Advanced Micro Devices, Inc.
Q3 2015 Earnings Call Transcript

Published: 16 Oct 2015

[Operator:]

Good day, ladies and gentlemen, and thank you for your patience. You have joined the AMD Q3 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 be given at that time. [Operator Instructions] As a reminder this conference may be recorded. I would now like to turn the call over to your host the Corporate Vice President of Corporate Communications and Investor Relations Ms. Ruth Cotter. Ma'am, you may begin.

[Ruth Cotter:]

Thank you, and welcome to AMD's third quarter 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 conference call are Lisa Su, our President and Chief Executive Officer; and Devinder Kumar, our Senior Vice President, Chief Financial Officer and Treasurer. This is a live call and will be replayed via webcast on amd.com. I would like to highlight a few dates for you. Lisa Su, will be present at the Wells Fargo Tech Media Telecom Conference on November10th in New York and at the Credit Suisse Annual Technology Conference on December 2nd in Arizona, Devinder Kumar will present at the Raymond James Technology and communications Investor conference on December 8th in New York and our fourth quarter player time will began at the close of business on Friday December 11th 2015. 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. Additionally 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 which are on our website at quarterlyearnings.amd.com. Please refer to the cautionary statements in today's earnings press release and CFO Commentary for more information. You will 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 27, 2015. Now, with that, I'll hand the call over to Lisa. Lisa?

[Lisa T. Su:]

Thank you, Ruth, and good afternoon to all those listening in today. We successfully executed many of our near term technical priorities in the third quarter. Were also taking several key steps as a part of our longer term strategy to focus AMD on delivering great products driving deeper customer relationships and simplifying our business. Highlights include delivering strong double digit sequential revenue growth in each of our business segments, expanding our prior portfolio with the introduction of several new APUs and GPUs that improve our competitive positioning in key markets, forming the Radeon Technologies Group to bring a vertical focus to our graphics business and help strengthen our performance in traditional graphics markets while simultaneously establishing leadership initiatives in immersive computing markets like virtual and augmented reality, and in the third quarter we also tapped out multiple products in FinFET technologies across both of our foundry partners that are on track to enter production next year. We also took targeted actions in the quarter to streamline portions of our business as a part of aligning our cost structure with our revenue profile and we are took an inventory write down primarily on some of our previous generation APUs largely related to weaker than expected PC demand. While not ideal we believe the write down helps ensure we have the appropriate balance of inventory in place given market conditions. Looking at our financial performance third quarter sales were 1.06 billion. The sequential increase of 13% included revenue growth across both our computing and graphic segments as well as our enterprise embedded and semi-custom segments. In our computing and graphic segment we delivered our first sequential revenue increased in two years. CG revenue increased 12% sequentially primarily due to improved GPU and desktop APU sales. Channel sales also improved sequentially for the second straight quarter as we saw the benefit from the work we completed earlier in the year to reduce channel inventories. We continue to have success with HP in the commercial market as they are seeing accelerating demand for their AMD based systems including increased adoption with key Fortune 500 accounts. As a result I'm pleased to share that for the first time AMD was the exclusive launch processor partner for HP's newest EliteBook commercial client systems based on our latest Carrizo PRO APUs which launched at the end of September. Overall PC demand particularly in the consumer markets continues to be somewhat muted as there remains a high volume of Windows 8 based systems still on shelves. As a result OEMs have been slower to ramp their Windows 10 platforms than we anticipated. We did see multiple customers introduce new Carrizo based Windows 10 platforms in the third quarter and we expect additional platforms will come to market in the fourth quarter. Shifting now to Graphics. GPU revenue increased again sequentially as we grew both OEM and channel sales based on the strength of our latest desktop and notebook offerings. Our strategy to profitably regain share by capturing key hardware and software technology transitions like HBM and DirectX 12 is gaining traction. We expanded our Fury family of HBM enabled GPUs in the quarter to include the Fury Nano the world's smallest and most power efficient enthusiast desktop graphics card. We delivered strong double-digit percentage sequential revenue growth in the high-end enthusiast and performance portions of the GPU market based on the success of our flagship Fury line of energy efficient products. On the software side, our GC and GPU architecture is delivering up to a 30% performance increase on applications written for the next generation of low level programming APIs like Microsoft’s DirectX 12 that are being quickly adopted by developers. Turning to our enterprise embedded and semi-custom segment. Revenue increased 13% sequentially driven by strong semi-custom sales to support holiday game console demand. We are on track to set an annual record for semi-custom unit shipments in 2015. Demand from Sony and Microsoft indicates that the record setting sales pace of this generation of game consoles will remain strong. We also remain on track to begin revenue shipments of our additional semi-custom design wins starting in the second half of 2016. As a part of further diversifying into the medical communications and non-console gaming markets we've planned to expand our embedded product offering this quarter with the introduction of our newest R-Series SOC which will deliver significant performance per watt improvements compared to our previous generation and offer industry leading graphics capabilities for embedded designs. Today we also announced that we have signed a definitive agreement with Nantong Fujitsu Microelectronics to form a joint venture combining AMD's high-volume assembly and test facilities and experienced workforce with NFME established OSAT expertise. Today's announcement is another example of how we are executing the strategy we outlined at our financial Analyst Day in May to focus the company on improving our long-term financial performance by building great products and simplifying our business model. Forming a back-end manufacturing joint venture is a significant step towards achieving these goals, as we align our operating models with other fabless companies and strengthened our balance sheet. Looking to the fourth quarter and beyond our priorities are clear. First we must make more progress returning our Computing and Graphics business to a healthy trajectory by ramp increase our unit shipments, further penetrating the commercial client market, regaining profitable GPU share, and maintaining healthy OEMs and channel inventory levels. While we are not anticipating Windows 10 will drive a dramatic near-term PC refresh cycle the continued adoption of Windows 10 which has already been installed on more than 110 million PCs to date, provides a great opportunity for AMD over the coming year based on a semi-consumer and commercial refresh cycle environment. Second, we must continue delivering strong new products. This includes successfully executing key design milestones through our breakout Zen CPU Core. Zen remains on track for availability in 2016 and we believe will return AMD to the mainstream server and high-end client market in a significant way in 2017 and beyond. We are also focused on delivering our next generation GPUs in 2016 designed to improve performance per watt by 2x compared to our current offerings based on design architectural enhancements as well as advanced FinFET products process technology. Third, we must further strengthen our balance sheet through continued improvements in our financial performance and strategic accidents like our joint venture with Nantong Fujitsu. One of our most valuable assets is our patent portfolio. We own foundational patents processing, graphics, semiconductor, fabrication and other technologies. This portfolio is not broadly licensed and could provide a significant source of revenue for years to come. We believe we have the right long-term strategy to return AMD to profitability and the correct set of priorities that will help us navigate the near term. Now I'd like to turn the call over to Devinder to provide some additional color on our third quarter financial performance. Devinder?

[Devinder Kumar:]

Thank you, Lisa, and good afternoon, everyone. In my remarks today, I will be referencing non-GAAP figures, except for revenue which is on a GAAP basis. I'm pleased to the progress we made in the third quarter with 12% sequential revenue growth in our Computing and Graphics segment and seasonally strong sales in our Enterprise, Embedded and Semi-Custom segment. Additionally we've continued to simplify our business model and sharpen our financial focus as evidenced by the manufacturing joint venture announcement for our ATMP Facilities which will also bolster our balance sheet and the restructuring actions which will help reduce cost. First let me review the third quarter numbers. Third quarter revenue was $1.06 billion, up 13% sequentially, driven primarily by seasonally stronger sales of our Semi-Custom SoCs and improved desktop processor and GPU sales. The year-over-year decline of 26% was driven largely by decreased sales across our Computing and Graphics products. Gross margin was 23%, down 5 percentage points sequentially, gross margin was impacted in the quarter by a 65 million inventory write down comprising primarily older generation APUs. The impact of the inventory write down was 6 percentage points. Before I cover the rest of the financial performance of the quarter let me briefly recap the restructuring plan we announced at the beginning of October. It is the latest step to simplify our business and better align our resources on our priorities and business outlook. As a result of these actions we expect to reduce global headcount by approximately 5% by the end of Q1 2016. Total restructuring and other special charges in Q3 2015 were 48 million comprised of 41 million related to the recent restructuring plan and 7 million of this [indiscernible] related charges from our 2014 restructuring plan. Operating expenses in the third quarter were $336 million, down $17 million from the prior quarter including $2 million of savings related to our 2015 restructuring plan. In our fiscal third quarter the operating loss was $97 million and net loss was $136 million, or $0.17 per share loss, calculated using 785 million shares. The impact of the inventory write down to the loss per share was $0.08. Net interest expense, other expense and taxes were $39 million in the quarter, down from $44 million in the prior quarter due primarily to a decline in other expenses. Adjusted EBITDA was negative $55 million, compared to negative $42 million in the prior quarter. Now, turning to the business segments; Computing and Graphics Segment revenue was $424 million, up 12% sequentially, primarily due to higher sales of GPUs and desktop processors. Computing and Graphics segment operating loss was 181 million compared to a 147 million in the prior quarter primarily driven by an inventory write down of older generation products partially offset by higher revenue. Enterprise, Embedded and Semi-Custom revenue was $637 million, up 13% from the prior quarter, driven by seasonally higher sales of our Semi-Custom SoCs. Operating income of this segment was $84 million, up from $27 million in the prior quarter, primarily due to the absence of the $33 million technology node transition charge in Q2 2015 and higher sales. Let me now cover today's joint venture announcement. We signed a definitive agreement with Nantong Fujitsu Microelectronics to form an industry-leading Assembly Test Mark impact or ATMP joint venture to which we contribute our ATMP facilities in Malaysia and China. The value of the deal is approximately $436 million and upon the close of the transaction AMD will pertain a 15% ownership in the joint venture. We expect to receive $371 million in cash, from our partner with net proceeds of approximately $320 million after taxes and other expenses at closing which is expected in the first half of 2016 after all regulatory and other approvals. We expect the transaction to be cost neutral to the P&L with significantly reduced capital expenditures for the company. In addition as a result of the plans for our ATMP facilities the balance sheet reflects held for sale accounting of the ATMP assets and liabilities with associated inventory property, plant and equipment and accounts payable balances been reclassified to other current assets and other current liabilities with an impact of a 119 million and 81 million respectively. As our business model continues to evolve and based on recent questions from some investors I want to take a moment to cover our cash and working capital management needs. As you know we target managing cash within the range of 600 million to 1 billion and cash may on occasion trend to the lower end of that range with the expectation that it depends to the mid-range or better thereafter. We are comfortable with this because of the lower quarterly revenue run rate, lower OpEx, focus on reducing inventory and continuing efforts to improve sales seniority. In addition there is a disproportionate impact on cash of approximately 70 million during the first quarter and third quarters of each year based on our current net profile that is also a factor on cash balances. Additionally the JV transaction should result in cash generation of approximately 320 million in the first half of 2016 with a significant CapEx reduction to an approximate 60 million annual run rate. We also believe we have the ability to generate significant revenue by licensing or other monetizing -- otherwise monetizing our IP portfolio. Lastly if needed, we have other options available to bolster cash. Namely tapping our asset back loan of which 230 million is drawn as of the end of the quarter or accessing the capital markets. Over the longer-term we look forward to de-risk our debt maturity profile, reduced interest expense and allocate excess cash over 1 billion to reducing debt. Turning to the balance sheet. Our cash and cash equivalence balances total 755 million at the end of the quarter, down 74 million from the prior quarter primarily due to a 69 million debt interest payment in the third quarter. Inventory was 761 million from down 799 million the prior quarter due to the 65 million inventory write down. Debt as of the end of the quarter was 2.26 million essentially flat from the prior quarter. As of the end of the quarter total borrowing against our secured revolving line of credit was 230 million unchanged from the prior quarter. Free cash flow in the quarter was negative 84 million compared to a negative 75 million in the prior quarter. Lastly as mentioned on our last quarter's earnings conference call we are actively working with GlobalFoundries to re-profile our 2015 wafer commitment in line with product demand in the fourth quarter of 2015 and into 2016. As of the end of the third quarter of 2015 we had purchases amounting to 631 million under the fifth amendment of the WSA. We anticipate concluding of a vessel purchase, re-profiling discussions at global foundries before the end of the year. Now turning to the outlook for the fourth quarter 2015. AMD expects revenue to decrease 10% sequentially plus or minus 3% due to a seasonal decline in semi-custom sales. We expect Computing and Graphics segment revenue to increase sequentially. Non-GAAP gross margin is expected to be approximately 30%. Non-GAAP operating expenses are expected to be approximately 350 million including savings of approximately 7 million from our 2015 restructuring plan. Interest expense, taxes and other to be approximately 45 million. Inventory is expected to be down from Q3. Cash is expected to be approximately flat at 750 million including cash payments of approximately 19 million related to the 2015 restructuring actions. In closing we continue to take steps to further simplify our business model manage expenses and make the right investment to deliver on our longer-term strategy and improving financial performance. With that I'll turn the call back over to Ruth. Ruth?

[Ruth Cotter:]

Thank you Devinder. Operator we'd like you to now pull the audience please for questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Chris Rolland of FBR & Company. Your line is open.

[Chris Rolland:]

I'm trying to put the pieces together the guidance particularly for the semi-custom business. the sequential drop is maybe a little bit more than I had thought. And I was just wondering if maybe you could talk us through the moving parts here, is it all units or is there perhaps a step function decrease in pricing? Was there some sort of inventory that was built? How do I think about the step down in Q4?

[Lisa T. Su:]

So Chris this is Lisa. Let me try to give you some color around that. So if you look at the semi-custom business as a whole, it actually was a very strong third quarter and a strong overall year. So we saw units go up, and we expect units to be up on a full year basis year-over-year and revenue to be modestly up year-over-year as well. When we talk about the Q3 to Q4 guidance we actually ended up Q3 a bit stronger than our original guidance and that was because our customers were ramping semi-custom units prior to the holiday ramped and so September was a very strong month for us, October, November will be strong months as well. Q4 is down seasonally from Q3 on just given the shape of the holiday ramp, so in terms of the magnitude of the overall units from a Q3 plus Q4 standpoint it was it's a pretty much as we would expect and it's really just the timing between Q3 and Q4. As we said and Devinder just mentioned in the prepared remarks we do expect the Computing Graphics business to be up quarter-over-quarter and again that's due to some of the progress that were making in that business.

[Chris Rolland:]

Okay, great. Thanks Lisa. The next one is for Devinder so congrats on the Assembly Test deal. I guess my question is was there a pre-arranged assembly test supplier agreement that you guys worked out as part of the deal and if so how should we think about minimum volumes or pricing or length of the arrangement?

[Devinder Kumar:]

So I think there is the lot of details Chris but let me tell you overall from a view point of the deal. We are very happy to be able to combined our ATMP facilities with the expertise with our partner NFME, they are one of the top most [Indiscernible] in China and as far as the supply arrangement is concerned we have a lot of flexibility overall from my standpoint in the product that we have in factories today, significant portion of that will become part of the JV product but at the same time we have a lot of flexibility to use other [assets] as the case might be.

[Chris Rolland:]

Okay alright. Was that you do have some capacity that's tied up your flexibility for the rest, is that -- did I understand that correctly?

[Devinder Kumar:]

Well I think about it, the five year agreement we have products that are running in the factories today but we also have a lot of product that's run in the [assets] that we do business with around the world and as the agreement is implemented but we will have some products in the JV facilities and at the same time lot of flexibilities to make products outside of the JV entities.

[Operator:]

Thank you. Our next question comes from the line of David Wong of Wells Fargo. Your question, please?

[David Wong:]

Thanks very much. Following on the earlier question the question just now. When you sell your assembly and test facility to show the stake in them, does that result in any increase in packaging cost when the deal closes? Do you have an estimate of the impact on gross margin if there is an increase?

[Devinder Kumar:]

Yes David as I said in my prepared remarks we expect this to be cost neutral so there should be no impact on packaging our overall cost, we've got a pretty good supplier agreement that we have put in place for the suppliers s don't expect any impact. However I'll add one thing now if you look at the OpEx side of the house you can expect some decline in the OpEx but in the cost side of the house essentially cost neutral.

[David Wong:]

Okay great. And then in addition to licensing your IP are they any pieces of IP you have that you could sell and if so do you have any estimate of the realizable full value of IP that you might be able to sell out right?

[Devinder Kumar:]

I think if you look at our overall portfolio of IP we have a lot of IP over this, the company has a strong investment that's made in R&D, Lisa will probably give some details in some sort of various areas but what I'll say about the what our portfolio especially the IP portfolio is we are able to generate revenue and we plan to monetize that for revenue and in some sense if you look at our 10,000 patents of which half are U.S. base, based on present transactions you can imagine the value of the IP portfolio is pretty strong and pretty significant I guess. So Lisa you want to comment on the IP portfolio itself?

[Lisa T. Su:]

Yes. David maybe just to expand on that a little bit. Look in terms of our IP portfolio we are very proud of sort of the overall foundational patents that we have across the processors, graphics as well as other semiconductor technologies. Previously we've been more opportunistic in how we've approached licensing and we believe that there is an opportunity now to be more strategic and deliver about what we do, so in terms of your specific question I think we are open to there are several different avenues including licensing technology, forging partnerships, perhaps sales of certain pieces of the portfolio, so we are considering all of those options.

[David Wong:]

Okay great. And my last one the 12% sequential that you sold for Computing and Graphics was that driven roughly equally by GPUs in the processor chips and similarly when you expect that segment to grow sequentially in December to expect both parts of it to grow?

[Lisa T. Su:]

Yes. So David in terms of the overall Computing and Graphics business up 12% I would say was a little bit more heavily weighted on graphics versus computing we do see some strength in both businesses as our product portfolio become stronger and we continue to launch more platforms in the market so we do expect overall growth in Computing and Graphics in Q4.

[Operator:]

Thank you. Our next question comes from the line of Hans Mosesmann of Raymond James. Your line is open.

[Hans Mosesmann:]

Lisa can you give us a sense of what's going on with Zen or actually I should ask with the departure of [indiscernible] that kind of shakes things up quite a bit what is the succession there, I suppose that Zen is already architecturally very well defined, what happened after that in terms of roadmap and Keller’s departure. Thanks.

[Lisa T. Su:]

Yes, Hans so let me talk overall about Zen and our roadmap in Zen, as specifically to your question. So as I said in prepared remarks Zen is on schedule for availability in 2016 and first full year of revenue ramp in 2017. As you know these microprocessor projects are multiyear projects so the architecture of the execution team very much in place, I think we’re pleased with the progress and we will continue to work hard to meet our objectives in that area. In terms of long-term roadmap we are extremely committed to high performance x86 CPUs. And there should be no confusion on that point. Mark Papermaster is currently directly engaging with the team on that execution and we’ll have more details to come. But overall pleased with the execution and it continues to be our number one priority for the company.

[Hans Mosesmann:]

If I could just as a follow-on relatively on the onset of the equation, we just heard earlier this week Qualcomm jumping into the fray [indiscernible] talked about some of the accelerator type assets what maybe happening next generation hyper scale datacenters. What's AMD's position on all this? There is lots of activity and what are you guys doing because it seems that Seattle or at least your first incarnation of ARM and servers didn't really pan out that much.

[Lisa T. Su:]

Yes so Hans I think relative to ARM, I continue to believe ARM has a place in the datacenter both as you think about towards the convergence between networking storage and servers. I think it's fair to say for all of us that it's been slower to adopt in the server market just due to the some of the software and the infrastructure. Relative to Seattle we will be starting our first modest production shipments in the fourth quarter in this coming quarter this year. I view it as a longer-term bet, so no question that server market is attractive, datacenter is attractive, we’re very focused on it from an X86 standpoint and we’ll continue our ARM efforts in a complementary way.

[Operator:]

Our next question comes from Harlan Sur of JPMorgan. Your question please.

[Harlan Sur:]

So if you give us sort of a relatively brief update on Zen. If you just give us an update on Zen from a performance perspective, it’s a new core architecture or new process technology. I think you kicked on a couple of chips last quarter, any feedback on the performance or the yield metrics that gives the team confidence on the broad rollout of the different product families starting next year.

[Lisa T. Su:]

So Harlan let me [indiscernible] it this way. As we stated in the Financial Analyst Day we had a target of 40% IPC performance of Zen over our previous generation. We believe we’re on track for that. Relative to process technology we've tapped out multiple products to multiple fabs in FinFET, and we believe that they are also on track in terms of overall ramp. So we continue to focus on both of those aspects, both the architecture of the process technology but so far so good.

[Harlan Sur:]

And then does the joint venture agreement also include transferring over your HBM technology to the JV? And does the JV have the right to offer this capability to some of its customers? HBM seems to be a fairly differentiated performance feature for AMD, wouldn’t want to see that being offered to other potential competitors. Any comments would be appreciated there.

[Lisa T. Su:]

So the high bandwidth memory technology that we introduced on our Fury line of products is actually done jointly with several [indiscernible]. So we have definitely put a lot of R&D into the technology and those are ramping today, and they are not part of the JV per se.

[Operator:]

Our next question comes from the line of Ian Ing of MKM Partners. Your question please.

[Ian Ing:]

Devinder thank you for laying out all the sources and usage of cash so you're guiding this 750 million cash, you're going to get some proceeds from the assembly and test sale I guess sometime mid-year. So between now and then what are the true contractual obligations you have, is it really things like interest and restructuring payments. I know you've got obligations to global foundries but then again there is no penalties there. So just a true obligations in your mind.

[Devinder Kumar:]

I think if you at it from a view point of the specific items that you mentioned, you're right. You are right about the restructuring actions, but the cash payments if I summarize the restructuring plan that we announced earlier this month $26 million of cash payments, 7 million actually occurred in Q3, 19 million to be paid out in Q4 and then as we get into the 2016 there is another $15 million to be paid on for the restructuring plan and then we are done and that point obviously we get the benefit from the restructuring plan. I mentioned in the remarks that I had that if you look at 2016 there is about $58 million of savings overall from an OpEx standpoint relative to the actions that we took. As far as the obligation to the supply agreement, yes you're right do not expect the charges that you talked about and obviously you are booking with GlobalFoundries our partner to go ahead and we profile the timing and the mix of the wafers as we look at the demand profile for Q4 2015 and integrated. CapEx I mentioned that in the transaction, not just posting the balance sheet with cash some time in Q1 2016, so the CapEx comes down by about 40 million from the current annual rate of 100 to 40 so net net I think when I look at all the [fells] and play all else be equal i feel good about the actions we have taken from a cash standpoint and you've seen us manage the cash within the range that we have played out and I went for a little bit more detail in this particular earnings call in terms of all the various areas and how we look at cash management as far as working capital management.

[Ian Ing:]

Great thanks. And then follow up enterprise embedded Semi-Custom I'm just trying to see how it can possibly grow next year, you have gain consoles obviously, regular ASP declines year-over-year, what should we think of the main drivers of new revenue that could perhaps get you over this year's type of revenue run rate, is it the other Semi-Custom wins or is it some other areas?

[Lisa T. Su:]

Yes. So the way I would think about the enterprise embedded and Semi-Custom segment in terms of longer term revenue growth, in 2016 as we said we will have additional Semi-Custom revenue ramping in the second half of 2016 so I think that would be one driver and then as we go into the medium term with them that would be more of the 2017 revenue driver.

[Ian Ing:]

Okay and then if I sit in one more, your computing graphics revenues up nicely in the September quarter, looks like your operating loss though grew sequentially, just trying to figures that sort of some transient marketing cost or is that some other things going on there in terms of the operating loss growing.

[Devinder Kumar:]

Yes couple of things. When you look at the numbers from a segment recording standpoint you are right that the operating loss did go up but within the operating loss in Q3 of 2015 the inventory write down that I talked about the 65 million, the larger portion of that is within the Computing and Graphics segment so it skews the results from an overall operational standpoint. So if you adjust for that the improvement even though it was a loss was there from Q2 to Q3 on the higher revenue.

[Operator:]

Thank you. Our next question comes from Steven Chin of UBS. Your question, please?

[Steven Chin:]

Hi guys. Thanks for taking my questions. Lisa if I could ask you on the graphics side of the business. Just looking at your AID business for the graphics boards can you talk about how those parts in particular performed relative to the overall graphics business in terms of their sequential growth and how the sell in sell out would be in and kind of what was your view on saved inventories exiting the quarter and kind of what the expectations are specially for?

[Lisa T. Su:]

Yes, so sure. So if I look at the overall graphics business we did see growth across both the desktop as well as the notebook portion of the business, relative to AID the third quarter was really the start of the ramp of the Fury series as well as the R9 series and I think was the transition quarter in terms of transition from the older products into the newer products. Relative to inventories actually I think we’re in a good shape on inventories China is a little bit sluggish and we see that across both graphics as well as computing, all other regions are in good shape.

[Steven Chin:]

Great. And as a follow up, in terms of the blended ASPs you guys noted that it was flat sequentially but up year-over-year. Can you just talk about just from a mix standpoint how you expect it to progress in the current quarter? Are you expecting the mix to continue skewing towards a richer Fury, a new product pushing the portfolio or do you expect a good amount of lower end GPUs sold in [the same] quarter?

[Lisa T. Su:]

It's hard to say as we have to look at all the dynamics but it's fair to say that the AIB ASPs are trending upwards because we have been now a solid offering in the enthusiast and performance segments where we did not before. Relative to overall ASPs I think we will have to comment on that next quarter.

[Operator:]

Thank you. Our next question comes from the line of Vivek Arya of Bank of America. Your line is open.

[Unidentified Analyst:]

Thank you. This is Shankar on behalf of Vivek. Just want to touch upon the console side of things again. So you mentioned the Fury growth was strong in Q3 but can you give us a sense on how the ASPs have trended this year and then how should we model ASP trends this year?

[Lisa T. Su:]

Yes so. Let`s see what's the best way to say that. I think what I said was overall units were up year-over-year 2015 to 2014 as we project into the fourth quarter. Revenue was up modestly so the ASP decline is modeled in there. As we go into 2016 again I expect that units will be up given our current visibility. The ASPs are known so the main thing will be they are just looking at -- and you can easily vary a couple of million units that this early in the cycle. So I won't say exactly where I expect revenue to be but those are the relative trends I expect units to be up ASPs on the same order and we have to see where that actually heads up.

[Unidentified Analyst:]

And then my follow-up is on the graphic side of business. Obviously you're shipping new products into the market but can you talk about what your overall gaming plan is and how fast you think that market will grow? And how fast you think you can grow in this market?

[Lisa T. Su:]

So yes, I think we’re very [bolt on] a graphics market as a whole. When you think about discreet graphics and the gaming portion of it as well as the newer applications, immersive applications around virtual reality is tough. The conventional wisdom that ASPs are going down is probably modified by the fact that there is with 4K with DX12 with some of these other drivers, virtual reality that there is more use for graphics horsepower. Going forward I think we have a lot that we can do in terms of product portfolio, so we’re very focused on launching sort of our 2016 products that will be significant architectural and process technology enhancements and we continue to believe that graphics is a growth business for us.

[Operator:]

Our next question comes from the line of Matt Ramsay of Canaccord. Your line is open.

[Matt Ramsay:]

Lisa, I just wanted to ask another question on the overall graphics market in follow-up to the last question. I think conventional wisdom among investors is that maybe AMD has focused mostly on the console business and your primary competitor is focused on the PC gaming business. And as trends -- I guess, first of all, do you agree with that? And just give a commentary on how you are focusing your investments. And second, as things like the eSports phenomenon take off, how do you feel the Company is positioned to benefit from that? Thanks.

[Lisa T. Su:]

I think it's fair to say we’re focused on overall gaming. It turns out that we have a very strong position in game consoles so certainly that's a great business for us. I think PC gaming with our focus on both hardware and software optimization particularly as we move from DX 11 to DX 12 as you talk about some of the online gaming initiatives. I think we’re actually very well positioned both with our APUs as well as our discrete GPUs. So in terms of investments I think you'll see us continue to invest and invest heavily in the graphics area. And as I said earlier I think it's a growth area for us. The fact that we’re strong in game consoles, I think is a benefit and we’ll continue to leverage how we can bring the game console and the PC gaming architectures closer together over time.

[Unidentified Analyst:]

Great, thank you for that. And Devinder, I just wanted to follow up on some questions that were asked earlier in the call about the JV and the impact of that. It looks like there is a significant number of employees that will be going into the JV from AMD outright. Could you potentially quantify the impact on operating expense that you see maybe pre the deal and then post that deal closing and how we should think about the OpEx trajectory going forward? Thanks.

[Devinder Kumar:]

A little bit [indiscernible] that we signed an agreement today and announced the deal today, we have work to do get the regulatory approvals to go ahead and get the deal closed and at the same time go ahead and get the deal done, and then you're right about the significant number of employees moving away to the tune of 1,700 employees and relative to our bas of about 9,500 that’s close to 20% when you look at it from that standpoint. So I think as we look for the details of how the JV is going to work [indiscernible] employees, I'll be able to give more color but I believe from the view point of what we have negotiated from a costing standpoint as I said earlier as a cost neutral from our standpoint and then OpEx as I said there should be benefit but too early to been quantify that I think I'll be able to get sort of that when we close the transaction.

[Operator:]

Our next question comes from the line of Joe Moore of Morgan Stanley. Your question please.

[Joe Moore:]

First, I have just a housekeeping question. I think before when you have taken these inventory reserves, they haven't been included in non-GAAP, if I'm remembering that correctly, and now you are leaving the inventory reserve in non-GAAP. Can you talk about is there something different about this reserve than what you have seen before that there is a different treatment of it?

[Devinder Kumar:]

I don't recall, if I have to go back to I think the 2012 timeframe when the PC market shifted pretty significantly and everybody felt the effects of that in the 2012 timeframe we had that impact. So we had the non-GAAP treatment for the inventory write-down at that point and we’re consistent with the way we do it. If you look at it from a viewpoint of how we talk about our numbers, putting in the non-GAAP and then comparing it and then we call it out from an inventory write-down standpoint where we have even in my script given the adjusted numbers in terms of what the impact is to EPS as well as the gross margin of the [indiscernible]. I think we are fairly consistent, that might have been something that you recall we took and an LTM adjustment that might have been included in the -- not included in the non-GAAP numbers but when you do an inventory write down from an AMD standpoint as far as I can recall, we've always have left that in the non-GAAP numbers.

[Unidentified Analyst:]

Okay, that's helpful. Thank you. And then, my second question is back to your graphics business. You had a nice sequential quarter, but I still have your GPU business down quite a lot year over year. Now that you have products that are more competitive in the enthusiast segment, can you give us an upper bound of what you might be able to achieve there? Is there supply constraints that are keeping this small and are you going to be able to regain the levels that you were at a year ago in GPU?

[Lisa T. Su:]

Yes so I think one quarter is good progress now you have to watch us over a number of quarters regain that graphics momentum and when I think about it, relative to the period launch of -- we did have some supply constraints in the third quarter, they were -- they are largely [solved] in the fourth quarter so I don’t think there would be any supply constraints. I think it's also fair to say that the graphics portfolio is quite broad and so you will see us updating the entire portfolio over the coming quarters and both on the OEM side and on the AIB side, so again it's a strategic effort, it's not a one or two quarter effort but to regain our graphic share.

[Operator:]

Thank you. Our next question comes from the line of Sanjay Chaurasia of Nomura. Your line is open.

[Sanjay Chaurasia:]

I have a question on your patent portfolio, so it's a two-part question. First question is, is that -- the option of licensing it, is that something have you decided that you will do or this is something you could do in future? And part two is where the demand for such licensing would come from? Does it necessarily imply that it would allow companies to build competing products in graphics and servers?

[Lisa T. Su:]

Yes. So in terms of our licensing our patents for our technology we have done it from time to time as I said on a more opportunistic basis and that's been both licensing technology as well as overall partnerships. As we go forward we do believe that there is an opportunity to be more strategic in how we approach that and that includes partnerships in certain markets that we are not directly building products out for example as well as working together with other companies that are interested in excess to some of the markets that we are competing in it, so I think both are possible and I would say a strategic effort that we will take on over the next couple of years.

[Sanjay Chaurasia:]

And as a follow up I have a question on your graphics reorganization, could you elaborate a little bit more how does this feel organization a vertical reorganization helps you to recapture graphic share?

[Lisa T. Su:]

Yes it really is in our view listen to some of our themes over the past couple of quarters, it is about a simplifying and providing focus in our business, so graphics isn’t area that is extremely competitive and having all of the graphics resources in a single vertical organization allows us to focus those resources and make good tradeoffs in terms of one of the key market opportunities, so it is again our belief that it's a very important segment for us as well as the computing segment and aligning the resources under Roger [Indiscernible] gives us a very strong strategic as planned upon where we are going with that business over the next couple of years.

[Operator:]

Thank you. Our next question comes from Mark Lipacis of Jefferies. Your question, please.

[Mark Lipacis:]

Thanks for taking my questions. Lisa, when you talk about being more strategic on the IP licensing, does that suggest you think about the opportunities here in licensing to your customers more or is that licensing to other semiconductor companies? And on that topic, is that -- is the vision -- can you help us with the vision from the standpoint of how big this could be? Is this something that is a single-digit revenue line item or low double digits or well into the double digits? How should we think about that?

[Lisa T. Su:]

Look so when I think about licensing again I view it as licensing to partners who are causing complimentary market segments as well as to those in OEM businesses so I mentioned three different areas that was licensing technology joint development partnerships as well as you address the fewer patterns sell relative to how the benchmark is as Devinder said it earlier just 10,000 patterns we think is a strong portfolio one of the strongest in the semiconductor industry our goal would be to monetize it across those various aspects over the next couple of years. So I don’t have the exact number but it is something that we view as very valuable and complementary as to our product development efforts.

[Mark Lipacis:]

Fair enough and then a follow-up, if I may. You mentioned virtual reality and Mark Papermaster has talked about that as an exciting market opportunity. Recently, NVIDIA had announced partnerships with -- to make VR ready notebooks to come out, I think, later this month. Do you have a similar effort to -- do you have something to do something similar on that front, to have a VR-branded ready notebooks with your customers? That's all I have. Thank you.

[Lisa T. Su:]

Yes, we are working very actively in the VR space. I think both Mark and Roger have probably talked about it over the last couple of months. We've been working with the budget software developers as well as OEMs and headset manufacturers to put together overall solution. So you'll be hearing more from us in those areas.

[Operator:]

Yes ma'am. Our next question comes from the line of John Pitzer of Credit Suisse. Your line is open.

[John Pitzer:]

Thanks for sneaking me in. Just a quick question on operating profit by segment. I guess -- the Company has done a good job over the last 12 months taking overall OpEx down by about $75 million, and if I look at the enterprise, embedded, and semi-custom business, revenue is down -- I am sorry, revenue is about flat year over year in the September quarter, but if you look, the op profit is down by about $20 million plus. I am just curious, Devinder. Did some of the inventory write-down hit that segment or just help me understand specifically what's going on with operating profit within the semi-custom business?

[Devinder Kumar:]

I think a couple of things. If you do the year-on-year comparison, and this is a little bit complicated that last quarter you remember we had the technology note transition charge and this quarter we have a small portion and the inventory write-down in that segment. When I look at the numbers from that standpoint it is down but it is down only slightly from the view point of competing from a year-ago quarter to where it is today. And one of the thing that happening that this [indiscernible] we've had situation where we launched couple of products two years ago you ramped the product we've the swing under this with us and we’re investing in that business and obviously that generate some expenses that go into that particular segment.

[Lisa T. Su:]

And maybe John just to give you little bit more color on that. So there was a smaller portion of the inventory write-down that was in the EESE segment, but if you're comparing year-on-year you also have to remember that in EESEs also server and embedded and those tend to be the highest margin parts of our portfolio and those are down year-over-year. So although semi-custom game consoles are up those are down and that had a little bit of effect on the margin mix in that business.

[Unidentified Analyst:]

That's helpful. Then maybe as my follow-on, turning to computing and graphics, even if I exclude the inventory write-down in the September quarter, you are still running at greater than $100 million per quarter operating loss there. Lisa, how do you think about, and hopefully this was the first quarter, as you pointed out, in two years you saw sequential growth, so you turned the corner. But importantly, as you think about bringing that business to breakeven, what are the most important levers in your mind over the next four to eight quarters?

[Lisa T. Su:]

John good question. Look we call the drop in the second quarter it was important for us return the corner on the business, but as you said it's a multi quarter effort to bring the business back to breakeven. We’re taking a number of actions in terms of what we’re doing there. There are OpEx actions as part of the restructuring efforts that we’re talking about, there are gross margin actions particularly as we see a ramp of our new Carrizo and our new commercial products you should see some mix improvements in that business as well, and we need to get the revenue up there is no question that we need to driver top line margin expansion as well as operating expenses. I do believe that we’ll make significant progress in 2016 and we see lots of good signs they just don't show up yet in the financials that you see. So we need to continue to make progress in those areas.

[Operator:]

And our final question comes from Vijay Rakesh of Mizuho. Your line is open.

[Vijay Rakesh:]

Just a question if it hasn't been asked before. If you look at 2016, the industry, how do you see -- what do you see on PC units? And then, I have a follow-up. Thanks.

[Lisa T. Su:]

I think if you look at the PC market, [IDC] has recently come out with some numbers on the third quarter and into 2015, but we expect the market to be down in 2016 modestly over 2015. We will also expect that we’ll continue to have some choppiness in certain regions particularly in the emerging markets relative to the mature markets and we’ll have to see how the next few quarters play out from a market standpoint.

[Vijay Rakesh:]

And when you look at your business for 2016 any thoughts in how the mix between PCs and semi-custom shakeout. And also with this foundry agreement does it get you any lower taxes with Malaysia or Penang?

[Devinder Kumar:]

I can address the tax question, Lisa can address the 2016. If you look at our tax line it's very minimal, the way our finances are on the maybe a various tax process in the locations especially in China and Malaysia so we have not been paying any amount of significant taxes in those areas, they are pretty minimal, so since we pay minimal once the JV is formed at the time of closure it will be a JV seem to go ahead and take care of the taxes but the thing that I can also throw in since you are looking at the accounting and the taxes is we will account for this particular JV once it's formed in an equity accounting method so it won’t affect all the lines of the P&L or it is just by sharing the in the bottom line of the JV on an equity basis in which we have 15% by ownership of the JV. Lisa?

[Lisa T. Su:]

Yes so on your question about sort of rough revenue mix in 2016, without being too exact I think you should expect it to be roughly 50-50 or so that's what we said, we expect sort of a steady state model to be roughly half SEG and half EESG going forward.

[Ruth Cotter:]

Thank you, operator. And that concludes our call for today and we'd like to thank everyone for participating and look forward to see many of you at the conferences will be attending and for the rest of the quarter. Thank you.

[Operator:]

Thank you, Ma'am. And thank you ladies and gentlemen, for your participation. That does concluding of this Q3 earnings conference call. You may disconnect your lines at this time. Have a wonderful day.