Advanced Micro Devices Inc AMD
Q2 2013 Earnings Call Transcript
Transcript Call Date 07/18/2013

Operator: Good afternoon. My name is Huey and I'll be your conference operator for today. At this time, I would like to welcome everyone to AMD's Second Quarter 2013 Earnings Conference Call. All lines have been placed on a listen-only mode at this time. After the speakers' remarks, you'll be invited to participate in the question-and-answer session. As a reminder, this conference is being recorded today.

I'd now like to turn the conference over to Ms. Ruth Cotter, Vice President of Investor Relations for AMD. Please go ahead.

Ruth Cotter - 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 have not reviewed these documents, they can be found on AMD's website at quarterlyearnings.amd.com.

Our participants on today's call are Rory Read, our President and Chief Executive Officer; Devinder Kumar, our Senior Vice President and Chief Financial Officer; and in addition, we have Lisa Su, our Senior Vice President and General Manager of Global Business Units who will participate in the question-and-answer session. This is a live call and will be replayed via webcast on amd.com.

Before we start, I'd like to highlight a few dates of interest for you. Matt Skinner, our Corporate Vice President and General Manager of our Graphics business unit, will attend the Jefferies Semiconductor and Hardware Summit in Chicago on August 28. Lisa will present at Citi's Global Technology Conference on September 4 in New York. Our third quarter quiet time will begin at the close of business on Friday, September 13. And lastly, we intend to announce our third quarter earnings on October 17, and dial-in information for that call will be provided in mid-September.

Please note we renamed our Graphics segment to Graphics and Visual Solutions. This better reflects the growing importance of gaming and semi-custom offerings to AMD. In addition, please note that non-GAAP financial measures referenced during this call are reconciled to their most directly comparable GAAP financial measures in the release and CFO commentary posted on our website at quarterlyearnings.amd.com.

Before we begin, let me please 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. You can refer to the cautionary statement in our press release for more information. You will also find detailed discussion 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 March 30, 2013.

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

Rory Read - President and CEO: Thank you, Ruth. We are making progress on our three-step strategy to restructure, accelerate, and ultimately transform AMD for growth. This progress allowed us to deliver improved results in the second quarter.

Revenue of $1.16 billion was higher than our guidance as strong demand helped drive sequential unit shipment increases and market share gains across both of our business segments. With our restructuring complete, our focus in the second half of the year is on continuing to accelerate our business. We expect a return to profitability in the third quarter based on the midpoint of our revenue guidance.

Our traditional PC business is heading into the typically stronger second half of the year with a competitive portfolio of new products and strong mobile design wins, particularly for systems in the $300 to $600 sweet spot of the market. Many of these systems will be the first to bring touch capabilities down into the mainstream price points where AMD has traditionally been the more successful.

We remain on track to deliver more than 20% of our revenue from our semi-custom and embedded businesses in the fourth quarter, with growth in the second half of the year primarily coming from our semi-custom SoC products for both the Sony and Microsoft next generation game consoles. These tailored products are great examples of the opportunities we have to quickly diversify our product portfolio and enter into new markets, where our IP and design capabilities provide us with a competitive advantage.

Looking more closely at our progress and the PC market, our strategy to gain share by introducing a new set of APUs and winning high volume notebook designs across key customers by region, price point and form factor help drive strong double digit sequential increases in mobile processor unit shipments. With our mobility APU launches, last quarter, we now offer the broadest range of mobile processors in our AMD history.

Our new elite mobility APUs scale down below 4 watts, well more than doubling the performance per watt compared to our previous generation. We are seeing strong adoption of these new APUs. This is particularly true of our high-volume Kabini, which is powering a number of thin and light touch notebooks that will hit the $400 price point. Acer, ASUS, Dell, HP, Lenovo, and Samsung have begun to roll out products based on our latest APUs, and we expect many more systems to launch in the second half of the year. We also continue to make progress rebalancing and strengthening our channel business. The introduction of our Richland APU helped drive a sequential increase in desktop processor channel revenue. We expect to continue to build on this improving channel trend in the second half.

Turning to our server business, a number of large data center wins in the quarter drove sequential revenue and unit shipment increases. Additionally, we continue to gain momentum in the emerging dense server market as customers are choosing AMD SeaMicro offerings for their data centers, based on the industry-leading energy efficiency, density, and bandwidth of our solutions. We intend to further attack the fast-growing portion of the server market in 2014 by introducing our next-generation X86 APUs and CPUs, as well as our first ARM-based server product. Our years of enterprise design experience and the ability to integrate our industry-leading dense server fabric into the processor provides us with a differentiated product for this new and exciting market.

Now, turning to our turning to our Graphics and Visual Solutions business. Our strategy to make AMD the de facto standard for game developers continues to gain momentum, as we launch the industry's fastest desktop and mobile graphics chips and cemented our position as the technology provider of choice for all three next generation game consoles.

In the high and enthusiast portion of the desktop's GPU market, the combination of our powerful graphics products and the Never Settle game bundle program drove significant share gain and a richer mix in the channel from the previous quarter. Our professional graphics business also recorded its four straight quarter of growth, delivering record revenue as we continue to aggressively pursue this lucrative market.

Looking at the second half of the year, we believe we have good opportunities for growth based on the PC market, strengthening slightly from the first half levels and the ramp of our semi-custom business. Longer term, the 300 million plus unit traditional PC market remains an important part of our core business, especially as the mainstream $300 to $600 system price points that have traditionally been our sweet spot become an even larger portion of the overall PC market.

We will continue transforming AMD, leveraging our design expertise and IP to pursue additional growth opportunities for our semi-custom, ultralow power client, professional graphics, dense server and embedded solutions. We expect these high-growth businesses will account for 40% to 50% of our revenue in the next two to three years.

In summary, we are pleased with the progress we are making to restructure, accelerate, and ultimately transform AMD, as strong demand for our latest products drove improved financial and operational results in the second quarter. We expect to deliver significant revenue growth in the second half of the year, as our strong new products position us to gain share in our traditional businesses and our first semi-custom SoC win, allows us to participate in new markets.

We are on track to reach our operating expense target of approximately $450 million and we expect to return to profitability in the third quarter based on the midpoint of our guidance. We are excited about the near-term opportunities to demonstrate our efficient business model, disciplined operational focus, and diversified product strategy that will deliver consistent profitability and growth.

With that, I'd like to turn it over to Devinder. Devinder?

Devinder Kumar - SVP and CFO: Thank you, Rory. Phase I of our three-phase turnaround and transformation strategy is largely behind us. We are now pursuing a diversification of our product and revenue portfolio, with a focus on high-growth market opportunities. As Rory mentioned, our performance in the second quarter was driven by both traditional PC and new growth opportunities, which support our business model transformation in an evolving PC market. We are on target to generate 20% of our revenue outside of the traditional PC space to semi-custom and embedded products by Q4 2013.

The last phase of transformation over the next two to three years is expected to see us transition 40% to 50% of our revenue base to higher-growth markets, which include semi-custom, dense server, professional graphics, ultra-low power client, and embedded products.

Revenue for the second quarter of 2013 was $1.16 billion. The 7% sequential increase was driven by a 12% increase in the Computing Solutions segment, which was partially offset by a 5% decrease in the Graphics and Visual Solutions segment.

Gross margin was 40%, a decrease of 1 percentage point sequentially and includes an $11 million benefit from the sale of certain products previously reserved in Q3 2012. You may recall that Q1 2013 gross margin of 41% included a similar benefit of $20 million. Excluding these benefits, gross margin was flat at 39% for both Q2 and Q1 2013.

Non-GAAP operating expenses were $479 million, and we remain on track to achieve our operating expense goal of $450 million by the third quarter of this year. Non-GAAP operating loss was $20 million and non-GAAP net loss was $65 million.

Non-GAAP loss per share was $0.09 calculated using 752 million basic shares. This loss per share includes an $11 million benefit from the sale of previously reserved products. Adjusted EBITDA was $54 million, an increase of $14 million from the prior quarter due to the lower operating loss.

Now switching to the business segments, Computing Solutions segment revenue was $841 million, up 12% sequentially due to significantly higher notebook and higher server and desktop unit shipments, primarily driven by demand for our new Kabini and Temash offerings as well as our latest Opteron 6300 series of products.

Client product revenue and server microprocessor revenue increased sequentially. Computing Solutions operating income was $2 million, an improvement from an operating loss of $39 million in the prior quarter. Graphics and Visual Solutions segment revenue was $320 million, down 5% compared to the prior quarter, primarily due to lower game console royalties.

Graphics and Visual Solutions segment operating income was breakeven compared to $16 million in the prior quarter. We continue to diversify our product portfolio into new markets where the competitive dynamics are different. In the semi-custom space for example, the market is differentiated from the rest of our business as our customers engage with us very early to jointly define and fund engineering development of customized products.

Development revenue and the associated costs are incurred during the development cycle of the given products. When the semi-custom products ship to the customer, we generate silicon sales and the associated ongoing OpEx is significantly lower than our non-semi-custom products due to the upfront funded development. The semi-custom model has the potential of providing a long-term revenue stream based on high volumes, which results in gross margin that is lower than the corporate average, but has significant revenue and earnings power as volumes ramp.

Under this model, the majority of gross margin dollar's fall through to operating income and the operating margin for this business will be in the low-double digit range, more than offsetting the impact of the lower gross margin. In addition as we transition to shipping silicon products, game console royalty revenue included in the semi-custom business is expected to decrease moving forward, although the decline will be more than offset by our growing semi-custom development and product revenues.

Turning to the balance sheet, our cash, cash equivalents and marketable securities balance including long-term marketable securities was $1.1 billion. During the quarter AMD made $40 million cash payment to GLOBALFOUNDRIES related to the 2012 wafer purchase commitment reduction and exited the quarter at our target optimal cash level and well above the target minimum cash level of $700 million. That, as of the end of the quarter was $2 billion, flat from the prior quarter.

Inventory was $711 million, up $98 million sequentially, largely driven by semi-custom products and the ramp of new products in the PC space to support growth in the second half of the year. Accounts payable at the end of the quarter was $402 million, up $101 million compared to the end of the first quarter of 2013 due to the timing of purchases and payments. Depreciation and amortization was $54 million, down from $62 million in the prior quarter, primarily due to the sale and leaseback of our Austin, Texas, Lone Star campus.

Now, turning to the outlook; for the third quarter of 2013, AMD expects revenue to increase 22% sequentially, plus or minus 3%. Gross margin is expected to be approximately 36%. Despite expecting revenue to increase significantly, quarterly operating expenses are expected to decline approximately 6% sequentially to around $450 million. Expense management will continue to be a focus area for us as we move forward.

At the midpoint of revenue guidance, AMD expects to be profitable at the net income level. Inventory is expected to increase sequentially to approximately $800 million, largely based on semi-custom product builds. We expect inventory to remain at those levels for the coming quarters, consistent with the ramp of our semi-custom business, and cash is expected to remain flat sequentially at approximately $1.1 billion.

In summary, in the third quarter, we will build on the strong foundation we have established as we remain laser focused on execution and returning to profitability in the third quarter and positive free cash flow generation in the second half of the year.

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

Ruth Cotter - IR: Thank you, Devinder. Operator, we'd be happy to poll the audience for questions now, please.

Transcript Call Date 07/18/2013

Operator: Vivek Arya, Bank of America.

Vivek Arya - Bank of America: First question, could you help us, Rory, differentiate between the growth prospects for your traditional PC and server segments versus the game console opportunity in Q3? And then, if you can give us any initial sense for Q4?

Rory Read - President and CEO: Sure, Vivek. As we look forward, we see a continued opportunity in the PC segment. While we see it only slightly stronger than the first half and I believe down year-to-year, I think there is an opportunity for us with our stronger product portfolio to continue to build on the momentum that we saw in the second quarter. Clearly, the market is moving down into the entry and mainstream price points where we've played very well, and I think this is a very good opportunity for us to continue to build share. Now, having said that, clearly the momentum and acceleration of revenue will come from the new segment, as well as off of that initial base but that -- those SoCs that we won in semi-custom are going to be a key driver moving forward in 3Q as we've guided.

Vivek Arya - Bank of America: Just one follow-up on that, Rory. I think yesterday Intel had guided to about 5% or so sequential growth in their PC and server segment. Is that roughly how we should be thinking about your traditional business and then whatever is left is the new opportunity?

Rory Read - President and CEO: Well, I see the overall PC market in the second half growing in that mid-single digit level, and what I'd like to do is to achieve that or exceed that so that we could slightly gain share.

Vivek Arya - Bank of America: One last one for Devinder. Devinder I think you mentioned low-double digit operating margin from the new wins that you have in consoles I assume that is exclusive of the royalties and is that an initial profitability level and does it get better than that or is that sort of a run rate level over time?

Devinder Kumar - SVP and CFO: I think we are giving guidance for Q3 and guiding to the low-single digit from a Q3 standpoint. As you can imagine, this business the semi-custom business and game console, in particular has a long lifeline and over time the mix between the ASPs and the cost can change. So, looking out in the future it's hard to tell, but at least at the starting point for the next couple of quarters I would target at the low-double digit.

Operator: Joe Moore, Morgan Stanley.

Joseph Moore - Morgan Stanley: Also on the console questions, how does the pricing work to you guys is there only good type (issues) is there any kind of yield risk to your profitability there, and I have a follow-up on that?

Lisa Su - SVP and General Manager, Global Business Units: Yeah, Joe this is Lisa. So, the game console SoCs are really as we would do. There are wafers that we expect good solid yields from. We've had very good bring up and so we're looking good with the prospects.

Joseph Moore - Morgan Stanley: And then how do you think about the ASPs in that business over the next some of years, is that a volume-based thing, is there a time, are there times when prices come down or just how does the price negotiation work over the course of the next few years in that business?

Lisa Su - SVP and General Manager, Global Business Units: These are long-term deals that we have with the customers given the range of the length of the design wins. So these are pre-negotiated.

Rory Read - President and CEO: Joe, what you would expect is you would expect what we've seen in the historical trends around game consoles. These generally run somewhere between five and seven years, and you would expect that over time the prices would move lower, but obviously expense and costs would move with it. What's powerful about this business is you can see a significant increase in our revenue quarter-to-quarter as we begin to ramp this. At the same time, you see our expense level decline by almost $30 million to the $450 million level, showing the benefit of doing that NRE customer funded development and how it flows through to the bottom line at that double-digit level.

Operator: Ross Seymore, Deutsche Bank.

Ross Seymore - Deutsche Bank: First question, looking back just briefly, the upside you had, can you walk through a little bit of what drove that surprise? I know the Computing Solutions group was up 12%. Was that mainly the Temash uptake? Or any more color you can give us there would be helpful, please.

Rory Read - President and CEO: Yeah, I think we saw a strong momentum in the new product segments, and obviously Temash and Kabini did well. I think Lisa has seen good uptake in the Graphics arena as well, and in the desktop channel area. So, we basically saw it in every part of our business progress quarter-to-quarter. Now of course, we're building off of that lower base as we saw the market fracture at the end of last year, but that's a good foundation, given these new products and the uptake that we've seen there.

Ross Seymore - Deutsche Bank: Is the ASP decline also driven by the new products, so it's a strategic decision and part of addressing those notebook price points that you mentioned earlier, Rory?

Rory Read - President and CEO: Well, from my perspective, what you're going to see is basically a mix discussion. We saw a very good performance in our entry in mainstream price points, and I think it's basically a mix area. We are focused on moving up the stack with the Richland offering as well as balancing that off with the new SoCs from the gaming and server areas. So, I'd say it was mix, Ross.

Ross Seymore - Deutsche Bank: I guess one final question on the gaming side of things. How do we think about eventual seasonality in that business? Do we have a good two or three quarter ramp before we even have to worry about that?

Lisa Su - SVP and General Manager, Global Business Units: Yeah, Ross, this is Lisa. I think the way to think about game console seasonality is like any consumer business. The first half is usually lower than the second half. Of course, we are in the middle of the ramp process, so the second half of this year will be the ramp of the consoles, but I would expect the first half would be weaker as most consumer cycles are.

Ross Seymore - Deutsche Bank: Even in the first half of '14 or is the ramp probably going to overcome any seasonality at that point?

Lisa Su - SVP and General Manager, Global Business Units: I would still expect a typical consumer seasonality.

Operator: John Pitzer, Credit Suisse.

John Pitzer - Credit Suisse: Lisa, maybe as a follow-on to that Ross Seymore question, given that we are early in the ramp phase, any way of quantifying the sequential ramp in gaming from Q3 to Q4 to kind of hit some of the unit numbers that are out there in the popular press as to how many of the gaming systems might be built for the Christmas holidays? Any way to give us some sort of color of how much of that's falling in Q3 versus Q4?

Lisa Su - SVP and General Manager, Global Business Units: Yeah, John, that's hard to say given that the customers are really dictating their ramps. I will say that, as Rory said earlier, a strong part of our guidance in the third quarter is as a result of the semi-custom ramp and we expect to ship a number of units over both the third quarter and the fourth quarter.

John Pitzer - Credit Suisse: And then Rory you guys did a good job kind of helping us understand the profitability in the gaming system. So, I'm just kind of curious as we see the launch of new products in the core compute and server market you're slightly above a breakeven operating level in the June quarter. How do we think about profitability in the core business, especially given that you gained market share in the second quarter, breakeven was probably a little bit lower than I would have expected, so how does that picks a sort of track through the second half of the year with these new products and market share gains?

Rory Read - President and CEO: Well I'm actually pleased with the progress to move back to profitability at the midpoint guidance. Driving to that level is something we've talked about over the past three, four quarters and I think we're executing well to deliver that. You're seeing a movement in the revenue up and the control of the expense down, and a nice new set of products that are coming out. That I believe we can continue to build on. The PC segment as I talked about earlier in the call, the markets choppy. There is no doubt that market will continue to be choppy the next 12 to 18 months. In spite of that, that markets over 300 million plus units. That's a great opportunity for us and a key component to our future strategy. We want to grow and we want to take share there. Now, to augment that and to balance off our expense and reuse our IP, let's take that IP and technology and apply it into these new high growth segments. You're beginning to see the power of that model emerge here in the 3Q quarter. Now, we have to execute and we need to execute through the end of the year, but that’s the fundamental structure of the business model, Devinder and I, and the team are creating.

Operator: David Wong, Wells Fargo.

David Wong - Wells Fargo: Given the pre-negotiated pricing patterns you have for the game console chips, do you expect – once you're at full volumes, do you expect your annual revenues to grow each year or should we expect them to be fairly flat once you're at full volume, with unit growth being offset by pricing declines?

Rory Read - President and CEO: Yeah, I think what's important to think about, David, is we're talking about third quarter guidance next, and as we go through this process, I think what's best for you is to look at the historical game console trends over time. I think that's a pretty good indicator of how this business goes. For us, I think there is a very good opportunity for us to build on this, and of course, Lisa and her team are continuing to build the pipeline in the semi-custom business to attack areas in the server segment, in the home segment, areas where graphics and our technology will play. We want to continue to build out this custom momentum so it becomes a very substantial portion of our business going forward. And I think it uniquely positions AMD to create differentiated solutions with our customers, David.

David Wong - Wells Fargo: And sort of related to this, you guys had said low double-digit operating margin for the console chips. Does that put gross margin in the mid-teens?

Rory Read - President and CEO: We wouldn't talk about gross margin at that level of the business. Devinder has got the commentary that shows you in the two business segments that we talk about. I think what you're going to see is that that business is a good business for us with significant revenue growth, managing the expense profile moving forward, flowing profitability to the bottom line, and that's what we've talked about as part of our strategy to diversify the portfolio.

Operator: Hans Mosesmann, Raymond James.

Hans Mosesmann - Raymond James: A comment or a question regarding your positioning with Temash and Kabini with one or two quarter lead over the upcoming Bay Trail. What is the competitive positioning or the advantage that you have besides being first to market versus that device that Intel is going to be shipping later in the year?

Lisa Su - SVP and General Manager, Global Business Units: Hans, if you look at our Temash and Kabini offerings, I think we are very pleased with overall performance both on the processing side and the graphics side and the adoption through the OEMs. We do have the time to market advantage and that proves good when you look at the systems that will be on the shelf, both starting this quarter and into the summer. And as we go forward, we think we're well positioned versus Bay Trail as well. So, I think this is an important segment for us to continue to grow in and that (sum our plans).

Operator: Christopher Danely, JPMorgan.

Christopher Danely - JPMorgan: Can you just maybe comment on the expected trend line of OpEx after this quarter? And then since you are opening up the Kimono on the gaming opportunity, maybe talk about your – sort of your goals for the combined growth and operating margin targets longer term for the Company?

Devinder Kumar - SVP and CFO: I think the way I would look at it, Chris, is the following, right, we are on target to hit the $450 million in Q3 of 2013, and beyond that, we are going to be laser-focused to look at the mix between the OpEx and the revenue. And as Rory talked about, as the revenue evolves over time, whether it's a semi-custom business or the traditional business that we have, we keep an eye on that. If you take for a moment that there's going to be an uplift in revenue we are going to watch that very carefully, and what I would say is the increase in OpEx if any would be significantly lower than the increase from a viewpoint of the revenue, is the way I would look at it. This is really moving to a model which is very different than we have had in the past and with the OpEx reductions you're seeing in Q3 with a significant increase in revenue, it demonstrates the earnings of the model in particular when you have a business that can drop low-double digit to the operating margin and help obviously the bottom line from an overall standpoint.

Devinder Kumar - SVP and CFO: And Chris on the expense side very important to think about how we're working on our overall processes and execution. The idea of an ambidextrous architecture and reusable IP this is what you're seeing. The power of Jaguar as a core showing up in semi-custom offerings into server chips into all the way to client chips. This is the model that we're -- on the journey that we're taking to dramatically improve the efficiency of how we create SoCs, leverage our IP and we've been investing to go get some of the best industry talent and Mark Papermaster's team and Lisa's team have really build out that technology leadership. But it's around that expense part that you want to see us continue to manage this very tightly and we should not be scaling that in a significant way moving forward.

Christopher Danely - JPMorgan: And combined margin target for the Company, would you care to update us on that?

Rory Read - President and CEO: It's 36% this quarter and that's the mix of the revenue that we have going from Q2 to Q3 and we're not giving long-term guidance for gross margin at this point.

Christopher Danely - JPMorgan: And then just one housekeeping item, you mentioned that you're ramping the gaming opportunity this quarter, should we think of the gaming opportunity as being the primary driver for growth in Q4 or will the ramp be done by the end of this quarter?

Devinder Kumar - SVP and CFO: Q2 to Q3, the gaming opportunity is the primary driver. We're not talking about Q4 at this point.

Operator: Stacy Rasgon, Sanford Bernstein.

Stacy Rasgon - Sanford Bernstein: First, you said that you have obviously the game console royalties that are there now rolling off. My understanding that was about on an annual basis $100 million to $150 million a year. So if you're running with low double-digit operating margins in the console business even at $1 billion a year in revenue that seems to be just enough basically over the long-term to offset the loss in game console royalties. Is that the – number one, I guess, is the magnitude of those numbers correct and is that the right way to think about this?

Devinder Kumar - SVP and CFO: I can't comment on the magnitude of those numbers, as you can imagine. But what I can tell you is, over time as our business model is transitioning, we're going to be in the silicon and development, NRE model in the semi-custom business, and you should look at it from an overall standpoint, whatever you peg the revenue to be for that business the fall through to the operating margin line because we're going to be very operating margin focused as opposed to a traditional historical gross margin outlook that everybody has been focused on the AMD model. Because this is truly a transition going from one business model that we have had in the history of the Company to where it's evolving into more focus on operating margin as opposed to gross margin alone.

Stacy Rasgon - Sanford Bernstein: But it is fair to say the loss of royalty revenues is going to impact any gains in operating income from the console business.

Devinder Kumar - SVP and CFO: That depends. It's all speculation depending on how much they increase it in the semi-custom and game console business. It's hard to really speculate on that.

Stacy Rasgon - Sanford Bernstein: I have one more quick question. So, this has to do with your wafer commitments to GLOBALFOUNDRIES. I think right now, your current commitments for this year $1.15 billion, that is flattish to last year in a PC environment that even according to you guys is right now kind of anything but flat. Are the console – are r all of the console chips we made at TSMC or can any of those console chips that actually go to satisfy your wafer commitments to GLOBALFOUNDRIES, and if not, is there a risk of a repeat of last year where you had a big shortfall. I think you are even still on the hook to pay for about $200 million in wafers that you didn't need in 2012 and pay for those in the first quarter of 2014, what's the risk around the wafer supply agreement? (Is it different) to the growth?

Devinder Kumar - SVP and CFO: Stacy, many points you made, and I think the key thing I would leave you with is, we do have a commitment this year as you called it a $1.15 billion. We're on track to meet the commitments, and as we finished half the year here, approximately half of those obligations have been extinguished. The $200 million that you referred to is part of the termination that we did for 2012 when the market took a downturn, and that $200 million is due in our Q1 2014.

Stacy Rasgon - Sanford Bernstein: So does that imply that some of the consoles which actually are being made at GLOBALFOUNDRIES, because I don't see how you could have flat wafer commitments (indiscernible)?

Devinder Kumar - SVP and CFO: We don't share level of detail in terms of our foundry strategy or where we make products between the foundries.

Operator: Ambrish Srivastava, BMO.

Ambrish Srivastava - BMO: I am just curious, Devinder and Rory, why would you not answer the long-term operating margin question that Chris was asking, and I understand it that the business is in transition and there are a lot of moving parts. But Devinder, you said that you are running the business with the operating margin focus. What is that focus? And I get it that the $450 million – you've just delivered on the $450 million and the breakeven, but just trying to understand longer term what are all the uncertainties that prevent you from giving us the longer term target?

Devinder Kumar - SVP and CFO: I wouldn't classify as uncertainty, but let's just go through what we have said from an overall standpoint. We are on target to get to 20% of embedded semi-custom by Q4 of 2013. We have also said very publicly that longer term we are targeting 40% to 50% of our revenue to higher growth markets and some of those businesses have higher than corporate average gross margins. So, you can imagine as we sit here in Q3 in essentially the first quarter, we are transitioning in a significant manner to a mix of revenue that's very different than what we have had in the past that there is going to be a transition over time because there is two to three years to get to the 40% to 50% mix and that can obviously has an impact on revenue, ASPs, it can have an impact on the gross margin, and finally, the all-important from my standpoint, the operating margin, because that's what flows to the bottom line of the EPS. So, it's a transition and you are asking for the longer term model to be laid out in the first quarter where the transition is occurring and that's just difficult to do.

Rory Read - President and CEO: And you remember we've gone – we're executing a three-step turnaround strategy we did reset and the restructure, we've completed that. Now, we're in the beginning of the turn and the acceleration as we execute the product plan and the move and then ultimately we transform the Company to that 40% 50% of the mix in a diversified portfolio on those high-growth segments. Now we're about four quarters, three quarters into this transition and we are right on track on that strategy.

Operator: Romit Shah, Nomura.

Romit Shah - Nomura: Just on gross margin I want to understand if there's more than one moving part driving gross margins from 39%, 40% down to 36%. Is it just the higher mix of console or are there other factors as well?

Devinder Kumar - SVP and CFO: Yeah, I think going from Q2 to Q3, primarily it's the higher mix of the game console business that driving from the 39%, 40% to the 36% guidance that we're providing.

Romit Shah - Nomura: And Devinder, for Computing, are Computing margins going to improve sequentially in the third quarter?

Devinder Kumar - SVP and CFO: I'm not going to give that level of granularity, but I think you can make the assumption that they are generally stable. We've been running at the 39%. If you go back and adjust for the benefit we got from the sale of previous year's inventory, we've been 39% for the last three quarters, and I think if you want to make an assumption, it's pretty stable.

Romit Shah - Nomura: And then the final question for Lisa. You referred to the traditional consumer electronics market I think in reference to a question about seasonality. Do you guys have any clues or insight on how to think about this console business and the ASP declines that you may see in the upcoming year?

Lisa Su - SVP and General Manager, Global Business Units: I mean, again, if you think about this, these are usually long-life products, and over five to seven years, you will see cost reductions go into place. But I think we've been clear that the business is a long-term business and we'll continue to service it over that period of time.

Operator: Cody Acree, Williams Financial.

Cody Acree - Williams Financial Group: This is for maybe Lisa on the embedded processing side. I know that you guys have been working for quite some time on the console business. Can you just talk about maybe what the next opportunities, maybe applications or end markets that you're targeting and maybe when we might start to see some of those layer in?

Lisa Su - SVP and General Manager, Global Business Units: Yeah, absolutely. So, the semi-custom and the embedded are both two important growth markets for us. Semi-custom has been so far dominated by gaming, but we see a lot of other opportunities. We have a strong pipeline that can similarly use our graphics and computing capability and some of the markets are things like other consumer, specialty servers, those types of markets. Embedded processing is also important to us and we see in those markets X86 being a very valuable in industrial and medical and other casino gaming type opportunities, and so we've been continuing to build that pipeline as well. Those design wins tend to be longer in nature and take about 12 to 18 months to get into production so that will be more of a 2014 phenomenon to see growth.

Cody Acree - Williams Financial Group: On X86, so you are moving forward with both an ARM and X86 strategy forcing Intel do similar on density on X86. So, in the server side, if X86 can reach a similar density and power savings, do you believe that there is still as large of a need for an ARM alternative?

Lisa Su - SVP and General Manager, Global Business Units: I think really we view ARM and X86 as two important ecosystems that are out there in the industry. So X86 will always continue to be very important in both the PC and the server market, but we see ARM being important with new markets, especially new operating systems as well as some of the high-volume datacenter applications. So yes, there will be a market for both ARM and X86 and I think that's one of the unique things that we can bring over the next few years to the marketplace.

Cody Acree - Williams Financial Group: Then, just following there then with your multi-pronged server strategy and the reductions in some of the headcounts you've had to go through, how confident are you that you are going to be able to address all of those different tracks without stretching your resources to it?

Lisa Su - SVP and General Manager, Global Business Units: Yeah, that's a good question, and I think the most important thing for us as a company, really the focus that we've been working on over the past 12 to 18 months has been around reuse and getting a strong reuse across our IP portfolio, whether you're looking at our client, semi-custom embedded or server markets that use the same core technology, the sane graphics technology and we bring that together in our solutions for each market.

Operator: Jim Covello, Goldman Sachs.

Jim Covello - Goldman Sachs: I thought that David Wong and Stacey had some good questions. I just wanted to try to follow up on those little bit if I could, maybe another way of asking what they were asking was if you guys do not get other wins with these APUs, this is a gross margin dollar neutral transition in gaming, is that correct?

Devinder Kumar - SVP and CFO: I don't know what you mean by that question.

Jim Covello - Goldman Sachs: Well, the point that Stacy is bringing up, you lose in operating income and royalties, what you gain in operating income from APUs, so net-net it's a zero operating margin dollar exchange, but then theoretically you have the opportunity to leverage these platforms to gain additional opportunities?

Devinder Kumar - SVP and CFO: Jim we have a real significant opportunity in these high growth segments to drive over the next two to three years the 40% to 50% of our revenue that means these businesses are going to get significantly bigger. And I think there is an opportunity for that to create very accretive and consistent profitability as we move forward.

Jim Covello - Goldman Sachs: So no ability to get any granularity specifically on the first question I asked?

Devinder Kumar - SVP and CFO: I think we did.

Operator: Christopher Rolland, FBR.

Christopher Rolland - FBR: Sorry to harp on the OpEx stuff, but if you could talk about the gaming consoles expenses either on an absolute basis or at least an anecdotal basis. What are the, call it, R&D and SG&A costs involved in supporting a launch like this and how do we sort of think about that over time?

Devinder Kumar - SVP and CFO: I think I said in my prepared remarks, when you look at a semi-custom model from a game console standpoint, it is a very different model. It's a model where the costs are upfront funded jointly between the customer and us. You incur the costs, you go and introduce the product, and at the time of product introduction, you get the sales. It's lower gross margin than the corporate average, but a majority of the gross margin dollars fall to the operating margin, and that's the benefit that we get at the bottom line from an overall standpoint. As far as the details of the business and how you manage it between the sales, marketing, G&A, and R&D, I'll let Lisa comment in a second on the R&D and G&A. But from a marketing standpoint, I can tell you that there's not much because essentially we are selling products to captive customers in this case and they do the marketing for their end product with consumers and we supply the product. Lisa?

Lisa Su - SVP and General Manager, Global Business Units: Yeah. So maybe to add a little bit more color to that. The way these products are defined, we jointly define it with the customers. We leverage IP that we have across our base businesses and then there's an engineering recovery done for the specific customization. Really no measurable sales and marketing expense, just given that it's a discrete customer set. So, the (E2R) ratio is substantially lower than our corporate average.

Christopher Rolland - FBR: Also, do you guys see some synergies here perhaps with these next-gen consoles with PC gaming sort of driving sales of AMD graphics cards, like, for example, might some game developers optimize specifically for an AMD GPU or APU or is that sort of a stretch there? Are there any sort of network effects here from gaming consoles across the PC?

Lisa Su - SVP and General Manager, Global Business Units: Yeah, we definitely believe there's a great synergy between the game consoles and the overall PC gaming market. I think gaming is one of the key pillars of AMD in our graphics and APU strategy. So having the game consoles on the same graphics architecture does allow synergies in the software development and the work that we do with ISVs, and we are pursuing that quite aggressively.

Rory Read - President and CEO: Yeah and there's no doubt the PC gaming segment is one of the best-performing segments in the overall PC market. And with this move of the game consoles, you see the key game developers writing to the technology first and we should expect better performance and better time to market based on that. This is clearly a franchise business that will spread across and create a network effect.

Operator: Patrick Wang, Evercore.

Patrick Wang - Evercore: My first question, you've guided for about $800 million of semi-custom inventory build this quarter. Presumably good chunk of that shifts in time for the holidays. Can you give us some color to help us think about that and perhaps maybe a sense of how much revenue this supports?

Devinder Kumar - SVP and CFO: Yeah, just to correct, if that's what we said, that's not what we intended. It's not $800 million game console inventory. There is inventory in the traditional business and actually predominantly, it is in the traditional business. The growth in the inventory that I talked about going from Q2 to Q3 is primarily in the game console business to support the ramp that we are seeing in the second half of 2013.

Patrick Wang - Evercore: So, I appreciate the clarification. So, that's the incremental inventory you would ship by the fourth quarter?

Devinder Kumar - SVP and CFO: Yeah, the products that we build for the customers obviously, there is a time lag in terms of getting the wafers and taking into the line and shipping to the customer, when you have a steep ramp in revenue like we are seeing from Q2 to Q3 you are going to have the increase in inventory probably ahead of the time of the ramp and we ship the product essentially after we finish making it through the assembly and test processes.

Patrick Wang - Evercore: Thanks for correcting me there. Secondly, it sounds like you plan to be cash flow positive either I guess this quarter or in the Q4, so a great job turning that around. I'm just wondering is this accurate and then how do we think about the timing of your remaining payments to go with foundries this year, outside of the $200 million in Q1?

Devinder Kumar - SVP and CFO: Yeah, two things I will say about cash. We've said even earlier this year, we plan to be free cash flow positive in the second half of 2013 and we are on target to do that. And the other thing, we have been saying consistently is maintaining cash at the $1.1 billion level optimal range. We have done that for the past several quarters and in spite of the payment that's coming up in the Q1 2014 timeframe I can say that we should be maintaining cash at the $1.1 billion optimal zone level through that timeframe and even in the Q1, 2014 timeframe.

Patrick Wang - Evercore: And last question, you know, Rory you talked about the dense server focus, obviously, some of the tailwinds you're gained in SeaMicro, can you talk about the size of that business to-date that you've got, maybe a few catalyst you see on the horizon and then also when you think that could hit maybe – I don't know – 10% of sales?

Rory Read - President and CEO: Patrick, from our perspective, we comment on the overall server business. We saw a good solid quarter out of that. We believe that we took share in that server segment, and key to that growth is that dense SeaMicro solution. But we are really focused as well on the traditional server. There's opportunities with APUs in the dense space and of course, our announcement around ARM server. So, I think this is a nice combination of server offerings to move forward and build on.

Operator: Shawn Webster, Macquarie.

Shawn Webster - Macquarie: So for Q2, you guys said that the chipsets were flat, and when I do the kind of bottoms up with the down ASP quarter for your microprocessors, I'm getting up something like 15% to 20% sequential unit growth for Q2 for microprocessors, versus the down, let's say, 1% for the global PC market. Can you help us understand or parse through maybe how much of that was your channel inventory rebuilding, which it sounds like some of that was happening, some new wins, and anything else, or share gains, because it seems like a very strong growth for Q2?

Lisa Su - SVP and General Manager, Global Business Units: Yeah, so as we said, we did have a good quarter in the Computing Solutions group. When you look at the breakdown, I would say that we had very strong notebook shipments, and that was across our new product portfolio. We also had a little bit of pickup in desktop, but I would say that was more modest than the notebook side.

Shawn Webster - Macquarie: Can you characterize how you think inventories are sitting right now at your OEMs in your channel?

Lisa Su - SVP and General Manager, Global Business Units: I would say they're typical.

Shawn Webster - Macquarie: Normal levels. And then, just another final quick one. The written-down inventory benefit that you saw in Q2 is most of that out of the system at this point or are there still parts that you can sell at no cost going forward?

Devinder Kumar - SVP and CFO: There is some left. I mean we had $100 million that we took as a write-down in Q3 2012. We had $20 million of that sold in Q1. We sold $11 million in Q2, and that's the benefit that I disclosed to the gross margin. We have about $65 million left. We don't see anything on the horizon right now. But as I said previously, we're very opportunistic and if something comes along and somebody wants those parts, we'll go ahead and sell those parts.

Operator: Glen Yeung, Citigroup.

Glen Yeung - Citigroup: Lisa a question for you about the mix you are seeing in the PC client business. Just trying to understand if you are seeing any changes in your mix of product and does that tell us something about the mix of a PC market? And specifically, I'm trying to understand if you think there's a down shift for lower price points in PCs?

Lisa Su - SVP and General Manager, Global Business Units: Yes, Glen. So, if you look at our mix, we have typically been stronger in those lower price points in the, let's call it the $300 to $600 system range and we have seen strength in that area. So, overall, I would say our mix has shifted a little bit to the lower end and I think that's typical of the overall market.

Glen Yeung - Citigroup: So, just as a follow-up to that, Intel now is kind of openly saying that with Bay Trail, they are one going to allocate a bit more sort of resources to that part of the business and perhaps more importantly, to you it sounds like they are going to focus more in that mid-range -- mid to low range part of the market. If you sense that, one, they will be more competitive there, and then two, what are your thoughts around the implication of that to your share in margins in that part of business?

Lisa Su - SVP and General Manager, Global Business Units: I think it's fair to say that that's where the market is focused, so the customer focus as we get more Windows 8 based touch systems into that more mainstream price point. So, I think that's a market shift. Clearly it's important to stay competitive in that area and we're continuing with our new product portfolio to do that. So, I think overall we'll continue to focus in that area and continue to be quite competitive.

Ruth Cotter - IR: Operator that concludes our second quarter earnings call and we would like to thank everybody for participating and if you could close the call, we would appreciate it.

Operator: Sure. Thanks. Thank you presenters and thank you, ladies and gentlemen. Again, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees you may log-off at this time.