Advanced Micro Devices’ (AMD) CEO Rory Read on Q2 2014 Results – Earnings Call Transcript

Source: Seeking Alpha


Advanced Micro Devices, Inc. (NYSE:AMD)

Q2 2014 Earnings Conference Call

July 17, 2014 05:30 PM ET


Ruth Cotter – CVP of IR

Rory Read – President and CEO

Devinder Kumar – SVP and CFO

Lisa Su – SVP and COO


Mark Lipacis – Jefferies & Company

David Wong – Wells Fargo

John Pitzer – Credit Suisse

Ross Seymore – Deutsche Bank

Christopher Rolland – FBR Capital Markets

Joe Moore – Morgan Stanley

Stacy Rasgon – Sanford Bernstein

Matt Ramsay – Canaccord Genuity

Betsy Van Hees – Wedbush Securities

Romit Shah – Nomura

Jim Covello – Goldman Sachs

Mike McConnell – Pacific Crest


Good day ladies and gentlemen. Thank you for standing by. And welcome to the Advanced Micro Devices’ Q2 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference to our host Ms. Ruth Cotter, Corporate Vice President of Investor Relations.

Ruth Cotter – CVP of IR

Thank you, and welcome to AMD’s second quarter earnings conference call. By now you should have had the opportunity to review a copy of our earnings release and the CFO commentary and slides. If you’ve not reviewed these documents, they can be found on AMD’s Web site at

Speakers on today’s conference call are Rory Read, our President and Chief Executive Officer; and Devinder Kumar, our Senior Vice President and Chief Financial Officer. Lisa Su, our Senior Vice President and Chief Operating Officer will be present for the QA portion of the call.

This is a live call and will be replayed via webcast on

I’d like to take the opportunity to highlight a few dates for you. Devinder Kumar will attend the Jefferies Semiconductors, Hardware & Communications Infrastructure Summit on August 27th in Chicago. Rory Read will attend the Deutsche Bank Technology Conference on September 9th in Las Vegas. Our third quarter quiet time will begin at the close of business on Friday, September 12th and lastly we intend to announce third quarter earnings on October 16th.

Please note that non-GAAP financial measures referenced during this call are reconciled to their most directly comparable GAAP financial measure in the press release and CFO commentary posted on our Web site at

Before we begin, let me remind everyone that today’s discussions contains forward looking statements based on the environment as we currently see it. Those statements are based on current beliefs, assumptions and expectations, speak only as of the current date, and as such involve risks and uncertainties that could cause actual results to differ materially from our current expectations.

Please refer to the cautionary statements in today’s earnings press release and CFO commentary for more information. You’ll also find detailed discussions around our risk factors in our filings with the SEC and in particular AMD’s quarterly report on Form 10-Quarter for the quarter ended March 29, 2014.

Now, with that, I’ll hand the call over to Rory. Rory?

Rory Read – President and CEO

Thank you, Ruth. The second quarter capped off a solid first half of the year for AMD. We have made significant progress in transforming our Company. This was highlighted by our second quarter results including; revenue of $1.44 billion, an increase of 24% from the year ago period; and non-GAAP EPS of $0.02, an improvement of $0.11 compared to the same period last year.

We are clearly executing our strategy, building a stronger AMD business model and enhancing our ability to deliver consistent performance. We have diligently managed expense and lowered our cost structure, significantly reducing operating expense, while strategically investing in innovations that will fuel our future growth. At the same time we have relentlessly focused on improving and consistently executing, hitting our key products, milestones and ensuring we deliver on our commitments to our customers.

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We have improved our balance sheet by re-profiling debt at lower rates, which we expect will reduce our interest expense with no significant debt coming due until 2019. We have driven our AMD leadership processing and graphics technology into new markets. And we are currently on track to generate approximately 40% of our revenue from these high growth markets for the full year 2014. And we also remained on track to deliver 50% of our revenue from these high growth markets by year-end 2015.

As a result, for the first six months of 2014, AMD’s revenue increased 26% and our non-GAAP EPS improved by $0.26 compared to the first half of 2013. We have now delivered four consecutive quarters of non-GAAP profitability and we remained on track to deliver on our commitment of non-GAAP profitability and revenue growth for the full year 2014.

Now let’s turn our attention to our business achievements in the second quarter. Semi-custom SoC shipments increased from the prior quarter as we continued to see strong demand for AMD-powered game consoles. We had record semi-custom unit shipments in the second quarter, and we expect to continue to ramp shipments into the third quarter, our peak quarter as Microsoft and Sony prepare for the holiday cycle.

In our embedded business, revenue increased by double-digit percentage from the previous quarter as new design wins started to ramp in this key growth market. We launched several new products in the quarter and announced win with HP’s thin clients, as well as Boeing’s next generation advanced cockpit display systems to name just a few.

Most importantly looking at our embedded pipeline, our design win momentum accelerated in the first half of this year across our key target markets of thin client, gaming and industrial controls.

In our professional graphics business, unit shipments increased significantly from the prior period as we continue to grow our FirePro business with Apple, Dell and HP. We look forward to driving either more share gains in this margin accretive market.

In our dense server business, first half 2014 revenues more than doubled compared to the year ago period. And we are actively sampling Seattle, the industry’s first 28-nanometer 64-bit ARM server processor and remain on track for launch in the fourth quarter.

Now let’s turn to the PC market. The overall PC market has shown signs of improvement, largely driven by the commercial refresh cycle. However, the consumer market remains under pressure. And we expect the overall PC market is going to continue to be down by 5% to 7% for the year 2014. In the second quarter AMD’s overall microprocessor unit shipments increased sequentially for the first time in four quarters, driven by the introduction of new notebook from Acer, Dell, HP, Lenovo and others powered by our latest Vima and Kaveri APUs. We also launched AMD’s Pro A-Series APU in the quarter and remain on track to more than double the number of AMD-based commercial offerings available by the end of the year. HP has already announced a full range of elite commercial offerings powered by AMD and additional OEMs will begin rolling out AMD-powered commercial offerings this quarter.

In the desktop space, demand for our desktop APUs was strong from our OEMs; however, the desktop component channel was softer than we expected. We believe that with the expansion of our A-series APU portfolio and continued ramp of our first lower-powered socketed desktop APU, this business was strengthened over the coming quarters. Overall, we saw the first sequential revenue increase for our computing solution segment in four quarters. Our PC strategy remains focused on developing profitability by diversifying into the commercial stabilizing the overall PC business and leveraging the channel to deliver profitability.

Now let’s turn to graphics. In graphics, we saw a strong growth in our notebook GPUs as OEM design wins began to ramp in the quarter. This was offset by a decline for our enthusiast class offering in the AIB channel as demand from cryptocurrency miners abated. We expect to increase GPU shipments this quarter as market pricing for our R7 and R9 offerings become more consistent and as we head into the, what is typically the stronger second half of the year for GPUs. Regaining graphics market share remain a priority and we are confidence that our products go-to-market programs and design wins can drive gains throughout the coming quarters.

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Today, we are more than half ways through our three-step transformational strategy. I am pleased with the progress that we have made as shown by the significant turnaround in our results and our strong continued momentum. We still have more work to do. In the second half of the year, we are focusing on delivering non-GAAP profitability into 2014 and full year revenue growth by continuing the following. The ongoing ramp of our semi-custom SOCs to meet the strong game console demand, driving sales for the expanded number of design wins we have secured in the commercial space, which is the clearly the strongest performing part of the PC market.

Return growth in our channel business and gain share and discrete graphics and continued growth in the embedded and professional graphics markets and securing additional design wins. We also remain on track to secure one to two additional semi-custom design wins that will help to accelerate our transformation throughout the coming years. So in summary, we are demonstrating that our three-step transformation is driving solid progress and result at AMD. To help drive continued success in the next space of our transformation, last month we realigned several internal functions to create a single market focus team design to strengthen our traditional PC business and drive future growth in adjacent markets where our leadership IP provides AMD with a competitive advantage.

We appointed Lisa Su as Chief Operating Officer to lead this new organization and she will oversee daily operations of our product roadmap strategy and execution to help drive long-term growth. Our three-step transformation will take us through 2015 at which time a different AMD will have a diversified portfolio, consistent execution, and our next generation technology which will take us to the next space. Our strategy is working and we look forward to updating you on our progress and success as we forward you head.

With that, let me turn the call over to Devinder, Devinder?

Devinder Kumar – SVP and CFO

Thank you, Rory, and good afternoon to tall those listening today. We had good financial performance in the second half quarter, capping off a solid first half of 2014. We grew revenue sequentially and realized our fourth straight quarter of non-GAAP net income. We also continue to make progress on our strategy to transform AMD and saw traction in our growth businesses as evidenced by the strong performance of our semi-custom, professional graphics and embedded products.

Turning to the specifics for the second quarter, revenue was $1.44 billion, up 3% sequentially, driven primarily by strong sales of our semi-custom SoC and notebook offerings and up 24% year-over-year, primarily driven by strong sales of our semi-customs SoC offerings? Gross margin was 35%, flat from the prior quarter despite higher semi-custom SoC sales which have a lower than corporate average gross margin, offset by a richer mix of notebook products. Non-GAAP operating expenses in the second quarter were $431 million, up 10 million from the prior quarter. We continue to manage operating expenses in line with revenue to meet our profitability goals and for the fourth quarter in a row the non-GAAP operating expense to revenue ratio was 30% or better.

Non-GAAP operating income was $67 million and non-GAAP net income was $17 million with non-GAAP earnings per share of $0.02, calculated using $764 million diluted shares. Second quarter non-GAAP earnings per share excludes $49 million of loss from debt redemption in the quarter. Adjusted EBITDA was $137 million, down $2 million from the prior quarter and for the trailing four quarters adjusted EBITDA was $594 million.

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Now turning to the business segments. Computing Solutions segment revenue was $669 million, up 1% sequentially due to higher notebook and embedded process sales, offset by lower desktop, processor and chipset sales. Computing solutions operating income was $9 million, an improvement from an operating loss of $3 million in the first quarter. This was driven primarily by improved gross margin from a richer mix of notebook processors.

Graphics and Visual Solutions segment revenue was $772 million, up $38 million or 5% from the prior quarter, primarily due to an increase in sales of our semi-custom SoCs. Operating income was $82 million, compared to an operating income of $91 million in the prior quarter, primarily driven by lower GPU revenue.

Turning to the balance sheet. Our cash, cash equivalents and marketable securities balance totaled $948 million at the end of the quarter, down $34 million sequentially, primarily due to the timing of sales and related collections during the quarter. Inventory was $960 million, up $91 million, primarily driven by increased level of our latest 28 nanometer microprocessor products and lower shipments to channel distributors. We remain focused on maintaining appropriate levels of inventory and plan to manage inventory levels down throughout the rest of the year.

Debt as of the end of the quarter was $2.2 billion, up $72 million from the prior quarter due to our most recent debt re-profiling activities. In the second quarter, we issued $500 million in principal amount of 7% senior notes due in July 2024, utilizing the proceeds to fully extinguish our 8% and 18% notes due in December 2017. By executing these debt transactions, we have further extended our term debt maturities and have no significant term debt maturities for approximately five years.

Additionally, we expect to reduce interest expense by approximately $3 million per quarter starting in Q3, 2014. One housekeeping note, the remaining $41 million net of our 6% convertible senior notes due in May 2015 has now been reclassified as short-term debt on the balance sheet.

Accounts payable at the end of the quarter was $511 million, up slightly from $483 million in the first quarter. We had negative free cash flow of $51 million in Q2, 2014, an improvement from the first quarter of 2014 which included a $200 million cash payment to global foundries related to the reduction of the take or pay wafer obligation commitments for 2012.

Now turning to the outlook. The overall PC market has strengthened, largely driven by the commercial space although there is continued weakness in the consumer PC market. In our semi-custom business, based on our strong first half shipments, we anticipate semi-custom revenue been more evenly spread across the year.

Guidance for the third quarter of 2014 is as follows; AMD expects revenue to increase 2% sequentially, plus or minus 3%; gross margin is expected to be approximately 35%; non-GAAP operating expenses are expected to approximate $435 million; interest expense to be approximately $42 million and the total of interest expense, taxes and other is expected to be approximately $50 million; and inventory is expected to decrease from second quarter levels.

In summary, we are pleased with the performance we delivered in the first half of 2014 in line with our commitments and a singularly focus on continuing to transform the company by executing the plans we have outlined. We remain on track to meeting the financial commitments we set for the year including; continued operating expense discipline while growing revenue year-over-year; achieving non-GAAP net income profitability; and positive free cash flow generation for 2014.

With that, I’ll turn it back to Ruth. Ruth?

Ruth Cotter – CVP of IR

Thank you, Devinder. Operator, we’d be happy for you to pole the audience now please for questions.

Question-And-Answer Session

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