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AMD (AMD) reported an increase in revenues, and believe they have gained 'massive market share' in notebooks. Declining desktop ASPs, however, contributed to a drop in gross margins. CFO Bob Rivet and CEO Hector Ruiz comment in today's earnings call with analysts:

CFO Bob Rivet on The Numbers:

Third quarter AMD sales of $1.33 billion were up 9% compared to the second quarter of 2006, and up 32% compared to the third quarter of 2005, driven by strong demand for server, mobile and desktop processors. Server and mobile ASPs were up, and desktop ASPs were down sequentially.

We established a new record for total microprocessor shipments, up 18% sequentially and up 34% year over year, driven by increased server, mobile and desktop shipments. Further, customer adoption of AMD Turion 64 processors resulted in a greater than 50% sequential growth and 70% year-over-year growth in mobile dollar sales and units.

Gross margin was 51.4%, down from 56.8% in the second quarter of 2006, largely due to lower desktop ASPs, as prices declined faster than cost reductions, primarily in the desktop area. However, this cost pressure will be relieved as we move to 65 nanometer and begin to fully utilize the 300 millimeter facilities.


CEO Hector Ruiz on Mobile Growth

Adam Parker - Sanford Bernstein

You said there is flat revenue in desktops. This implies, I guess, your server plus notebook revenue combined grew quite a bit. Could I assume your server business grew more than 20% sequentially on a revenue basis? Also, can you comment about maybe did notebook units grow 30% or 40% sequentially or more? Can you just give us some color there?

Hector Ruiz

No, the numbers are not quite in that mix. As you heard from Bob Rivet's comments during his discussion, our mobile products experienced a fairly significant growth. As a matter of fact, it was sequentially greater than 50% for both units and revenue quarter on quarter.

Adam Parker - Sanford Bernstein

50?

Hector Ruiz

50.

Adam Parker - Sanford Bernstein

Oh, so you gained massive share in notebook in the quarter, then?

Bob Rivet

Yes, sir. We believe.

Adam Parker - Sanford Bernstein

So that implies, maybe, that you lost a shade of server revenue share, then? Is that correct?

Hector Ruiz

Based on the numbers that we see, we believe that we did not lose share in the server space, and we grew, of course, quarter on quarter as well as significantly year on year.

Adam Parker - Sanford Bernstein

But did you grow double-digit revenues in server sequentially?

Hector Ruiz

No.


Bob Rivet and Hector Ruiz on Desktop ASP Declines

Adam Parker - Sanford Bernstein

The other question would be, I'm just a little confused about the gross margins, just because with that kind of revenue growth, I wouldn't have expected your actual gross profit dollars to be lower. I know it was tough desktop pricing. But were there other moving parts there? It was just a surprising fall-off to get out of your target business model, despite pretty good revenue growth.

Bob Rivet

No, it is mostly characterized by the ASP issue. Clearly, there's a little bit of cost increase as we continue to produce more dual-core products. But the lion's share of the issue was the price pressure drop in desktop, which manifested across the whole portfolio on the average ASP of AMD.

Adam Parker - Sanford Bernstein

Right, so how do I think about this going forward then, Bob? Because you grow your revenue, whatever, $100 million plus sequentially; the operating profit dollars are not up all that much. So I'm just trying to figure out what the new incremental gross margin is here. Or how do I think about price stabilization, or how do I forecast your margins, given this kind of pricing volatility?

Hector Ruiz

I think maybe one way to look at it, perhaps, would be as Dirk mentioned in his remarks, is we have some, we would call it, some transitionary hurdles to overcome in the third quarter. We had a transition to a new memory technology, we had transition to a new product, Rev F. All of that places a phenomenal burden on our organization.

Also, frankly, the demand for mobile product was a lot stronger than we had anticipated, and in shifting a rather complicated system of supply chain logistics while doing all this product transitions to go toward more mobile and less desktop, we lost some efficiencies. We believe that somewhere on the order of 2 of the 5 percentage points that we lost in margin were lost due to us not being able to execute as well as we would have liked, as Dirk mentioned. But the other 3 points, the 60% or so of the margin, is really to a rather precipitous decline in desktop ASPs.

For more, see the entire conference call transcript (free). A full list of the most recent conference call transcripts on Seeking Alpha is here.

Source: AMD Gross Margins Suffer from "Precipitous Decline" in Desktop ASPs