Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Advanced Micro Devices Inc. (NYSE:AMD)

Q4 2009 Earnings Call

January 21, 2010 5:00 pm ET

Executives

Ruth Cotter – Director of Investor Relations

Dirk R. Meyer – President and Chief Executive Officer

Thomas Seifert – Chief Financial Officer

Analysts

Glen Yeung - Citigroup

Joanne Feeney - FTN Capital Markets

Tim Luke - Barclays Capital

John Pitzer - Credit Suisse

Uche Orji - UBS

Doug Freedman - Broadpoint Am Tech

Craig Berger - FBR Capital Markets

Patrick Wang - Wedbush Morgan Securities

Hans Mosesmann - Raymond James

Ross Seymore - Deutsche Bank Securities

David Wu - GC Research Ltd.

James Covello - Goldman Sachs

Christopher Danely - J.P. Morgan

Daniel Berenbaum - Auriga USA

Adam Benjamin - Jefferies & Co.

Operator

Good day, ladies and gentlemen, and welcome to your Advanced Micro Devices Q4 ’09 earnings call. (Operator Instructions)

And now it’s my pleasure to announce your host, Ruth Cotter.

Ruth Cotter

Thank you and welcome to AMD’s fourth quarter earnings conference call. Our participants today are Dirk Meyer, our President and CEO and Thomas Seifert, our Chief Financial Officer.

This is a live call and will be replayed via webcast on AMD.com. There will also be a telephone replay. The replay number is 888-266-2081. Outside of the United States the number is 703-925-2533. The access code for both is 1422675. The telephone replay will be available for the next ten days starting later this evening.

I’d like to take this opportunity to announce that AMD will hold its 2010 financial analyst day on November the 11th. We’ll provide you with more details including the location of the event over coming months.

I’d also like to call to your attention that our first quarter 2010 earnings quiet time will begin at the close of business on Friday, March 12th.

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.

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 our 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 discuss the risk factors that could cause actual results to differ materially from our expectations. You’ll find detailed discussions about such risk factors in our most recent SEC filing, AMD’s quarterly earnings report on Form 10-Q for the quarter ended September 26, 2009.

And with that I’d like to turn the call over to Dirk Meyer, our CEO. Dirk?

Dirk R. Meyer

Thanks, Ruth, and thanks to everybody on the call for joining us today. A year ago in a very cloudy economic environment we outlined a bold game plan to transform this company into one designed to generate consistent profitability while exploiting the unique combination of x86 and graphics processing technology that only AMD possesses.

We’re pleased with our progress on this transformation, both in the quarter and throughout the past year. We promised to lower our breakeven point and we did. We promised to increase our focus on our core businesses, x86 microprocessors and graphics, and we have. We promised to execute on our roadmaps on time and on budget, and we did. We promised to expose the truth about the monopolistic environment in which we were operating and we did. We promised to execute our asset smart strategy and transform ourselves into a fabulous company and we did. And we made significant progress in improving our balance sheet, reducing our overall debt by more than $2.2 billion through the creation of global foundries and other debt transactions.

In short, we delivered on every major milestone to which we committed in the past year, placing ourselves in a much stronger position to succeed in the quarters ahead. In the meantime, our fourth quarter operating performance was solid and in an improving global economy we saw growing customer and end user to AMD platforms, products and marketing offerings, with particularly strong performance in our server and discrete graphics businesses.

In servers, customer adoption of the six core AMD Opteron Processor has been impressive, accounting for nearly 60% of our server revenue and half of our units. We saw particularly strong adoption in HPC and cloud computing cluster environments. In fact, AMD now powers the number one supercomputer in the world, the number one GPU powered supercomputer in the world and four of the top five supercomputers on the semiannual TOP500 computer list.

In discrete graphics, we’ve expanded our leadership position on the strength of the Radeon 5000 series, expanding our portfolio of the industry’s only DirectX 11 capable graphics processors. And we shipped more than 2 million DirectX 11 capable GPUs in the first three months after launch.

AMD’s world class sales and marketing engine is increasing its pace. Our innovative vision marketing campaign is gaining support across the industry and we were thrilled to expand the program in the commercial notebooks, with the first commercial notebook ThinkPad based on AMD Vision Pro technology.

Meanwhile our Fusion Partner Program is exceeding expectations in the component channel, securing over 100 new premier partners in its first full quarter of operation. In summary, our fourth quarter was a good balance of achieving strategic milestones and solid operating performance in an improving market. It also represents a springboard for the year ahead.

In the market, the center of gravity for innovation in our industry is in the consumer space and historical AMD strength. Consumers demand a vivid, digital experience, immersive, media rich with a natural user interface. And these play well to AMD’s design, technology and marketing strengths.

Our customer list continues to grow with customers attracted to AMD’s differentiated technology portfolio and growing recognition that good enough computing simply isn’t good enough. And we have a winning business model. We have access to leading edge capacity from what has already become one of the most impressive semiconductor foundry companies in the world, Global Foundries. We have a new operating footprint and a strong, emerging discipline of staying inside that operating envelope.

But what is most difficult to see from outside the company is the change that is occurring within our culture. There’s a renewed spark within our employees as we see growing validation of our innovative platform strategy and a rapidly approaching future, based on the strength of AMD fusion technology.

I think it’s important for you to know what this culture is all about. It’s about winning. It’s about changing the game. And it’s about consistent, profitable growth, making money for our customers, our shareholders and our employees.

And with that I’ll turn it over to Thomas.

Thomas Seifert

Thank you, Dirk. We’re pleased to report that in 2009 we reached and maintained the target financial model we defined at the beginning of the year and made significant progress in decreasing our operating loss. As Dirk mentioned, AMD delivered a solid quarter. Fourth quarter revenue was $1.646 billion, up 18% compared to the third quarter of 2009 and up 42% compared to the same period a year ago.

The quarter over quarter improvement was helped by a number of factors including healthy holiday sell through; increased enterprise spending, particularly in service; and strong demand for our industry leading Radeon 5000 series, driving faster sell through by our inboard partners. AMD reported a non-GAAP net income of $80 million in the fourth quarter of 2009, which excludes the net favorable impact of $1.235 billion primarily from the legal settlement with Intel.

Fourth quarter non-GAAP operating income was $169 million, which excludes the impact of the legal settlement and ARC charges. We continued to make good progress on cross margin as a result of double digit unit growth in both the computing and traffic businesses, completion of our transition to 45 nanometer CPUs and higher ASPs. Fourth quarter non-GAAP cross margin grew to 41% compared to 38% in the prior quarter.

We managed operating expenses within our target model. R&D was $301 million and SG&A was $209 million for the quarter. Fourth quarter adjusted EBITDA was $282 million, up from $169 million in the third quarter.

Before I turn to our business segments I would like to point out that AMD’s fourth quarter share count is 791 million on a fully diluted basis. The diluted share count is high due to the inclusion of the 5 ¾ convertible common shares, which were dilutive to the fourth quarter EPS.

Now switching to the business segments, strong demand for our products and platforms drove several all time records in the fourth quarter. We shipped a record number of notebook processors and a record number of chipsets. In our graphic product business we saw a record discrete mobile unit shipments and finally we also recorded record gaming revenues in the quarter.

In our Computing Solutions segment, fourth quarter revenue was $1.214 billion, up 14% sequentially, driven primarily by double digit unit growth. Notebook processor unit sales were up 19% quarter over quarter, while server processor unit sales grew 21% sequentially. And operating income for the Computing Solutions segment was $158 million, up significantly from the third quarter operating income of $76 million.

In the Graphics segment, revenue for the quarter was $427 million, up 40% sequentially. AMD’s sweet spot strategy continues to pay dividends as evidenced by another fast ramp of our new generation of graphic products. Growth in the Graphics segment was driven by strong sales [NG] import channel, with double digit increases in both mobile discrete graphics and workstation graphics. The Graphics segment reported an operating income of $53 million, a substantial improvement from the prior quarter.

Now let’s turn to the balance sheet. Our cash and marketable securities balance at the end of the quarter was $1.8 billion. In addition to the Intel settlement receipts of $1.25 billion, and the reclassification of $58 million of our auction rate securities to long term assets, we executed several debt transactions in the quarter. We redeemed the remaining amount outstanding of the 7 ¾ senior notes due in 2012, which was approximately $390 million. We reduced the aggregate amount outstanding of the 5 ¾ convertible senior notes due in 2012 by approximately $1 billion. And we issued $500 million of 8.125% senior notes, due in 2017. As a result of these efforts, we were able to decrease our debt due in 2012 by nearly $1.4 billion to $485 million.

Let me now spend some minutes talking about the deconsolidation of Global Foundries. As I mentioned in December, our goal was to deconsolidate Global Foundries as soon as possible in 2010. A number of events have occurred in the past quarter that allowed us to accelerate the process. First, AMD and Intel agreed to a new cross license agreement under which we have broad half [made] rights. Second, [88] acquired semiconductor which will now be jointly operated with Global Foundries and third, AMD agreed to waive some rights that previously required unanimous Global Foundries board approval.

Given these developments and new accounting regulations becoming effective in 2010, AMD is able to deconsolidate Global Foundries. Starting in the first quarter of 2010, AMD’s investment in Global Foundries will be accounted for using the equity method of accounting. As a result of the deconsolidation we are in the midst of valuation analysis of Oracle Foundries investment, which may result in a one time non cash impact to our Q1 2010’s financials.

Let’s turn to the outlook now. The following statements concerning AMD are forward-looking and actual results could differ materially from current expectations. For the first quarter of 2010, AMD expects revenue to be down seasonally, operating expenses are expected to be approximately $550 million through the salary reinstatement performance related accruals in some R&D project expenses, and taxes expected to be approximately $3 million.

As a reminder, our 2010 guidance for AMD is as follows, gross margin to be in the range of 40 to 45%; SG&A to be in the range of 14 to 17% of sales; depreciation and amortization to be in the range of $340 million to $370 million; capital expenditures to come in at approximately $120 million; profitability on an operating income levels throughout the year and free cash flow to be positive.

In conclusion, we did what we said we would do in 2009 and we entered 2010 with a clear vision, executing to a lean business model. At this point I would like to turn it back to Ruth for Q&A.

Ruth Cotter

Thanks, Thomas. And John we’re very happy if you could poll our audience for some questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Glen Yeung – Citigroup.

Glen Yeung - Citigroup

I wonder if I could ask a question first on GPUs, obviously huge growth there. Can you talk about the type of ASP increase you saw on a blended basis there? But also where you think inventory levels are after such great growth in the quarter. Channel inventories.

Derrick R. Meyer

Hi Glen. Thanks. When you say ASP improvements on a blended basis are you talking across?

Glen Yeung – Citigroup

I mean across your various GPU business, not GPU and MPU.

Derrick R. Meyer

I don’t want to get that granular other than to say clearly the ASP benefit was driven largely by the ramp of the 40 nanometer DirectX 11 products, which you know lead the way in desktop and follow on in notebook this quarter. Relative to inventory, we don’t see anything unhealthy about inventory levels downstream from us.

Glen Yeung – Citigroup

Thinking about 2010 as a whole, when you look out into the year, and obviously it’s been a relatively good end to 2009 and hopefully that segues into a good 2010. When you look out into the year and think about your pricing strategy in microprocessor, how do you think about that? Is this a year where you want to be aggressive on price to regain share? Or is it one where you think the market can carry you along at the pricing strategy you already have?

Derrick R. Meyer

Yes, Glen, good question. You know in general, consistent with past policies, we price with a mind towards maximizing gross margin dollar volume versus specific share targets or specific gross margin percent thoughts. You know now having said that, there’s a lot of moving parts in the marketplace, emerging markets represent a big growth opportunity on the one hand. On the other hand, you know, we feel pretty good about our opportunity to drive a richer product assortment with our OEMs. You know as you know if you look at the distribution of our products across the system price points in the market, we tend to be I’ll say disproportionately represented in the value and mainstream segments. So we think on the strength of new products combined with a very good and well received marketing campaign in the form of vision, we’ve got an opportunity to drive a richer mix. So, you know, in summary a lot of moving parts.

Glen Yeung – Citigroup

To get that richer mix do you think you need to discount there or do you think just the product can stand on its own?

Derrick R. Meyer

It’s not so much a statement about discount. It’s more of a statement about driving more volume sales up our performance stack, and also driving a higher GPU attach rate at the platform level. That’s what I think.

Operator

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

Joanne Feeney - FTN Capital Markets

Following up on Glen, perhaps you could help us understand the importance of graphics and your success there for your success over in notebooks. Could you give us an update on your traction with design wins with the Puma platform and the new Congo? And perhaps give us an update on how well you’re doing relative to perceptions that Intel has a better offering with regards to battery life and that sort of thing.

Derrick R. Meyer

Yes. Thanks, Joanne. Good questions. You know I would say the best dial on the [inaudible] if you will that we have is our design win momentum. And we’re doing very well as evidenced by the recent announcement on Lenovo introducing for the first time notebook products based on AMD technology, both for the commercial segment under the ThinkPad brand as well as later on this year the consumer SMB transactional segment under IdeaPad.

You know I would say that our strategy of positioning our offering around what is increasingly a consumer driven usage model in the PC market is really resonating with our customers. The importance of graphics is clear and is becoming more so, including downstream from our customers into their channels and in the end user community. We’ve noted year-to-year that increasing percentage of our notebook platforms are being designed with discrete graphics attach capability, which is good. And going out the door with more GPUs attached as well, which is also good.

So you know you put it all together and we feel pretty good about our design win momentum and feel good about the prospect for that momentum turning into positive sales momentum this year.

Joanne Feeney - FTN Capital Markets

And do you feel as a follow up that your sufficiently well positioned in terms of the design wins you know about to participate in an enterprise refresh cycle this year which will probably involve a high ratio of notebooks?

Derrick R. Meyer

Good question and before I answer I’ll remind you that with segmenting the market the big volume opportunities consumer, a little bit smaller is commercial. When in the commercial space, enterprise is actually the smallest of the segments, SMB being bigger. The SMB sub-segment of commercial is really our focus area. As an example, the ThinkPad products from Lenovo are really targeted at the SMB segment. Though having said that I do expect and we do see our SMB focused offerings from OEMs bleed over into enterprise because they represent a very good value. So you know not a direct target for us as compared to SMB but to the extent that enterprise takes off, we’ll get some updraft for sure.

Operator

Your next question comes from Tim Luke - Barclays Capital.

Tim Luke - Barclays Capital

Just wanted to clarify a couple of things. So Thomas this is going to be the last quarter that you would report deconsolidated AMB. Going forward for the calendar first quarter you’re just going to report the numbers for AMD Product Company. That’s correct?

Thomas Seifert

This is correct.

Tim Luke - Barclays Capital

You mentioned that you’re going to have a one time non-cash charge. Could you just outline that and provide a little bit more color on that? And then for Dirk, 40% sequential revenue improvement in Graphics in a market that is perceived to have to [inaudible] sort of in the low double digits, could you give us some color? Are you taking a lot of share with the market maybe a lot stronger? Were there a lot of channel refill? Any color there, please.

Thomas Seifert

Let me start there. So in this process of preparing for the deconsolidation from the first quarter on we will show a line on our balance sheet that says Investment into the Foundries. And in order to determine the value we have to make a valuation of the Global Foundry entity. So this is a work in process. We’re not going to speculate about the outcome. We will talk about when the results are available and they will be available with us publishing our next quarter’s results.

Tim Luke - Barclays Capital

And then there’s another income line for your stake. Is that right?

Thomas Seifert

Yes. Very much. So all the disputed elements of Global Foundries in their P&L today will be consolidated in one line item.

Derrick R. Meyer

And Tim with respect to your other question which if I got it right is 40% sequential growth on GPG is pretty stout given kind of historical trends. What’s that say about the market? At least our performance in the market. A lot of our quarter-to-quarter growth was driven by notebooks and I think clearly there’s a share gain implication there. I mean we’ll see when the numbers come out. In addition we got nearly a full quarter of shipment of some of our new DX 11 products. We clearly have a distinctive product there and that drove business generally in a positive way. And the final thing I’ll say is, typical for us when we introduce new technology we do so shipping a lot of cards, that is AMD cards, so there was an unusually large I’ll say card revenue in the quarter.

Operator

Your next question comes from John Pitzer - Credit Suisse.

John Pitzer - Credit Suisse

Dirk, relative to the graphics market there was some speculation that with the launch of Win 7 you’d actually see attach rates of discrete go up as Win 7 better users, sort of a discrete GPU within the system. Are you seeing clear evidence of that? And to a follow up on a large portion of the revenue being cards this quarter, can you help us understand and quantify that a little bit?

Derrick R. Meyer

Yes. Second one first. I didn’t mean to say a large percentage of the revenue. We ship cards every quarter but typically when we introduce a new technology, we ship a little bit more to get the market going. So I didn’t mean to say a large fraction of GPU revenue was cards. And I don’t want to get more granular than that.

With respect to GPU attach rates, we’ll wait to see the numbers come out. It’s hard to make definitive statements about the market, but there’s no question that in I’ll say my anecdotal conversations with some of our customers, we’re getting the feeling that yes, in fact GPU attach rates are going up, particularly on notebooks.

John Pitzer - Credit Suisse

And then, Dirk, just getting on the corporate side, can you help me understand what kind of ASP leverage you might have if the mix used towards corporate within the core PC business, and I guess a lot of us out here on the street are trying to figure out whether or not that corporate rebound is a first half or a second half phenomenon. I’d like to get your opinion on that.

Derrick R. Meyer

Yes, it’s a good question and of course we’re more exposed clearly to the consumer market than as the market representative overall. And within commercial as I said on the earlier conversation with Joanne a little bit more exposed to small and medium business. So it’s hard for us to speak definitively on experience on the big corporate market. Now having said that, we kind of think the corporate buying refresh will be more of a second half phenomenon on the PC client side as compared to the first half.

John Pitzer - Credit Suisse

And the potential ASP leverage if the mix moves more toward corporate this year?

Derrick R. Meyer

You know again a lot of moving parts there as well. Clearly historically the commercial PC market was, you know, a richer opportunity. Frankly I think that one of the reasons for that is that was a market segment that benefited less from competition. That is we didn’t participate in that market as much as we did the consumer market. So we’ll see how this changes as time unfolds here.

Operator

Your next question comes from Uche Orji – UBS.

Uche Orji – UBS

Can I just start off again with the graphics business, two questions there. First was there any progress made in FireGL? Was that any revenue included in that in terms of what has driven the growth in graphics? And then secondly Nvidia as to rule out [firmly] I just want to understand how you think you can maintain momentum in graphics.

Derrick R. Meyer

Yes. With respect to the FireGL, we did see quarter-to-quarter growth but it wasn’t a big absolute driver of the dollars. We still have a relatively small share in professional graphics, although our design win momentum is pretty good and I expect that to be an opportunity for us over the next one to two years. You know with respect to your question about the competition, you know it’s hard to know in detail the answer to that question since they haven’t launched anything yet. What I can tell you is we’ve got very enthusiastic response to our products that are in the market today. We see a very good pipeline of OEM design wins down the road, which our OEMs of course both companies roadmaps and you know our strategy is to continue to stick to the sweet spot method we’ve had and deliver leadership products as measured by performance per watt per dollar, as well as features. And consistent with that we’re ramping the HD 5000 series now and look forward to refreshing the entire lineup in the second half of next year. So we feel good about our prospects in that business.

Uche Orji – UBS

Just let me ask you about service. If I were to try to come close to gross margin improvement, the 3 point gross margin improvement, how much of that do we attribute to the strength of the service of notebooks? And going forward, can you also talk about a timing for [inaudible] and in terms of what we should expect that to do to your server business.

Derrick R. Meyer

Sure. I’ll start with the gross margin commentary and Thomas may want to fill in a little bit. Well the server units did outgrow our units on average by a little bit. I wouldn’t call it a significant contribution to the gross margin improvement quarter-to-quarter. Rather I’d just reflect back on the three things that we’ve talked about on prior calls as being potential drivers for gross margin. Number one was improving capacity utilization in Global Foundries Dresden facility, which we’re still on the hook for on a fixed cost basis. That was number one. Number two, the completion of our transition to 45 nanometer MPUs and number three, ASP improvements. And the improvement we saw quarter-to-quarter on gross margins I’d say was split relatively evenly across those three subcategories.

Your next question was about how we feel about the Magnecor’s [Marinella] launch next quarter and the short answer is we feel very good. We are on track for that launch next quarter and it represents the biggest improvement in performance that we’ll be driving into our Opteron lineup since we introduced that product line in 2003. So we feel very good about our potential there, particularly around recapturing momentum in the two socket space.

Operator

Your next question comes from Doug Freedman - Broadpoint Am Tech.

Doug Freedman - Broadpoint Am Tech

Dirk, can you dig into some more detail on the server market, how your units were this quarter and what your ASPs sort of look like and maybe give us an idea of what that trend or what your outlook for the year, given you are coming with a complete product refresh?

Derrick R. Meyer

Sure. First as we said in the prepared remarks, our unit growth quarter-to-quarter was a little bit north of 20% and our ASPs were actually up a bit on servers. You know it’s hard to forecast with a lot of granularity how the market’s going to move next year. First, we did see kind of the second half of the year characterized by increasing strength in the server market, particularly as we left the year. And we’re hopeful that that momentum will continue at least through the first half. You know clearly the middle of the first half, we’re introducing a top to bottom new lineup. Intel is introducing new technology as well. So a lot of moving parts.

I think on a relative basis we’re going to have an even stronger competitive position in the two socket space, which as you know, Doug, is 75 to 80% of the opportunity there. And really that’s where the game is played, so to the extent we are successful in getting traction, getting those machines in the market and gaining share that will be a good new story for AMD.

Doug Freedman - Broadpoint Am Tech

There seems to be a thesis going around that you know PC’s are cyclical and our cycle is peaking. Can you talk to whether you’re seeing any signs from your customers or end market demand that would lead you guys to believe that, you know, we’re nearing a peak or what you would look for to sort of signal that?

Derrick R. Meyer

Sure. You know first, we’re looking into next year feeling pretty good about the opportunity for the PC market being a growth year in 2010. You know low double digits, 10, 11, 12%, something like that, more or less consistent with what we said on the analyst day call in November. You know I would say our experience with Q4 confirms that thesis about the way 2010 will look. End user demand was strong, certainly the holiday sales out were strong and that’s true really in all regions, even in Eastern Europe which was pretty weak through the whole of 2009. We started to see a recovery there.

In addition, based on our conversations with our customers as well as with our distributors, inventories look to be in good shape. So we don’t see any dangerous pileup of inventories across the areas of the downstream supply chain that we can see, so you know based on all that, we’re sticking to feeling pretty positive about the prospect for unit growth next year.

Doug Freedman - Broadpoint Am Tech

My last question targeted really Global Foundries. I noticed that there was a filing recently over in Germany that highlighted their interest in possibly taking complete control. Are you guys at all interested and your language in the press release today sounds like you’re willing to go completely fabless. Is there sort of a point in time or what would it take for you to sell the remaining interest in Global Foundries?

Thomas Seifert

There’s no discussion between the parties at this point in time. The statement you refer to has to do with AT filing in Europe, especially in Germany for anti-trust approval to get into a joint operating mode. And I think some of the filing was misinterpreted.

Operator

Your next question comes from Craig Berger - FBR Capital Markets.

Craig Berger - FBR Capital Markets

Just a couple model questions here. First of all on the gross margins as you guys shift to being a fabless company here, when do you begin to pay kind of variable per wafer pricing as opposed to more of a fully burdened price?

Thomas Seifert

Yes, good point. In our discussions last year we already outlined a roadmap where we said gross margins in 2010 will operate in a 40 to 45% range and 2010 is a year of transition for us in many ways. Before we migrate completely in a fusion driven environment on 32 nanometers, we are also as you heard Dirk before until at least the end of the first quarter of 2011 responsible for the fixed cost of the capacity in one of the trace modules. So as I said, 2010 is a year of transition and then we will move into a more variable cost environment beyond that.

Craig Berger - FBR Capital Markets

And what do the margins look like then?

Thomas Seifert

We said that in a time, in a long term range, we are going to get beyond the 45%.

Craig Berger - FBR Capital Markets

And then moving over to operating expenses, they stepped up, they’re going to step up pretty meaningfully here in Q1, is there any more step up? Or how do we think about that progression during the rest of 2010?

Thomas Seifert

No. I think we’ve given the main reasons that drive the step up in the first quarter. It’s really restoring the salaries. We’ve done this in December of last quarter and in the first quarter of this year we see the full effect across the three months and we have to take some accruals with respect to performance paid topics. And we see an acceleration of some R&D takeouts in the first quarter.

Craig Berger - FBR Capital Markets

How do we think about share count and interest expense for both Q1 and 2010?

Thomas Seifert

So check on this more difficult to forecast the up in the fourth quarter was of course driven by the high profit that we had and interest payments will come down since we executed the transaction only towards the end of the fourth quarter we didn’t see much benefit in the fourth quarter numbers. We’ll see the full benefits of the transaction of course over the course of 2010.

Craig Berger - FBR Capital Markets

Is $40 million a quarter about right on interest expense at this point?

Thomas Seifert

We don’t want to go into this granularity at this point in time. As I said the fourth quarter was without benefits and you’ll see the benefits of the transaction in the complete year of 2010.

Operator

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

Patrick Wang - Wedbush Morgan Securities

I just wanted to ask one on cost structure here. I know Craig just asked about the wafer cost side of things, but if we take a look at how you’re actually going to be rolling out products and integration and the fusion just over the next four to six quarters, you know we’ve completed most of your 45 nanometer transition, what are some of the other moving parts just on dye size and things like that that we should think about over the next couple of quarters?

Thomas Seifert

Of course you’re right. We have completed the 45 nanometer transition on the CPU side. We have still room to improve in respect to factory utilization and trace. We have room to improve in the yield segment, especially on the newer technology notes that ramp our traffic product. We are going to see product mix improvement over the course of 2010 with the new products that are launching across the complete product portfolio. This will pretty much drive margin expansion in 2010 and I already alluded to some of the factors that will get us beyond this once we move into a fusion environment.

Patrick Wang - Wedbush Morgan Securities

You know earlier you said that 2010 was a year of transition, you know, implying margins of 40 to 45%, is it too much to read into it saying that maybe in 2011 we’re talking about seeing a full year margin above 45%?

Thomas Seifert

I’m not going to comment at this point in time on 2011. I think we provided a good logic behind what the number’s going to do in 2010.

Patrick Wang - Wedbush Morgan Securities

On the server market again, I know that you guys talked about clearly you had really strong growth here in the fourth quarter, but can you give a sense of, maybe talk in a little bit more detail in terms of how you guys expect the server market to recover over the course of the year?

Derrick R. Meyer

How means by segment or by geo, Patrick?

Patrick Wang - Wedbush Morgan Securities

By segment, so of course the UP, DP, MP segments then you know across the world, when you would expect different geographies to start ramping back and to start spending and refreshing that hardware.

Derrick R. Meyer

The first thing I’ll say is that we were a little surprised at just how robust demand was in Q4. You know I think some enterprises are clearly looking to start upgrading technology now. As I said in our remarks we saw particular strength for us in the HPC segment as well as in cloud infrastructure build outs. In terms of predicting the wider enterprise refresh cycle, you know I think that’s difficult to be definitive about. We’re hopeful that the momentum will continue into the first half and beyond that it’s awful hard to say. And then the geo mix, you know again a little harder for us to call because our average share into the market is smaller than our other product lines but you know we saw signs of strength essentially everywhere.

Operator

Your next question comes from Hans Mosesmann - Raymond James.

Hans Mosesmann - Raymond James

Were you constrained in graphics in the quarter and if you were, how much more business could you have accomplished in the quarter?

Derrick R. Meyer

Yes. Hi Hans. We were heavily constrained in the quarter and we could have done a lot more business were we not so.

Hans Mosesmann - Raymond James

When do you think the constraints are not going to be an issue? A quarter from now? Two quarters? How are the yields coming along in TSMC?

Derrick R. Meyer

I don’t want to get granular other than to say we’re seeing progress, both in terms of delivery of wafers and underlying yields. But we’re constrained today.

Hans Mosesmann - Raymond James

On the CPU side of the equation, do you expect to maintain or gain market share in 2010?

Derrick R. Meyer

Yes. If I look at where we’ve got opportunities I think opportunity number one is in the notebook category. As you probably know our unit share in notebooks is half or less than our desktop share and increasingly there’s no good reason for that. Our customer footprint is healthy and growing in the notebook space. Our product offerings are very good and very appropriate to the needs of particularly consumers but also small and medium businesses. We’ve seen good design win momentum and I think that represents a very good opportunity, that being notebook for share expansion for us this year.

Operator

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

Ross Seymore - Deutsche Bank Securities

On the ASP commentary that you’ve given across the two main segments and even the sub-segments, could you give any more granularity, I mean where price is up on GPUs than on CPUs, within CPUs where were they up more or less? Any additional color would be helpful.

Thomas Seifert

No, we don’t want to get into more granularity. We would rather stick with the level of guidance we have given when it comes to ASPs.

Ross Seymore - Deutsche Bank Securities

Not even anything CPU versus GPU?

Thomas Seifert

We said that prices were up compared to the third quarter in both segments but we would not go into more differentiation at this point.

Ross Seymore - Deutsche Bank Securities

Looking at the gross margin for the first quarter, you kind of give us the range for the full year. What are you looking at for the first quarter?

Thomas Seifert

Good question. Of course we are comfortable with the range we have given for the whole year between 40 and 45%. We see topics of opportunity moving into the first quarter, especially when it comes to idle cost and yield improvement. We also have to see that we will see some headwind on the side just by having lower volume and being down seasonally going into the first quarter.

Ross Seymore - Deutsche Bank Securities

So does that mean kind of look at the middle point of that range because those two dynamics you mentioned offset? Or lower end because of seasonality?

Derrick R. Meyer

I don’t think Thomas was trying to get that granular. He was trying to say as compared to Q4, moving parts both on the upside and the downside.

Ross Seymore - Deutsche Bank Securities

Relative to the 705 million shares or the 790 I think it was, which end of that spectrum should we start to think about as we look into the first quarter and then probably more importantly for the remainder of 2010?

Thomas Seifert

For the first quarter definitely the low end of your description.

Ross Seymore - Deutsche Bank Securities

And is there anything that changes that through 2010? Is it just the profitability dynamic again?

Thomas Seifert

Yes, it is. And there are certain thresholds when it comes to the convertibles and both thresholds are valid for the fourth and for the year. For the 5 ¾ convertible the threshold is about $0.30 per share.

Ross Seymore - Deutsche Bank Securities

What would you plan to be doing on the inventory that you carry on your own balance sheet as we look into the first quarter?

Derrick R. Meyer

Your question is about how we expect our inventory to change quarter-to-quarter?

Ross Seymore - Deutsche Bank Securities

Yes, inventory rising, falling, etc.

Thomas Seifert

So we have been building some inventory ending the Q4 to be prepared for the graphic launches that will follow. I expect it to be rather flat quarter over quarter.

Operator

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

David Wu - GC Research Ltd.

I was wondering in light of the supply constrain on the GPU side, is it possible that GPU actually would be flat and maybe even up sequentially, even though seasonally it’s a down quarter? You don’t have any competition until the month of March at the earliest and judging from the graphic card customers of yours at the CES show, everyone seems to be fighting over your chips. So I was wondering where the GPU could be unseasonably strong in this year’s first quarter.

Derrick R. Meyer

Yes. Good question. I certainly wouldn’t want to set expectations around that. You know we’re clearly walking into seasonally a down period. As well an awful lot of our business in Q4 was still 55 nanometer DX 10.1 product. So you’re right, we’ve got an awful lot of demand on the DX 11 stuff. But looking across the whole product line, I think it would be overreaching to set an expectation around the GPUs being flat quarter-to-quarter

.

David Wu - GC Research Ltd.

So I assume then that the bulk of revenue in Q4 was still not 55 nanometers, even though you shipped about 3 million units.

Derrick R. Meyer

Yes, I don’t want to get as granular as the bulk of but there was substantial 55 nanometer revenue still in Q4. Yes.

David Wu - GC Research Ltd.

Once you get fusion started, which I guess is late this year, at what level of discretes would you play at? In other words I assume that the low end discrete chips will basically have no room to exist and I was wondering from a product standpoint where do you stop selling discretes and where does fusion end and discrete begin?

Derrick R. Meyer

David, that’s a really good question. I mean clearly when we start putting these fusion products into the market there’s going to be interaction between our fusion products and the discrete offerings. Rather than get into that in detail I’d like to simply say wait until the launch where we’ll talk in more detail about the position into the product line. It would be premature to get granular but it’s a very good question.

Operator

Your next question comes from James Covello - Goldman Sachs.

James Covello - Goldman Sachs

The only real question I had left is relative to the comment about normal seasonality in Q1 or normal seasonal revenues in Q1, there’s a very big difference between your historical mean seasonality and the median seasonality with the median being just down very slightly and the mean being closer to almost double digits. Is there any granularity you could offer there in terms of which one you’re talking about?

Thomas Seifert

Yes, good question. So looking at the fourth quarter of course we ended revenue at a pretty high note. If you look today in the market I think seasonality is defined as being down in the high single digits. We would be comfortable to move into a range from between 5 and 10% down.

Operator

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

Christopher Danely - J.P. Morgan

Can you give us your expectations on the relative growth rates between your graphics versus your CPU biz for 2010?

Derrick R. Meyer

The question was for the whole of 2010?

Christopher Danely - J.P. Morgan

Yes.

Derrick R. Meyer

Yes, I don’t think we want to get more granular than to reflect back on what Thomas conveyed at the analyst conference which is to say that we expected the unit growth opportunity in the marketplace for both GPUs and CPUs to be in the 10 to 15% range and that we expect to outgrow the market.

Christopher Danely - J.P. Morgan

And then your expectations for ASPs?

Derrick R. Meyer

Another good question. You know clearly if you look across many years what we’ve seen is an erosion of PC system prices having a resulting effect on the lower ASPs at the component level. As a long term trend I expect that to continue. As I said a lot of the unit growth opportunity is being driven by emerging markets which tend to be a little bit lower system price opportunity. Across that backdrop I would say we got a real story for having CPU ASPs no worse than flat year-to-year and the reason for that is what I said earlier. You know our participation across system price points has us I’ll say over represented in the value category in the low end of the mainstream. Given the strength of the product introductions, the design wins and the marketing campaigns we have, we feel we have an opportunity to drive a little bit richer mix.

Christopher Danely - J.P. Morgan

And then given all the demand for your graphics products, have you guys seen any extension in your lead times there?

Derrick R. Meyer

Well clearly we’re heavily supply constrained, which always has a rippling effect on lead times for sure.

Christopher Danely - J.P. Morgan

But you said you expect to have that fixed within a quarter or two?

Derrick R. Meyer

Yes, over the course of the next one or two quarters we’ll work all that out. And we have seen improvements over the past months. Those improvements we expect to continue.

Christopher Danely - J.P. Morgan

When can we expect an update from the Foundry company?

Thomas Seifert

I’m not sure I heard you. On the progress we make or the progress they make?

Christopher Danely - J.P. Morgan

On them, like their financials and what their goals are, etc., etc.

Thomas Seifert

The nice thing about the event we just announced is that this is information you will have to get from Global Foundries moving forward.

Ruth Cotter

Operator, we’ll take two more questions, please.

Operator

Your next question comes from Daniel Berenbaum - Auriga USA.

Daniel Berenbaum - Auriga USA

Just going back to the deconsolidation so I’m clear, I understand you’re going to account for your stake in Global Foundries using the equity method and you’ll take a write-off on the balance sheet. Does that mean that the cash flow is completely deconsolidated or that your cash flow will only reflect the product company and that your debt and cash will be reduced by the amount that goes with Global Foundries?

Thomas Seifert

Well, first let me make one correction. I did not talk about a write-off so we are in the process of valuation, this will impact, we have not determined what this impact is going to be. With all the other statements you are correct. Moving forward our cash flow, our balance sheet, the debt structure on our balance sheet will reflect Product Company and Product Company only.

Daniel Berenbaum - Auriga USA

So now is there going to be any debts or any debt service or any cash that you’re responsible to Global Foundries for or would it all just flow through the P&L through that one equity line? Is that correct?

Thomas Seifert

There will be no responsibility.

Derrick R. Meyer

The only cash connection if you will between Global Foundries and AMD will be the purchase and sale of wafers.

Daniel Berenbaum - Auriga USA

Just on the share count, with the higher share count for the GAAP EPS, what’s the interest add back on that?

Thomas Seifert

I will come back to you on that.

Operator

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

Adam Benjamin - Jefferies & Co.

Just a couple of clarifications, first you indicated that you think you can gain some share on the notebook side in 2010. Do you mind just digging inside that a little bit more? Is that with the Thin-n-Light strategy versus the CULV? And kind of fitting in that niche, you know, above the netbooks but below the CULV can you talk a little bit about that?

Derrick R. Meyer

I’ll just say we see the opportunity to grow share generally in notebooks for the reason I said. We’re comparatively under penetrated in that broad category of products so that means traditional mainstream notebooks as well as the ultra portable category that we created with the Congo platform. And finally we do have components showing up in netbook size form factors today from some of our customers. So the answer is yes across all those categories.

Adam Benjamin - Jefferies & Co.

Anyone in particular you’d like to call out?

Derrick R. Meyer

No, I think the broad category represents an opportunity for us.

Adam Benjamin - Jefferies & Co.

And then on ASPs you mentioned that you thought ASPs to be flattish. I was just looking to clarify, is that on a blended basis across all your CPUs or could you give a little bit more granularity you know by desktop, notebook and server?

Derrick R. Meyer

I was really talking about the whole MPU portfolio and really don’t want to get more granular than that.

Adam Benjamin - Jefferies & Co.

Could you just give directionally then?

Derrick R. Meyer

Again directionally we’re thinking average across the whole portfolio.

Ruth Cotter

We’d like to thank everybody for participating in this earnings call and we look forward to talking to you again next quarter and this concludes AMD’s fourth quarter earnings call. Thank you.

Operator

Okay, ladies and gentlemen, this does conclude your conference for today. Everyone have a great day. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Advanced Micro Devices Inc. Q4 2009 Earnings Call Transcript
This Transcript
All Transcripts