Advanced Micro Devices, Inc.

Greetings and welcome to Advanced Micro Devices' fourth quarter and full year 2018 conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Laura Graves. Please go ahead.

Thank you and welcome to AMD's fourth quarter and fiscal year 2018 conference call. By now, you should have had the opportunity to review a copy of our earnings release and slides. If you have not reviewed these documents, they can be found on the investor relations page of AMD's website, www.amd.com. Participants on today's conference call are Dr. 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 our website. I would like to highlight some important dates for you. Dr. Lisa Su will present at the Goldman Sachs Technology and Internet Conference on Tuesday, February 12th. Also... Ruth Kotter, Senior Vice President of HR, Worldwide Marketing, and Investor Relations, will present at the Susquehanna Annual Technology Conference on Tuesday, March 12th. And our 2019 First Quarter Quiet Time will begin at the close of business on Friday, March 15th, 2019. 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. We will refer primarily to non-GAAP financial measures during this call, except for revenue, gross margin, and segment operational results, which are reported on a GAAP basis. The non-GAAP financial measures referenced herein are reconciled to their most directly comparable GAAP financial measure in today's press release, which is posted on our website. Please refer to the cautionary statements in our press release for more information. You will also find detailed discussions about our risk factors in our filings with the SEC, and in particular, AMD's quarterly report on Form 10-Q for the quarter ended September 29, 2018. Now with that, I will hand the call over to Lisa. Lisa?

Thank you, Laura, and good afternoon to all those listening in today. 2018 marked another year of strong financial performance, driven by our expanded high-performance product portfolio, despite near-term graphics weakness. We grew annual revenue by 23%, with Ryzen, Epic, and Data Center GPU product revenue growing by more than $1.2 billion for the year. Our new products gained share and significantly expanded gross margin, leading to our most profitable year since 2011. Looking at the fourth quarter, revenue of $1.42 billion increased 6% from a year ago, with approximately 65% of sales coming from our new products. We reached an important milestone in our business in the quarter as our high-margin data center CPUs and GPUs accounted for a mid-teens percentage of overall revenue. While we expect our data center revenue to be lumpy, the ramp of our data center business is beginning to contribute meaningfully to our financial results. Looking at our computing and graphics segment, we delivered our eighth straight quarter of year-over-year segment revenue growth. Sales of Ryzen desktop and notebook processors and data center GPUs offset lower GPU sales as the channel continued working through elevated levels of graphics inventory. Client processor unit shipments grew by more than 50% from the year-ago period. We had our highest client computing revenue in more than four years, and we believe we gained client CPU unit share for the fifth straight quarter. At CES, Acer, Asus, Dell, HP, Huawei, Lenovo, and Samsung all launch notebooks powered by our new second-generation Ryzen mobile processor with Radeon Vega graphics. The second-gen Ryzen mobile processor delivers more performance, enhanced features, and longer battery life than any mobile processor we have ever built, and is the fastest processor available for ultra-thin notebooks. The industry's first AMD-based Chromebooks launched earlier this quarter from Acer and HP. We expect additional AMD-based Chromebooks to launch later this year as we expand our participation in this growing portion of the PC market. Based on the competitive positioning of our Ryzen processors, we expect the number of Ryzen systems that will launch in 2019 to increase by more than 30% in 2018. with the number of Ryzen notebook systems planned to launch increasing by more than 50%. In graphics, GPU revenue decreased year over year, driven largely by lower channel GPU and memory sales, partially offset by a significant increase in data center GPU sales. We saw an improvement in channel GPU sellout throughout the quarter, as our partners continued to drain their inventories. There is still more work to do, but we remain confident we're taking the right actions to further reduce channel inventory. We set a record for professional GPU revenue in the quarter, driven by multiple high-volume wins for our Vega-based data center GPUs. We started shipping our new 7 nanometer Radeon Instinct accelerators in the quarter and introduced a major set of enhancements to our data center GPU software that make it easier for customers to deploy Radeon GPUs for AI and machine learning workloads. At CES, we highlighted the significant gaming momentum we are generating for Radeon across consoles, PCs, and the cloud. For gamers and creators, we announced our return to the high-end GPU market with the new Radeon VII GPU. Powered by our second-generation Vega graphics core and featuring 16 gigabytes of second-generation high-bandwidth memory, our new 7-nanometer Radeon VII GPU delivers leadership performance in content creation and compute workloads and is very competitively positioned when running the most demanding AAA games at 4K resolution. In cloud gaming, we announced that Google selected Radeon Pro GPUs to power their game streaming initiative, Project Stream. The performance and differentiated virtualization features of our Radeon Pro GPUs enabled Google to deliver an uncompromised, high-definition gaming experience on virtually any PC. Turning to our enterprise, embedded, and semi-custom segments, Revenue was flat from a year ago as a double-digit percentage decrease in semi-custom revenue was offset by strong growth in epic processor sales. As expected, semi-custom sales were down from a year ago based on where we are in the current console cycle. This console generation remains one of the most successful ever, as Microsoft and Sony combined have now shipped well in excess of 120 million AMD-powered consoles. Fourth quarter server unit shipments more than doubled sequentially based on growing demand for our highest-end 32-core EPIC processors with cloud, HPC, and virtualized enterprise customers. As a result, we believe we achieved our goal of mid-single-digit server unit share exiting 2018. We had another strong quarter of cloud adoption, highlighted by industry leader Amazon announcing new versions of their most popular EC2 computing instances powered by EPIC processors. Businesses can easily migrate their AWS instances to AMD and save 10% or more based on the technology advantages of our platform. Microsoft Azure also announced general availability of their AMD-based storage instance in the quarter, as well as a new HPC instance powered by EPYC processors that is 33% faster than competitive x86 offerings. We secured multiple HPC wins in the quarter, including Procter & Gamble, the U.S. Department of Energy, and one of Europe's largest supercomputers at the University of Stuttgart's High Performance Computing Center. Lawrence Livermore Labs also announced a new supercomputer featuring both EPYC processors and Radion Instinct accelerators that will be used for machine learning and big data analytics workloads. Customer interest in our next generation Roam server processor remains very high. Roam is expected to deliver four times the floating point performance and double the compute performance per socket compared to our current generation EPYC processors. We publicly demonstrated a single 64-core next-generation EPIC processor, outperforming two of our competitors' highest-end server processors in multiple workloads. Roam development is proceeding very well, and we are on track to start shipments mid-year. I am also pleased to report that we concluded discussions with Global Foundries on the Seventh Amendment to our wafer supply agreement. The amendment affirms the strategic partnership with GF for products built at 12 nanometers and above and provides AMD with full sourcing flexibility at the 7 nanometer and below nodes. GF continues to be a critical supplier of AMD's current generation products and will play a key role in our next generation Ryzen and EPYC products with our chiplet strategy. In summary, 2018 was another strong year for AMD. Increased adoption of our high-performance products drove a second straight year of double-digit annual revenue growth, expanded gross margins, and improved profitability. I would like to thank the more than 10,000 AMD employees whose dedication to building great products have made these results possible. While headwinds remain in the graphics channel and macro uncertainties are causing some caution in the first half of 2019, We believe we are well positioned to gain share throughout the year and accelerate growth as we ramp our next generation 7 nanometer products. As we enter 2019, we are preparing to launch our strongest product portfolio ever. In gaming, we will launch our high-end Radeon 7 GPU in February, followed by our next generation Navi GPUs later in the year. In client computing, we started the year with our second generation Ryzen mobile processors and we are on track to launch our third generation Ryzen desktop processors in the middle of the year. And in the server market, we expect to deliver a significant step function performance increase with the launch of our next generation Roam processors in the middle of the year. I am very proud of what we accomplished in 2018, and even more excited about how our long-term investments are set to pay off in 2019. Now I'd like to turn the call over to Devinder to provide some additional color on our fourth quarter and full year financial performance. Devinder?

Thank you, Lisa, and good afternoon, everyone. 2018 was a strong year for AMD. New product introductions drove the highest annual revenue since 2011 and a significant improvement in gross margin year over year. Earnings per share increased from $0.10 per share in 2017 to $0.46 per share in 2018. Full year 2018 revenue was $6.48 billion, up 23% year-on-year, driven by strong performance in the computing and graphics segment with significant growth in Ryzen processor sales. Although there was weakness in the graphics channel in the second half of the year, we saw strength in data center CPUs and GPUs. Gross margin was 39%, up 440 basis points from the prior year. Gross margin improvements were primarily driven by our new Ryzen, Epic, and Radeon products. Operating expenses were 29% of revenue, an improvement of 2 percentage points from the prior year. For the full year, operating income was $633 million, up $409 million from $224 million in the prior year. Net income was $514 million, up $411 million compared to net income of $103 million in the prior year. On the balance sheet, we reduced principal debt by $171 million and improved gross leverage significantly from 4.6 times a year ago to 1.9 times at the end of 2018. Let me turn to the details of the fourth quarter results. Fourth quarter revenue, gross margin, operating margin, and earnings per share all improved year on year. Quarterly revenue of $1.42 billion was up 6% from a year ago. Strong sales of Ryzen and Epic processors and data center GPUs more than offset lower channel GPU and semi-custom sales during the quarter. Fourth quarter 2018 revenue did not include any IP-related revenue and blockchain-related GPU revenue was negligible. Gross margin was 41%, up 740 basis points from 34% a year ago. Year-on-year gross margin improvement was driven primarily by the ramp of Ryzen and EPYC processor sales. Gross margin has increased year over year for seven consecutive quarters, driven by a higher percentage of revenue from new products. Fourth quarter 2018 gross margin excludes a $45 million write-down of older technology licenses that are no longer being used. Operating expenses grew 9% year-over-year to $474 million and remained approximately flat as a percentage of revenue from the year-ago period. We continued to invest in our product roadmap and go-to-market activities as we gained market share in important markets. Operating income was $109 million, up $90 million from $19 million a year ago. Operating margin was 8% up from less than 2% last year. Net income was $87 million compared to $8 million a year ago. Q4 2018 net income excludes a withholding tax refund plus interest of $43 million related to an IP litigation settlement from 2010. Diluted earnings per share using a diluted share count of $1,180,000 was $0.08 per share compared to $0.01 per share a year ago. Now turning to the business segment results. Computing and graphics segment revenue was $986 million, up 9% year-over-year. Revenue growth was driven primarily by continued strong Ryzen desktop product sales and the adoption of second-generation Ryzen mobile processors largely offset by lower channel GPU and memory sales compared to the prior year. Ryzen products continued to ramp and were greater than 80% of total client revenue driven by OEM and channel momentum. In graphics, Sales were down year over year due to negligible blockchain-related revenue in the fourth quarter of 2018, as well as elevated levels of graphics inventory in the channel. Total graphics revenue grew sequentially, driven by strong Radeon data center GPU sales. Computing and graphics operating segment income was $115 million compared to $33 million a year ago. The increase was driven primarily by strength in Verizon product sales and significantly higher ASPs in both desktop and notebook compared to a year ago. Enterprise embedded and semi-custom revenue was $433 million, flat from the prior year. Server revenue growth was offset by lower semi-custom revenue. Epic processor units more than doubled sequentially, driving significant growth in data center revenue in the quarter. EESC segment operating loss was 6 million compared to a loss of 13 million a year ago. The improvement due to higher epic processor revenue was partially offset by lower semi-custom revenue and continued engineering and go-to-market investments in the server business. Turning to the balance sheet, our cash, cash equivalents and marketable securities totaled 1.16 billion at the end of the quarter. We generated free cash flow of 79 million in the quarter. Free cash flow was a negative 129 million for the full year, primarily due to growth in inventory related to new products and the timing of collections. Inventory was 845 million, up 107 million sequentially, primarily due to the ramp of new products. Total principal debt was $1.5 billion as we further reduced term debt by $60 million during the quarter, resulting in total debt reduction of $171 million during 2018. We expect to pay off the remaining $66 million of 2019 term debt in March 2019, and beyond that, there are no long-term debt maturities until 2022. Adjusted EBITDA was $152 million compared to $58 million a year ago, and on a trailing 12-month basis, adjusted EBITDA was $803 million, more than doubling year over year. Gross leverage was 1.9 times as we ended 2018, and we are pleased to have achieved our long-term gross leverage target of less than two times. Before turning to our financial outlook, let me discuss our vapor supply agreement with GlobalFoundries. Today's seven amendment of the WSA spans from January 2019 through March 2024. It establishes purchase commitments and pricing at 12 nanometer and above for the years 2019 through 2021. The amendment also provides AMD full sourcing flexibility at seven nanometer and beyond without any one-time payments or royalties for products purchased from other foundries. Turning to the outlook for the first quarter of 2019, we expect revenue to be approximately $1.25 billion plus or minus $50 million, a decrease of approximately 12% sequentially and 24% year over year. Sequentially, the decrease is expected to be primarily driven by continued softness in the graphics channel and seasonality across the business. The year-over-year decrease is expected to be primarily driven by lower graphics sales due to excess channel inventory, the absence of blockchain-related GPU revenue, and lower memory sales. In addition, semi-custom revenue is expected to be lower year-over-year, while Ryzen, EPYC, and Radeon data center GPU product sales are expected to increase. In addition, for Q1 2019, we expect non-GAAP gross margin to be approximately 41%, non-GAAP operating expenses to be approximately $480 million, non-GAAP interest expense taxes and other to be approximately $25 million, and we also expect to record a $60 million IP licensing gain associated with the TATIC JV in the first quarter of 2019, which will be a benefit to operating income and recorded on the licensing gain line of the P&R. For the full year 2019, despite near-term weakness in the graphics channel and a cautious macro environment, we expect high single-digit percentage revenue growth, driven by Ryzen, EPYC, and Radeon data center GPU product sales, and as we ramp our 7nm products throughout the year. We expect non-GAAP gross margin to be greater than 41%, non-GAAP operating expenses to be approximately 29% of revenue, and a non-GAAP tax rate of approximately 4% of pre-tax income. In closing, we made excellent progress in 2018. We grew the top line by more than $1.2 billion, expanded gross margin, and significantly improved profitability. We continue to execute our long-term financial model, driven by our new high-performance computing products that gained solid momentum last year. We are pleased to enter 2019 with a strengthened balance sheet and a strong portfolio of next-generation products capable of driving continued financial growth. With that, I'll turn it back to Laura for the question-and-answer session. Laura?

Thank you, Devinder. Operator, we're ready for our first question, please.

Certainly. We'll now be conducting a question-and-answer session. If you'd like to be placed into question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star one to ask a question. One moment, please, while we poll for questions. Our first question today is coming from Toshiya Hari from Goldman Sachs. Your line is now live.

Great. Thank you. Thank you so much for taking the question. Lisa, I had a question on your full-year 2019 outlook. You guys are guiding revenue growth kind of in the high single-digit range. Embedded in that outlook, what kind of growth rates are you assuming for your core businesses, computing, graphics, semi-custom, and server CPUs? And then on the gross margin side, you know, 41% or greater. Is the improvement year over year primarily a function of, you know, revenue growth and mix, or is the amendment in the WSA playing a role there as well? Thank you.

Sure. Thank you for the question. So relative to the full year guidance of up high single digits, you know, the primary growth drivers are, you know, Ryzen and Epic are the two largest growth drivers with data center GPU also. We're expecting that to be up. And then we would expect that semi-custom will be down. If you look at the life cycle of semi-custom, we'll be in the seventh year of the console cycle. And so we expect semi-custom to be down approximately 20%. And then we would expect consumer graphics to also be down, let's call it double digits, as we you know, really burn off some of the channel inventory that we see in the first half of the year. So, you know, Ryzen and Epic are the large drivers of the growth. And, you know, that's as we launch our seven nanometer products throughout the year. And then your second question, Tosh, was?

Yeah, gross margins, 41% or greater. That's a two percentage point. or greater improvement year over year? Is that primarily a function of revenue growth and, you know, improvement in mix given Ryzen and Epic, or is the WSA amendment providing a tailwind as well?

Yeah, it's primarily due to mix. So the mix of the higher margin new products, you know, Ryzen, Epic, and the data center GPUs.

Got it. Thank you.

Next question, please.

Certainly our next question is coming from Matt Ramsey from Cowan & Company. Your line is now live.

Thank you very much. Good afternoon. Lisa, I guess I wanted to attack Tosha's question on the full year a little bit differently and maybe just talk about a little bit what share gain assumptions you guys are embedding for your seven-annumeter roadmap versus maybe some pragmatism or conservatism on the market, just given the macro. I mean, Intel talked about a flat PC TAM in terms of units and obviously has only, I guess, guided us to mid-single-digit growth for their sort of expansive server business for the year. And you guys are starting off down maybe 25% year-over-year in revenue for the first quarter, given what's going on in the graphics business. So maybe you could just walk us through a little bit what you're thinking about the TAM growth of your two main growth markets for the year versus share gains you're embedding. Thank you.

Yeah, absolutely, Matt. So, look, I think as it relates to the market, you know, I don't think we would have a very different view of the market as others may have stated. You know, our story really is a share gain story. And when you take a look at sort of the progress that we've made in 2018 and the design wins that we have in 2018, as we go over to 2019, when we look at, you know, both Roam as well as Ryzen, We look at sort of the breadth of OEM platforms that we have, the customer engagement by workload, and sort of how we see that progressing. We feel very good about the opportunity to gain share as we go through the year, particularly given how competitive the product set is. Similarly, on the PC side, we've made nice progress over the last four or five quarters on Ryzen, We started strong on desktop, and then the last couple of quarters we've made good progress on notebook. We see a broader portfolio with our OEMs as we go into 2019, and we also see a more competitive desktop product line as well as notebook product line. So that's how we're thinking about the year. You know, to your point about, you know, starting a little bit – With lower guidance in Q1, I think that's true. You know, when we look at Q1, particularly on a year-on-year basis, there are a lot of moving pieces, but it's primarily due to the graphics channel. And that's, you know, both the reduced demand as well as the absence in blockchain revenue on a year-over-year basis, as well as the semi-custom business. But as we move forward, as we go into Q2 and beyond, we see a significant opportunity with the ramp of our new products, and that's how we see the year.

Got it. Thank you very much for the color there. That's helpful. Devinder, maybe just a couple of little things in terms of licensing gains and IP revenue. I got asked a few times tonight, so I just want to clarify here that the growth margin outlook for the first quarter does not include any any IP or licensing gains? And then for the full year, are you including any IP revenue in the revenue outlook? And how should we think about the rest of the static licensing gains applied to sort of timing for when those might get recognized? I know it's a lot there, but lots of questions on just the moving pieces there tonight. Thank you.

Yeah, I can take that. License gain essentially does not impact gross margins. That is on a separate line altogether on the licensing gain line of the P&L. So the gross margin is not impacted by that. As far as IP revenue is concerned, in Q1, there is no contemplated IP revenue. So the gross margin at 41% guide is based on the products that we have. And for the year, at this point, outside of the static JV IP licensing gain that we are expecting to record in Q1, while there might be opportunities from an IP standpoint or nothing, substantially contemplated at this point.

All right, thank you very much. Thanks, Matt.

Thank you. Our next question is coming from Vivek Arya from Bank of America, Maryland. Your line is now live.

Thanks for taking my question. Lisa, I'm curious, as you look back at 2019 and the success you had with Epic, the initial success with Epic, what was the mix of cloud versus enterprise success? And then how do you think it trends in 2019 because of all the concerns around slowdown and Cloud CapEx and so forth? And as part of that, if you could share with us what your market share assumptions are as we exit the year on Epic.

Yeah, sure, Vivek. So, look, as we look through 2018, you know, we were pretty pleased with our progress on Epic. And, you know, coming off of the fourth quarter, actually it was a fairly strong fourth quarter for us. and the fact that we doubled the number of units for our server business. And when you look at that mix, it is more cloud-weighted. So we had some large deployments that went online here in the fourth quarter, and that was positive for us. That being said, though, we are making nice progress in the enterprise and HPC side of the business, too. We've had a number of wins in the quarter as well as going into 2019. You know, as we look into 2019, I would expect that the early Rome deployments will also be cloud-based, you know, will be the first ones. But we have a strong set of enterprise platforms. And as I mentioned earlier, it's the breadth of the OEM platforms that, you know, gives us a good confidence that, you know, we're going to a broader set of workloads and, you know, having broader coverage in the markets. In terms of share assumptions, we'll have to see how the market and the year play out, but I think what we've said before is that after reaching the mid-single-digit market share in the fourth quarter of 2018, we would expect it would take another four to six quarters to reach 10% market share, and I think we're still in that range.

Got it. And for my follow-up, there were two things that came out on your competitors' last few public discussions, which is one, this concept of CPU shortages. And I'm wondering if that has had any positive or negative effect on your strategy or positioning. And then Intel has also mentioned being a little more tactical when it comes to pricing. And I'm wondering how that figures into your full year outlook. So both the impact of CPU shortages and pricing, any color would be very helpful. Thank you.

Sure, Vivek. So look, on the CPU shortages, you know, my comment is that, you know, there are some pockets of shortage, you know, particularly at the low end. However, our focus has really been on ramping Ryzen. And if you look at the Ryzen percentage of our overall business, you know, Ryzen, you know, Devinder mentioned was 80% of our client business. So we are really actually improving our mix in the client business. You know, I think that, you know, Again, from my view, the shortages are temporary, but we look at it as, you know, really getting consistent share gain. And, you know, as we've gone through each quarter in 2018, we've seen consistent share gain, and we believe we gained share in the fourth quarter as well. So I think we're well positioned with the portfolio, and we'll certainly drive, you know, drive that into 2019. And then the other – Pricing. Pricing, yes. Relative to pricing, look, when we think about pricing and when we put together our long-term model, we have factored in that pricing and competition will be aggressive. I think we know that to be the case. What we've seen in the market is consistent with that. But we also believe that particularly as you go into the data center, the single largest factor from a buying decision standpoint is the performance and the total cost of ownership of the product. And we believe that, you know, Rome will be very, very well positioned in 2019. And so, we are cognizant of the competitive environment, but, you know, feel good that we have the right set of assumptions.

Thank you. Thank you. Our next question is coming from Mark LaPaces from Jefferies. Your line is now live.

Hi. Thanks for taking my question, and great to hit the mid-single-digit milestone exiting the year. Lisa, as you start, I just wanted to confirm, you expect to start shipping Roam mid-year. And as you do, what's the biggest risk for Roam? Is it execution on delivering the product, or is it, you know, the sales process convincing customers to take Epic 2 in volume?

Yeah, so I think with Roam, our biggest risk, you know, opportunity slash risk is adoption rate. You know, I think from a competitive standpoint, the product is very solid. Everything going through our development labs looks very good, as well as our customer engagement. And so this is just about getting customers to production as fast as possible. We do expect, though, that the adoption rate for Roam will be faster than the adoption rate for Naples. And the reason for that is, you know, we are in a socket compatible infrastructure. And so, you know, customers who don't necessarily need the newest features of the platform can actually, you know, use the same motherboard and system that they currently have with Naples and drop in Rome. And so I think that will help us accelerate some of the adoption, but right now it's about helping customers in their environment. We are widely sampling Rome, and there's a lot of work to be done, but we feel good about the trajectory.

Great. Thank you. And a follow-up, if I may, for Devinder. So inventories looked like they were up about $100 million going into a pretty healthy seasonal quarter that's declining. How should we read that, Devinder? And was there just some opportunity to get some wafers more cheaply? Or is there, you know, are you trying to stockpile product in front of launches? And when can we expect the inventory to be a source of cash on the cash flow statement? Thank you.

Yeah, Matt. So the inventory growth is primarily driven by our new products and in preparation for the seven nanometer next generation product launches later this year, as you just mentioned. You know, we overall expect to manage the inventory in line with revenue, but also in support of the new products that will be launching and ramping throughout the year. Lisa mentioned a few of the launches at CES and also in the script. And, you know, we're prepared to support that from an inventory standpoint. And we'll see how the year progresses and then manage it from there.

Thank you, Mark. Next question, please, Operator.

Certainly. Our next question is coming from Stacy Razgon from Bernstein Research. Your line is now live.

Hi, guys. Thanks for taking my question. Around the Q1 guide, obviously you mentioned the GPU weakness, but you also mentioned seasonality across the businesses. Is my assumption correct that that means everything is basically down sequentially, CPUs, GPUs, servers? Tell us, is that true? And if so, can you give us an idea of the magnitude, like at least what is down, I guess, most versus least sequentially, Ryzen versus GPU versus EPYC?

Sure, Stacey. So the largest driver, as I said, is the GPU channel situation on a year-over-year basis. On a sequential basis, you know, typical seasonality for let's call it PCs and GPUs and data center is probably around 10% or so. We are forecasting or, you know, we believe that that will be a little bit, you know, down a little bit more than that. And in terms of the rankings, I would say VPUs are down a bit more than the other two segments. That's the way we currently see it.

Got it. Thank you. For my follow-up, I had a question just on general ESC. So revenues are flat year over year. The server revenues are up a bunch. It's still losing money. And I get it. There's some incremental investments and everything, but I guess, how do we think about the profitability of that segment? How big does Epic or Roam, the server business, need to get before it's sustainably profitable, especially if Semicustomer is going to continue to decline, you said 20% in 2019?

Yeah, I think the key phase is going to be ramping the server business in 2019. You are right that year over year, if you look at it, it's lost a little bit of money, but fundamentally it's investing in the go-to-market programs and launching the new products, investing in the ongoing engineering work that's needed to make sure that customers bring up the product on time. And semi-custom, given the fact that it's in the seventh year of the cycle, we expect it to be down from 2018 to 2019. But we do expect to go ahead and ramp our server business, and that will definitely benefit the EESC profitability in 2019.

Do you think it's profitable for the full year?

Too early to tell. I don't want to predict property at the segment level, but we'll see how it evolves over the year.

Got it.

Thank you so much.

Thank you.

Our next question today is coming from Ross Seymour from Deutsche Bank. Your line is now live.

Hi, guys. Thanks for letting me ask a question. Lisa, a potentially different way to ask the same question on the full year 2019 guide is Late last year at a few different events, you talked about the server business being second-half weighted. If I go through the remainder of this year, it seems like you have to grow the better part at 20% plus sequentially in each quarter to get there. I know it's not going to be perfectly linear like that, but I guess my overall question is if the server side of the business is back-half weighted – What sorts of businesses are helping the middle portion of the year? Is there some snapback on the GPU side? Is there something going on on the Ryzen side? Just trying to get somewhat of the shape of the year off of a base that's admittedly pretty low as your first quarter starting point.

Sure, Ross. So, you know, I think it is fair to say that our quarterly progression will have a lot to do with our product launches. So you would expect that, you know, server will be more second half weighted than, you know, first half. In general, our business is more second half where you go if you think about the consumer, you know, portions of our business. But think about it as, you know, we would expect sequential growth in PCs. We would certainly expect sequential growth in data center, although stronger in the second half. We would – we're also, you know, as we see the GPU business right now, we see the first quarter as the low point in the business with the channel getting – improving as we go into the second quarter, and we have, you know, additional product launches there as well. So, you know, that's the way we would see the portfolio. And semi-custom, although it's lower on a year-over-year basis, we would expect it to also, you know, increase as we go from second quarter into third quarter as well.

Perfect. Then a question on the GPU side. Your big competitor in that market obviously is having some current issues and mentioned that the new product at the high end wasn't selling through. Are you at all concerned that the competitive landscape in that market, whether it's because China demand being weaker, as they cited, or them having to be a little bit more aggressive on pricing, would do anything to your ability to penetrate the market with either existing or new GPU products?

the year progresses yeah so when we look at the GPU market and let's you know separate sort of gaming and data center I think on the gaming side you know from what we are seeing we did see sellout increase in q4 versus q3 so you know gamers are still buying GPUs they may be more discerning about price points and so you know I can imagine that there might be a bit more softness at the high-end versus in the mid-range But, you know, we believe that, you know, we have a good understanding of what's happening in the gaming side of the business. And it will be driven, you know, our gaming growth will be driven by new products. You know, we will see that as we go, you know, through this year and, you know, with our Radeon 7 launch as well as our Navi launches on the gaming side. On the data center side, you know, we're making good progress in GPU data center, you know, obviously from a low base. But, you know, the GPUs in the data center are very workload dependent. And there are, you know, some workloads that actually we do very well in, you know, things like cloud gaming and virtualization. And we have some early HPC wins. And so we see this as, you know, sort of customer acquisition, new deployments. And so, you know, those are the sources of growth on the GPU side for us.

Thank you. Thank you.

Thank you. Our next question today is coming from Aaron Rikers from Wells Fargo. Your line is now live.

Yeah, thanks for taking the questions as well. Just two questions, if I can, building on that last one. In your prepared remarks, you noted that you've reached the milestone of which GPUs as well as data center CPUs reach a mid-teens percentage of your total revenue. I'm curious, as you kind of contemplated your full-year guidance, Where do you think that mix of business can go? And is there a point in time where we actually – you foresee us kind of getting granularity on how big the data center GPU business is trending?

Yes, Aaron. So, you know, I think the mid-teens percentage revenue for us in Q4 was a good milestone. I mean, I think that's a meaningful percentage of our revenue, and it was a contributor to our – you know, gross margin as we exited 2018. I think as we go into 2019, you know, again, we will continue to, you know, give you visibility into where the data center growth is. To be fair, my expectation is that the CPU side of the data center business will grow faster than the GPU side, you know, just given what we see in terms of overall But I think both businesses will be meaningful for us and are a key part of the growth story for us in 2019. And we'll continue to give color on how they develop as the year develops.

Okay. That's very helpful. And then just real quickly on the semi-customs side, as you kind of contemplated the guidance as well through the course of this year and that 20% decline for the full year, is your assumption that, you know, Q1 kind of marks the bottom and we can grow, you know, seasonally off of that level, or should we think about something differently from a progression through the quarters in 19?

Yeah, Aaron, yeah, that's the correct way to think about it. So, you know, Q1 will be a low, Q2 will be higher, you know, Q3 will be higher, and then, you know, Q4 will come down again. That should be the seasonality of semi-custom.

Okay. Thank you very much.

Thank you. Our next question is coming from John Pitzer from Credit Suisse. Your line is now live.

Yeah, good afternoon, guys, and congratulations on the solid results. Lisa, notwithstanding that the macro is extremely uncertain, making any predictions difficult, I'm just kind of curious, going back to Ross's question, how do you see sort of the cadence of growth sequentially throughout the year? Because as he pointed out, if you kind of divide it up equally by quarter, you're growing north of 20%. in Q2, Q3, Q4, half-on-half growth would be somewhere around 50%. If you assume more seasonal, and seasonal is a little bit difficult to get to because of the change of accounting, I think you can get half-on-half growth as high as 75%. So as you think about the full-year growth, is this something that's more like 50% half-on-half or 75% half-on-half?

Yeah, thanks for the question, John. It might be a little bit early for us to – go there, but what I would say is the following. You know, when we look at the year-on-year compares from 2019 to 2018, you know, Q2 2018 was still a very strong quarter for us because we still had a significant amount of blockchain sales in Q2 2018. So I expect that we will grow sequentially into Q2, but I think that will still be, you know, let's call it a a tougher year-on-year compare. But then when we get into the second half of the year, you know, we expect to be fully ramped on the entire 7-nanometer portfolio. And so, you know, we would see a heavier weighting in the second half. So we see sequential growth into the second quarter, but, you know, more heavily weighted into the second half.

That's really helpful. And then, Devendra, on the profitability front, if you kind of run the numbers from Q1 guidance to kind of what you need to be exiting Q4 at to hit the full year number, you could see revenue up well over a billion dollars Q1 to Q4. I'm a little bit surprised that despite that, the gross margin guidance isn't a little bit better. I know you guided the full year to greater than 41 with Q1 at 41, but I'm kind of curious, if you look at a Q4 run rate that's north of a billion higher than the Q1 run rate, How should we think about gross margin and operating margin exiting the year?

I think, John, if you look back the last many quarters, I think seven quarters year on year, we've improved gross margin on the strength of the newer products. We ended the year quite well in 2018 and achieved gross margin in the fourth quarter. That was nice. And now we start the year with 41%, and as we start the year, it's early, we're guiding to greater than 41%. I think you should expect that as the products ramp, in particular with the 7 nanometer product that Lisa referenced, our margin should continue to improve, and we'll see where we end up by the end of the year, but we do expect that year on year, you know, margin goes up from where we ended in 2018 at 39%, and greater than 41% for 2019. Thank you.

Our next question is coming from Mitch Thieves from RBC Capital Markets. Your line is now live.

Hey, thanks for taking my question. I had two quickly. First, on the C&G side, I realize that there's going to be a lot of kind of sequential difficulties there, but when I think about the long-term growth rate, I know you guys are kind of taught to kind of high singles to double-digit growth. Is that still essentially what you think that business can grow at long-term? And then secondly, in terms of the next epoch, too, is there any reason why it would underperform an Intel 10 nanometer in a testing environment? And if so, why would that be?

Let me take the second question, and then maybe, Devinder, you can take the first question. So as it relates to our Rome product, when Rome was originally planned, we had planned that it would be competing against a 10 nanometer product. So that was the – That was our expectation when we started. I think we've shown some of the generational performance advantages in terms of double the performance on a socket basis, four times performance on a floating point basis. And the other thing I would say is that with our second generation Roam, the customer set is now more used to our architecture, and so some of the architectural and software improvements that we've also spent quite a bit of time on over the last four to six quarters are coming into play. So I think we feel very good about the competitive positioning of Roam. And, you know, the other thing to keep in mind is we are deep in development of our next generation beyond Roam. So the Zen 3 product portfolio is deep in development as well. And so that's, you know, our goal is to ensure that, you know, we have a consistent cadence of very competitive products.

Yeah, and then as far as your question on the segment growth is concerned relative to, you know, high single digits growth for the company level, you know, in both of the segments, there are some factors that come into play. In computing and graphics, obviously, we feel good about the data center side of GPU. But on a compare basis, when you look at 2018 to 2019, we do have the impact of the blockchain and some memory sales from 2018 that, you know, don't happen in 2019 from a standpoint of where the market is. And then on the ESE side, semi-custom in down, obviously is a factor when you compare year-on-year per segment. But, you know, good growth on the data center piece of it, in particular, with the 7-minute Rome product launching in the back half, I mean, clamping in the back half of 2019. And that's the way you kind of look at it. It is still early in the year from an overall standpoint. And, you know, where we ended up in 2018, You know, we're projecting high single-digit growth at the company level for 2019 over 2018. Got it.

Thank you. Thank you. Our next question is coming from Blaine Curtis from Berkeley. Your line is now live.

Thanks for taking my question. I just want to ask you, you laid it out a little bit, but in terms of Epic 2, it's the same socket, but you have sampled it early. In terms of getting over the finish line and getting these shipped, I guess the customer still has to wait for production silicon, and then typically people talk about six to 12 months to kind of test it and make sure it does everything with the production silicon. So can you just walk us through that timeline? Because obviously you're baking in a pretty steep ramp in the second half. Thanks.

Yeah, so we started sampling Epic actually last year, so the second half of last year, to some of the top cloud vendors as well as our OEM partners. We've had a significant amount of development with our ODM partners as well. So I think there is a good amount of overlap between the customer development cycle and our development cycle. Now, as you said, production of silicon is very key, and ensuring that the final specifications are locked in is work that we still have to do here in the first half of this year. But I think we feel good about it. We feel good about the platforms, the customer engagement, the current progress of development, and so that is very much our plan from an execution standpoint.

Thanks. And I just want to ask on the GPU side, it looks like your issue is up substantially with the data center. I'm just kind of curious as you think about the mix of data center, how do you think about the trajectory of that business? I mean, is that portion lumpy as well, or is this kind of the kind of go-forward kind of level after that pretty sharp initial shipments in December? Thanks.

Yeah, so on the data center side, you know, we do expect that the data center GPU business will be a growth driver for us in 2019. It will be a little bit lumpy, so I wouldn't say it's a straight line. But I would say on a year-over-year basis, it's an important growth driver for us. And, you know, as it relates to the overall data center GPU ASPs affecting overall ASPs, I think that's true because the gaming ASPs are I'm sorry, the gaming business was lower than expected given the channel inventory situation. So I think it's also just weighted in terms of the units. Thanks.

Thank you, Blaine. Operator, we have time for two more questions, please.

Thank you. Our next question is coming from Joe Moore from Morgan Stanley. Your line is now live.

Great. Thank you. It seems like the GPU data center business is doing pretty well. Can you Give us some color if you look at mid-teens exposure overall between the two data center businesses, CPU and GPU. Can you give us some qualitative sense for how much of that is GPU at this point, and what are the main applications? Is it mostly virtualization? What other applications are you seeing there?

Sure, Joe. So for the mid-teens percentage of revenue in Q4 between CPU and GPU, it's actually roughly similar. And then in terms of the workloads on the GPU data center side, we do very well in cloud gaming. We do very well with our virtualization solutions, and we have some early traction in HPC.

Great. Thank you. That's helpful. And then I guess Just in terms of the business segmentation, I think you alluded to this earlier, but it seems like the conversation typically is around microprocessor graphics and semi-custom as sort of three different opportunities. Have you thought about moving the segmentation to more align with that? And I realize that's easy to talk about and hard to implement, but what's your thought in terms of over time sort of migrating that more in line with the way you guys talk about the business segmentation?

Yeah, so we look at the business in all different cuts, as you can imagine. We look at it by segment, our CG and EESC. CG is very much a PC-driven segment, and EESC with enterprise and semi-custom. And we are also, based on some of the feedback, trying to be a little bit more granular in terms of how the various businesses fall underneath that. So I think as the data center business becomes a larger piece of our business, you know, we'll continue to look for how do we get, you know, give you guys more color and, you know, more transparency in how that is doing.

Great. Thank you. Thank you. Our next question is coming from Vijay Rakesh from Mizuho. Your line is now live.

Yeah, hi, guys. Just in terms of the GPU gaming side, you mentioned higher inventory levels. I was wondering if you could give us some, you know, number on that. where normal inventory GPU levels are and where are they running currently? Thanks.

Yeah, so when we look at the GPU channel inventory, you know, we do believe our channel partners reduced inventory in Q4 and they will reduce inventories in Q1. We still think the Q1 levels are elevated and there will be some spillover into Q2 where we'll see some elevated inventory levels. We'll have to see how, you know, the the sell-through really plays out. But my expectation is that in Q2 we'll have sort of improved channel inventory levels, and we will return to sequential growth in the gaming side of our business.

Got it. On the 7-nanometer side, is the 7-nanometer GPU and CPU as those ramp in the back of, are they accretive to this 41% gross margin levels? Thanks.

Yeah, so the 7-nanometer GPUs on the data center side started ramping in Q4, so that was part of the data center GPU revenue that we talked about. The 7-nanometer CPU will ramp middle of the year, and the 7-nanometer CPU and GPU are both above corporate average margins, so you would expect that they're above the 41 points and would be sort of accretive to margins. as that mix includes.

Got it. Thank you.

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further closing comments.

Thank you very much, operator. We appreciate everyone joining us here today. We're quite proud of the accomplishments in 2018 and look forward to seeing you all on the road in 2019. Have a great afternoon.

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