Advanced Micro Devices, Inc. (AMD) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for your patience. You've joined AMD's Q3 Earnings Conference Call. [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.

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've 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 and 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 present at the Wells Fargo Tech Media Telecom Conference on November 10 in New York and at the Crédit Suisse Annual Technology Conference on December 2 in Arizona. Devinder Kumar will present at the Raymond James Technology and Communications Investor Conference on December 8 in New York, and our fourth quarter quiet time will begin at the close of business on Friday, December 11, 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 expectation. Additionally, please note that non-GAAP financial measures referenced during this call are reconciled to their most directly comparable GAAP financial measures in the press release and CFO commentary, which are posted 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'll also find detailed discussions about our risk factors in our filings with the SEC, and in particular, AMD's quarterly report on Form 10-Q for the quarter ended June 27, 2015. Now with that, I'll hand the call over to Lisa. Lisa?

Thank you, Ruth, and good afternoon to all those listening in today. We successfully executed many of our near-term tactical priorities in the third quarter while 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 product 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 emerging, immersive computing markets by virtual and augmented reality. And in the third quarter, we also taped 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 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 the 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 Graphics segments as well as our Enterprise, Embedded and Semi-Custom segments. In our Computing and Graphics segment, we delivered our first sequential revenue increase in 2 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 am 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 market, 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 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 GCN, 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 segments. 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 plan 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's 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 established companies and strengthen 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 of unit shipments, further penetrating the commercial client market, regaining profitable GPU share and maintaining healthy OEM 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 steady 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 actions like our joint venture with Nantong Fujitsu. One of our most valuable assets is our patent portfolio. We own foundational patents in 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?

Thank you, Lisa, and good afternoon, everyone. In my remarks today, I'll be referencing non-GAAP figures, except for revenue, which is on a GAAP basis. I'm pleased with the progress we've 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 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 costs. 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 around 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 facilities-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 for the loss per share was $0.08. Net interest, 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 $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 and pack, or ATMP, joint venture to which we will 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 retain 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 being reclassified to other current assets and other current liabilities with an impact of $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 returns to the midrange 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 and ERP. In addition, there's a disproportionate impact on cash of approximately $70 million during the first and third quarters of each year based on our current debt 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 monetizing -- otherwise monetizing our IP portfolio. Lastly, if needed, we have other options available to bolster cash, namely tapping our asset-backed 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, reduce interest expense and allocate excess cash over $1 billion to reducing debt. Turning to the balance sheet. Our cash and cash equivalents 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, down from $799 million in the prior quarter due to the $65 million inventory write-down. Debt as of the end of the quarter was $2.26 billion, 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 commitments 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 our wafer purchase re-profiling discussions with GLOBALFOUNDRIES 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 others 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 investments to deliver on our longer-term strategy and improving financial performance. With that, I'll turn the call over back over to Ruth. Ruth?

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

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

I'm trying to put the pieces together on 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? What -- how do I think about the step down in Q4?

Sure, 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. We expect units to be up on a full year basis year-over-year and revenue to be up, 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 ramp. And so September was a very strong month for us. October, November will be strong months as well. Q4 is down seasonally from Q3 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 pretty much as we would expect and it's really just the timing between Q3 and Q4. As we said in -- Devinder has mentioned in the prepared remarks, we do expect the Computing and Graphics business to be up quarter-over-quarter. And again, that's due to some of the progress that we're making in that business.

Okay, great. The next one is for Devinder. So congrats on the assembly test deal. I guess my question is was there a prearranged assembly test supply 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?

Yes, I think there's a lot of detail, Chris. But let me tell you overall, from a viewpoint of the deal, we are very happy to be able to combine our ATMP facilities with the expertise with our partner, NFME. They are one of the top OSATs in China. And as far as the supply arrangement is concerned, we have a lot of flexibility overall from my standpoint in the products that we have in our factories today. A 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 OSATs as the case might be.

Okay. Was that -- sorry, was that -- you do have some capacity that's tied up but you have flexibility for the rest? Is that -- did I understand that correctly?

Well, think about it. It's a 5-year agreement, we have products that are running in the factories today, but we also have a lot of products that's run in the OSATs that we do business with around the world. And as the agreement is implemented, we will have some products in the JV facilities and at the same time, a lot of flexibility to make products outside of the JV entities.

Our next question comes from the line of David Wong of Wells Fargo.

Following up on the earlier -- the question just now, when you sell your assembly and test facilities, so the stake in them, does that result in any increase in packaging costs when the deal closes? Do you have an estimate of the impact on gross margin if there is an increase?

Yes, David, as I said in my prepared remarks, we expect this to be cost neutral. So there should be no impact on packaging or overall cost. We've got a pretty good supply agreement that we have put in place with the suppliers, so we don't expect any impact. However, I will add one thing. If you look at the OpEx side of the house, you can expect some decline in the OpEx. But in the COGS side of the house, essentially cost neutral.

Okay, great. And then in addition to licensing your IP, are there any pieces of IP you have that you think you could sell? And if so, do you have any estimate of the realized full value of IP that you might be able to sell outright?

I think if you look at our overall portfolio of IP, we have a lot of IP over the history of the company with a strong investment that's made in R&D. Lisa will probably give some details in terms of the various areas. But what I will say about our portfolio, especially the IP portfolio, is that 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.-based, based on present transactions, you can imagine the value of the IP portfolio is pretty strong and pretty significant, I guess. But Lisa, do you want to comment on the IP portfolio itself?

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 processors, graphics as well as other semiconductor technologies. Our previous -- previously, we've been more opportunistic in how we've approached licensing, and we believe that there's an opportunity now to be more strategic and deliberate about what we do. So in terms of your specific question, I think we're open to -- there are several different avenues including licensing technologies, forging partnerships, perhaps sales of certain pieces of the portfolio. So we are considering all of those options.

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

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

Our next question comes from the line of Hans Mosesmann of Raymond James.

Lisa, can you give us a sense of what's going on with Zen? Or actually, I should ask, with the departure of Jim Keller, that kind of shakes things up quite a bit. What is the succession there? And I suppose that Zen is already architecturally very well defined. What happens after that in terms of road map and Keller's departure?

Yes, Hans, so let me talk overall about Zen and our road map and then specifically to your question. So yes, as I said in the prepared remarks, Zen is on schedule for availability in 2016 and a first full year of revenue ramp in 2017. As you know, these microprocessor projects are multiyear projects, so the architecture, the execution team's 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 the long-term road map, 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 #1 priority for the company.

Okay. And if I could, just as a follow-on. Relatedly, on the ARM side of the equation, we just heard about earlier this week Qualcomm jumping into the fray. Xilinx talked about some of the accelerator-type assets of what's maybe happening in next-generation hyperscale data centers. What's AMD's position on all this? There's 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.

Yes, so Hans, I think relative to ARM, I continue to believe ARM has a place in the data center, both as you think about sort of the convergence between your 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 some of the software and the infrastructure. Relative to Seattle, we will be starting our first modest production shipments in the fourth quarter, this coming quarter this year. And I view it as a longer-term bet. So no question that the server market is attractive, data center is attractive. We're very focused on it from an x86 standpoint, and we'll continue our ARM effort in a complementary way.

Our next question comes from Harlan Sur of JPMorgan.

So Lisa, you gave us sort of a relatively brief update on Zen. If you could just give us an update on Zen from a performance perspective. It's a new core architecture, a new process technology. I think you taped out 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?

Yes, so Harlan, let me couch it this way. So 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 taped out multiple products through multiple fabs and FinFETs. And we believe that they're also on track in terms of overall ramp. So we continue to focus on both of those aspects, both the architecture and the process technology. But so far, so good.

Great. 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.

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

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

Devinder, thank you for laying out all the sources and uses of cash. So you're guiding to $750 million cash. You're going to get some proceeds from the assembly and test sale, I guess, sometime midyear. 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 GLOBALFOUNDRIES, but then again, there's no penalties there. So just the true obligations in your mind.

I think if you look at it from a viewpoint of the specific items that you mentioned, you're 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 to 2016, there's another $15 million, $15 million, 1-5, to be paid out of the restructuring plan. And then we are done, and that's when obviously we get the benefits 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 now overall from an OpEx standpoint relative to the actions that we took. As far as the obligation to the Wafer Supply Agreement, yes, you're right. Do not expect the charges that you talked about. And obviously, our booking with the GLOBALFOUNDRIES, the GLOBALFOUNDRIES -- our partner to go ahead and reprofile the timing and the mix of the wafers as we look at the demand profile for Q4 2015 and into 2016. CapEx, I mentioned that with the transaction, not just forcing the balance sheet with cash sometime in Q1 2016, but the CapEx comes down by about $40 million from the current annual run rate of $140 million. So net-net, I think when I look at all the factors at play, all else being 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 laid out. And I went through 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 well as working capital management.

Great. And then a follow-up, Enterprise, Embedded and Semi-Custom, I'm just trying to see how we can grow -- possibly grow next year. I mean, you have game consoles, obviously, regular ASP declines year-over-year. I mean, 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?

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 '16, so I think that would be one driver. And then as we go into the medium term with the -- with Zen, that would be more of a 2017 revenue driver.

Okay. And then if I could fit in one more, I mean, your Computing and Graphics revenue is up nicely in the September quarter. Looks like your operating loss though grew sequentially. Just trying to figure, is that sort of some transient marketing costs or is that some other things going on there in terms of the operating loss growing?

Yes, a couple of things. When you look at the numbers from a segment reporting 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 to the tune of $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.

Our next question comes from Stephen Chin of UBS.

Lisa, if I could, a few on the Graphics side of the business. Just looking at your AIB business for the graphics boards, can you talk about how those products in particular performed relative to the overall Graphics business in terms of sequential growth, how the sell-in and sell-out may be and kind of what your view is on safe inventories exiting the quarter and kind of what the expectations are Q4?

Yes, sure. So if I look at that overall Graphics business, we did see growth across both the desktop as well as the notebook portion of the business. Relative to AIB, the third quarter was really the start of the ramp of the Fury series as well as the R9 series. I think it was a transition quarter in terms of transitioning from the older products into the newer products. Relative to inventories, actually I think we're in 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.

Great. And as a follow-up, just in terms of the ASPs -- 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 this to progress in the current quarter? Are you expecting the mix to continue skewing towards a richer Fury and new product pushing the portfolio or do you expect a good amount of lower-end GPUs to be sold in this coming quarter?

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

Our next question comes from the line of Vivek Arya of Bank of America.

This is Shankar on behalf of Vivek. Just want to touch upon the console side of things again. So you mentioned the unit 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 next year?

Yes, so let's see. What's the best way to say that? I think what I said was overall units were up year-on-year 2015 to 2014 as we project into the fourth quarter. Revenue is 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 just looking at -- and you can easily bury a couple of million units 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'd have to see where that actually ends up.

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

So yes, I think we're very bullish on the graphics market as a whole. When you think about discrete graphics and the gaming portion of it as well as the newer applications, immersive applications around virtual reality and stuff, what -- the conventional wisdom that ASPs are going down is probably modified by the fact that there's -- with 4K, with DX12, with some of these other drivers, virtual reality, that there's more use for graphics horsepower. Going forward, I think we have a lot that we can do in terms of the 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.

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

Lisa, I just wanted to ask another question on the overall graphics market, and to follow-up to the last question. I think conventional wisdom among investors is that maybe AMD is focused mostly on the console business and your primarily competitor is focused on the PC gaming business. And as trends like -- I guess first of all, do you agree with that? And just give a commentary on how you're 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?

Yes, okay, so good question. I think it's fair to say we are 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've moved from DX11 to DX12, 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 will 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 are strong in game console, 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.

Great. And Devinder, I just wanted to follow up on some questions that were asked earlier in the call about the JV and the impacts of that. It looks like there's 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?

A little bit too early for that. We signed an agreement today and announced to you today. We have work to do to get the regulatory approvals to go ahead and get that 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 over. It's to the tune of 1,700 employees. And relative to our base 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 with moving the employees, I'll be able to give more color, but I'm pleased from the viewpoint of what we have negotiated from a costing standpoint, as I said earlier, kind of cost neutral from our standpoint. And then OpEx, as I said, there should be benefit but too early to kind of quantify that. I think I'll be able to get through that when we close the transaction.

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

First, I had just a housekeeping question. I think before when you've 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've seen before, that there's a different treatment of it?

I don't recall. I think if I have to go back to, I think, the 2012 time frame when the PC market shifted pretty significantly and everybody felt the effects of that in the 2012 time frame, we had that impact. So we had the non-GAAP treatment for the inventory write-down at that point, and we are consistent with the way we do it. If you look at it from the viewpoint of how we talk about our numbers, putting it into 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 -- on the write-down internally. But I think we are fairly consistent. There may might have been something that you recall, we took on LCM 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 left that in the non-GAAP numbers.

Okay, that's helpful. And then the second question is back to your Graphics business. You've 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 like an upper bound of what you might be able to achieve there? Are there supply constraints that are keeping this small? And are you going to be able to kind of regain the levels that you were at a year ago in GPU?

Yes, so Joe, I think one quarter is good progress. Now you'll have to watch us over a number of quarters regain that graphics momentum. And when I think about it, relative to the Fury launch, we did have some supply constraints in the third quarter. They were -- they're largely solved in the fourth quarter, so I don't think there'll 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 1- or 2-quarter effort to regain our graphics share.

Our next question comes from the line of Sanjay Chaurasia of Nomura.

Lisa, I have a question on your patent portfolio. So it's a 2-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 2 is where the demand for such licensing could come from? Does it necessarily imply that it would allow companies to build competing products in graphics and servers?

Yes. So in terms of our licensing our patents or 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's an opportunity to be more strategic in how we approach that, and that includes partnerships in certain markets that we're not directly building products, for example, as well as working together with other companies that are interested in access to some of the markets that we are competing in. So I think both are possible. And it's a strategic effort that we will take on over the next couple of years.

And as a follow-up, I have a question on your graphics reorganization. Could you elaborate a little bit more how does this reorganization -- vertical reorganization help you to recapture graphics share?

Yes, it really is -- if you listened to some of our themes over the past couple of quarters, it is about simplifying and providing focus in our business. So graphics is an 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 trade-off in terms of what are 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 Raja Koduri gives us a very strong strategic slant on where we're going with that business over the next couple of years.

Our next question comes from Mark Lipacis of Jefferies.

Lisa, when you're talking about being more strategic on the IP licensing, does that suggest that you -- this is -- you think about the opportunities here 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's a single-digit revenue line item or low double digits or well into the double digits? How should we think about that?

Look, so when I think about licensing, again, I view it as licensing to partners who are, let's call it, in complementary market segments as well as to those in OEM businesses. So I mentioned 3 different areas. That was licensing technology, joint development partnerships as well as just a pure patent sale. Relative to how to kind of benchmark it, Devinder said it earlier, it's 10,000 patents. We think it's a very 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 to our product development efforts.

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 has 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 of VR kind of branded ready notebooks with your customers? That's all I have.

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

Operator, we will take 2 more questions, please.

Our next question comes from the line of John Pitzer of Crédit Suisse.

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's kind of down -- I'm sorry, revenue's about flat year-over-year in the September quarter. But if you look, the op profit is down about by about $20-plus million. I'm just kind of 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.

I think a couple of things. If you do the year-on-year comparison, and that's a little bit complicated with the last quarter, if you remember, we had the technology node transition charge. And this quarter, we have a small portion of the inventory write-down that hit the segment. When I look at the numbers from that standpoint, it is down but it is down only slightly from a viewpoint of comparing from a year-ago quarter to where it is today. And one of the things that's happening in that business, as you correctly say, is we've had a situation where we launched a couple of products 2 years ago, you ramp the product, we are pursuing other businesses and we're investing in that business. And obviously, that generates some expenses that go into that particular segment.

Yes. And maybe, John, just to give you a little bit more color on that. So there was a smaller portion of the inventory write-down that was in the EESC segment. But if you're comparing year-on-year, you also have to remember that in EESC is 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's had a little bit of effect on the margin mix in that business.

That's helpful. And maybe as my follow-on, turning to computing graphics, even if I exclude the inventory write-down in the September quarter, you're still kind of running at greater than $100 million per quarter operating loss there. Lisa, how do you think about -- and hopefully, this was the first quarter. You pointed out in 2 years you saw sequential growth, so you turned the corner. But importantly, as you think about kind of bringing that business to breakeven, what are the most important levers in your mind over the next kind of 4 to 8 quarters?

Yes, so John, good question. So look, we called the trough in the second quarter. It was important for us to turn the corner on the business. But as you said, it's a multi-quarter effort to bring the business back to breakeven. We are taking a number of actions in terms of what we're doing there. There is -- there are OpEx actions as part of the restructuring effort 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 improvement in that business as well. And we need to get the revenue up. There's no question that we need to drive top line, margin expansion as well as operating expenses. I do believe that we will 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.

And our final question comes from Vijay Rakesh of Mizuho.

Just a quick 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.

Yes, so 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 then we'll have to see how the next few quarters play out from a market standpoint.

All right. And when you look at your business for 2016, any thoughts on how the mix between PCs and semi-custom shake out? And also, with this foundry agreement, does it get you any lower taxes with Malaysia or Penang? That's it.

I can address the tax question, and then I'll let Lisa address the 2016 question. On our taxes, if you look at our tax line, it's very minimal. The way our financials are and the way we have settled tax structures in the locations, especially in China and Malaysia, we've not been paying any amount of significant taxes in those areas. They are pretty minimal. So because we pay minimal, once the JV is formed at the time of closure, it will be a JV thing 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 in the P&L but it will just show in the bottom line of the JV on an equity basis in which we have 15% ownership of the JV. Lisa?

Yes, so you 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've said. We expect sort of a steady-state model to be roughly half CG and half EESC going forward.

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

Thank you, ma'am. And thank you, ladies and gentlemen, for your participation. That does conclude AMD's Q3 Earnings Conference Call. You may disconnect your lines at this time. Have a wonderful day.