October earnings call another 2 design wins on the semi-custom side of the house. Revenue is starting in 2016 to the tune of over $1 billion. One of them is an ARM-based product and that revenue is over a 3-year cycle. We think it's about $1 billion starting sometime in 2016.

John Pitzer-Credit Suisse Securities

You've given us generalities around those 2 products.

Devinder Kumar

Yes.

John Pitzer-Credit Suisse Securities

Anything more specific you can tell us, and [indiscernible] $700 million over the life of those programs?

Devinder Kumar

That's right. Its average about $500 million I would say, but the 2 products combined that we announced the design wins for, it's about $1 billion revenue opportunity starting sometime in 2016 over a 3-year period. I can't be more specific than that only because these are exclusive with one customer high volume parts, like we said, one is ARM based and one is x86. And that's about all you're going to get out of me at least this morning.

John Pitzer-Credit Suisse Securities

So in the embedded space though, when you think about generic applications as you could go after, how much of this is going to be data center focused versus other types of embedded applications, whether it's point of sales or something signage or something different?

Devinder Kumar

So if you look at embedded, the total market is about $9 billion. Our target market is about $2 billion and within that we have about 8% to 10% right now. We've had very good growth in 2013 over 2012, 2014 over 2013. Lisa, who you have met, who is now the CEO, is actually very familiar with the embedded market. She came from Freescale where that's clearly very good at that and we've had laser focus on that over the last 3 years. It's accretive from a gross margin standpoint, significantly higher than corporate average. It is sticky business that lasts over 3-year period. It is not in the hundreds of millions of dollars like what we have in the game console, but it's at least tens of millions of dollars.

So for example, one customer we picked up in the embedded space, that does some cloud-based - software-based cloud ne2rking is Arista. We announced that last quarter and again those are tens of millions of dollars of opportunities, but more importantly the growth pattern is more predictable and we've seen double-digit growth just last quarter over the previous quarter, year-over-year it's double-digits and we think 2015, the design wins that we have and the pipeline that we have, we can continue to grow that business. Small base, but in the end, with the higher gross margin definitely benefits the revenue model, one, because it is sticky and, 2, the gross margin model and therefore benefiting operating income.

John Pitzer-Credit Suisse Securities

[Indiscernible] a little bit more detail on the gross margin, you talked about accretive margins in this business, and in the semi market, there tends to be an inverse correlation between the number of units you can sell and the profitability of each one of those units. In the embedded market, it's sort of lots of customers, as you pointed out, with potentially smaller dollar size, significantly higher profitability. Can you put a range of numbers around that profitability. Is it a 50% gross margin type business potential for AMD?

Devinder Kumar

I am not going to give you a specific number, but it's significantly higher than our corporate average. You know, we've been disciplined from a view point over the last 5 quarters executing at about the 35% gross margin somehow despite some of the challenging PC side. And on the semi-custom side, obviously it brings down the gross margin, but you pick it up on the operating margin line, but it's significantly higher than corporate average. And the other thing as you know, you mentioned the embedded, so industrial controls, digital signage, casino gaming areas is all that we're pursuing. We've got a new management team with a new General Manager that came in. And like I said, we're engaging with customers, the relationship is very deep. And we continue to knock off design wins on tens of millions of dollars of opportunities on kind of a weekly, monthly basis and that builds the revenue model for 2015 and beyond.

John Pitzer-Credit Suisse Securities

Want to spend a little bit of time on the relationship between yourselves and GlobalFoundries as defined by the wafer supply agreement, the WSA. Correct me if I am wrong, but the WSA still stands at about $1.2 billion…

Devinder Kumar

That's right. 2014 is $1.2 billion. We're in discussions for 2015 right now.

John Pitzer-Credit Suisse Securities

How do you think - one, are you on track to meet the $1.2 billion for this year; and 2, as we go into 2015 and beyond, how do you think that relationship will evolve between yourselves and GlobalFoundries?

Devinder Kumar

You know, if I step back, and I have been involved in the GlobalFoundries transaction way back in 2008. GlobalFoundries [indiscernible] in 2009. I can tell you that with the changes that have occurred on GlobalFoundries with the management team and the focus that Abu Dhabi has and the investment that they have as a partnership with GlobalFoundries, the relationship between AMD and GlobalFoundries is the best in the history of the relationship. The folks that we're working on in fact we just had a meeting in Abu Dhabi just a couple of weeks ago. Really good discussions, very business oriented.

And I think the execution of GlobalFoundries has improved significantly and that helps us from an overall standpoint. In 2014 for the first time, some folks may not know then. For the first time in the history of the relationship we went beyond PC product and actually we are making graphics, PC, and semi-custom products at GlobalFoundries in 2014 and that continue into 2015. When you diversify the product that you make at a foundry like GlobalFoundries, it benefits them from a mix standpoint and benefits us from a mix standpoint. And like I said, the execution is continuing to get better and we are very pleased - very, very pleased with that relationship.

John Pitzer-Credit Suisse Securities

Can you talk a little bit about kind of your roadmap around Moore's Law; a lot of discussion at the industry level about FinFET, about whether or not Moore's Law is slowing. AMD has been a little bit more absent in the conversation. That might just be a function of the embedded business, not necessarily needing to push Moore's Law as aggressively as perhaps graphics and the CPU business, but what do you think about your roadmap of getting the FinFET and moving down Moore's Law and the expense of doing so?

Devinder Kumar

AMD has been absent because we are a fabless company. And typically fabless companies are not the ones that have to worry about the process technologies. I think that's for the GlobalFoundries to go ahead and figure out. And GlobalFoundries did something very interesting, the alliance with Samsung, I think that's going to help both Samsung and GlobalFoundries and us from an overall standpoint because it makes FinFET available to a broader set of customers in the industry as opposed we have one or 2 players that go ahead and have the technology.

From our standpoint, given our product portfolio and the customers and the market that they're pursuing, we do not need to be at the bleeding edge of technology. We need to be at the leading edge, we don't need to be at bleeding edge like we used to when we had the PADs, we pushed the process technology equation. In the compute space, we have shown the ability from a power, efficiency and performance standpoint and architecture and software investments to have competitive products and that is in some sense less costly if we pick and put it that way than investing millions of dollars in technology from an overall standpoint.

So from an overall standpoint, today the bulk of our products are 28 nanometers. We will have certain products in 20 nanometers and then we'll go to FinFET from there, but our partnership with GlobalFoundries is where it comes into play in terms of what's the right point to go and intersect products with technology and introduce the parts out in the market.

John Pitzer-Credit Suisse Securities

That's helpful. Are there any questions in the audience? Devinder, if I could ask just another question around just OpEx and kind of some of the restructuring program that you have in place. One of things you've done a very good job with that the Company is bringing down kind of breakeven, bringing down the minimal cash balance that you need. I think at one point it was a minimal cash balance of a billion, now you're calling that an optimal cash balance with minimal cash balance, I think about 600 million, how much more can you go, and kind of where in the restructuring on the OpEx line you're really targeting to take cost out of Company?

Devinder Kumar

You know Q4, we guided $385 million. That's coming down from close to $600 million in the beginning part of 2012. Right. And really a lot of it is predicated on efficiencies. You talked about OpEx management. The other area that you say OpEx on which shouldn't be loss on focuses [ph]. In the PC market, there's a lot of marketing dollars that get deployed if you want to go defend market [indiscernible] business. As other PC business has gone down.

Frankly we don't need to invest that many marketing dollars and that obviously helps bring the OpEx down.

The one area we have actually protected and in the embedded, enterprise and semi-custom space, actually we're spending more dollars in that area because those are growth opportunities. Could we do more? We could. I think today if you call it $400 million, $385 million, I'm comfortable at that level from a viewpoint of what we have done. In 2016, with the restructuring actions that we just did which are primarily targeted on the CG business because that's where the business has come down, we get a benefit to the tune of $85 million to $90 million on an annual basis with the actions that we just took with head count down 7% after the actions are complete and some of the space actions and building related actions.

And like I said, the bulk of those savings are not coming from the R&D area because that's where you know with our ARM products coming out in the 2016 time from K12 [indiscernible] product that we're introducing right now, Seattle in the server space and other products that are coming out. In graphics, we continue to invest that in a big way.

John Pitzer-Credit Suisse Securities

That's helpful. My last question for you is the tablet and handset markets. We've heard from Intel, we've heard from other large chip companies about the importance of connectivity within the IP portfolio. How does AMD feel about you know the importance of connectivity and do you have a strategy to - tablets I can see very easily, that's an extension of kind of the core compute business. Any strategy around handsets in the future?

Devinder Kumar

I think we have a lot to focus on right now. I think in all of the things that we have in the transformation, we get to 2016 with a roadmap that we have brought there in terms of notebooks and desktops and the Seattle, which in the first 64-bit ARM-based server product that we should see shipments in the first half of 2015 and then I talked about the K12 product that we need to bring to the fore. I think we have [long plate] right now. On the tablets, we've seen the hockey stick of tablets is growing, but recently we've seen it actually stabilize and actually has gone down, and I think people are - the consumers are making choices in terms of productivity tools and therefore the two-in-ones and the convertibles, and the PC market in some sense, is going to benefit from that shift that is happening from the consumers as they settle into productivity as opposed to just consumption of information.

John Pitzer

Perfect, with that we run out of time in this session. I really want to thank Devinder Kumar for spending time with us this morning, and everyone for joining us. Thank you.

Devinder Kumar

Thank you John.

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