Edited Transcript of Advanced Micro Devices (AMD) Q3 2014 Earnings Conference Call..
Company: Advanced Micro Devices (AMD)
Event Name: Q3 2014 Results Earnings Conference Call
Date: October 16, 2014 05:30 PM ET
Operator: Good day, ladies and gentlemen. Thank you for standing by. And welcome to the AMD third quarter 2014 earnings conference call. (Operator Instructions) I’d now like to turn the conference to our host, [technical difficulty]. Ma’am, you may begin.
Ruth Cotter – Corporate VP, IR
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 the CFO commentary and slides. If you have not reviewed these documents, they can be found on AMD’s website at ir.amd.com.
Participants on today’s call are Lisa Su, our President and Chief Executive Officer; and Devinder Kumar, our Senior Vice President and Chief Financial Officer. This is a live call and will be replayed via webcast on amd.com.
I’d like to take this opportunity before the call begins to highlight several dates for you. Matt Skynner, our Corporate Vice President and General Manager of the Graphics Business Unit will present at the UBS Technology Conference on November 18 in California. Devinder Kumar will present at the Credit Suisse Technology Conference on December 3, in Arizona; and at the Raymond James IT Supply Chain Conference on December 8 in New York.
Mark Papermaster, our Senior Vice President and Chief Technology Officer will present at the Barclays Global Technology, Media and Telecommunication Conference on December 8 in San Francisco. Our fourth quarter quiet time will begin at the close of business on Friday, December 12. And lastly, we expect to announce our fourth quarter earnings results on January 20, 2015.
Please note that we are now reporting two new financial segments beginning the third quarter. Computing and Graphic segment, primarily include desktop and notebook processors and chipsets, discrete GPUs and professional graphic; and the Enterprise, Embedded and Semi-Custom segment, primarily include server and embedded processors, dense servers, semi-custom SoC products, engineering services and royalties.
Additionally note that non-GAAP financial measures referenced during this call are reconciled to most directly comparable GAAP financial measures in the press release and CFO commentary, which are posted on our websites at quarterlyearnings.amd.com.
Before we begin, let me remind everyone that today’s discussion 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 about our risk factors in our filings with the SEC, and in particular AMD’s quarterly report on Form 10-Q for the quarter ended June 28, 2014.
Now, with that, I’d like to hand the call over to Lisa. Lisa?
Lisa Su – Chief Executive Officer
Thank you, Ruth, and good afternoon to all those listening in today. I am pleased to be here on my first earnings call as CEO. In addition to covering our quarterly results, I also want to use this opportunity to provide some details on my initial priorities and the steps we are taking to continue transforming and strengthening AMD.
Our third quarter results highlight the progress we have made in diversifying our business, as we delivered our fifth straight quarter of non-GAAP profitability. While our Enterprise, Embedded and Semi-Custom segment had a strong quarter, we did face some challenges in our Computing and Graphics business due to ongoing weakness in the consumer PC market.
We know what we need to do to improve performance going forward and are taking the appropriate actions. So let me give you some more color on each of the segments.
Our Enterprise, Embedded and Semi-Custom segment delivered sequential and year-over-year revenue and operating profit improvement. We had strong embedded processor revenue growth and secured multiple new design wins across our priority markets. For instance, Arista, a leader in software-driven cloud networking, began ramping production of new switches powered by our embedded G-Series SoC.
Our customers also began ramping a number of new retail and educational digital signage wins in the third quarter. We also started sampling our first embedded ARM SoC in the quarter, and at ARM’s TechCon Conference we demoed the industry’s first ever 64-bit ARM-powered Network Function Virtualization Solution. The demo won Best in Show software Product and is a great example of how our leadership, ARM and x86 offerings are generating increased interest from telecom and networking customers.
Our work to lead the industry’s transition to 64-bit ARM servers also gained momentum in the quarter. After ceding Opteron A-Series development kits with key ecosystem partners earlier this year, we expanded availability to software developers and system integrators. We continue building out the 64-bit ARM Server Ecosystem in advance of system launches expected next year.
This quarter we also had public demonstrations of community versions of Red Hat’s Fedora and SUSE’S OpenSUSE 64-bit ARM Linux operating systems running Oracle JDK and enterprise-class Java platform on our upcoming Opteron A-Series SoC. Based on the wide-spread availability and silicon status of our Seattle development boards, we are also seeing a number of our partners and customers using the AMD platform as their lead ARM 64 development vehicle.
The highlight of our quarter was in our strong semi-custom business, where we shipped a record number of units for our game console customers. Q3 will be our peak unit shipment quarter for the year, as Microsoft and Sony prepare for the holiday season.
And relative to our new semi-custom design win pipeline, I am very pleased to announce that we have secured two new wins, accomplishing our goal to close one to two semi-custom wins this year. These new semi-custom SoCs are expected to deliver combined total lifetime revenue of approximately $1 billion over approximately three years. Design work for these opportunities has started and we anticipate first silicon revenue in 2016.
Although I can’t go into details on the customers or the specific products, it is important to note that we are diversifying our semi-custom business beyond gaming.
These wins also mark another significant milestone for us, as one of the wins is our first 64-bit ARM-based semi-custom design, building on our growing ARM 64 momentum in the embedded and server markets. Our semi-custom design win pipeline remains strong and we continue to have good opportunities to deliver future growth for this important part of our business.
Now, turning to our Computing and Graphics segment. The Computing and Graphics business remains very important to us and is an evolving area of the company where we have started a substantial amount of work to transform and strengthen this business.
Earlier this year, we laid out several important objectives to improve the financial performance of this segment. These include: expanding in the commercial client market; improving our mix in consumer notebooks; gaining share in professional graphics; and increasing component and AIB channel sales.
We met our goal to double our commercial client design wins from last year, and are pleased with the initial progress we are making to build a richer mix in our PC business. New commercial client offerings from Dell, HP, and Lenovo have started ramping, resulting in approximately a 50% increase in our commercial APU shipments from the second quarter.
We also improved our notebook APU mix in the quarter, as our Kaveri processors ramped in mobile design wins and our higher-end mobile processor unit shipments increased nearly 50% from the second quarter.
Mobile discrete GPU unit shipments also increased from the second quarter, as new design wins entered production. And earlier today, Apple announced a number of new iMacs powered by our Radeon GPUs. Included in the wins is the new 27-inch iMac with 5K retina resolution, which highlights the ongoing move to higher resolution displays. This trend plays well to our strengths in discrete GPUs.
And in the professional graphics market, we believe this remains an area where we see the opportunity for ongoing growth. In the third quarter, channel sales increased sequentially and we secured several new design wins with Dell and HP that will reach market early next year.
Desktop Processor and Graphics Performance
Now, turning to the desktop processor and graphics performance in the quarter. Although we increased overall desktop processor unit shipments from the previous quarter, our performance in the component and graphics channel was weak. We saw sell-out momentum slow, particularly in China, and believed there was some downstream inventory build in the quarter, causing our distributors to be more cautious managing their inventories. We are committed to these markets and have started taking actions in conjunction with our channel partners to improve sell-through in the coming quarters.