Advanced Micro Devices' (AMD) 2014 Raymond James' Systems, Semiconductors, Software & Supply Chain Conference.

Advanced Micro Devices, Inc. (NASDAQ:AMD) 2014 Raymond James’ Systems, Semiconductors, Software & Supply Chain Conference December 8, 2014 10:45 AM ET

Executives

Devinder Kumar - SVP and CFO

Analysts

Hans Mosesmann - Raymond James

Question-and-Answer Session

Q - Hans Mosesmann

Okay, why don’t we get started? Good morning everybody and welcome to the AMD fireside chat with Devinder Kumar, CFO of AMD and Devinder, thanks for coming.

Devinder Kumar

Sure, thank you.

Hans Mosesmann

And just ahead and have a seat.

Devinder Kumar

Sure.

Hans Mosesmann

So, Devinder, I’m guessing that some of the meetings that you’ve had so far concerned about AMDs transition. It’s been a tough period on the PC side of the equation, the competitive dynamics has been -- you know probably not the easiest, can you give us just a very brief update as to what’s occurred here over the past couple of months and as part of the process that the company has engaged in over the past three years of the transformation?

Devinder Kumar

Sure. I can do that. You know and only when you are talking about the PC market, if you step back a couple of years ago, we embarked on a strategy to transform the company and really change the profile from a revenue standpoint. And you’ve seen us over the last couple of years in particular in the semi customs space where we have the game console wins with Sony and Microsoft that we’ve been able to do that and today about 35% to 40% of our revenues coming from the non-PC sector.

If you go back years ago 2011 timeframe, 95% of the revenue was dependent on the PC sector and today it’s down to like I said about 60% of the revenue coming from there and 40% from other businesses. And in some sense it’s played out like we thought it would. The PC market has been challenging. It has stabilized a little bit from an overall PC market. We are kind of over indexed in the consumer and channel space and therefore our revenues have come down, but the one thing we’ve been able to do as we’ve gone through the transition over the last couple of years is manage the losses in particular in the computing and graphic segment.

Starting Q3, we have recast from the segments in terms of computing and graphics and embedded enterprises semi custom and you can see kind of the two companies within the company if I call it that in terms of the computing and graphics on the one hand declining revenues, but losses especially from '13 to '14 have come down pretty significantly and on the embedded enterprise semi custom we are doing pretty well actually.

Hans Mosesmann

Great. So you have a new CEO, Lisa Su, who is new at the helm and replacing Rory Read.

Devinder Kumar

Yes.

Hans Mosesmann

Can you give us a sense of what kind of strategic vision is going to characterise Lisa, vis-à-vis Rory?

Devinder Kumar

Sure. So Lisa joined the company about three years ago. She has been very much a part of the strategy that we are executing to and the transformation journey that beyond. And I worked with Lisa very closely in the last two and half three years and I can tell you that from a strategy standpoint we are sad. We know exactly what we need to do in terms of continuing the transformation journey and getting to the point where you know a lot more of our revenue even from today is coming from growth areas which we’ll talk about in a minute and Lisa is very technology and product focussed.

Lisa has a deep pedigree in the semiconductor industry as opposed to Rory who had come in from kind of IBM and Lenovo and that actually helps us from a view point of going forward, we need the technology focus to introduce the products that we are going to have in the x86 ARM, embedded server space and also by the same token products while [ph] our customers in terms of what they want in the semi customer and embedded space. Lisa is very deeply familiar with the embedded space especially with [ph] free scale experience and the last three years she has been very much a part of the overall strategy. She steps into the CEO role, you know AMD is very fortunate to have somebody like Lisa that can step into the role and almost seamlessly take on the CEO role.

Mark Papermaster is our Head of Engineering, myself on the Finance side and we’ve got a couple of General Managers that Lisa has put in place for computing and graphics and embedded enterprises semicustom so that Lisa can play the CEO role. So it’s going to work out very well I think. AMD is very very fortunate to have somebody like Lisa step into the role.

Hans Mosesmann

Fantastic. So the Company is going to commence as already started process of layoffs to the degree that is perhaps 7%, what are the areas that you are going to focus on or try to protect in terms of investment in the future?

Devinder Kumar

So transformation, any company is never on a straight line. You have the ups and downs and in particular the restructuring actions that we announced in the October timeframe when we had the earnings call are very very targeted. So for example in the computing and graphic space we have taken the computing and graphics business units and collapsed them into one group, run by one General Manager and the mission there is to make thing more efficient, make it more seamless because it’s kind of the same set of customers you know HP, Lenovo, Dell and others that we work with, and we need to find a way to do it more seamlessly and more efficiently.

So the cuts that we had were very targeted, protecting the engineering resources that are going to deliver the roadmap of the future and the products we are working on in terms of the K12 and ARM core which we are going to introduce in 2016 timeframe, the [Indiscernible] of power disk coming on in 2015, some of the Embedded part shaving business with companies like HP and Boeing, that’s all protected.

Sales and marketing with the revenue coming down in the computing and graphic side and that comes down. G&A getting more efficient in terms of the two groups that we have set up, there is opportunity there we went ahead and did that. It’s about 7% of the headcount as you assumed we got about $10 million of savings in the Q4, 2014 timeframe and those translate to about $80 million to $90 million in 2015, primarily again predicated towards the computing and graphics business and actually if you look under the covers we are spending more money, more money from an OpEx standpoint in our growth areas whether its embedded enterprise or semi custom, because that’s where the growth is and that’s where a bigger part of the revenue is going to come from AMD on a go-forward standpoint.

Hans Mosesmann

Okay. Good Devinder thanks. On the traditional PC, CPU side of the equation, on the GPU side of the equation, what are you doing in terms of your product roadmap to regain from the momentum, are you seeding some of the segments of the markets that say that say Intel or Nvidia and these respected market?

Devinder Kumar.

Yes, so let’s take it in order right. If you look at the computing side of the business, on the MNC OEM side, I feel the business is pretty good, pretty solid. In the channel space, there have been challenges and we are you know over index from an emerging geographies over-exposed if you want to call it that way. You look at China, you know mixed in terms of the economy right now, there is some impact there. If you look at what’s happening in Eastern Europe including in Russia, that’s having an impact on us and we go ahead and obviously have the impact there.

In the Channel space, it’s been a little bit choppy; it’s been difficult, right. If you look at the GPU desktop channel space or you look at the PC channel space, that business has hurt us a little bit over the last couple of quarters. Some of the things are working out in the channel space and we think it’s still going to be a couple of more quarters before it works out but like I said on the OEM space we see stability.

Overall PC market has stabilized. We have introduced some products that are targeted towards the commercial PC business, actually doubled over design wins going in at 2014 early part of this year and we are seeing some traction in the commercial space for example, Q2 to Q3 we were able to double the commercial unit shipments and we see the traction continuing in 2015.

For us the whole thing is to go ahead and change the mix of the business, get our computing and graphics business back to break even and into profitability as we enter 2015.

Hans Mosesmann

Okay. And then some clarification on the channel. Is it challenging because of the completion or is it challenging because there is an inventory correction? I know that you had some cryptocurrency related issues on the GPU side of the business starting this spring, so if you can give us some granularity there?

Devinder Kumar

I think it’s both. I think if you look at the consumer space in particular especially at the lower end, the competition is very very aggressive. As opposed to the AMD of the old when we had 95% of the business dependant on the PC side, we had to go ahead and you know chase every dollar of revenue because that’s the place the revenue was coming from. Today, from a financial standpoint if it doesn’t make senses, we don’t ahead and chase the business. If you look at the unit share in the PC space that’s definitely down. But if you look at the dollar revenue share, I mean it’s down about 1 % to 1.5% on a year on year basis but we knew [ph] the cut down of our loss is pretty significantly in that particular space for that particular segment.

AIB you mentioned cryptocurrency for sure it has an impact, had an impact in the Q2 timeframe when the exchanges collapse on the cryptocurrency side. That’s kind of worked its way out, but I think in the AIB channel business, in the desktop channel GPU space in particular, things are still challenging.

Hans Mosesmann

And Intel a couple of weeks ago during that Analyst Day, or meeting indicated that the PC market review is flat over the next several years and their data center or server business up in mid-teens, can you comment on how AMD reviews the traditional PC markets and the server markets?

Devinder Kumar

I think overall that’s true. That’s kind of the way we view it. I think overall PC market has definitely stabilized, but looking below that from an AMD standpoint, if I look at an AMD statement, we over expose from the consumer side and not index in the commercial side as I said earlier. So obviously that benefit while the overall market is stable, they strengthened the commercial enterprise space, but we -- our share kind of overall standpoint is low there and we need to grow there in order to go ahead and benefit the PC business.

But from a server standpoint, yes, there is strength. We have a server part on the ARM side which we are sampling with our ecosystem partners as well as the developers out there which is an ARM based part we call Seattle. We are sampling that out there, we will see revenue for that in the first half of 2015, but that’s a business that grows overtime in the dense server space as we get to 2019. But the server business is continuing to be strong.

Hans Mosesmann

Great. And at this point are there any questions from the audience for Devinder. Okay, so speaking of the Seattle product and you are working on a custom version of that as well based on the recent developments, recent architectural license with ARM, so if you look at both products and products that are coming into markets, where does the potential opportunity for that AMDs for ARM specifically outside of x86 in the server space.

Devinder Kumar

So if you look out over a long time period from 2014 to 2019, we believe by the time we get to 2019 in the server business ARM is about ARM server is about or dense server as we call it is about 20% of the total revenue opportunity. It’s a long journey, you know AMD as you know Hans has had a history in the server space. We understand 64-bit computing, we had the x86 server business that if you go back quite a few years we did pretty well, we still have the expertise, we understand the ecosystem, we have the relation to be the partners and the Seattle ARM is using off the shelf ARM core to go ahead and sweep the business in 2015.

As you get into 2016 timeframe, we will have a product called the K12 product which is from the ground sub built with an AMD using an ARM based core, it is within the same group that is run by Jim Kelleher who is our CPU architect in the company and that is the path that we see taking us forward as we continue to increase our footprint and revenue share that dense server space go into the 2019 time frame. It is a journey, multi year journey. We see a lot of potential in that business from a power efficiency and power performance equation stand point and that’s a business that we will grow overtime.

Hans Mosesmann

You begin [ph] with Jim Kelleher, he came from Apple, is that correct?

Devinder Kumar

He used to look at AMD and then went off to Apple and with all of the stuff that we are doing today, you know in AMD today, whether you want to work on x86 ARM or CPU or GPU, you know we have it all. And somebody like Jim Kelleher and other by the name Raja Koduri, who came to AMD through the API acquisition left and actually [Indiscernible] went to Apple and both of them actually over the last couple of years have come back to AMD. One is our architect on the CPU side and Raja Koduri is our architect on the GPU side and they work very closely together to introduce the path that we’ve been talking about the last few minutes.

Hans Mosesmann

Okay. And so the K12, the custom version is 2016…

Devinder Kumar

2016, that’s right.

Hans Mosesmann

28 nanometer for…

Devinder Kumar

28, not yeah, I think it will be 28 nanometer, but you know it’s more from my standpoint the products that I think you want to focus on in terms of what the products can do, you know we be a process technology as necessary but you don’t have a leading edge to these days to go ahead and give the kind of performance or the path that we introduced.

Hans Mosesmann

Okay. And then part of this subject is, how is the SeaMicro acquisition coming along, I know it’s an important building block or a fabric that comes from…

Devinder Kumar

Yes.

Hans Mosesmann

Acquisition of leaseback [ph] how is that coming along and how is that part of the strategy in the transformation?

Devinder Kumar

I think from a technology standpoint it’s playing out as we expected. You take AMD as a company that had x86 expertise, need no ARM, we got the ARM architecture license, now we are to going to ahead and have an Phenom [ph] based pod build on the ground some by 2016 timeframe.

SeaMicro fabric plays from a viewpoint of -- it is a server space, allows us to understand systems from a server standpoint as a SeaMicro fabric marrying that with AMD’s own expertise and servers, x86 64-bit has played out as we anticipate and now engineers today in the server business and particular learning all aspect of the server business include the SeaMicro fabric.

The revenue today is not something that’s significant, but like I said this is a longer term play going to the 2018, 2019 timeframe that we see the benefit from the acquisition of SeaMicro, which we did as you probably know in the early 2012 timeframe.

Hans Mosesmann

That’s right. Okay. Devinder, thank you. Let’s shift gears and go into game console.

Devinder Kumar

Yes.

Hans Mosesmann

So you got nice wins at Sony and Microsoft, give us a sense on what you expect in terms of the seasonality? Where we are in these various phases of game console shipment as we look into 2015 and beyond?

Devinder Kumar

This is the existing part of our business. We launched the game console product Xbox One and PS4 in the 2013 timeframe. 2014 is the first full year and is played out as we anticipated the strength of our customer selling the product, happens in the holiday season in Q4. Because it is a 100% exclusive business with both Microsoft and Sony for the PS4 and Xbox One, our part ship to them in the Q3 timeframe and that’s why we call Q3 the peak from a semi-custom unit standpoint. Q4 will be down over Q3, we’ll see how the holiday season goes and I from all indications based on public information is going very well.

We’re going to have a solid holiday season in terms of game console sales. And then you get into the January, February timeframe and take stock of what happened in 2014. It is possible as what happened in previous game console generations where the peak unit happens in year three and year four. So in this particular cycle 2013 being the first partial year with the launch happening in the Q3, Q4 of 2013 timeframe, 2014 is the first full year, so call it the second year, 2015 is year three and 2016 is year four. And in past cycle year three, year four is when the peak happens from a unit standpoint and it could in this particular generation play out the way which benefits us from a viewpoint of getting into 2015 for the game console business.

The other thing I’ll mention in the semi-custom business which you probably picked up in the announcement that we had in October earnings call is we’ve been having a lot of interest in the semi-custom business, the semi-custom business is very unique, whereby it takes AMD’s core IP, we use it across market segments, across customers, across products, customer interest has been high and we projected earlier this year that we would have at least one to two semi-custom design wins and I’m pleased to report that we have those design wins, the work to design the products that has already started, the contract assigned and those parts get introduced in 2016.

So the 2016 semi-custom design wins will have parts 186 one ARM goes beyond gaming. And by the way it is a $1 billion revenue opportunity over three-year period starting sometime in 2016. So we’re excited about that too, because it takes us from a revenue standpoint beyond the two game consoles that we have with Microsoft and Sony. And then for good measure, we provide the technology for Nintendo Wii U where we earn a royalty from an overall standpoint from those companies.

The design wins are interesting because the funding, the R&D dollars for customizing the parts for the products to our customers is precisely pre-funded by the customer and like I said the workload is started and we are spending the money and the resources and the work to go ahead and design the parts to be introduced sometime in 2016.

Hans Mosesmann

These two contracts, they are in the consumer space or enterprise?

Devinder Kumar

We didn’t say at which space it is in. I’m not going to give too much detail. I’ll say that one is x86 and one is ARM, and atleast one will be on gaming, right. But that’s about as much as you going to get out me today, because the customers from the standpoint to be fair to them. It is their product. They launch it. They announce it and then just like the game console or the parts you find out that its AMD’s APU that’s been used in those products.

Hans Mosesmann

Okay. Fair enough. But just sort of curiosity, who compete against you guys and for these types of projects in semi-custom?

Devinder Kumar

You know, AMD is the only company in the world that has native CPU and graphic technology on the chip. Sony and Microsoft in their own right are fierce competitors and both selected AMD on an exclusive 100% basis to go ahead and have us supply the APU for the game console both PS4 and Xbox One.

Hans Mosesmann

Okay. Fair enough. Any questions, I poll the audience one again. Okay, Foundries, kind of a Foundry strategy, how is the situation with GlobalFoundries is coming along. Is there something we need to understand there that is maybe different and the strategy and relationship with TSMC, how does that play out over time?

Devinder Kumar

So we have a very balance foundry strategy you’ve seen and you are very familiar, Hans you know 2011, 2012 timeframe where we have all the challenges with the PC market shifting and some of the challenges that GlobalFoundries had from an execution standpoint. I can tell you as I said last week at another conference. The relationship with GlobalFoundries both at the GlobalFoundries level and with our partners in Abu Dhabi is the best in the history of the relationship. You know I’ve been involved in this right from the inception of when GlobalFoundries was formed in 2009, but the relationship is just great at this point.

From an execution standpoint, GlobalFoundries execution is significantly better today than it was even a year ago, and as you know they have brought in new management team there and I think that’s doing really well for us from a Foundry partner standpoint. But we do our business with them. Everything is playing out even for 2015. We are on track in 2013 and 2014. We’ve been very fortunate with our partner in GlobalFoundries. And in 2014 if you look at the product where it used to be all PC products in 2014 for the first time in the history of our relationship with them. They are making semi-custom product, they are making graphics product and they are making PC product. And I think the mix of the product within the foundry just like any other foundry that you work with is going to help us as we move forward in this relationship.

We are in the process of working out the WSA and volume commitments from a capacity and demand standpoint for 2015, and again is a mix of the product and that’s going to help us as we continue our relationship with GlobalFoundries.

Hans Mosesmann

Why don’t you remind us, Devinder what’s the WSA for this year and is there potential for you there [ph]?

Devinder Kumar

It’s just under $1.2 billion. We’re on-track to go ahead and take that from GlobalFoundries. Now what happens when you get to the end of the year for us and them in 2015 is there’s always a balancing of the supply, demand, capacity statement, but overall we’re on track to go ahead and meet our obligation for 2014. And then like I said, negotiate the supply arrangement for 2015.

Hans Mosesmann

Okay. And then as a follow-on, the TSMC relationship, will that continue and how does that shift over time?

Devinder Kumar

That continues. I think it’s a pretty balance strategy from an AMD standpoint and we still -- we buy a lot of product from TMSC. We buy lot of product from GlobalFoundries.

Hans Mosesmann

Roadmap, 16-nanometer FinFET or 14-nanometer?

Devinder Kumar

Today the bulk of our product is 28 nanometers at both foundries. We will have certain products move to 20 nanometers in 2015. And then, going forward we will be in FinFET timeframe to be determine based on product intersection with technology needs on a go forward standpoint. But we will get FinFET. Now the thing that’s interesting that you might have observed is GlobalFoundries signed an alliance agreement on future technology nodes including FinFET with Samsung and very recently they’ve gone ahead and had the arrangement with IBM, whereby they’re going to take the Microelectronics division. So that’s already helpful for us because it gives them the scale, gives them additional customers and from all those standpoint a healthy and GlobalFoundries as doing well is obviously very good for AMD.

Hans Mosesmann

Excellent. Okay, balance sheet, cash, how we’re looking?

Devinder Kumar

We managed the cash well, inventory down this quarter compared to last quarter as I guided. We’ve been close for our optimal range of cash. And in fact you might have picked up in the 10-Q filing that we did for Q3 that post Q3 in the October timeframe with the debt trading where it did at the discount. We deployed about $70 million to go ahead and buyback public market debt at a discount 2020 and 2022.

And I think you will see us as we get into 2015 and manage our working capital and managing our cash levels that any excess cash that I have call it over $1 billion or so, we will go ahead and deployed a buyback to that and bring down the interest burden on the P&L, but more importantly the leverage from a debt standpoint on the balance sheet.

Hans Mosesmann

Any question. Okay. So, Devinder, I’ll circle back to some bigger issues that investors are concerned about and [Indiscernible] it seems to be slowing even Intel struggled for the better part of this year deploying their 14-nanometer FinFET. In a world that sees prolonged kind of slowing transitions from one node to next, how does AMD provide value? What’s your secret or how do you become successful or more successful?

Devinder Kumar

I think, if you look at AMD denominated like the old where it was always competition on the process technology node than that’s a wrong way of looking at AMD. What you had to look at AMD is we have core IP. We have made our focus to be the design, which is what we are good at from an IP standpoint. We have diversified the portfolio to go beyond x86 and have ARM. I mentioned the Seattle product in the server space using ARM. We are introducing products and the embedded phase using ARM and we’ve had some demonstration of some products there and you heard me talk about the K12.

So if you look at AMD you’ll look at very diverse market than what we use to have in the past. A very diverse set of customers and with the embedded semi-custom professional graphic space with the focus we’ve done very well over the last one year. And I think the transformation continues 2015 and going to 2016. So you’re going to look at AMD that is able to provide products with IP that is reused across a broad market segments, broad set of customers, broad markets and verticals as opposed to everything is in process technology. We do not have to be and we’ve shown that. And many consumer devices these days do not use the bleeding edge of technology, you have to be a leading edge and I mentioned 29 nanometer today and we will go to on the curve where it make sense from a financial standpoint working with our foundry partners but not needing to be at the bleeding edge of technology for the products.

Architecture is important, software is important. The way we do the power management and the process efficiencies within those products is going to be important in the go-forward standpoint. And the diversified portfolio of revenue that we’ve already indicated we’re going to go to 2015 or by the end of 2015 where 50% of revenue is not going to be coming from the PC sector, and at the same time improving our financial performance is what we are focused on.

Hans Mosesmann

Great. We have one minute. I think investors are interested in seeing how this plays out with Nvidia as part of their lawsuit against the Samsung and Qualcomm regarding fundamental Graphics IP, now AMD obviously has as well a very deep portfolio of Graphics IP. Has management considered a strategy to monetize that like Nvidia is doing, and what would you need to do this and start that effort?

Devinder Kumar

Yes. We have considered that and we will explore possibilities in that area as we move forward.

Hans Mosesmann

Okay. Devinder, thank you very much. It’s been a pleasure and thanks for the rundown and audience thank you very much for coming.

Devinder Kumar

Thank you. Thank you very much. Thank you, Hans.