Advanced Micro Devices - Earnings Call - Q3 2011
October 27, 2011
Transcript
Speaker 2
Afternoon. My name is Huey, and I'll be your conference operator for today. At this time, I would like to welcome everyone to AMD's third quarter 2011 earnings conference call. All lines have been placed on a listen-only mode at this time. After the speaker's remarks, you'll be invited to participate in a question and answer session. As a reminder, this conference is being recorded today. I would now like to turn the conference over to Ms. Ruth Cotter, Vice President of Investor Relations for AMD. Please go ahead.
Speaker 4
Thank you, and welcome to AMD's third quarter earnings conference call. By now, you should have had the opportunity to review a copy of our earnings release and CFO commentary. If you have not reviewed these documents, they can be found on AMD's website at quarterlyearnings.amd.com. Participants on today's conference call are Rory Read, our President and Chief Executive Officer, and Thomas Seifert, our Senior Vice President and Chief Financial Officer. This is a live call and will be replayed via webcast on amd.com. There will also be a telephone replay. The number is 888-266-2081. Outside of the United States, the number is 703-925-2533. The access code for both is 1554016. The telephone replay will be available for the next 10 days, starting later this evening. I'd like to take this opportunity to highlight a few dates for you.
Thomas Seifert will present at the Barclays Global Technology Conference on the 7th of December in San Francisco. Rory Read will present at the Raymond James Annual IT Supply Chain Investor Conference on the 13th of December in New York. Additionally, our 2011 Financial Analyst Day has been deferred to February 2, 2012. Lastly, our fourth quarter quiet time will begin at the close of business on Friday, December 16, and we'll announce our fourth quarter earnings on Thursday, January 20, 2012. AMD's ownership of GlobalFoundries on a fully diluted basis decreased to approximately 9.6% as of the conclusion of the third quarter. The two-year time period after which we no longer have the right to designate a representative to the GlobalFoundries Board of Directors was triggered in September of this year, when our ownership interest in GlobalFoundries decreased below 10% on a fully diluted basis.
Reconciliation for all non-GAAP financial measures discussed today is included in the financial tables that accompany our earnings release, available in the Investor Relations section of amd.com. Before we begin today's call, I'd like to caution everyone that we will be making forward-looking statements about management's expectations. Investors are cautioned that those statements are based on current beliefs, assumptions, and expectations, speak only as of the current date, and involve risks and uncertainties that could cause actual results to differ materially from our current expectations. The semiconductor industry is generally volatile, and market conditions are particularly difficult to forecast. We encourage you to review our filings with the SEC, where we discuss the risk factors that could cause actual results to differ materially from our expectations.
You'll find detailed discussions about such risk factors in our most recent SEC filing, AMD's quarterly report on Form 10-Q for the quarter ended July 2, 2011. Now, with that, I'd like to hand the call over to Rory. Rory?
Speaker 1
Thank you, Ruth, and thank you all for joining us on the call today. AMD's third quarter revenue was $1.69 billion, up 7% from the prior quarter and up 4% year over year. AMD's non-GAAP operating income grew by 28% quarter to quarter and was flat year over year. In my first 60 days at AMD, I'm excited by the energy and resources I see here, and I am encouraged by what I hear from our customers and partners. AMD clearly continues to play an important leadership role in the industry, but there's more to do. There is a lot of interest in our products, and customers are looking for us to improve our execution in order to help them grow even faster.
Third quarter demand for our new AMD platforms was strong, particularly in the mobile processor space, where we saw revenue grow 35% sequentially and 20% year over year, clearly outpacing the market in a significant way. Additionally, in the server space, we saw a solid 27% gain in revenue sequentially, with solid customer demand for our next-generation AMD Opteron offerings. However, we also had our challenges. We saw both 32nm and 45nm supply challenges in the third quarter. No doubt, we must improve our execution, and we are taking action to improve our ability to consistently deliver our products on time, day in and day out. We are working with our key partners to improve the processes and disciplines to deliver on our commitments to our customers. We have more to do, but we are clearly making progress, and we are on the right path.
Now, let's take a deeper look at the mobile segment. In the third quarter, we saw record AMD processor shipments and revenue in the mobile space. Over 90% of our mobile units were Fusion APUs, which are uniquely suited to meet the advanced processing needs of today's mainstream and entry-level mobile PC buyers. For example, we believe AMD's worldwide share of the $200 to $600 retail price band is now over 28%. These bands make up 45% of the retail notebook volume across the planet. We believe AMD gained consumer notebook share in the key emerging markets year over year, particularly in China, where our microprocessor revenue grew 23% quarter on quarter. We also set another record for Brazos shipments in the quarter, up 36% quarter to quarter. Our mobile AMD processor unit sales in total are now up over 50% in the last two quarters alone.
We clearly outgrew the market in the mobile segment, and we believe we took share in the quarter. Now, for our server business, the third quarter was the beginning of a move in the right direction, with server revenue up 27% sequentially. Initial production shipments of our new AMD Opteron products gained traction in the high-performance computing space, where, with the help of our key partner Cray and some of our most notable customers, which included the National Supercomputer Centers in Stuttgart, Germany, in the UK, and in Switzerland, as well as the U.S. Department of Energy's Titan project at the Oak Ridge National Laboratory, this project, in fact, is likely to be one of the world's fastest supercomputers. We are excited about our key partners, including HP and Dell, who are launching new products based on our new Opteron platform this fourth quarter.
We are confident they will do well against competition, particularly in key workload areas like the cloud and virtualization. Now, let's turn our attention to the graphics business. AMD's graphics segment continued to be a solid business for us. Segment revenue was up 10% quarter over quarter and up 4% year over year. This growth was driven largely by strong seasonal revenue increases in the AIB channel. Our AMD Radeon HD GPU was also recognized as the world's fastest mobile product in the most recent quarter. This continues to show outstanding graphics innovation from AMD. We also publicly demonstrated our next-generation 28nm GPU product during the third quarter. We look forward to building on our performance leadership position in the graphics area throughout 2012 and the years ahead. Now, let me take a moment to focus on execution.
From an execution standpoint, you know and we know we face significant manufacturing challenges in the quarter. Having said that, demand was strong, and interest in our products is significant. We will continue an aggressive effort with our foundry partner to improve manufacturing performance at this important 32nm technology. We are already seeing steady improvements, day after day, week after week, but we are not out of the woods yet. In the last few quarters, you've also heard Thomas describe our initiatives to streamline our business processes.
We will continue to explore ways to accelerate these efforts, both to unlock the efficiencies and productivity to better compete in the current marketplace, and also to enable our organization to better capture the trends for which our technologies are so well suited, namely the move to low-power platforms, the continued rise of the emerging markets, and the emergence of cloud and mega data center computing. In summary, our exciting new AMD Fusion architecture is a unique and differentiated approach, and we are seeing strong interest from the marketplace. It is particularly well-targeted to lower power form factors and high-volume price bands. Our new AMD Opteron server technology is well-tuned to increasingly important workloads like virtualization and cloud-based servers. We are seeing a nice uptick in our server business, which is, in fact, long overdue. Customer demand is strong, and momentum is clearly there.
While we face challenges in supply and execution, we are making steady improvements with a maniacal focus on execution across the entire company. In short, I believe AMD is uniquely positioned to take advantage of today's largest and fastest growing market opportunities. Through better execution, we will accelerate our growth. Through innovation, we will lead in this changing technology landscape and capture the emerging inflection points already underway. With that, I'll turn it over to Thomas, who will cover the financials for our third quarter.
Speaker 0
Thank you, Rory. Revenue in the third quarter was $1.69 billion, up 7% compared to the second quarter of 2011. Revenue growth in the third quarter of 2011 was adversely impacted by 32nm and 45nm product supply constraints. The sequential revenue increase was driven primarily by record mobile processor revenue and unit shipments, partially offset by lower desktop revenue due to lower 45nm supply and seasonally higher graphics segment revenue. In addition, since our preliminary third quarter results announcement in September, we saw unanticipated sales strength in the channels through the end of the quarter. Gross margin was 45%, down one percentage point quarter over quarter due to lower than expected supply of 45nm products, lower than expected supply of higher ASP and higher margin 32nm products, and therefore a higher percentage of revenue in our lower margin GPU business.
Operating expenses were $610 million, less than guided due to lower than expected revenue in the quarter and ongoing discipline and expense management. R&D was $361 million, and SG&A was $249 million. Non-GAAP operating income was $146 million, and non-GAAP net income was $110 million. Interest expenses declined by $5 million compared to the prior quarter. Additionally, we repurchased $150 million of our 6% convertible notes in the quarter, which will result in over $2 million of quarterly interest savings moving forward. Non-GAAP EPS was $0.15, calculated using 741 million fully diluted shares. Adjusted EBITDA was $239 million, up $34 million from the prior quarter due to higher operating income driven by higher revenue. Now, switching to the business segments.
Computing Solutions segment revenue was $1.3 billion, up 6% sequentially, driven by record mobile processor revenue and unit shipments, partially offset by lower desktop revenue, and double-digit growth in server processor revenue driven by significantly higher ASP. Computing Solutions operating income was $149 million, up $7 million from the previous quarter, primarily due to a higher mix of APUs and improved server microprocessor ASPs. Graphics segment revenue was $403 million, up 10% compared to the prior quarter, mainly due to seasonal strength in the add-in board market, strong demand from mobile discrete graphics at OEMs, and an improved product mix. Graphics segment operating income was $12 million, up $19 million from the prior quarter, primarily due to higher GPU shipments and ASP. Now, let's turn to the balance sheet.
Our cash, cash equivalents, and marketable security balance, including long-term, at the end of the quarter was $1.86 billion, down $4 million compared to the end of the second quarter of 2011. Accounts receivable at the end of the quarter was $908 million, up $149 million compared to the end of the second quarter, due to higher revenue and the timing of sales. Inventory was $540 million exiting the quarter, down $102 million from the prior quarter, due to a decline in 45nm inventory, driven by a transition to 32nm products and efficiencies in the backend manufacturing. Long-term debt as of the end of the quarter was $2.1 billion, and non-GAAP free cash flow was $131 million. Now, turning to the outlook. AMD expects revenue to increase 3%, plus or minus 2% sequentially for the fourth quarter of 2011, and operating expenses are expected to be approximately $620 million.
APU traction in the marketplace and demand for AMD's leading-edge technology is strong. While we exit the quarter recognizing we could have done better, we continue to deliver to our business model, improving profitability and free cash flow, and we fully expect our strategy to be successful and deliver improving shareholder value going forward. With that, I'll turn it back to Ruth.
Speaker 4
Thank you, Thomas. Operator, we'd be happy for you to poll the audience, please, for the Q&A session.
Speaker 2
Yes, ma'am. Ladies and gentlemen, if you would like to ask a question, please press star, then one on your touch-tone phone. If your question has been answered or wish to remove yourself from the queue, you may press the pound key. Again, if you would like to ask a question, please press star, then one on your touch-tone phone. Our first questioner in queue comes from Glenn Young with Citi. Your line is now open. Please go ahead.
Speaker 5
Thank you. My first question is about gross margins. Thomas, in your comments, you indicated ASPs were up, sounds like quite noticeably in the quarter, and obviously gross margins impacted by yields. How should we think about the recovery of gross margin as yields improve, particularly given the ASP trends you have? Specifically, how should we think about gross margins for Q4?
Speaker 0
Yeah, thank you, Glenn. Very good question. As we said in the script, in the third quarter, we had to fight a couple of headwinds, mainly on 32nm supply, impacting really the product mix we had in terms of high ASP and highly margin accretive 32nm products. We also had to make some trade-off decisions on 45nm capacity that hit us from a cost of goods sold perspective. We had to deal with a higher relative share of graphic product in the overall revenue picture. How is that going to change moving forward? A couple of trends you have to keep in mind: headwinds and tailwinds. The tailwinds certainly are we will recover gross margin by shipping a higher share of Llano products, and we will increase gross margin, of course, by increasing our server revenue. We will face some headwinds in the current quarter.
45nm supply is still going to be not where we want it to be because we continue to trade off capacity towards 32nm. We also will see some ramp-up costs from a 28nm technology perspective. We will have a one-time effect in the fourth quarter, just cleaning up manufacturing startup costs around 32nm to make sure that WIP is clear. That one-time effect is going to hit us probably with just under 1%. If you add up all the headwinds and tailwinds, we think we're going to be about flat moving into Q4, but continuing to execute our model if you keep the one-time effects out of the picture.
Speaker 1
You know, and think about it, Glenn, from a standpoint, one of the key drivers that you can see, and we clearly have more work to do, is around execution. As I've started my first 60 days here at AMD, when I've met with customers, partners across the planet, they've told me that they're really interested in the product sets that we're creating and the solutions that we're making here at AMD. They also want to believe and trust more and make bigger investments to grow with us. We have to focus not only just on the margin items that Thomas hit, but across execution. Improving our execution and improving our supply position has to be one of our top priorities. We have much more still to do in that space. You heard it in Thomas's comment. That impacted our margins and our results.
We're not out of the woods yet, but we're making steady and clear progress day after day, week after week. We're working with some really outstanding technical leaders from here in AMD, our partners like GlobalFoundries, but also key partners like IBM and PDF. We're going machine by machine, step by step to improve that activity and our yields. That, I think, will help improve over a longer period of time our margin performance. That's really a little bit more background on that item, Glenn.
Speaker 2
Rory, thanks for that. Maybe just a follow-up question here. Based on the comments again, it sounds like what fell short must have been desktop. I wonder, as I think about the execution issue, one, do you sense that there's a longer-term impact from that? Did you just turn some customers off forever because you screwed it up on the execution side? The reason I bring up desktop is I wonder if that's less impactful when it's in desktop than it would have been were it to be seen more in your notebook results, because I think that's where your customers were probably depending on you more.
Speaker 1
It's kind of interesting. You know, I've had the opportunity over the first two months here to really meet with just about every major partner across the planet. The feedback's been very consistent. They really believe in this AMD APU kind of strategy based on the Fusion architecture. It's not a surprise that we saw revenues increase 35% sequentially based on this strong APU demand in the mobile space. Think about it. To date, we've already shipped 20 million Brasos in that area. Clearly, from being a customer in my past job, it's about building trust, trust in execution, trust in technology. We have to continue to focus on that. That is job one from my perspective. If we execute better, we'll enhance that trust. I don't think we've irreversibly damaged that trust at this point, but we eroded some of it.
We need to make sure that we execute every day to our commitments. You're right. In the desktop space, there's a little less pressure. We had to choose where we did our manufacturing capacity in order to support our notebook growth and to make sure that we tried to deliver on the commitments that we made to our customers. They felt some of that pain in the third quarter because we weren't able to execute as cleanly as we would like. In the notebook space, we're making progress. In the desktop space, I think we know how to manufacture in that space. We just need to be able to move more of the wafers in that direction. Net-net, I don't see it as an irreversible trend. I believe this is a trend we can build from, but it's all about execution.
We need to, as a company, AMD, deliver on our commitments. It's whether it's our roadmap, our features, our supply. That's the first lift to creating shareholder value in this market. We can go tackle in parallel how to intercept the very interesting inflection points going on in the industry. Inflection points around low power, around the cloud, around emerging markets. These are real opportunities. Sorry, Glenn, but I got fired up on that one.
Speaker 2
Good to hear from you, Rory. Thanks.
Speaker 1
Thanks.
Speaker 2
Thank you, sir. Our next questioner in queue is Ross Seymore with Deutsche Bank. Please go ahead. Your line is now open.
Speaker 5
Hi, guys. Continuing on the comment or on the topic of the gross margin and more specifically the manufacturing problems, can you just give us an idea of the good die contract that you signed with GlobalFoundries in the first half of this year? I just want a little clarity on how the yield issue impacts your gross margin, considering that you did have that agreement going forward.
Speaker 0
Yeah, very good question. Keep in mind the die-by agreement we have is an agreement we have on the 32nm process. It's not an agreement we have on the 45nm process. I think I described it in the last of their first quarter conference call pretty much as a downside protection. This is how you have to look at it. When yields fall below a certain level, the downside is protected. We built it from there. On the 45nm side, it's a different picture. We pick up the cost for that capacity pretty much in the old model. Since we have allocated 45nm capacity towards 32nm capacity, we've had some margin impacts there.
Speaker 5
Great. I guess two somewhat housekeeping issues. The first one is a little more general. On the flood side of things over in Thailand, any commentary on what you think that would do to impact you? The housekeeping one on the interest expense, are you more or less saying that the $2 million benefit per quarter is what you'll see in the fourth quarter so that we can just model that down $2 million?
Speaker 0
Yeah, start me with the second question first. That's the easier one. Yeah, that is exactly as you described it. It's a $2 million benefit on a quarterly base moving forward. That's what you see then in the fourth quarter to 100%. On the flood, I think the supply chains in the industry have become rather efficient for maybe the wrong reasons with all the disasters we had to deal with. Overall, the reaction time, finding out where the bottlenecks could be, worked out really well, and the information flow across the supply chain seems to work rather well too. From this point and perspective, we don't see an impact in the fourth quarter, to be very honest, at least after discussions with our customers.
We'll have to see how this is going to impact the supply chain moving forward and into 2012. It depends on a lot of things, how long this situation is going to continue and how much damage needs to be repaired. Short term, not much of an impact.
Speaker 1
Yeah, and Ross, I'll add a little bit of color on that. As I've been meeting with the key partners in the OEM space, their feedback is, that's a challenge. Thomas is spot on. Those supply chains are quite resilient. They're working hard to work around that and make sure the mix is there. The feedback and signals that I've gotten from each of the major players is they're looking for us to improve our execution and deliver more product to them. They see opportunities to continue to deliver and execute. The flood doesn't appear to be a major factor at this point. We're going to continue to monitor it, but all indications at this point are that this shouldn't be a major impact.
Speaker 5
Great. Thank you.
Speaker 2
Thank you, sir. Next questioner in queue is Joanne Feeney with Longbow Research. Your line is open. Please go ahead.
Speaker 3
Great, thanks. I was hoping we could get into the Brazos and notebook side of things a little bit more. You remarked a little bit about the channel strength picking up towards the end of the quarter, and that's why you ended up a little bit higher now. Was that due to sort of the value end of the notebook market, perhaps, or was it due to something else entirely?
Speaker 1
You know, what we've seen in the notebooks segment, Joanne, is we've seen strong uptake in the APU demand, whether it's in the Brazos area in low power and more in the entry bands or into the Llano segment where it's a little bit more into the mainstream. $200 to $600 retail price bands where we believe the worldwide share now is up to 28%. Since two quarters ago, we're already up 50%. There are clearly a couple of major factors that are going on in the marketplace, one around consumerization in the PC market and also around convergence and around the cloud. The APU strategy that we've put in place with the Fusion architecture, with the Brazos and Llano chipsets, really takes advantage. The idea of the CPU and GPU together and the idea of delivering the graphical user experience from the cloud is very well positioned.
Customers are clearly reacting to that in the mobile segment in terms of those entry to mainstream price bands. I think that's a reflection that we've been listening to the marketplace, and we've been reacting to it. At this point in the third quarter, the APU mix of our total client business is up to 90% of that client mix. I think that's pretty telling. We're going to continue to double down there, focus on building out that APU strategy, continue to drive for low power. These are the trends that the customers in those segments are saying, and we're seeing it across the planet.
Speaker 0
Yeah, let me follow up on that, Joanne. The description you gave is pretty much correct. It's retail strength in terms of sell-through. It was primarily emerging markets, and it was primarily around Brazos APU platforms.
Speaker 3
Great, thanks. Thanks, Thomas. Rory, could I ask one follow-up, please, about the future of Brazos? You know, everyone expects that the success of this line will continue. It's been very appealing. We understand that the next generation coming will use more advanced manufacturing, and there are some concerns about the readiness of one of your foundry partners to contribute to production of the next-generation Brazos, GlobalFoundries. I'm wondering if you have plans for dealing with those challenges your foundry partner may be facing and whether you still think you'll be able to follow the same sort of time zone for releasing, excuse me, the new Brazos at the beginning of the year like you did last year. Do you think you need a new revision to capture the same interest in the market?
Speaker 0
Yeah.
Speaker 3
What your strategy is there?
Speaker 0
Yeah, let me get started here. I don't want to give any specific statements on roadmap and launch dates for 2012. I think in general terms, of course, we are pleased with the success of the low-power version of our Fusion products, and we are excited by the perspective and the opportunities that creates in the marketplace. I think the first big follow-up on that is actually the second generation of Llano products, Trinity, that is going to launch very early next year and where we pretty much cut the power performance in half. Of course, we'll drive the Brazos and Bobcat-based products further down and have a big focus on that. I think we mentioned it also in our last call that moving forward, we think we found a way to better balance our risk profile in terms of manufacturing foundry partners.
This also, I think, will help us to better mitigate the ups and downs that are just part of this business model.
Speaker 1
You know, and Joanne, as we look at that segment, clearly that Brazos family, we're going to continue to extend that. As we are tracking execution each week across AMD, we're looking at the design win activities with our key OEMs. We're looking at the momentum of sell-through, and the buy-in around the product continues to show strong interest, strong demand. They're counting on us to improve these execution items that allow us to move forward. I think what we're seeing with the progress that we're making since late September, it's slow, it's steady. We clearly have much more to do, but there are those signs of clear improvement, and the demand and interest in this architecture and solution is spot on. Thomas mentioned the emerging markets. Think about it. Both in China, India, we saw very significant growth.
This product set should play very strongly there and continue into 2012.
Speaker 3
Yes, it seems like both you and your main competitor are launching products earlier in the year than has been traditionally the case. Do you see the seasonal pattern for sales really shifting earlier in the year?
Speaker 1
You know, I think what we're going to see is, from our perspective in AMD, the key is understand the customer. We're spending just an intense amount of time across our business units to really understand the market data. Where are the customer pain points? What's the feedback we're getting from the key retailers? What is the feedback from the customer sets that are interested in the product? What we're trying to do is take that and combine it with where we believe the puck is going, right? We want to skate not where it is today, but where it's headed to. If you think about that in this set, I really think that we're building on that same set of success.
What we're trying to do is to continue a nice drumbeat of products throughout the year and to make sure that we're keeping a fresh set of improvements that allow us to improve the experience for that customer. Customers are telling us low power. They're talking about faster boot times. They're talking about a better experience in terms of the graphical representation and the experience on the screen. That's what they get with AMD's Fusion architecture and the APU set. That's why we'll bring it to market as we have those solutions and make sure that we're hitting the customer. We're going to try and get there first. We have work to do, but we're going to do that.
Speaker 3
Great. Thanks so much, guys.
Speaker 2
Thank you. Next questioner in queue is Uche Oche with UBS. Your line is open.
Speaker 0
Thank you very much. Rory, can I just probe a little bit into the trends you saw in the channel post the pre-announcement? I'm still not sure I'm convinced as to what drove that. I mean, it's unequal to ask whether it's a case of customers trying to get what they can, given the announced manufacturing problems, or are you convinced it's really on demand? If so, what were the real catalysts that drove this sudden strength in demand soon after the pre-announcement?
Speaker 1
You know, what I think, Uche, is it's very important. When we took a look at the data throughout the quarter, it was clear that we were going to miss the original guidance. There's no doubt that was the case. It was our prudent decision that we needed to represent that to our shareholders, to our investors, and to the marketplace. That's what we did. I think as you looked at it, we had the impact that we saw in terms of the margin down 1 point quarter over quarter. We saw us outside of the range of guidance on revenue. We did see some activity that, quite frankly, surprised us a little bit in the channel at the very end of the quarter in terms of some sell-through of some channel inventory that was a little bit higher.
There's no doubt that was the prudent decision given we were going to miss the guidance that we had shared. Think about it. Take a look at our inventory position. Our inventory position hasn't been in a better position in a long time. That's a reflection of a maniacal focus on improving productivity. Also, we've got that bit of surge of channel sell-through at the very end that kind of pushed us a little bit higher on that. In no way you look at it, that was the right call, the prudent decision.
Speaker 0
That's great. Thanks for that. Can I have a quick follow-up? In terms of really what happened with the cycle time and the yield issues, how better controlled is that now? Specifically, what lessons have you learned with this that you think can apply to Trinity? From the early signals we've seen with Trinity, are you comfortable with where you think that yield could be within a few months of launch? The same question will apply to Bulldozer. Just kind of get a sense of what you learned from this and how we should be able to feel comfortable when you give us the guidance around Trinity in the future.
Speaker 1
Sure. From a standpoint, clearly, we were disappointed with the execution around the yields in the 32nm space. That occurred over a sustained period of time. As I mentioned in my comments and earlier questions, we're not out of the woods yet. We're making progress, and we're focused on it every single day. We're seeing progress. We are focused at a machine-by-machine level, step-by-step, and trying to improve both our sort yields and our total yields across the board. This is something, you know, based on some strong results here from your perspective, you might get the wrong read on this. We have work to do in the execution space. While we're making progress, we need to continue that progress. I think we're seeing that steady improvement, and step-by-step, machine-by-machine, we'll make that progress in 32.
Clearly, we'll ship significantly more 32nm product in the fourth quarter than we did in the third quarter. What we're doing is to apply the learnings to 28nm. The difference between 32 and 28nm, quite frankly, isn't gigantic. The experiences that we're learning there in terms of the machine-level data, the flow through the recipe, those we're applying in the 28nm space. We have much more work to do, but we believe that we're making steady progress day after day. We have more work to do, but we're on it. This is really job one from my perspective. We must execute better as a company. My experience as a customer of AMD for five years, this is an area that we must improve on, whether it's on the roadmap, features, or supply.
Our customers have been telling me that the first 60 days, every single day, and we cannot let them down. We need to improve. Not out of the woods yet, making progress, and 28nm, very close to 32, we're taking the learnings and applying them.
Speaker 0
Thank you very much. Good luck.
Speaker 2
Thank you, sir. Our next questioner in queue is Cody Acree with Williams Financial. Your line is open. Please go ahead.
Speaker 5
Hey, guys. Thanks a lot for taking the questions. Maybe for both Rory and Thomas, I guess given that this goes back to the July conference call, I'd like to get maybe a bit of quantification on where you started with the yield curves as you were coming into that July call that gave you confidence of a 10% growth. What happened to that yield trajectory? To what degree of quantification can you give that? You talk about execution, but I think we need some degree of what exactly the progress has been and what kind of ramp are you on for the next few months?
Speaker 0
Yeah, I think let me try to give you some color around that. Of course, you will understand that we will not disclose specific yield figures. Going into the quarter, we were, you know, based on the information we had and the data we looked at, pretty confident that we could outperform the ramp of the Brazos product line. If we look back today, then we did not really achieve that. We are pretty much on the same slope, but we could not outperform that slope as we had previously expected. It's not so much only a matter of, you know, here's a product issue and we have a product yield issue. It was much more a matter of how do you get a significant and very steep capacity ramp handled at our foundry partner.
A lot of new tools had to be brought on place, had to be ramped, had to be qualified. How disciplined and how successful this steep ramp process was handled gave us a lot of headache over the quarter and a lot of volatility. Not so much only in terms of did we lose good product on the wafer, but just not getting enough wafers out the door, so to speak.
Speaker 5
Thomas, if we look at where that real yield curve is today versus where you expected it to be, is it a matter of just a push-out of that same type of ramp, or is it a reduction in that ramp so that you hit the endpoint further out rather than just maybe a gap of the correction being put in place?
Speaker 0
I would say it's a matter of both, to be very honest. At least the volume we lost from a just pure volume and capacity bring-in-place perspective, that will be recovered without any doubt and without any gap. Once you have a little delay on your yield curve, on the product yield curve, that obviously leads to a time delay. We saw steady improvement. You heard Rory talking about that we will see significantly more output in the fourth quarter compared to the third quarter. We see the trend being reversed, but you know, we also have some work that still needs to be done.
Speaker 1
Cody, from a standpoint of, you know, that curve, we're not where we want to be yet. That's the bottom line. We have more work to do on it. We had to shift volume away from 45nm and away from desktop in order to get the yield and to try and fulfill as much of the customer demand as we possibly could. We're seeing some improvements. We're still not at the right levels, and we need to make more progress. I think what we've done with our key partner there, I've spent a lot of time with their executive team, and they're bought in just as significantly at GlobalFoundries as AMD to work with us and to find the right path here. Bringing other key partners like IBM and PDF, as I suggested earlier, these things are the things that'll help to lift that on a sustainable basis.
Again, we are not where we need to be yet, and we'll have to make choices to get the best outcome to satisfy as many of our customers as possible. We have more work to do, Cody.
Speaker 5
Could you maybe just comment on the health of the overall PC market? I guess not your share gains withstanding or the current manufacturing constraints. Can you kind of talk about what the backdrop is versus where you would expect it to be seasonally?
Speaker 1
As I look at it, I look at some of the same data you look at, whether you go look at IDC or any of the other industry reports out there. I believe the PC market is going to continue to grow, and it's going to grow for the foreseeable future. I think there's going to be hundreds of millions of new PC customers over the coming years. I think there are going to be a lot of them in the emerging market. That's why I'm so pleased with the progress that we're beginning to see in our emerging market focus. We're going to double down in that space. We need to continue to build momentum in the emerging markets. We know that a lot of that growth, a huge portion, is going to come in those entry and mainstream price points.
This is right smack where we can reach with the Brazos and Llano technologies, that APU is a value proposition that works. You look at that combination, emerging market, right technology, even as it moves into more cloud delivery of content, you're going to see the importance of the APU and the GPU built into that APU become even more critical. I believe that the market, the PC market, as represented by IDC, is a fair representation. There will be growth, and it will continue to grow, and it will continue to grow consistently over the next several years. If there's some huge macroeconomic event, I can't predict that. Clearly, the market, I believe, is solid. It's growing, and it has opportunities for us, particularly with the products and technologies that we have.
Speaker 5
Rory, lastly, I know it's early, but I'd like to get your thoughts on AMD's eventual participation in the tablet market and maybe eventually into even the smartphone market. I guess, what are your initial thoughts on pulling your architecture down into those lower power envelopes, or is it something that you would consider moving to bring in ARM core for that usage?
Speaker 1
Yeah, you know, I think it's a fair question. Remember, I'm here 60 days. We'll have an analyst day in February. I think you're on the right trend here in the idea that low power is a trend that's here to stay. You know, thin and light, convergence, consumerization, those are core trends. They're not going to change. We're listening to the customer. We want to focus on what that customer needs, how we can create leadership, and then drive that through. You're going to see us, as I mentioned, double down in those key areas around low power. That is a trend. Thomas mentioned the next year and the kind of power envelope reductions that we're driving in the Brasos and Llano family.
You think about the work that we'll do across the APU and how to continue to extend that architecture and the Fusion architecture so that that customer experience is even better. Low power is definitely a right trend. I also think the trends in the emerging market where I think low power, thin, light, longer battery life, those are trends that are going to play. Customers like them. They're going to want them, and they want them in a value proposition that works. I can promise you that we're going to look at the market data, make sure that we're understanding it, and fill the areas that give us the return and the benefit that leverage the capability across AMD. You think about it across 60 days. I've been very impressed with the technical capabilities of AMD.
We just announced Mark Papermaster joining our team as the Senior Vice President of Technology and Engineering, our Chief Technology Officer. He comes from a background of some of the most innovative companies in the industry. I think that a teammate like that coming on board and is focused in this segment, there are a lot of very important inflection points. You talk about tablet. I'm not sure the tablet just in the form factor itself is the real game at hand. I think the impact in terms of proprietary control points and shifts in the marketplace that's going to occur both in client and server over the coming months and years are going to be exciting opportunities. For us in AMD, with the capability we have, first focus on execution, execution, execution, deliver on our commitments, then focus on innovation. Where's the puck going?
In those areas, get the right technical team. We have thousands of engineers that we've created the capability to tackle this. How many companies have that capability? The status quo is going to change. That's an opportunity for us. We're at a market share position where the upside is in front of us. We have to embrace those changes and move forward. We'll get in a little more detail around the specifics in our February session. Clearly, our capabilities, the kind of talent that we have here that we're developing, that we already have, and the talent that we're beginning to attract into the team are the kinds of solutions to react to the marketplace. You're right. Low power is right. Emerging market is right. That trend is going to continue.
Speaker 5
Appreciate it. Thank you.
Speaker 2
Thank you, sir. Our next questioner in queue is David Wong with Wells Fargo. Your line is open. Please go ahead.
Speaker 3
Thanks very much. Thank you very much. Your guidance for growth in December, just a clarification. Did you say that that will be driven by an increase in output of Llano so there will actually be a fair increase in revenue from Llano rather than a shift back to more output on 45nm?
Speaker 0
We guided revenue up quarter over quarter with a midpoint of 3%. We also said that this will include a significant increase of our shipments on 32nm and Llano. Yeah, that is true.
Speaker 3
Okay, great. When might we hope to see the first products on the power driver core?
Speaker 0
One of the first products we launch will be Trinity. We have not released an official launch date yet, but it will happen early in the year.
Speaker 3
Okay, great. Could you give us a rough idea of how many Llano chips did ship in the September quarter, and what you expect in terms of unit shipments in December for Llano?
Speaker 0
No, but I said you can deduct that from what I said before. You know, our original intent was to really outperform the Brazos ramp in terms of steepness of the slope. We were, for the reasons we've discussed now at length, not able to achieve that. We're on a similar trajectory to what we had on our Brazos ramp on a quarterly comparable level.
Speaker 3
Great. Thank you very much.
Speaker 4
Off the record, we will take two more questions, please.
Speaker 2
Yes, ma'am. Next questioner in queue is John Pitzer with Credit Suisse. Your line is open.
Speaker 3
Yeah, guys, thanks for squeezing me in. Tom, just a clarification on the negotiations with GlobalFoundries around good die versus cost plus. How long is that agreement in place? If it's going to sort of grandfather here, do you have the leverage to go back and continue down a good die kind of contract with your foundry partner, GlobalFoundries?
Speaker 0
Yeah, fair question. The agreement that we have in place is around 32nm, and it's pretty much limited until the end of the current calendar year. Then we would default back to the original agreement. I think I also said already on the last call that we have started negotiations with our partners, and they are progressing well. As soon as we have an update and something to announce, we'll talk about it. We are in the process. As I said, this is a very firm, very committed partnership, and it's moving along.
Speaker 3
Rory, as a follow-up, you mentioned Mark's name earlier. When you look at his resume, he's very strong in PowerPC, a very rich ARM history, not necessarily a rich x86 history. I'm just kind of curious if this is a subtle signaling that perhaps you're moving to a multi-architectural strategy. If it's not, I guess what core skill sets does Mark bring to the table that you think are a good fit with the challenges at AMD today?
Speaker 1
Sure, no problem, John. From the standpoint of what I've seen here over the first 60 days, I really have been impressed with the technical capability. When you look at the technology industry in this silicon space, there are very few players that can match the capability that AMD has in terms of its engineering capacity and the talent that we have on board. We have some great leaders, and we have a large contingent of just super talented engineers that are fighting every day to find out what the customer needs and how to tackle it. There was an opportunity to go out and work with Mark, and he saw the same kind of excitement around AMD that I did and that Thomas has shared over the past several quarters. I think the marketplace has definitely had some very interesting inflection points, whether it's architectural or form factor-based.
There are things that are occurring in the marketplace that will change the status quo. As I said in an earlier question, I believe that it's key for us to embrace, be the innovative disruptor, to make sure that we continue to build on that. We have a long track record in x86, and we're going to continue to build on that. It just makes sense. From the standpoint of Mark, what he brings to the table is innovation and leadership. He knows the market. He's been a customer. He knows about architectures. You combine him with the talent that we have in place with Chekib and the leaders across the engineering teams. This is an opportunity for us not only to leverage our existing businesses, but to see where the puck's getting next. Where's the next evolution to APUs? How do we take that further?
We're on the right track there and the right kind of execution. How far can we go on power? How can we leverage these kinds of solutions into server? We're a design organization, a design company, and we need to take those actions to move this ball forward.
Speaker 3
Great, thanks.
Speaker 1
Thanks, John.
Speaker 2
Thank you, sir. We have time for one final question. Our final question for today's event comes from Hans Mosesmann with Raymond James. Your line is open.
Speaker 5
Great, thank you. A couple of questions. In terms of Q4, what would your sales outlook be if you had unconstrained supply issues, if you were unconstrained?
Speaker 1
We wouldn't comment on that. That's not a normal idea. Obviously, it would be higher, but that's about the only thing I'd say about it.
Speaker 5
In terms of seasonality, would it be seasonal like you commented on your graphics business in Q3?
Speaker 1
I think we've given the clear guidance of where we think it's going to settle in. You can see the IDC kinds of information. I think we've represented that data, and we've shared it clearly.
Speaker 5
Okay, and then as a follow-up, it looks like your yields are improving, but you really haven't figured out the root cause. It looks like it's an iterative process. Do you have a plan B in place or on the table, perhaps using your other foundry to kind of fix the problem? It seems they have no issues whatsoever with Brazos, and the Llano would be just a continuation of that kind of architecture.
Speaker 1
Yeah, I think it's unfair to kind of suggest that we don't have an understanding of the root cause. The analysis that we're doing is machine by machine, step by step. We're making those changes as we speak. We've begun to see over the past several weeks, with this kind of intense maniacal focus on execution, the starts of improvements across that set. I don't want to leave anyone with the feeling that we aren't working, that understanding the issue and have our hands on the rudder and driving this boat. We have work to do. I'll for sure share that. You know it and I know it. We have to improve our execution. We have the experience, the expertise that's getting underneath that, that we believe will drive further improvements as you go through the quarter. Thomas, do you want to add anything?
Speaker 0
That is very fair. I think this is a very important correction to make. It's not like this is an iterative process where we don't know where we go. It's a complex situation. It takes a maniacal focus, as Rory Read said. We've put lots of teams on this problem from our partner, from our company, from outside from the ecosystem. We work hard in that direction. We see the improvement. It's a steep road, but we know the direction and we know the path.
Speaker 5
Great. Thank you very much for the clarification.
Speaker 1
Thanks, Hans.
Speaker 4
Thank you, Operator. If you'd like to conclude the call, please.
Speaker 2
Yes, ma'am. Ladies and gentlemen, thank you for your participation. This does conclude today's.
