Greetings, and welcome to the Advanced Micro Devices Third Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ruth Cotter, Chief Human Resources Officer and Senior Vice President of Corporate Communications and Investor Relations for Advanced Micro Devices. Miss Cotter, 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 calls 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'd like to highlight a few dates for you this afternoon: Lisa Su will present at the Crédit Suisse TMT Conference on November 30 in Arizona; I will present at the NASDAQ Investor Program on November 30 in the U.K.; Devinder Kumar will present at the Barclays Global Technology, Media and Telecommunications Conference in December in San Francisco; and our fourth quarter quiet time will begin at the close of business on Friday, December 16, 2016. Before we begin, let me remind everyone that third quarter 2016 was a 13-week quarter, and we expect to record our extra week in the fourth quarter of 2016. 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 we will be referring to non-GAAP figures during this call, except for revenue, which is on a GAAP basis. The non-GAAP financial measures referenced are reconciled to their most directly comparable GAAP financial measures in the press release and CFO commentary 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 25, 2016. Now with that, I would like to hand the call over to Lisa. Lisa?

Thank you, Ruth, and good afternoon to all those listening in today. Our strong third quarter results highlight the progress we have made across AMD this past year as we improve our financial performance by delivering great products. Third quarter revenue of $1.3 billion increased 27% sequentially and 23% from the year-ago period, driven by upside demand for our graphics products and record semi-custom sales. In addition to the significant revenue growth, we also achieved several financial and operational milestones in the quarter. We strengthened our balance sheet and improved our P&L through a series of capital markets transactions that reprofiled and reduced our debt. We also signed a strategic amendment to our Wafer Supply Agreement with GLOBALFOUNDRIES that provides sourcing flexibility and financial predictability. Most importantly, we delivered non-GAAP net income in the quarter based on strong execution of our product road map and growing momentum across our business. Looking at our Computing and Graphics segment, we had solid growth in the quarter. Revenue increased 9% sequentially and 11% from the year-ago period, driven by improved sales of mobile APUs and discrete GPUs. Mobile processor revenue and unit shipments increased for the fourth straight quarter as seventh-generation APU shipments continued ramping, highlighted by the launch of our new Pro series APUs earlier this month with HP. Customer and partner excitement for our Zen-based desktop product, Summit Ridge, is growing as we successfully passed several key engineering and design win milestones in the quarter. We provided our first competitive performance preview of Summit Ridge in the quarter and believe we will have a very competitive offering for the $4 billion high-performance desktop processor market. We are working closely with our infrastructure partners and customers in preparation for the launch in early 2017. In graphics, we had a very strong quarter…

Thank you, Lisa, and a very good afternoon to everyone. In the third quarter, we achieved another milestone in our progress as we return to non-GAAP net income profitability. The third quarter financial performance was driven by strong demand for our semi-custom SoCs, higher graphics revenue and positive free cash flow. We executed a series of capital markets transactions that have significantly improved our balance sheet and termed that profile and will reduce interest expense beginning in Q4. We also finalized a long-term Wafer Supply Agreement with GLOBALFOUNDRIES. Third quarter revenue was $1.3 billion, up 27% sequentially, driven by higher sales of our record semi-custom SoCs and higher graphics processor sales. The year-over-year revenue increased 23%, driven by higher sales of our semi-custom SoCs, client mobile processors and graphics processors. Non-GAAP gross margin was 31%, flat from the prior quarter, driven by a richer mix of PC and graphics products offsetting lower margin semi-custom products. Non-GAAP operating expenses were $353 million, up $11 million from the prior quarter due to increased R&D investment. We recognized $24 million of net licensing gains associated with our server JV with THATIC. Non-GAAP operating income was $70 million this quarter, up $67 million from the prior quarter. Third quarter other net expense was $63 million, mostly consisting of a $61 million loss related to debt retirement. The equity loss in the ATMP JV was $5 million based on a 15% JV ownership stake. Non-GAAP net income was $27 million with earnings per share of $0.03. Non-GAAP EPS was calculated using 865 million diluted shares of common stock, which includes 12 million shares associated with the equity offering that closed late in the third quarter. Included in our GAAP operating loss and GAAP net loss is a $340 million charge associated with our sixth amendment…

Thank you, Devinder. Operator, we would be pleased to poll the audience for questions, please.

[Operator Instructions] Our first question today is coming from Matt Ramsay from Canaccord Genuity.

Obviously, a lot's going on in the last quarter. I figured I would ask a couple things about Zen since that's been one of the things that's most topical in my conversations with investors. Lisa, you talked about, in your prepared remarks there, multiple OEM engagements and design wins for desktop and also the same on server. Maybe you could do a little bit to expand upon those, I guess, the timing of launch of each and in particular, in the server market, the focus whether that be enterprise or whether that be cloud-based.

Yes, absolutely. Matt, thanks for your question, and as you said, it's been a very busy quarter for us. As it relates to Zen, we are on track to launch in the first half of the year for both our desktops and our servers. The desktop launch will go first, and it is on track for the first quarter. And then the server launch will go in the second quarter. We've had a wide amount of sampling that's gone on in the third quarter. We have multiple customers on both the PC side as well as the server side, who have working hardware now in their labs. They're bringing up their platforms and software, and we're very pleased with how smoothly it's coming up actually. So you asked specifically about the server side. Our focus on servers is really across the OEM business, including enterprise as well as the cloud data centers. And I think the key for us is we're getting a lot of interest from our partners, and we continue to work with them to bring up their systems. But I think we are optimistic about where we are in the Zen bring-up and the Zen launch cycle.

That's helpful. And then, I guess, as a follow-up there in the server market, I think, obviously, your GPU primary competitor has had some very stellar traction with server acceleration around GPUs. And you highlighted in the prepared remarks some wins and engagements that you've had on Polaris and I assume, on Vega for server acceleration. Maybe you could expand upon -- on that commentary a bit, what you're investing there, how the GPUOpen or the openCL environment is developing relative to the CUDA environment in server acceleration. And just what proportion of your GPU business could be driven by that server opportunity in the long term? Any commentary there will be great.

Yes. So let's talk on overall about our graphics business. So when you look at our graphics business, certainly, we're very pleased with the progress that we've made on the consumer side with Polaris, but we've also mentioned that we've made good progress on the professional graphics side, including both workstations as well as server GPUs. I think the market is certainly very receptive to growth in the server GPU area. I was just at the Alibaba Cloud Computing Conference last week where we announced our collaboration with them. They're actually using parts that are pre-Polaris and pre-Vega, so we were demoing a GPU-based cloud server based on some of our FirePro technology using hardware-based virtualization. And I think the main feedback that we've gotten from them as well as multiple other cloud engagements is the hardware looks very good. We're working with them on sort of the overall infrastructure and software bring that up, and we believe that the products are very competitive in this market. And the market is nice because it's certainly margin accretive to the consumer side of the business. So we do expect, as we bring out Vega in the first half of 2017, that, that will certainly strengthen the product portfolio. But there is a lot of interest in the cloud space around what we're doing with Radeon Pro and on the server GPU side.

Our next question is coming from Mark Lipacis from Jefferies.

I had 2 questions. First one on the Alibaba deal. So this is not a new set of products you're developing. It's products you already have. And is -- can you talk about to the extent this is like a cloud services offering versus like deep learning applications that they might be doing with your products? And I guess, when I think about the architecture, I normally think about having an x86 processor sitting next to the GPU. I was wondering, is it logical to assume that Zen is the natural x86 pairing with your GPUs in the Alibaba deployments?

Sure, Mark. So again, I think on the Alibaba deployment, it is the beginning of what we expect to be a long-term collaboration. So the work today is being done on a pre-Polaris base, but we do expect that, that will upgrade as we go forward. I think the key is there are many, many applications, but what we're starting from is a GPU-based cloud server application. So in virtualized environments, you can imagine cloud gaming or remote workstation-type environments, which need a lot of graphics horsepower as well as virtual desktop environments. And I think, as we go forward, certainly, we view the opportunity to expand that into a broader set of workloads as well as obviously on the CPU side as well. So I think, overall, we think the cloud is a very important market for us to focus on, on both the GPU and the CPU side, and we're ramping up our efforts there.

Great. And a follow-up if I may. Last night, Tesla announced that it was using NVIDIA for their self-driving car, but on the conference call, Elon Musk, I think the expression he is -- was that it was a tight decision between NVIDIA and AMD, which suggests that you're farther along in solutions for deep learning and neural networking and -- than most, including myself, thought. And so I was wondering if -- can you talk about your efforts in deep learning and artificial intelligence? How big is that business now? Do you have anything in that business now? And how do you grow that going forward?

Sure, Mark. So look, there is a lot of interest in the deep learning space overall, and certainly, our GPUs are very applicable to that space. So when we look at competitiveness and all that stuff, we think we can be very competitive there. We will be talking more about our strategy in the coming quarters, so maybe let me refer to that, Mark. But I think, suffice it to say, I think we look at GPUs as overall secular growth, whether you're talking about consumer, professional workstations, server GPUs or any of this machine learning area. And so we're going to continue to invest and lean in, in those areas.

Our next question today is coming from John Pitzer from Crédit Suisse.

I guess, Devinder, first, just going to the December quarter guidance. You're kind of characterizing it as seasonal. I kind of know the trappings of talking about normal seasonal because there's so much variance around it. But it does seem like in prior quarters where you had a 14th week, that extra week actually did help revenue a little bit. So I'm just kind of curious within the context of the December quarter guidance, how you're thinking about that extra week both on the revenue line and on expenses.

Yes. I think, if you look at the 14 week quarter, I think, John, you're right. It depends upon many factors. Our 14 week quarter is in the Q4 time frame, which is this quarter we are in. On the revenue side, I would say, looking at it overall, there's not much of an impact as the extra week falls during the holiday season when a large portion of our operations and our customers are in shut-down mode. There is an impact on the expense side, but that's already contemplated within the guidance of OpEx that I gave at the $350 million due to the extra week.

That's helpful. And then, Lisa, a little bit longer term. I mean, over the last kind of several quarters, you've been somewhat forced to try to manage profitability level to that break-even line given the lack of revenue growth. But now that you're sort of on this path of more sustainable revenue growth, I'm just kind of curious, as you think about R&D specifically, how should we think about kind of your desire to want to invest at higher rates as revenue begins to grow from these levels? Because, clearly, as Mark talked about on the last question, you've got a lot of potential new areas and opportunities to go after. Can you give us a sense as to what -- sort of to what degree you think you've been underinvesting in R&D and how we should think about R&D investments over the next several quarters as revenue growth kind of resumes?

Yes, absolutely, John. So I think it's fair to say that we've been very prudent in how we've invested overall. If you look at our operating expenses, '16 to '15, although we've been relatively flat overall, we've actually increased R&D relative to other elements of the P&L. But as we see revenue growth and as we've seen progress over the last couple of quarters, I think you've also seen us increase our R&D spend. I think there are several areas that we see as very large opportunities, and we talked about some of the graphics area in the previous question with Mark. I also think in the data center, I mean, there's a large opportunity for us on the CPU side as Zen fully comes to market. So I think we have an opportunity to invest a bit more in R&D as our revenue grows, but we're still going to be very prudent with how we do that. And I think the key metric there in terms of being net income profitable this quarter, ensuring that we get free cash flow positive from operations for the full year, those are all important metrics for us, and we're going to continue to manage every diligently.

Our next question today is coming from David Wong from Wells Fargo.

Do you expect GPU sales will grow sequentially in the December quarter? And what about computing revenues?

Yes. So David, I think we would expect overall that the CG business or the Computing and Graphics business will grow in Q4. The EESC business will be down. And then within the Computing and Graphics business, I would expect growth on both the graphics as well as the computing side.

Great. And do you have any new semi-custom wins you can tell us about or at least give us some idea of what the momentum is in the pipeline?

Yes. I think, on the semi-custom side, David, I will say that we've previously announced 3, and that's the number that we'll talk about today. Two of them are now known, and they're both in the game console area. One is outside of game console. I will say that we have some very good active discussions on future products and applications, and we'll update more as we get further along.

Our next question is coming from Blayne Curtis from Barclays.

This is Chris Hemmelgarn on for Blayne. It was Summit Ridge launching in Q1 of 2017. I guess, how would you expect the channel to ramp that? I mean, do you see it ramping pretty fully in first couple of quarters of the year? Or are you looking for more normal PC seasonality ?

I would expect that there will be a relatively good initial demand for Summit Ridge that may be not quite at the seasonal patterns. From where we see, Summit Ridge is playing in a space in the high-end desktop that we currently aren't offering a product. So we believe we'll be competitive, certainly, with Core i5 as well as Core i7, and we will be launching in those areas.

I guess, then, looking at the GPU side of things. You guys saw some pretty nice share gains in the first half of this year with legacy portfolio. Any metrics you can give to help frame how the business did in the first full quarter with Polaris? And any further color you can provide on how you see kind of the share situation progressing into the year-end?

Yes. Look, we're very happy with how Polaris ramped in Q3. The customer demand across all geographies was very strong. Q3 was primarily a channel-based quarter, so with our add-in board partners and -- as some of you noted, in the early part of Q3, we actually had some supply constraints given the customer demand. We did catch up towards the end of the quarter, so very pleased with how that's ramped. I think it's a very competitive market. We've leaned into VR, and we've leaned into sort of our work with DX12. And I think you can see in some of the benchmarks that we're doing very well there. As we go into Q4, in addition to the channel partners continuing to ramp, you should expect some OEMs launching in Q4 more broadly. And so yes, Polaris is off to a very strong start.

Our next question is coming from Stacy Rasgon from Bernstein Research.

I first wanted to ask about the second sourcing ability embedded in the new Wafer Supply Agreement. So you've said that you're going to be doing some second sourcing, I guess, starting in 2017. I wonder, did that push to actually seek out that supply diversification come from you? Or was it from specific requests from your customers? And given that, how do you guys make the decision on which products to manufacture at GLOBALFOUNDRIES versus manufacture somewhere else?

Sure, Stacy. So let me start with that. I think, relative to our second sourcing or our supply sourcing flexibility, I think we make it, on a product-by-product basis, based on where we are in the business. So we will have multiple products in 14-nanometer and 16-nanometer that will be sourced across foundries. And similarly, when we talked about the Wafer Supply Agreement, we mentioned 7-nanometer as being a key target node for that. Relative to how we make the decision, I mean, I think it's a combination of factors. It includes the complexity of the product. It includes the timing, customers, all kinds of things. So I think that's part of our product planning process.

Got it. But did the customers themselves have a hand in driving you to make that push to second source?

I think that's one element, but frankly, I think what's more important to me is I need to commit a strong 5-year product road map to the customers, and so we want to make sure that we have all the flexibility to ensure nothing happens. I mean, I'll give you just a little bit of context, Stacy, because I think you know our business well. In this past 6 months, I mean, we've ramped 5 new FinFET products. I mean, it's the fastest transition we have ever made in a process node, and it's gone really, really well. And I think what's helped us with that is the fact that we've had 2 sources ramping at the same time.

Got it. And for my follow-up, I just want to get some clarification on the timing of the Summit Ridge and Zen launches. So you said Summit Ridge launches obviously in Q1 '17. You had said before that you were going to be shipping at least some product in Q4 this year. Is that still true? And around the server launch in Q2, does that mean the volume is actually in Q3?

So I think our expectation is we may shift some production samples in Q4, but the volume launch for desktop will be in Q1, and that's consistent with everything that we have -- we planned into the business. And as it relates to server, I think it's a little early to tell. I mean, I think we'll go through our process and our customers' processes, and then we'll have more color on that as we get into next year.

Our next question today is coming from Ambrish Srivastava from BMO Capital Markets.

Kulin Patel calling in for Ambrish. I mean, in the prepared remarks, you mentioned semi-custom to decline and computing, graphics to be up, so it implies that you will have a pretty rich mix for Q4. Why is GM guided up only 1% given the [indiscernible] really strong mix for 4Q?

If you look at it from an overall standpoint, let's talk about Q2 to Q3 first of all. Q2 to Q3, we had a significant ramp in the semi-custom space which led to significant revenue in the EESC side, and we were able to manage the margin flat quarter-on-quarter, which we are pleased with. Now going to Q4, essentially with the Computing and Graphics business, as what Lisa said, ramping and then the EESC business, in particular semi-custom coming down, the gross margin is up 1 percentage point primarily due to the mix in revenue between the 2 segments.

Okay. And for a follow-up, a question on the cash balance. It looked like you're guiding cash to be up in 4Q, and looks like you have some excess cash after the transactions you've done in the quarter. And it looks like it might be up over your $1 billion target balance. How do you plan using excess cash? Or where would you reinvest that cash?

I think right now as you observe, it's true. At the end of Q3, we did have some remaining net proceeds from the capital market transactions. After completing what we did in the early part of Q4, we have about $162 million of remaining net proceeds. What we plan to do with it, I think, from a long-term strategy, that hasn't changed. Our plan is to continue to delever the balance sheet, reduce debt towards our longer-term target of getting to the net debt cash neutral that I've talked about previously and getting the leverage ratio down to about 2x from a longer-term standpoint.

Our next question today is coming from Joe Moore from Morgan Stanley.

Lisa, you talked about a $4 billion performance desktop opportunity. I guess, what's your thinking in terms of what you can eventually attain of that and just how you're thinking about your potential for market share? And can you give us some sense for when you have a chip like this that you have enthusiasm about how quickly it can ramp into that segment?

Yes. So I think, if you look at our PC market share as published by Mercury or so, I mean, we're talking about somewhere around 10%, plus or minus. I think we view that, historically, we've been higher than that in the PC market. And certainly, the desktop market, especially the desktop channel market, we're fairly well known by that customer set. So we're enthusiastic about Summit. We think the performance is right on the mark with what we wanted to achieve, and we're hopeful that, as we launch into the first quarter, that there will be a good solid ramp in that business.

Okay, great. And then how are you thinking about, as you think of bringing that to market, when will you make it available for third-party benchmarks and sort of get a broader marketing program beyond the launch that you've done? That's a [indiscernible]?

Yes. No, I would expect, certainly, there are a lot of confidential benchmarks at the moment, but in terms of third-party benchmarks, yes, you'd expect that in the first quarter.

Our final question today is coming from Chris Rolland from Susquehanna International Group.

We don't have September sell-through data yet, and it's kind of hard to predict the holiday season and what it's going to look like for consoles. But perhaps, the past 2 quarters' growth in the EES might be outpacing kind of expectations for consoles. So I guess, my question is, first of all, is that right? Is there something that's helping your guys' units here like initial channel stocking for the PS4 Slim or the PS4 Pro? And how should we think about the size of the benefit that you're going to get from initial channel stocking there?

Yes. So Chris, I think the game console shouldn't be really looked at on a quarterly level when you're looking at sell-in and sell-out because it's so different from the other markets. I would say, on an annual basis, everything trues up. And the thought process is, in Q2 and Q3, there is a bit of build ahead as the customers are really building for the holiday season. And the customers do so much of their business in the last 6 weeks of the year. That's when all the inventory is green. So my view is that, if you look on the annual basis, the game console business is doing quite well, and so we expect units to be up. We expect revenue for the business to be up for us. And the quarterly transitions are less important. It's more that we want to ensure that we're meeting our customers' build cycles so that they get to build everything that they want and get it into their channels. But from my standpoint, I think it's a very well-managed system.

Operator, that concludes today's call. If you could wrap it up, please, that will be great.

Certainly. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We do thank you for your participation today.