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Advanced Micro Devices Inc. (NYSE:AMD)

Q3 2009 Earnings Call

October 15, 2009 5:00 pm ET

Executives

Ruth Cotter – Director of Investor Relations

Dirk R. Meyer – President and Chief Executive Officer

Thomas Seifert – Chief Financial Officer

Robert J. Rivet – Chief Operations and Administrative Officer

Analysts

Doug Freedman - Broadpoint Am Tech

Ross Seymore - Deutsche Bank Securities

Chris Danely - J.P. Morgan

Glen Yeung - Citigroup

David Wong - Wells Fargo Securities LLC

Joanne Feeney - FTN Capital Markets

Tim Luke - Barclays Capital

John Pitzer - Credit Suisse

Patrick Wang - Wedbush Morgan Securities

James Covello - Goldman Sachs

Uche Orji - UBS

David Wu - GC Research Ltd.

Kevin Cassidy - Thomas Weisel Partners

[Hans Osefin] – Raymond James

Alex Gauna - JMP Securities

Craig Berger - FBR Capital Markets

Adam Benjamin - Jefferies & Co.

Operator

Good 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 2009 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded today.

I would now like to turn the conference over to Miss Ruth Cotter, Director of Investor Relations for AMD. Please go ahead.

Ruth Cotter

Thank you and welcome to AMD’s third quarter earnings conference call. Our participants today are Dirk Meyer, our President and CEO and Bob Rivet, our Chief Operations and Administrative Officer.

This is a live call and will be replayed via webcast on AMD.com. There will also be a telephone replay. The replay number is 888-258-7854. Outside of the United States the number is 703-925-2490. The access code for both is 1397389. The telephone replay will be available for the next 10 days starting later this evening.

I would like to take this opportunity to remind everyone that AMD will hold its Financial Analysts Day on November the 11th at its headquarters in Sunnyvale, California. I would also like to bring to your attention that our Q4 2009 earnings quiet time will begin at the close of business on Friday, December the 11th.

References to AMD on this earnings call refer to AMD Product Company, which refers to the operating results of AMD excluding our Foundry segment and intersegment eliminations. We provide a reconciliation of AMD Product Company to AMD consolidated operating results, which are reported for GAAP purposes in today’s earnings press release issued earlier this afternoon.

Before we begin today’s call I would 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, especially in light of the current state of the economy. We encourage you to review our filings with the SEC where we review the risk factors, setting forth information that could cause actual results to differ materially from our expectations. You will find detailed discussions about such risk factors in our most recent SEC filing, AMD’s quarterly earnings report on Form 10-Q for the quarter ended June 27, 2009.

With that, I’d like to turn the call over to Dirk. Dirk?

Dirk R. Meyer

Thanks Ruth, and thank [audio impairment] on the phone for joining us today. Before we begin, I would like to introduce the newest member of our management team, Mr. Thomas Seifert, who is taking over the CFO role. Thomas, welcome aboard.

Thomas Seifert

Thank you, Dirk. I’m excited to be here and I look forward to getting to work with all of you out there in the year’s ahead beginning with our upcoming Financial Analysts Day in November.

Dirk R. Meyer

So again welcome Thomas, and I also want to thank Bob for your steady hand in this arena over the past nine years. I know you’re really looking forward to having 100% focus on your new role as Chief Operations and Administrative Officer.

Turning now to the business. Third quarter consumer PC demand continued to improve from prior periods, with particular strength in notebooks and in China and continued recovery in Europe and in North America. And it appears the commercial IT markets are positioned to improve next year.

We experienced very strong global demand for our discrete graphics offerings, particularly in the notebook sector, as consumers continued to value graphics rich PC experience. And I’m really encouraged by our financial performance in the quarter. We grew revenues by 18% sequentially. We improved our gross margins through a continued transition to 45 nanometer CPUs, increased factory utilization and higher CPU ASPs. And we controlled expenses very well, reducing OpEx by 9%. And most importantly, AMD the Product Company put a positive number on the bottom line.

Meanwhile, we delivered on each of the three key pillars of our differentiation, platforms, discrete graphics leadership and marketing focused on real world end user needs. With respect to platforms, our momentum continues to build with HP, Acer, Toshiba, ASUSTeK and MSI all announcing plans to introduce more than 70 notebooks based on AMD’s latest generation of mainstream and ultra-thin platforms.

In servers, HP, IBM and Dell are all using our new Six-Core AMD Opteron Processors to meet the growing demand for energy efficient and high density server platforms. We now offer 15 full featured, low and very low power options for cloud computing deployments and hyper-scale data centers.

Our graphics business continues to gain momentum as we added to our industry leading discrete graphics portfolio. The rating on HD 5870 captured the graphics performance title, winning greater than 50 industry awards up to this point. The rating in HD 5000 family is the first in the industry designed to take advantage of Microsoft’s next generation, Direct X11 technology. We believe this new offering is uniquely well positioned to take advantage of Microsoft’s Windows 7 upcoming rollout. And the HD 5000 family also supports our widely acclaimed Ifinity multi-display technology, allowing a single PC to drive up to six high def monitors.

In marketing, we launched a pair of important new programs in the quarter, Vision Technology from AMD and the AMD Fusion Partner Program. The Fusion Partner Program will help AMD’s channel partners gain sales traction and streamline the delivery of AMD platforms into the channel. And with our new vision campaign, we introduced a new approach to retail merchandising. Simplifying the consumer buying experience by highlighting what can be done with a PC rather than simply what’s inside the PC. Industry response to the program has been very positive indeed. Both of these new programs are designed to demonstrate and reinforce the unique value proposition of an all AMD platform.

On the manufacturing front, we joined with Global Foundries to break ground on Fab 2 in New York, a state-of-the-art semiconductor manufacturing facility that will provide additional leading edge manufacturing capacity when the facility enters production, which is scheduled for 2012.

In summary, the AMD value proposition continues to resonate across segments, product lines and geographies. Our new products are strong and in the case of our graphics offering absolutely stunning. Our marketing programs are focused on the things that demonstrate our differentiation, graphics leadership, balance platforms and performance per watt superiority.

Our customers tell me they like what we’re delivering today as well as what they see coming in the future. Going forward, we believe we are well positioned to succeed. We are focused on the biggest and most opportunity rich market for our technology, the PC market. Our product momentum is increasing. We are winning confidence and enthusiasm from our world class customers. And we will continue to carefully manage costs, increasing operating efficiencies and improve our financial performance.

With that, over to you, Bob.

Robert J. Rivet

Thank you, Dirk and welcome Thomas. In the fourth quarter of last year we outlined our breakeven business model for AMD the Product Company that was both sized to the new market reality and optimized for agility and flexibility. And in the past quarter we demonstrated we are there on the top line and in our cost structure, achieving profitability in each of our core businesses.

Meanwhile our partner, ATEC, reinforced their strategic commitment to the Global Foundries investment opportunity by choosing to fully fund their first capital call which took place during the past quarter. In short, we hit all the major milestones in the quarter.

Third quarter revenue was $1.396 billion, growing 18% compared to the second quarter of 2009. Compared to the third quarter of last year, revenue declined 22%. However, excluding the $191 million Process Technology License revenue, revenue declined 13% on a non-GAAP basis.

AMD Product Company reported a non-GAAP net income of $2 million in the third quarter of 2009, which excludes a net favorable impact of $54 million primarily from a $66 million gain from the repurchase of debt. Third quarter non-GAAP operating income was $47 million, which excludes the impact of unusual items as described in the press release.

We made very good progress on gross margin in the third quarter, a result of higher unit volumes across the entire portfolio, a stronger mix of 45 nanometer CPUs, higher microprocessor ASPs and improved factory utilization rates. As a result, third quarter non-GAAP gross margin improved to 38% compared to 27% in the prior quarter.

You may remember our breakeven model is predicated on SG&A of $200 million and R&D of $300 million per quarter. We met and exceeded both targets in the third quarter, reducing SG&A spending to $195 million and R&D to $285 million. As a result of our operating discipline, we saw our adjusted EBITDA improve significantly over the second quarter to $214 million in the third quarter.

Switching to the business segments, we are pleased to report that both our Computing Solutions and Graphic Business were profitable in the third quarter, each reporting sequential double-digit revenue growth. We were encouraged by demand for our products and the growth of our business with OEM and channel partners, particularly in Europe and Greater China.

Computing solution revenue was $1.069 billion in the third quarter, up 17% sequentially, driven by higher microprocessor ASPs and double-digit unit growth. Unit growth was mainly driven by notebook [prosser] shipments which increased by 28% quarter over quarter. We saw revenue and unit growth in each of our desktop, notebook and server businesses and saw a record quarter in our chipset business.

Operating income for the computing solution group was $76 million, a significant increase over a loss of $72 million in the second quarter.

In the graphics segment, revenue for the quarter was $306 million, up 22% sequentially. Growth was driven by significantly higher shipments of mobile discrete graphic processors, demand in the add-in board and retail channels was spurred by the launch of the Radeon HD 5000 series, the industry’s first DX 11 compatible graphics cards. And the graphics business also reported an operating income of $8 million in the quarter, an improvement from a loss of $12 million from the second quarter.

Now turning to the AMD Product Company’s balance sheet, our cash and marketable securities balance at the end of the quarter was $1.5 billion. We used $104 million to repurchase $186 million of principal amount of debt. Excluding this retirement of debt, cash was flat quarter on quarter. Since this time last year, we have retired a total of $419 million of outstanding convertible notes.

As I mentioned a moment ago, it’s worth noting that Global Foundries had its first capital call in July for $260 million. AMD declined to participate in this funding.

Now let me turn to the outlook. The following statements concerning AMD the Product Company are forward-looking and the actual results could differ materially from current expectations. For the fourth quarter AMD expects revenue [audio impairment] to be up modestly. We expect operating expenses to be approximately $500 million, in line with the breakeven model. And capital expenditure guidance remains unchanged at approximately $100 million for the year.

In conclusion, we executed well in the third quarter, reaching our breakeven model and achieving profitability while we continued to improve our balance sheet. We believe we are now operating a grounded and sustainable business model, the benefits of which will be amplified with the return to normal IT spending in the commercial sector. In the meantime, demand for our balanced platforms, discrete graphics and chipsets offering should provide continued strong momentum as we grow out the year.

At this point let’s go to Q&A with Ruth.

Ruth Cotter

Thanks Bob. We’ll now move to our question-and-answer session which Dirk and Bob will host. Huey, if you could please poll our participants for questions that would be good. Thank you.

Operator

Question-and-Answer Session

Operator

Thank you ma’am. (Operator Instructions) Your first question comes from Doug Freedman - Broadpoint Am Tech.

Doug Freedman - Broadpoint Am Tech

If I could start off with I think the language we understand is seasonality. If you could understand where moderately fits in with seasonality on the top line guidance.

Dirk R. Meyer

Sure Doug. You know our view is that seasonal increases Q3 to Q4 average around 9% and are 6 or 7% on the low side. Given the big build we’ve seen of PCs in anticipation of the Win 7 launch, we’re really wanting to see the consumption side of that build happen in Q4 and therefore at this point we’re calling moderate which is a little bit less bullish than average seasonality I would say.

Doug Freedman - Broadpoint Am Tech

Can you talk a little bit about what probably are going to be the give and takes on the gross margin? And if you wouldn’t mind in the process of doing that, maybe rank for us sort of the gross margin contribution differences between GPU, notebook and desktop platforms, maybe lastly fit server in there. What our expectation and outlook should sort of be on the gross margin line and how are you guys going to balance say gross margins with possible share gains or potential opportunities for share gains.

Dirk R. Meyer

Sure. First clarifying point, your question about the product by product breakdown is directional, meaning Q2 to Q3?

Doug Freedman - Broadpoint Am Tech

More helpful, Q3 going into Q4.

Dirk R. Meyer

Well standing back, first of all the Q2 to Q3 improvement was driven by the three factors that we’ve been talking about and talked about on our last call. Number one was increased mix of 45 nanometer CPUs, number two factory utilization, number three ASPs. We certainly got the opportunity to drive forward looking improvement based on the first of those going from Q3 to Q4. We’re not done completely with the 45 nanometer transition on a sales up basis. As well, we’ll drive slightly higher utilization rates in Q4 as compared to Q3. ASPs of course are always a wild card, but we feel good about some of the new products that we introduced, both on the GPU side as well the CPU side with the new notebook programs that are hitting the market.

You asked also about how we think about gross margin playing off against market share. And you know there we’re going to approach the market the way we always have, which is to maximize margin dollar accumulation over the course of the quarter.

Robert J. Rivet

This is Bob and I just would amplify, and particularly since we still have a lot of capacity in our factories to take advantage of upside unit opportunities. Obviously we’ll do the appropriate math on each of those opportunities as Dirk said, but we have definitely room to ship more units.

Doug Freedman - Broadpoint Am Tech

Can you offer us some sort of a timeline as well on separation and deconsolidation between AMD the Product Company and Global Foundries and what milestones we might measure along that path?

Dirk R. Meyer

Yes. If we circle back, we’ve had this conversation before so I’ll remind you. You know it’s really this simple. The biggest milestone will be third party revenue by Global Foundries. But you know it will, from that perspective and they have a ways to go before that will happen, but it’s really the appropriate magnitude of third party revenue so it’s not a [revelated] party transaction just between Global Foundries and AMD.

There are other accounting things that will have to happen, but that’s the single biggest thing that I would say would be the fencepost that needs to be out there and measured over time.

Operator

Your next question comes from Ross Seymore - Deutsche Bank Securities.

Ross Seymore - Deutsche Bank Securities

I just wanted to get a little more color on the ASP trends that you highlighted in the quarter, both within CPUs and GPUs. Just what drove those between the various metrics mix, apples and apples pricing etc.?

Dirk R. Meyer

Sure. First on the CPU side, the biggest driver was in the desktop part of the product line, largely driven by mix improvement. A relatively larger mix of both Phenom II and Athlon II products helped there. Notebooks largely flat. Server ASPs were actually up a bit in the quarter although the overall server revenue grew more or less in line with MPU revenue. On the GP side as we said I think in the press release, ASPs were down just a bit quarter on quarter.

Ross Seymore - Deutsche Bank Securities

I would have thought with some of the new products that you had on the GPU side that that would have helped blend up ASPs. Is it just they didn’t have a chance to get to be a meaningful part of the mix to impact overall ASPs?

Dirk R. Meyer

Yes. Exactly right. The 5000 Series in particular really didn’t contribute meaningfully in the Q3 timeframe.

Ross Seymore - Deutsche Bank Securities

So if you think about it going forward, I know it’s always hard to talk about ASPs in the future, but just from the mix component in GPUs would you expect that to have a positive impact as you go into the fourth quarter?

Dirk R. Meyer

Clearly an opportunity. Yes.

Ross Seymore - Deutsche Bank Securities

Just from an SOI technology point of view and with your new marketing program with Fusion, etc., how should we think about going from SOI to bulk sea moss from a timing perspective, if at all?

Dirk R. Meyer

Yes, that’s a good question and we’ll put a little bit more light on this in the Analyst’s call. Of course the CPU products are on 45 nanometer SOI today. We’ll have CPU so-called Fusion parts in 32 nanometer SOI in the next generation. And then the bulk SOI question is one we evaluate in every subsequent generation. More to come in the Analyst’s conference.

Operator

Your next question comes from Chris Danely - J.P. Morgan.

Chris Danely - J.P. Morgan

Real quick, Bob, just to follow up on Dougie’s question can you give us a revenue number or level for the Global Foundries business? And does that include the [Charlie] revenue or is it just Global Foundry revenue for when you can start to spin it out?

Robert J. Rivet

It’s just Global Foundry revenue. And you know that’s a little bit of I’ll call it the mystery of how big that number has to be. But it has to be a respectable portion of what Global Foundry would report. So I’d say you know it’s probably got to be above 10, 15% and it would be helpful if it’s more than just one additional customer. So it’s got to be a meaningful number. It can’t just be you know $1 million. It’s got to be a bigger number than that.

Chris Danely - J.P. Morgan

And then Dirk, any plans for a netbook processor offering?

Dirk R. Meyer

Yes, you know netbook is a little bit of a nebulous term. We actually have customers who have I’ll call it netbook-like offerings based on our components out there today, meaning screen sizes down below 12 inches. And we continue to work with our customers to enable I’ll say small, thin and light form factors. You’ll hear more in the financial Analyst conference next month about the product lineup that we’ll be rolling out over the course of the next two years that will include increasing focus on those small form factor notebooks.

Chris Danely - J.P. Morgan

You know you mentioned a little bit of a build for Win 7 out there. You know it kind of goes against what some of your competitors are saying. Can you just shed a little more color on that and maybe get into some clarity as to the magnitude? And where the product is?

Dirk R. Meyer

Oh. Yes, that’s a good question. I didn’t mean to convey necessarily any inventory builds in the channels. Rather simply a lot of PCs have been built. We’re not hearing at this point about any unnatural pileup of inventory. But nonetheless there’s a lot of consumption that still has to happen in Q4 before we can say we’re really entering a normal seasonal selling cycle on Q4 in preparation for first half next year PC consumption.

Operator

Your next question comes from Glen Yeung – Citigroup.

Glen Yeung – Citigroup

Can you just give us a sense, looking into the fourth quarter whether or not you think graphics or your microprocessor business will grow faster?

Robert J. Rivet

You know if you kind of again go back, let’s just talk about seasonality in general and then get into specifics. But in typical seasonality mode, microprocessors lead. They have the strongest growth rate from third to fourth. The big quarter for graphics is the third. Now as Dirk kind of outlined, we’re not sure we’re exactly normal yet. I would say that trends. But we don’t think that will break the trend in the fourth quarter. We expect CPU revenues to be stronger than GPU between the two pieces.

Glen Yeung – Citigroup

You know, you mentioned that you’re starting to see Europe get a little bit better here. And that’s actually been [inaudible] done relatively well and do you think that as Europe comes back, given the product portfolio, that you can continue to show good growth as you maintain or even gain share in that market?

Robert J. Rivet

Yes. I would say Europe is certainly an important market for us. One, because we have had relatively good share in that region over the years. And number two, it tends to be a relatively high attach rate region for discrete GPUs, which is also important for us. So you know as Europe comes back that’s going to help us differentially. In particular Eastern Europe happens to be a very rich discrete graphics market.

Glen Yeung – Citigroup

And then last one for me, Dirk maybe for you, if you could just give us some examples of where you’re gaining traction with Congo and with Istanbul. You know what kind of business we might expect to see. And maybe add to that, what OEMs are telling you about those products? Are they coming to you because they’re great products or are they coming to you because they feel like you need to gain some more share here? What’s driving them towards your product at this point?

Dirk R. Meyer

Good question. I would say both. I mean clearly all of our customers want strong suppliers in their supply base and that’s a positive factor for us. But as well our products are darn good products. In particular, Istanbul is doing well in an area that’s been one of historic strength for us, namely four and eight socket servers. The other area where we’re seeing a lot of opportunity alongside our OEMs is in high density data center installations, where our EE and HE Opteron parts in the six core variety are really darn good.

On the Congo or you know second generation thin and light platform, we’ve got a number of design wins as I spoke to in the opening remarks. I expect to see a lot more momentum in that essentially new product category that we created between netbooks and mainstream notebooks going into the Christmas cycle. You know we created that category really in partnership with HP. We only had one platform in the market together. It was HP DV2. It did relative to our expectations. But we’ll have a much broader assortment of platforms walking into the Christmas cycle and I expect we’ll see increased momentum as a result.

Operator

Your next question comes from David Wong - Wells Fargo Securities LLC.

David Wong - Wells Fargo Securities LLC

Can you give us some idea of what Istanbul was as a percentage of server chips in the third quarter and what you expect for the fourth quarter? Was growth higher in four way server processors than two way server processors in September?

Dirk R. Meyer

Sure. You know high level, the six core stuff was about a third of our server mix overall. And I would call the growth of our two and four socket platforms to be first order similar.

Operator

Your next question comes from Joanne Feeney - FTN Capital Markets.

Joanne Feeney - FTN Capital Markets

I’d like some more clarity if you would on the notebook side. The strength there is a little bit of a surprise given that you aren’t launching Tigris until this quarter. So if you could clarify. That did not include any sales of Tigris, correct? And if you could explain where that strength came from I think that’d be a great help.

Dirk R. Meyer

Sure, Joanne. Actually we did start selling Tigris components into OEMs at the very end of the quarter to prepare them for their builds for the Christmas cycle. But to your point, most of the sales was on the prior generation Puma platform where you know we just saw a very strong back-to-school cycle. So as a result good notebook sales in the quarter.

Joanne Feeney - FTN Capital Markets

If I could a follow up on the graphics side, what do you see as we transition over to your newer product, the 5000 Series, what do you see as your gross margin potential in that segment? And you know how does that evolve over the next several quarters as you move from OEM sales to add-in board sales?

Robert J. Rivet

You know, think about it this way, Joanne as you know in the graphics business you know the zone, the zip code you want to be in is in the 35 to 45% gross margin level. We’re not in that model right now. We believe you know the execution we’ve had in the 5000 Series will help us push toward closer to the model. At least break in from the lower level. So it’s moving in the appropriate direction.

Joanne Feeney - FTN Capital Markets

Do you feel as prices are set for these new products where you can get there once those take over your offerings or is it another generation that we should expect to wait before that really happens?

Dirk R. Meyer

It’s hard to be that clairvoyant, Joanne. I’ll give you a few factors to watch. You know one is we’ve been doing extremely well on the current series with our OEM customers and notebook and desktop. The big opportunity is for us to further increase our share in the so-called AIB channel. And in particular you know high end GPU business in that channel. We feel really bullish about the 5000 Series as we walk into Q4 and obviously next year.

The next big opportunity for us is in workstation graphics which we’ve spoken to in the past. There you know the rate of penetration is going to be naturally slower since that’s in an enterprise market and it takes us time to get the ISV certifications, ISV marketing programs going and so on. So I think you’re looking at a couple of year’s story to really get all the land in the zone that Bob described.

Joanne Feeney - FTN Capital Markets

And then just one follow up on someone else’s question about the budget thin and light. Do you have a sense of what share of your fourth quarter notebook shipments that might be able to achieve? For the Congo platform?

Dirk R. Meyer

Sure. Well less than half.

Joanne Feeney - FTN Capital Markets

And more than 10%?

Dirk R. Meyer

Yes.

Operator

Your next question comes from Tim Luke - Barclays Capital.

Tim Luke - Barclays Capital

Was it correct in further you were suggesting that your graphics and microprocessors might grow at fairly similar rates in the quarter? In the fourth quarter?

Robert J. Rivet

No, Tim. It was the other way around. CPUs will grow faster than GPUs.

Tim Luke - Barclays Capital

Even though you have the new product in the GPU area?

Robert J. Rivet

You know I would love them to be equal but that’s how I’d handicap it right now.

Tim Luke - Barclays Capital

And just to be clear on what Dirk was inferring, he was saying that 6 to 7 is sort of lower end of the norm and that’s largely what you’re thinking? Or do you think it’s going to be a bit below the 6 to 7?

Robert J. Rivet

No. I think what Dirk said is the average, around 9. This is probably below the average so I’d call it more in the 6, 7 range. Five to seven.

Tim Luke - Barclays Capital

And just on the gross margins, with all the things that was outlining on full utilization ASP, you didn’t think you know 200 basis points plus of improvement may be achievable?

Robert J. Rivet

I’m not going to give that level of granularity but as Dirk outlined, as we outlined in the current quarter and we outlined, those are the same factors that we’ll continue to make progress on in the current quarter. No where near the level of improvement we’ve made from second to third, but we will make progress.

Tim Luke - Barclays Capital

And there were some stories about Congo moving from the beginning of the quarter to maybe middle of November. Can you just clarify when you would expect to see that launch? And then also, Bob, if you have any sort of early countries on the legal backdrop and what we should anticipate in terms of the next three to six months that would be helpful too.

Robert J. Rivet

Yes. On Congo we haven’t had any change to our original plans. So I don’t know where those stories came from.

Tim Luke - Barclays Capital

What is the plan, just to clarify?

Robert J. Rivet

You’ll see Congo notebooks out the normal Christmas cycle.

Dirk R. Meyer

Yes. Post October 22nd.

Tim Luke - Barclays Capital

Legal?

Robert J. Rivet

Legal, nothing to report from that perspective. So you know we’ll just leave it at that. We continue to work down the right path and you know trial is scheduled for the end of March.

Tim Luke - Barclays Capital

And then Dirk you said SOI for 32. Below that, that’s when you could start moving the bulk for the microprocessor for low power?

Dirk R. Meyer

No. What I meant to convey Tim is that in the generations beyond 32, we value technology choices as we do in every generation. And we’ll give you some more granularity on all of this next month.

Operator

Your next question comes from John Pitzer - Credit Suisse.

John Pitzer - Credit Suisse

Dirk, to the extent that a lot of us here on Wall Street are looking forward to the corporate replacement cycle next year, can you just help me understand [inaudible] what you’ve been doing sort of in the corporate client market that might better position yourself there as that [thinking] gets turned back on?

Dirk R. Meyer

Sure. Our corporate client, you’re probably referring to the kind of the classic corporate enterprise market, big business 5000 users and above. We’ve got two principal I’ll say or maybe three access points into that market. One is clearly our Opteron business, which you know is an enterprise class server offering. You know next would be through enterprise deployments of what are otherwise more like commercial SMB type platforms which actually does occur more than you might think. A lot of enterprises actually don’t buy all of the manageability features that are burdened on these enterprise class platforms. So we do participate in enterprise big business with our OEMs on the SMB platforms that we have. And finally would be our workstation graphics business which is clearly an enterprise focus.

John Pitzer - Credit Suisse

And suffice it to say, Dirk, that you think that with some of the recent successes you’re better positioned for this round of PC refresh than you were for the prior?

Dirk R. Meyer

I would just say well positioned, to the extent that the commercial IT sector starts to regain strength. That’s going to help us.

John Pitzer - Credit Suisse

And then Bob I think you said that the AMD design CapEx for the year is still staying at $100 million. Can you help me understand what Global Foundries budget is? And I guess you know as you talk about SOI versus bulk, as you guys make your way to 32 just remind me the timeline and is 100% of the Global Foundry CapEx at 32 going just to support you guys? Or will they also be kind of trying to work on bulk silicon at 32 as well for potential customers down the road?

Robert J. Rivet

Let me dissect a few of the questions. First on the capital number, the Global Foundries capital number for this year is approximately $550 million. AMD the Product Company’s is $100 million. So $650, AMD consolidated but those are the two pieces of that. The capital spend they’re spending right now I’ll call it, think of it in a couple of buckets. Bucket one is to serve AMD’s needs on additional capacities and 45 nanometer tools, 32 nanometer tools and you know technology development for 22 nanometer. So the tools associated with AMD’s needs to service the microprocessor business.

The second bucket is they’re trying to get into the foundry business. And so they’re putting in bulk capabilities. At 32 nanometer and below technology nodes, so that they can service other people in the industry in the foundries. They’ll talk a lot more about that again at the November 11th conference. So those are the two buckets.

And then the third bucket and it’s an early bucket is breaking ground and building a building and those kind of things in New York. But those are really the three buckets of the capital spend this year and probably the same story of the capital spend for next year. [Inaudible] changing as time goes on.

John Pitzer - Credit Suisse

And just relative to the 32 nanometer ramp for the microprocessor business, is that still on schedule for first half next year?

Dirk R. Meyer

We’ll be sampling customers in the first half, ramp and production in the second half.

Operator

Your next question comes from Patrick Wang - Wedbush Morgan Securities.

Patrick Wang - Wedbush Morgan Securities

Just a couple of questions. First, can you talk about how your 65 nanometer and 45 nanometer mix shifted last quarter? And how that’s expected to change in the next?

Robert J. Rivet

Well I’d kind of characterize it this way. We went from a majority of the shipments in the third quarter being 65 nanometer to much more balance in this quarter, to driving to much more significant 45 nanometer from fourth quarter and beyond. And then 32 nanometer as Dirk said you know in the second half of 2010 from that perspective of the manufacturing run rates that we’ll put into the factories.

Patrick Wang - Wedbush Morgan Securities

And that’s something that’s supposed to be a nice margin driver. Is there any way that you can help us maybe frame the impact there?

Robert J. Rivet

No. It’s pretty hard, because to be honest it’s fairly complex at the platform level and at the different CPU level. But clearly 45 nanometer gives you both performance and a smaller die size, and if ASPs are constant you know that’s a better thing. But we actually like to get a pick up of a little bit better ASP new product and a smaller die size.

Patrick Wang - Wedbush Morgan Securities

And then second you know I guess maybe Dirk I was hoping you could talk a little bit more about graphics, you know. Given that you feel that CP grows faster than GPU next quarter, could you give us a feel of what you think overall graphics demand is going to be over the next couple of quarters? And then maybe follow up with perhaps how you shape up competitively, given what we know about your competition out there today. Thanks.

Dirk R. Meyer

Yes. Well first of all on the competitive front, feeling pretty good about the HD 5000 lineup. First of all, you can buy it today which is a good step above what the competition recently announced. In terms of performance and features, it’s absolutely killer. We think its going to lineup very well with the Windows 7 launch here this month. We’re getting really enthusiastic response from our customers as measured by OEM design ins. So you know I think very bullish on that.

The graphics market overall we’re also feeling pretty good about. We’re starting to get some anecdotal input from our customers that discrete GPU attach rates on OEM systems are actually increasing a little bit, even in notebooks which may surprise some. So you know overall I see a pretty robust market for graphics, one that we love to participate in because it drives important technology across our platform.

Operator

Your next question comes from James Covello - Goldman Sachs.

James Covello - Goldman Sachs

I’ve got a little bit of a strategic longer term oriented question in that I’m trying to figure out how much of Global Foundries capacity do you need to be in the long run to continue to be able to dictate their product roadmap?

Dirk R. Meyer

Yes, I understand the question. You know we are Global Foundries only customer today and even the most wildly successful scenarios for Global Foundries, we still are a big important strategic customer for Global Foundries. Particularly given that we will procure technology and wafers at the leading edge. So you know part of the relationship here is that by virtue of us driving so much volume at the leading edge, they’re going to be highly motivated and I’ll tell you they are highly motivated to tune their offering to the needs of our products.

James Covello - Goldman Sachs

For sure, but I mean ultimately they’re planning on being a leading Global Foundry along the lines of a TSM or something along those lines, you know and again I just wonder is there any percentage in your mind three to five years out that you think you need to represent of their capacity in order to continue to have the kind of close dialog on the roadmap?

Dirk R. Meyer

No. I would say that you know given the amount of silicon that we procure, I expect that we’re going to have their attention for a long time. Not only because of the contractual obligation that they have to our company but because of the size of the business we represent. We actually enjoy that sort of relationship with TSMC today given the size of our business with TSMC.

Operator

Your next question comes from Uche Orji – UBS.

Uche Orji – UBS

Let me just start by asking a little bit of clarification again on the Win 7 comments with regards to the inventory build. The flip side of that of course would also imply that the Vista based PC inventory currently is being drained, so if you look across the channel and I know you’re talking about consumption in Q4 and all of that but you know will you say, I also know you clarified it as no alarming [being] inventory but you know implied in your comment it sounds like you’re worried somehow about impending trials. So I’m just trying to get a bit more comfort as to how the interaction between Win 7 in particular and Vista is meant to drain. You know kind of some stopping to your view of the inventory channel, so please.

Dirk R. Meyer

Yes. Good question. You know again I’ll reiterate. We haven’t heard or gotten any signals of alarm from either our customers or you know the channel checks that we routinely run downstream of our customers relative to inventory being anything but you know in good shape. With respect to this OS transition you know industry insiders vacillate between being worried about an inventory build on the one hand versus you know consumption stall, where people are waiting to buy the new operating system. You know as you know Microsoft has been making available free upgrade coupons on the Vista machines today, and that’s been helpful in making sure that those machines continue to sell. So I haven’t heard anything that causes me alarm. Rather we’re simply looking at a global world economy that still is not all that robust by many measures, and on that basis we’re a little reluctant to call a return to normal seasonality at this point.

Robert J. Rivet

I would actually add one comment. I like to do what I call my Warren Buffett which is walk into stores and pretend I’m a buyer. And I’m sure you know every city is different, but there’s hard to find a computer currently in the stores in Austin, Texas. So I think the OEMs have done a very good job of bleeding down the inventories in anticipation of the Windows 7 launch later this month. So I feel real comfortable that the supply chain is as tight as can be, and it’s prepped for the launch of these new products. And again what I think we both don’t know, Dirk and I is what is the consumer appetite to buy new products? Is it in line with what the OEMs are building or not? We won’t know until we see some of that data.

Uche Orji – UBS

OpEx, you brought it below the target of $500 million for this quarter. You know as revenue starts to improve [inaudible] at some point you know bonuses will start getting accrued, how sustainable is this level of OpEx? You know before you even answer that you know on an ongoing basis, can you just help me understand what we should model for OpEx for Q4?

Robert J. Rivet

I’d answer it this way. You know we’ll use the November analyst’s conference to talk about 2010 but for the upcoming quarter it’ll be in you know approximately the shoe size of the $500 million.

Uche Orji – UBS

You know your ASPs are up and we’re in an environment where PC ASPs are down and most components have been up. [Inaudible] is up, panel you know appears to be weaker a little bit recently. You know my sense is somebody, somewhere is getting squeezed, possibly the OEMs. But within that context, how sustainable do you think that the ASPs you have now for microprocessors will be? Within the context of a declining ASP for the PC, I know that components you know being fairly strong.

Robert J. Rivet

Yes. A good question and you really have to kind of pick apart the component pieces. The biggest opportunity that we have to preserve an increase of ASPs is to sell our platform offerings into what I’ll call a richer mix of PCs. That is higher priced PCs. If you look at the overall distribution of PCs, PC price points across the market, we’ve still got an opportunity to be better represented at higher PC price points. So that’s point one.

Your point was really around how much of the [bomb] cost can the microprocessor or the GPU get over time in the face of decreasing prices and has pinched costs over time. That’s certainly a factor but I think that factor is outweighed by the fact that we’re relatively under represented and I’ll call it mainstream and performance PC price points in the market.

Uche Orji – UBS

Do you think that you gained share in graphics this quarter? I know it’s too early to tell but do you think you gained share in GPU?

Robert J. Rivet

I think it’s too early to tell, to your point.

Operator

Your next question comes from David Wu - GC Research Ltd.

David Wu - GC Research Ltd.

Just to a point of clarification. The first one is if you’re going to stay on SOI for Fusion on your next generation, I guess we’re talking about low feature packaging with GPU and sea moss and CPU and SOI. Would it affect your performance on a combo chip like that versus fewer silicon bulk sea moss? That’s the first one.

And then I have a question about the thin and light. I think the retailers are pushing that back on the premium pricing that Intel’s trying to get on those ultra low voltage products and I was wondering whether your thin and light combo platform is aimed at the same niche or is it a little lower on the stack in terms of when you talk about thin and light? Are we talking about the same comparables?

Robert J. Rivet

Good questions. So first, no our first Fusion parts will be monolithic integration, single die consisting of CPU and GPU technology. The question about our ultra thin and light offering, we think it’s positioned at the right point in the market but squarely between netbooks on the low end and mainstream notebooks on the high end. And to your point from what we’ve seen so far the Intel based offerings are not appropriately priced or positioned. So we think we’ve got a good opportunity.

David Wu - GC Research Ltd.

I assume that we’re talking about $600 to $800 on the stuff that you talk about.

Dirk R. Meyer

We’ll have offerings that are lower than that at the platform level.

Operator

Your next question comes from Kevin Cassidy - Thomas Weisel Partners.

Kevin Cassidy - Thomas Weisel Partners

Dirk you had mentioned in your prepared remarks you thought the IT market was positioned to improve. I wonder if you could expand on that a little bit.

Dirk R. Meyer

Sure. You know it’s hard to put a number on it but the tone of the conversations that we’re having with CIOs and other IT decision makers around the industry have certainly changed in the last three months. You know clearly wallets are starting to free up you know now even a little bit as people perhaps will actually spend the IT procurement budgets that they had at the beginning of the year. And again the tone of the conversation about what they’re thinking in regards to overall IT spend in 2010 is certainly more bullish than it was. Yet to be realized yet but you know where six months ago people were thinking maybe it’s another down year in terms of their IT procurement, not so. People seem to be thinking they might spend a little bit more money next year. So time will tell.

Kevin Cassidy - Thomas Weisel Partners

So you think there even could be a fourth quarter budget flush?

Dirk R. Meyer

Possible.

Operator

Your next question comes from [Hans Osefin] – Raymond James.

[Hans Osefin] – Raymond James

Dirk, can you give us an update on 40 nanometer as it relates to graphics over the ramp for TSMC earlier in the year? Is that now behind you guys in the industry do you think?

Dirk R. Meyer

Yes. Certainly TSMC has made good progress with the 40 nanometer technology. You know at this point our new HD 5000 family is pulling on 40 nanometer and as is always the case with the hot new product early in the launch, we’re hand and mouth on supply. I expect that situation to improve over the coming weeks and months.

[Hans Osefin] – Raymond James

And a follow up more from a platform and strategic sense but the Blue Team is about to engage in a integration of basically the Northbridge and the microprocessor and the platform is going to change. Is there an opportunity for AMD during this transition as they go through it? Are there pros and cons in doing that kind of an approach? And when do you guys suspect you’ll be doing the same?

Dirk R. Meyer

Well relative integration of the Northbridge you know we in effect did that when we introduced you know Opteron and Eflon 64 by virtue of integrating the memory control. You may be referring to some of the upcoming products the other side has in relation to integrating GPUs in the CPU socket next year. You know at the end of the day, customers don’t buy integration. They buy features and performance. And I feel really good about our graphics technology as compared to anybody in the world, particularly the Blue Team that you’re talking about. And I think the evolution towards you know away from components and towards platforms and the messaging consistent with that is really in our long term best interests. So I applaud it.

Operator

Your next question comes from Alex Gauna - JMP Securities.

Alex Gauna - JMP Securities

I was wondering if you would give some clarification on how you see IT budget spend improving next year. Can you maybe talk about interest as it falls out around your 4, 6, 8 and eventually 12 core? And maybe update us to the extent that you can on maybe the timing on some of these multi-core and magna-core releases?

Dirk R. Meyer

Sure. Headline is no change from what we communicated back earlier this year. You’ll see systems available from our OEM partners essentially very early in the year, Q1 timeframe. You know the interest from our customers is measured by design ends I would say is good. You know the 12 core offering obviously has a lot of benefits and throughput, limited workloads of which there were many in the other area where I think we’re going to get a lot of uptake as in the HPC part of the market. Where you know bandwidth and flops in each socket is really important. And you know we’re looking forward to updating you on some of the other elements around these platforms next month at the analyst conference.

Alex Gauna - JMP Securities

You mentioned HPC. I’ve had some of my own conversations with CIOs and I’ve sensed a lot of interest around virtualization and 12 cores. Is there any difference between some of your multi-core sockets in terms of virtualization interest?

Dirk R. Meyer

Well and to your point that’s another workload where our offerings will do very well.

Alex Gauna - JMP Securities

And you effectively ducked the question on market share. Am I reading that as right now you’ve had a very good quarter, Intel’s had a very good quarter, for the best you’re able to discern it you would imagine your green competitor is also doing pretty well on this rising tide? Or is there something else in terms of mix going on that keeps you from speculating on share with all your 5800 success?

Dirk R. Meyer

Well as I said the new generation is really going to be more impactful in Q4 than Q3, you know. And beyond that rather than speculate I’ll just wait to look at the numbers.

Alex Gauna - JMP Securities

And in terms of that impact in Q4 you also said you’re expecting chip business to grow in excess of GPU. Is there some older product lines that are falling down that are keeping that 5800 from driving out performance?

Dirk R. Meyer

No, I think Bob was just reflecting on what is history in terms of the CPU, GPU mix. And you know thinking out loud as I agree, you know using history as a guide is reasonable. Clearly we’ve got a lot of opportunity with the new family, but as I told you we’re also going to be a little bit hand to mouth on supply here in the early stages of Q4.

Ruth Cotter

Huey, we’ll take two more questions.

Operator

Yes ma’am. Your next question comes from Craig Berger - FBR Capital Markets.

Craig Berger - FBR Capital Markets

Can you just update us on your kind of Fusion plans? What might be the timing of that and any new developments on that front?

Dirk R. Meyer

Yes. First, no change from last public communications. We’ll of course give a lot of in depth information in the analyst conference next month. You know we’ll be sampling Fusion technologies first half of next year and ramping in the second half.

Craig Berger - FBR Capital Markets

Can you talk a little bit about how much of the Global Foundries joint venture do you guys own? What’s your voting share? And what’s the implication of either of those for consolidation? I know you said its other customers. And then also as part of that you know when does ST Micro start ramping? How big might they be next year?

Dirk R. Meyer

You know our governance is 50%, we’ve got half the board seats. Our equity ownership on a fully diluted basis is sitting at about 32, 33%. Both of those factors as well as as Bob said the share of third party customer revenue from Global Foundries all together kind of define very loosely a box that defines consolidating versus not.

And relative to ST Micro, I’d like to defer that one until we have the analyst conference next month. Doug Gross will join us and provide that sort of color.

Craig Berger - FBR Capital Markets

Last question, you know until starting to ramp 32 you guys are getting deeper into 45 so it’s about a one generation lag, maybe a little less, which seems to be wider than in recent history. Can you talk about you know kind of how you plan on closing the gap or what the product or customer impacts might be there as we look over the next few years? Thank you.

Dirk R. Meyer

Yes. That’s a good question and you know some of the numbers we throw around give I think the wrong impression. We actually started shipping 45 nanometer CPUs to our customers in Q4 of last year. And we started a pretty rapid ramp. You know honestly the economic crisis really delayed the rate at which we were able to transition our sales from 65 to 45 because you know obviously we had a bunch of 65 nanometer inventory leaving last year that took us much longer to sell out into the market over the course of this year. So you know the fact that we’re still transitioning to 45 on an output basis is really misleading relative to when we ramped.

Typically we ramp and transition in two quarters. Because of the economy and the reason I said it’s taking us longer on an output basis to effect the transition. This time around I’d expect as I said the ramp to start deep in the back half of next year. But for the transition to be more typical like two quarters.

Operator

Your last question comes from Adam Benjamin - Jefferies & Co.

Adam Benjamin - Jefferies & Co.

Just a couple of follow ups. Obviously on the Win 7 I think that’s been an interest area of topic for a lot of people. First off, when did you guys transition over from Vista to Win 7 machines?

Robert J. Rivet

Do you mean internal on our IT?

Adam Benjamin - Jefferies & Co.

No. Just in terms of when you started shifting over in terms of shipping with machines you’re going to receive for the October 22nd release that will show up in stores with Win 7.

Robert J. Rivet

Let me repeat. So you’re asking when in effect, when our OEM customers started to build machines that would be loaded with Win 7?

Adam Benjamin - Jefferies & Co.

Correct.

Robert J. Rivet

The longest lead time are typically the notebooks that are you know built in Asia and shipped on boats, so those builds probably started six weeks ago.

Adam Benjamin - Jefferies & Co.

And I’m just trying to reconcile I mean you guys are trying to say look, don’t worry about it, we are guiding a little bit more conservatively because we think we may have built ahead for Win 7 as has been speculated by many, but you are looking for the sell through. So I’m just trying to reconcile those comments. If you felt better about it you obviously would have guided better, so I’m just trying to better understand what you’re thinking there in terms of actual Win 7 here.

Dirk R. Meyer

You know again we’re guiding a little bit less bullish than typical seasonality because the economy still has a bit of a ways to go to get back on its feet, number one. And number two, I personally don’t see much reason to signal anything stronger than we said. I’d rather you know beat our numbers.

Adam Benjamin - Jefferies & Co.

And then just last question just in terms and not necessarily your parts but other parts out there, there’s been talk of increasing lead times and potential cancellations and double ordering. In terms of what you’re seeing, have you seen any constraints and stretching lead times out there for the PC market?

Dirk R. Meyer

Yes. Rephrasing your question, you’re asking about areas where the supply chain is tight on components or you know lead times?

Adam Benjamin - Jefferies & Co.

Exactly. Where components, the lead times are stretched and potential double ordering has occurred.

Dirk R. Meyer

Yes. Haven’t seen any direct examples of double ordering, double booking yet. That’s a good question. No question that you know in our supply chain as an example across the Foundry and outsourced assembly and test area, capacity utilization has increased dramatically over the past 90 days. And we are seeing lead times stretch out a little bit and that’s something our supply chain team is working every day.

Ruth Cotter

That concludes AMD’s third quarter earnings call. We’d like to thank everybody for participating today and look forward to you participating in our Financial Analyst Day on the 11th of November. Thank you.

Operator

Ladies and gentlemen this does conclude today’s program. Thank you for your participation and have a wonderful day. You may now all disconnect.

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Source: Advanced Micro Devices Inc. Q3 2009 Earnings Call Transcript
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