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Advanced Micro Devices Inc. (NYSE:AMD)

Q2 2010 Earnings Conference Call

July 15, 2010 05:00 pm ET

Executives

Dirk Meyer - President and Chief Executive Officer

Thomas Seifert - SVP & CFO

Analysts

Tim Luke - Barclays Capital

Doug Freedman - Gleacher & Company

David Wong - Wells Fargo Security

Glen Yeung - Citigroup

Uchi Orji - UBS

Ross Seymore - Deutsche Bank

John Pitzer - Credit Suisse Securities (NYSE:USA) LLC

Shawn Webster - Macquarie

Kate Kotlarsky - Goldman Sachs

Christopher Danely - JPMorgan

Patrick Wang - Wedbush Securities

Srini Pajjuri - CLSA

Krishna Shankar - ThinkEquity LLC

Hans Mosesmann - Raymond James

Frank Jarman - Goldman Sachs

Operator

Thank you and welcome to AMD's second 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 by our webcast on amd.com. There will also be a telephone replay; the number is 888-266-2081. Outside of the United States, the number is 703-925-2533. The access code for both is 1465123. The telephone replay will be available for the next ten days, starting later this evening.

Before we start, I’d like to highlight that AMD will attend the Citi Technology Conference on September 7th in New York. And also AMD will host its Financial Analyst Day on November 9th at the company’s headquarters in Sunnyvale, California and not November 11th, as previously communicated. Lastly, our third quarter quiet time will begin at the close of business on Friday, September the 10th.

Last January, we announced that we deconsolidated GLOBALFOUNDRIES as of the first quarter of 2010 and began accounting for ownership interest under the equity method of accounting. AMD has an ownership stake in GLOBALFOUNDRIES, which is reflected in the equity and net loss of investee line on our statement of operations. AMD's class A preferred share ownership of GLOBALFOUNDRIES decreased from approximately 82% to approximately 79% as a result of additional capital calls that took place in the second quarter.

ATEC participated in the cash calls and AMD did not. As a result, AMD's ownership on a fully diluted basis also decreased to approximately 28%.

Reconciliation of all non-GAAP financial measures disclosed today are included in the financial tables that accompany our earnings press release, which are also available in the Investor Relations section of amd.com.

Before we begin today’s call, I’d like to caution everyone that we will be making forward looking statements about management’s expectations. Investors are cautioned that those statements are based on current beliefs, assumptions and expectations, speak only as of the current date, and involve risks and uncertainties that could cause actual results to differ materially from our current expectations.

The semiconductor industry is generally volatile, and market conditions are particularly difficult to forecast, 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 of such risk factors in our most recent SEC filing, AMD’s quarterly report on Form 10-Q for the quarter ended March 27th, 2010. Now with that I would like to hand the call over to Dirk.

Dirk Meyer

Thank you Ruth, and in an environment of healthy demand for IT products, AMD delivered another solid quarter of revenue growth and operating performance. Our second quarter results demonstrate that we can generate profits while continuing to transform the business to achieve our short and long-term goals. Demand for our GPU offerings in the quarter was very strong, and shipments were tempered only by supply constraints. This was the second straight quarter of record GPU shipments, led by an 18% sequential increase in Notebook Discrete units. More than half of our GPU shipments in the quarter were DX11 capable, and we have shipped nearly 16 million DX11 GPUs to date.

In the second half of the year, we expect GPU demand to remain healthy and supply constraints to ease. We remain on track to bolster our GPU leadership with the introduction of our second generation DX11 graphics products, later this year. We completed the rollout of our high-low server products. We are targeting power and value conscious markets with the new Opteron 4000 series we introduced late in June. The Opteron 4100 series processor is the world’s lowest power, per core server processor and the first CPU design specifically for cloud datacenters.

We are targeting performance oriented markets with our Opteron 6000 series. Shipments of our 6000 series nearly quadrupled sequentially, ramping late in the quarter as our largest customers transitioned the bulk of their AMD based offerings to the new platform. We expect to see the substantial impact of our new generation sever products to fully materialize in the third quarter.

Turning to our client DC business. Customer response to our newest AMD VISION client offerings is outstanding. We more than tripled the number of VISION branded platforms in the market compared to just nine months ago. The launch of our latest VISION offerings was the most successful platform introduction in our history, driving record mobile CPU unit shipments for the quarter.

We secured more than 130 design wins, spanning multiple price points across both the consumer and commercial markets. Customer adoption of our (inaudible), the mainstream notebook platform in higher priced bands is a testament to the competitiveness of our platform offerings. The broad assortment of VISION offerings positions us well for the key back-to-school and holiday buying cycles.

We are very pleased that Sony is now offering notebooks based on AMD CPUs as part of its vision enabled VAIO notebooks. And we welcome Sony back to the ranks of AMD CPU customers.

We are excited about building on our market momentum with the introduction of the world’s first Fusion Accelerated Processing Units or APUs and two new x86 processor cores that will be the foundation for our next generation platforms.

One of our forthcoming APUs codenamed Ontario combines our new low-power Bobcat CPU core and the DX11 GPU. The Bobcat CPU core featuring in Ontario delivers mainstream CPU performance in less than half the area and a fraction of the power consumption.

Ontario offers the ideal solution to meet the growing demand for low power, small-form-factor computers that deliver a visual computing experience previously available only on high-end PCs.

We are excited about the opportunities Ontario offers. It’s a game changer that significantly expands our adjustable market. Based on strong customer demand and an accelerated engineering cycle, we now expect Ontario to be the first Fusion APU we bring to market. We plan to ship Ontario APUs in the fourth quarter of this year, ahead of schedule.

Customer systems based on Ontario are planned to be available early next year. Llano our Fusion APU offering aimed at the higher end of the client market is also generating positive customer response. However, in reaction to Ontario’s market opportunities and a slower than anticipated progress of 32 nm yield curve, we are switching the timing of the Ontario and Llano production ramps.

Llano production shipments are still expected to occur in the first half of next year. In the second quarter this year we also taped out the first 32 nm product based on our new high performance Bulldozer CPU core. We plan to begin sampling our Bulldozer based server and desktop processors in the second half of this year and remain on track for 2011 launches. These new processors will deliver significant performance improvements to the AMD platform.

Customers are increasingly excited about our portfolio of technologies and the product roadmap. The growing importance of graphics is clear. The revolutionary potential of vivid GPU accelerated applications is becoming a reality and the performance, value and power efficiency of AMD Fusion platforms, starting with Ontario, will be compelling.

In closing, we are pleased with our overall performance in the quarter. We see strong opportunities for continued improvement in our operating performance and an exciting future for AMD built on the power of our Fusion and Vision platform strategies. And with that, I will turn it over to Thomas.

Thomas Seifert

Thank you, Dirk. Robust demand for our latest mobile platforms and solid execution of our business model drove record second quarter revenues and increased profitability. Second quarter revenue was $1.65 billion, up 5% compared to the first quarter of 2010 and up 40% compared to the same period a year ago.

AMD reported non-GAAP net income of $83 million in the second quarter of 2010. To calculate the non-GAAP net income, we excluded our share of financial results and other equity accounting adjustments related to GLOBALFOUNDRIES , a non-cash loss of $120 million.

As usual, we also excluded the $17 million amortization of acquired intangible assets and other non-recurring charges and credits as outlined in our earning press release table. Our non-GAAP diluted EPS of $0.11 in the second quarter was calculated using 733 million shares.

Second quarter non-GAAP operating income was $138 million, excluding the charges and credits as outlined in our earnings release. Gross margin for the quarter was 45%, up two percentage points compared to the non-GAAP gross margin last quarter. The increase was mainly due to improved product mix and GLOBALFOUNDRIES , fab utilization rates.

Operating expenses in the quarter were $600 million. R&D was $371 million and SG&A was $229 million for the period. Operating expenses came in higher than guidance largely due to revenue and operating income variable expenses coming in higher than flat. We also incurred some additional R&D costs associated with accelerating the time to market for Ontario.

As you heard Dirk mention, Ontario will be our first APU and will ship ahead of schedule in the fourth quarter of this year. Second quarter adjusted EBITDA was $244 million, down from $302 million. However, excluding the first quarter one-time gross margin benefit of $69 million related to GLOBALFOUNDRIES deconsolidation, the adjusted EBITDA was up $11 million sequentially. Adjusted free cash flow was $76 million resulting in $253 million in adjusted free cash flow for the first half of 2010.

Now, switching to the business segments. Second quarter revenue increased sequentially in both our Computing Solutions and Graphic segments. In the Computing Solution segment, second quarter revenue was $1.21 billion, up 4% sequentially. The sequential revenue increase in Computing Solutions was primarily driven by record notebook processor and chipset unit shipments. Both of these product lines saw double-digit revenue and unit percentage growth sequentially and year-over-year.

Server ASP improved for the fourth consecutive quarter as we nearly quadrupled shipments on the AMD Opteron 6000 Series platform, also known as Magny-Cour. We look forward to extending the success of our latest server offerings into the two socket volume space with the Opteron 4000 series platforms recently launched in June. Overall, microprocessor ASP was flat sequentially and increased year-over-year. Computing Solutions segment operating income was $128 million compared to $146 million in the first quarter of 2010.

In the Graphics segment, revenue for the quarter was $440 million, up 8% sequentially. The sequential increase was firmed by record GPU shipments as mobile discrete GPU shipments achieved a fourth record quarter in a row. GPU ASP decreased sequentially due to an increased mix of notebook discrete unit shipments coupled with supply constraints for the AIBs channel. Operating income was $33 million compared with $47 million in the first quarter.

Now turning to the balance sheet. Our cash and marketable security balance at the end of the quarter was $1.9 billion. Long-term debt as of the end of the second quarter of 2010 was $2.4 billion. We retired $206 million of our 6% convertible senior notes due in 2015 during the quarter via open market repurchases. Debt reduction continues to be a focus for us for the remainder of the year.

Now let me turn to the outlook. The following statements concerning AMD are forward-looking and actual results could differ materially from current expectations. For the third quarter of 2010, AMD expects revenue to be up seasonally. Operating expenses are expected to be $630 million for Q3. The $30 million sequential increase is due to a change in our marketing programs. We will now approve marketing expenses earlier and closer inline with revenue development that for insertion to the new marketing program is expected to take two quarters.

In conclusion, we continue to execute well to our business strategy and our success is reflected in our financial performance. We remained focused in our financial targets as we prepare to deliver the first APUs to our customers in the fourth quarter of this year.

At this point, I would like to turn it back to Ruth for Q&A.

Ruth Cotter

Thank you Thomas. [Huey] if you could now pull the audience please for their questions, that would be good.

Question-and-Answer Session

Operator

Thank you Ms. Cotter. (Operator Instructions). Our first question in queue comes from Tim Luke with Barclays Capital. Your question please.

Tim Luke - Barclays Capital

Thank you so much and well done on the strong quarter. I was wondering has Thomas given that you’ve had a lot of variability in this season, under a sequential revenue progression for the third quarter. How you perceive seasonal guidance, what’s the framework for that? And I was also wondering if I may, if you could give some color on, with the higher revenue that you saw in the quarter, why was the operating margin slightly lower for both the Computing segment and the Graphics segment?

If you can get some color on that. And then lastly just for Derrick, can you just clarify your comments on the time line for 32 nanometer? I think you said that it will begin shipping perhaps in the fourth quarter with Ontario, is that revenue now in the fourth quarter of this year? Thanks.

Thomas Seifert

Yes, lots of good questions. So let’s start with our guidance first, we said seasonally up. We like to see the mid point 7.5% to 8%, and we would like to paint a box of 5% to 10% around it. And if you come to the operating performance and you have to keep in mind that we had some special events in the first quarter that impacted our operating income. So especially if you look at the operating income for the Computing Solutions segment in the $146 million of operating income in the first quarter, we had a one-time positive effect of $39 million. If you take that out, and look at the development of then 107 to 128, very good development in our opinion.

The graphic segment is bit more difficult, you heard me say that we saw a quarter-over-quarter price decrease that affected our operating income, mainly because our product mix being shifted and not having because of the supply constraints enough material available to participate in a higher price performing IP channel.

Dirk Meyer

Yes, Tim so your question was, do we expect to realize revenue for Ontario shipments in Q4 this year?

Tim Luke - Barclays Capital

I guess, and just clarify what you said about the timelines, it sounds like there is a pushout to some extent on Llano, is that correct? And that you have mentioned that related to yield is that correct? And how is the timeline for Ontario changed or not?

Dirk Meyer

Yes, so first, the timeline for Ontario has changed quite dramatically, we’ll plan to begin shipments to our customers in Q4 for revenue, which is a substantial falling from our prior plant. Meanwhile, we have seen the rate of yield learning below our plants on 32-nanometer, and as a result of the opportunity, frankly that Ontario gives us and the reaction to the yield situation, we've put our engineering resources into creating samples for Ontario supporting ODMs and OEM system designs, while we take a bit more time to work the 32-nanometer yields up the curve.

So the effective change if you will doing our internal plans on Llano amounts to a couple of months.

Tim Luke - Barclays Capital

What's the margin implication there?

Thomas Seifert

We are not here yet to talk about margins for 2011, but right now we are also not in a position to make any steps back from the long-term guidance we had in mind. As Dirk mentioned, Llano will still come in the first half of next year, and the pull-in potential that we generate with Ontario is quite significant.

Tim Luke - Barclays Capital

Last, if I may just to clarify, you had a very strong gross margin, would you expect with the seasonally improved revenue that this level of gross margin could be sustained or improved?

Thomas Seifert

Yes, a very good question, of course we are quite happy with the performance we have seen so far on the gross margin side, mainly coming from to effect us with that improved ASPs through mix, and also better utilization of Global Foundry capacity. Moving forward in the second half of this year, we see some ups that support that trend and of course some downs. So if you look at the upside opportunities is of course selling up the stock or product mix or product platforms are improving. We also see some further potential in increasing Global Foundry utilization. And then there will be some hindrance to that, and the exchange rate development over the last weeks reversed. And we also have to keep in mind that while the second half is strong in terms of revenue demand is also generated more from the consumer segment. But I think that gives you a pretty good picture on where the potentials are moving into the second half.

Operator

Our next question in queue comes from Doug Freedman with Gleacher & Company. Your line is now open.

Doug Freedman - Gleacher & Company

Great, thanks so much for taking my question. Can you guy's talk about what percentage of sales are you presently seeing from where you are selling both the GPU and CPU so a full platform?

Dirk Meyer

Doug, let me free rephrase that to make sure I’ve got it. So what percent of our total revenue comes from platform sales where we have the CPU and the GPU populated together?

Doug Freedman - Gleacher & Company

Correct.

Dirk Meyer

Well you know it’s a really good question and honestly it’s a hard one for us to get our hands around, especially on the channel side where what we see is selling in the distribution but its really hard to know how the components actually end up getting mated by system builders, two and three tiers below the master distributors.

So you know, it's a good question and its one we struggle with too. I can’t tell you on the other hand. Then on the OEM side, we are seeing very much of an increase and what we call AMD on AMD and AMD, that means AMD CPUs, AMD Chipsets and AMD Discrete Graphics.

And the final point I will say is that we are seeing the discrete attach rate on the AMD platform and in particular the AMD Notebook platform increasing over time as a result of what Thomas alluded to which is our platforms being assorted at slightly richer price points than in the past.

Doug Freedman - Gleacher & Company

If I could move on from that point, can you talk about how your fusion product is going to line up against the offering that we are expecting to see out of Intel at the end of the year? I think there is a little bit of confusion in the marketplace as far as what segment of the market these different products are targeted at.

Dirk Meyer

Well I will first of all layout our Fusion products and you know talk about where we position them. Obviously the Intel ones you will have to talk to them about. So we have got plans; in essence three different fusion silicon designs which will span four different packages and a class of systems ranging from netbooks and small-form-factor desktops on the one extreme all the way up through mainstream notebooks and mainstream desktops on the other extreme. But the bookends are the two code names that I used in my opening remarks which are Ontario on the one hand which is targeted specifically at the low-cost, low-power, I will call it netbook in small-form-factor category. The other bookends being two different pieces of silicon design under the umbrella of Llano, which will together be positioned in mainstream desktops as well as mainstream notebooks.

Doug Freedman - Gleacher & Company

Are you willing to disclose yet how lower power Ontario is going to be?

Dirk Meyer

We won’t go there yet. We’ll talk about that clearly at the launch. It will open up segments for us that we haven’t been able to compete in before namely the low-power netbook segments as well as bring us a better cost base to some of the price points that we compete in today. So it really is a market expansion potential for us.

Thomas Seifert

And we should not forget this allows us really to get graphic performance into form factors where this type of graphical experience was not possible before.

Doug Freedman - Gleacher & Company

All right. And for my last question if I could, can I just get a sense of where you see enterprise spending going and what impact that is expected to have on either your server ramp or a client upgrade cycle?

Dirk Meyer

Yes, good question. First on the server side, we still see robust demand for enterprise servers. I would say our big opportunity is less variation around what happens with enterprise consumption versus just ramping our new platforms. You know I've said often, we've become what I think is pretty terribly underrepresented in the server category. Our shares I think are being relative all time low as we feel very good about the positioning of Magny-Cour. Those products from our big customers really just became available in June.

So I think the big story for us and the big swing factor for us is more about successfully positioning and selling those platforms in the market versus minor swings in overall enterprise market size. On the client PC side of our business, frankly that's our lowest priority in terms of focus, number one clearly consumer, it's the big market SMB and GovEd are the other two big ones, and enterprise, yes we do play there, but it’s the smallest part of market overall and as a result the smallest focus area for AMD.

Dirk Meyer

Thank you.

Operator

Thank you. Our next question in queue is from David Wong with Wells Fargo Securities. Your line is now open.

David Wong - Wells Fargo Security

Thank you very much. For the Ontario core processor, can you tell us what technology it will be done on, will it be 45-nanometer technology or 32, and which foundry will it be done at, GLOBALFOUNDRIES or somewhere else? Is it bulk or SOI and will you be able to us a die size on it?

Dirk Meyer

Sure, it’s built in 40-nanometer bulk technology supplied by TSMC and we will hold off from the die size statement until we get closer to launch.

Operator

Our next question in queue comes from Glen Yeung with Citigroup. Please go ahead.

Glen Yeung - Citigroup

Thanks. Good results from you, good results from Intel and the forecast from both of you also are seemingly quite good, but when we look at the supply chain data points maybe not quite as good, certainly not as closer to the line to seasonality as you seem to expect. I wonder if you could just give us any thoughts you may have on the discrepancy that we are seeing between the supply chain and what both now microprocessor companies are talking about.

Dirk Meyer

Glen, when you say supply chain, who are you talking about?

Glen Yeung - Citigroup

Notebook OEMs, motherboard companies, you know those kind of guys.

Dirk Meyer

Well, again I don't know what chatter you are hearing, what I can say and really what you are asking for is commentary on the back half. Maybe a little color, Glen is that right.

Glen Yeung - Citigroup

Yes, that's probably right. Your confidence maybe in that.

Dirk Meyer

Yes. So I guess I will start with a high order statement that says we expect the overall PC unit growth to be in the 15% to 20% range year-on-year which is up from what we were thinking going into this year. As you might recall, we were thinking 10% to 15% that's what we talked about at the analyst conference.

So, as a high level statement, that’s still showing a fair amount of bullishness on the year-end also at the back half. I will say that all of our customers and partners read the general business press the same way, we all do, and they are nervous about things like the debt crisis in Europe, worried about the potential of a slow down in China as a result of the changes around the housing and so on. And therefore everybody is very reluctant to put cash in the inventory. In many ways I consider that good news because as we look across supply chain, we don't see any inventory buildups anywhere.

And as far as end user demand goes which is really what in the end of the day drive through business, we still see a pretty good story. In all of our regions, we’re healthy going into Q2. Clearly, everybody is nervous from the many reasons I said. But overall, in terms of PC consumption, we’re still feeling pretty good about the back half of the year.

Glen Yeung - Citigroup

And Derrick, maybe as part of that, it would appear that in notebook and in graphics, you are probably gaining share. One is that affair statement and two, if that’s also a part of the way you are looking at your confidence in the second half?

Dirk Meyer

Yes and yes.

Glen Yeung - Citigroup

What about a two-way server and that also. Is that something where you feel like as early as second half, you’ll be gaining share there?

Dirk Meyer

I think we should start to gain share in the back half of the year. I will say, I'm not all that happy with the way we did in Q2 as I said. All the big OEMs didn't have the products out on market until June. So I suspect frankly, we lost a little bit of share in Q2 and we will be growing our way up from a lower basis but as I said, I think we got a lot of opportunity in the form of Magny-Cours and also that 4000 series.

Operator

Our next question in queue comes from Uchi Orji with UBS. Your line is open.

Uchi Orji - UBS

Let me just start by asking how we should think about R&D for next quarter going up and given all the changes that’s made to your product. So, Thomas, how should we think of R&D next quarter out there and then going forward for the rest of the year? Are we re-modeling at this elevated levels or so should we expect it to come down shortly?

Thomas Seifert

Well, we are currently assuming that R&D spending will be flat for the second half.

Uchi Orji - UBS

Flat on this 371 quarterly run rate?

Thomas Seifert

Flat coming out of this second quarter, so we are comfortable with the guidance we’ve been giving and the ranges we have been giving but their spending level of R&D will be flat.

Uchi Orji - UBS

Derrick, let me just understand how you’re positioning, Ontario will be for netbooks? With Llano and with (inaudible) products, should we be expecting that you should be able to be able to compete in tablet markets or do we have to expect that to be with 2,800 different products?

Dirk Meyer

So, Ontario will be the APU that is positioned at lower price points, lower power envelopes and hence smaller form factors as compared to the Llano. Llano will be assorted in mainstream notebooks as well as mainstream desktops. In Ontario, in the technology components for Ontario, I'll say that is above Bobcat core and our graphics IP. We clearly have the capability to create products targeted to tablets but that will not be where Ontario will be targeted. It will be more netbooks and up into the low end of mainstream notebooks.

Uchi Orji - UBS

So, okay, that’s fair.

Thomas Seifert

Let me underline the statement we just made because I think that’s a very important statement from our perspective. It is going to increase for us at the addressable market and especially in times that we have to target a lot more macro economic uncertainty I think. This is the exciting part for us that will really increase our addressable market with a (inaudible) Ontario.

Uchi Orji - UBS

Right, okay. Derrick, can you talk about rates renovated difficulties. I mean, I know your value will be talking out of turn now to describe what's going on out. Perhaps, GLOBALFOUNDARIES, but is there anything you can tell us as to why the yield is a little bit slower for you? I mean Intel has done it, AMD, even TMC has finally done it, anything you can tell us, without necessarily compromising what GLOBALFOUNDRIES would like us to know?

Dirk Meyer

I don’t want to paint too bright a light on this situation. One thing I will correct you on is TSMC is not at the 32-nanometer node either. At the highest level we are simply a little bit behind our progress up the yield curve. Your question is why I bought them, I am not going to go into details, I will say that we all anticipated that GLOBALFOUNDRIES would have an awful lot of work on their plate in terms of supporting a very difficult transition for us in the form of 32 nanometers, while at the same time expanding their technology portfolio to include support for other customers. This is a risk that we all knew about. I think we are managing it very well. I am very encouraged by the progress we have made over the past couple of weeks in GLOBALFOUNDRIES. And pretty confident that we’ll climb up the yield curve consistent with the new expectations we painted in my opening comments.

The final point is I feel very good about the technology roadmap that GLOBALFOUNDRIES has put in place for AMD in the sense that it represents a workload that I think is very practical and achievable for them, and really good for our products. And we are looking forward to talking about both of those in the upcoming analyst conference, in November.

Uchi Orji - UBS

And then just lastly, two markets that people were worried about, Europe and of course China, can you just talk about what you see by way of the end market dynamics, channel situation for products in those two markets, and possibly just for as many geographies as you can, the US, North America, and just for us to get a sense of what the real demand situation is? Because there seems to be a disconnect of what we think is happening with the macro and what we’ve seen and what Intel is seeing.

Dirk Meyer

It’s a really good question. And Europe first, it’s hard to know what’s going to happen. I can tell you what the mood amongst the partners is. Number one, as I said, due to the caution driven by macroeconomic concerns, there is a hesitance to put a lot of cash in the inventory. Therefore the supply chain is being managed very tightly, which in all and all is not a bad thing. The other thing that you’ll obviously see in Europe in response to the degradation of the euro is OEMs in some sense mixing down the solutions that they assorted at the various price points. So as an example, at 599 euro, they might buy a lower end CPU so they can still assort graphics, that’s just an example.

In China, on the other hand, first we had a good quarter in China. We had a good quarter in every region, pretty consistently. There again, our partners are wondering whether the back half of the year is going to hold up, but we are not seeing any evidence that would suggest we change the guidance that Thomas gave at this point. And we are still pretty optimistic that China is going to be a growth engine for us, both in the back half of this year, and frankly for many years to come.

And then the rest of the world I would say is nothing exceptional to report, frankly.

Operator

Our next question in queue comes from Ross Seymore with Deutsche Bank.

Ross Seymore - Deutsche Bank

Just looking at the inventory side of the equation on your balance sheet, obviously it didn’t rise very much which I think keeps everybody pretty happy, given that you are guiding to seasonality there, is there any limitations in your availability of chips, given that the inventory didn’t really rise ahead of what is guided to normal seasonality?

Thomas Seifert

You know I think the story that Dirk gave you for the industry certainly is true for us too. So we manage our working capital very carefully. We watch the inventory and at which points we decide to put inventory very carefully. That’s why you see inventory flat overall. Actually in days inventory it came down by four days quarter-over-quarter but with the improved processes and focus the company has put on it, we feel very confident that we can execute to the range that we have provided.

Ross Seymore - Deutsche Bank

Then as far as the two main markets you serve in the CSG and GPU side of things, the seasonal outlook you have, is there a wide variability on which of those two segments would do better seasonally and any semblance of what normal seasonal means by those two segments as opposed to, for the company as a whole?

Dirk Meyer

Yes I don’t remember frankly the numbers for each of the GPU and MPU segments but I will say that of the two, Q3 is typically stronger for GPU than MPU and then Q4 is the other way around, seasonally weaker for GPU than MPU.

Ross Seymore - Deutsche Bank

The last question, when you talked about the GPU being, the operating margin being hurt by mix and that was because of the shortages of actual parts, you also mentioned that some of those shortages are actually lessening, should that start to help the operating margin as we think about your ability to mix up the GPU segment and therefore maybe the ASPs could actually start heading the other direction?

Dirk Meyer

Yes.

Ross Seymore - Deutsche Bank

And finally I guess one last one quickly, any evidence of like for like price competition changing either for better or worse in the GPU segment?

Thomas Seifert

It’s always going to be a competitive environment but we see the trends that we have seen so far continue.

Operator

Thank you. Our next question in queue comes from John Pitzer with Credit Suisse, your line is now open.

John Pitzer - Credit Suisse Securities (USA) LLC

Dirk, you talked a little bit about relative to the notebook market share gain, the server business has been a little bit relatively disappointing. I’m kind of curious can you quantify how much the server business was up in the June quarter and then relative to sort of that mid-point of overall guidance, do you think server has outperformed or underperformed in the September quarter?

Dirk Meyer

First one first, then I will ask you to qualify the second one. You know Intel certainly knocked the ball out of the park in their server business. They were up on units and revenue. On our side, we were up on ASPs, down on units, and a wee bit down on revenue. So just look at that and clearly we lost some share and I attribute much of that to the slight delay in availability from our big OEMs and new platform, but we’re clearly going to be climbing out of a slightly lower share base than we had anticipated. Could you clarify your second question for me?

John Pitzer - Credit Suisse Securities (USA) LLC

You guided overall revenue up about 5% to 10% sequentially for the overall business, I’m just kind of curious as we think about servers and some of the 6,000 parts that seemed to have better availability at the end of the June quarter, do you think servers grow faster than the overall company in September quarter for you?

Dirk Meyer

I don’t think they need to in order for us to hit that forecast.

John Pitzer - Credit Suisse Securities (USA) LLC

And then Dirk again on the Llano part, I’m just kind of curious are you still committed to only manufacture that part at GLOBALFOUNDRIES or would you think about potentially having another foundry partner on Llano? Does that run the risk, this push out that some other good market share gains you’ve had in notebooks might reverse? And then I know there was some speculation of better wafer pricing from GLOBALFOUNDRIES in the first part of next year and I’m just kind of curious as to whether or not the Llano push-out changes that at all?

Dirk Meyer

So first, Llano is a GLOBALFOUNDRIES part period in the end. You know clearly there is share implications if Llano becomes qualitatively delayed from our expectations which is now what we are seeing today. And I guess I will not provide specific comments on the wafer pricing difference between our various foundries.

Operator

Thank you. Our next question in queue comes from Shawn Webster with Macquarie. Your line is open.

Shawn Webster - Macquarie

Okay. On the lead-time question, things just sound a little bit tight on the graphics side, is there tightness elsewhere in your portfolio product and do you expect the tightness to normalize in Q3 or Q4 or what's your expectation there?

Dirk Meyer

We’ve also got a little bit of tightness on chipsets, for much of the same reason, it's the supply chain really heated up, but we have been successfully managing through that issue and expect to continue to do so. So the chipset supply doesn't at all limit our CPU availability.

Shawn Webster - Macquarie

Okay. Were your revenues limited in any way because of the tightness you had in Q2?

Dirk Meyer

GPUs yes, elsewhere no.

Shawn Webster - Macquarie

Okay. And then, in terms of the desktop business, can you provide some color on that part of the business in terms of what the revenue did sequentially and maybe even units?

Dirk Meyer

Just very high level, ASPs were up, units were down and revenues were down by a little bit.

Shawn Webster - Macquarie

Okay. And then on the chipset business it sounds like you’re doing, I think your commentary on the chipsets being a record was specifically for notebooks, but maybe could you provide some color on how your chipset business is doing and your expectations for Q3-Q4?

Dirk Meyer

Yes, our chipset business is doing very well. First of all, on our notebook platform the chipset attached is essentially 100%. And our desktop business, the chipset attached on the OEM side is very close to a 100%. And on the desktop channel, we still have a very good support from Nvidia on chipsets. Does that answer your question?

Operator

Thank you. Our next question in queue comes from Jim Covello with Goldman Sachs. Your line is open.

Kate Kotlarsky - Goldman Sachs

Thank you. This is Kate Kotlarsky for Jim Covello. I had a couple of questions. One, on the Ontario product, I know you talked about it expanding your market opportunity. I know the product is targeted primarily toward netbooks. I was just curios whether your thoughts now look on the netbook market has changed at all, now with Apple coming out with the iPad and other tablets that are going to be launching in the second half of the year. Do you think that those at all will cannibalize some of the opportunity in netbooks?

Dirk Meyer

At this point, no. I mean clearly the tablet market is still in its relative infancy. There is really only one supplier out there, namely Apple that's shipping substantial volume. I guess speaking broadly, we view tablets as yet another form factor that allow people to access media and the internet, and therefore view it as market expansion. And in clearly in the same way that on the margin between mainstream notebooks and netbooks, there's some cannibalization or overlap, you will see the same thing between netbooks and tablets, but on the whole I think tablets are our market expansion.

Let me clarify one other thing, Ontario is not purely positioned in netbooks, it will cover netbooks and allow us a no excuses means of doing so, but we will also position Ontario variance in the low end of the mainstream notebook market as well.

Kate Kotlarsky - Goldman Sachs

My other question was on the server business and if you can maybe comment about how you are thinking about your ramp in servers impacting margins in the second half. I know you talked about seasonality being more sort of consumer oriented being in the second half of the year, but how are you thinking about the impact of maybe the second half typically being more of a consumer heavy quarter but at the same time you are ramping your server product.

Dirk Meyer

Well, I guess what I would say is that one can make an argument that those two facts would conspire to cancel each other in effect.

Kate Kotlarsky - Goldman Sachs

So you don’t think the impact of one is meaningfully greater than another?

Dirk Meyer

No.

Operator

Our next question in queue comes from Christopher Danely with JPMorgan.

Christopher Danely - JPMorgan

For the upcoming Ontario, can you just maybe give us a sort of rough comparison on processing capability versus your current line up? And also versus the competition and maybe also a view on the price relative to your current line up in the competition?

Dirk Meyer

Clearly don’t want to get too specific here because I don’t want to launch the product here on the telephone. What I can say is to reflect back on the opening commentary I made which is the Bobcat core delivers essentially the performance that you see in, I'll call it, the low-end of today’s mainstream full size notebooks and a much smaller diary and a much better power efficiency. And very importantly, Ontario also includes in addition to the Bobcat core, a pretty high performance DX11 capable GPU which is really the game changer for that segment of the market where with Ontario, people will be able to get small form factor PCs with good and mainstream CPU performance and almost outrageous graphics and video processing performance, bringing in a visual experience into these small form factors that you really can only get on kind of mid-range notebooks today.

Christopher Danely - JPMorgan

Sure. I guess you would expect to get a premium then for that type of performance?

Dirk Meyer

Well, it depends on premium against what? I mean, we think it’ll position very well against Atom based anything as an example.

Christopher Danely - JPMorgan

How about versus your own products?

Dirk Meyer

Well, we always said that the Fusion launch and the Fusion product are a part of our story to increase gross margin over time.

Christopher Danely - JPMorgan

Got it. And then, as my follow-up. Do you expect to be doing any more processors at TSMC?

Dirk Meyer

Any more than what we are doing today?

Christopher Danely - JPMorgan

Exactly.

Dirk Meyer

Yeah. TSMC is an important partner and I expect to use them in GPUs and as I continue to perform well in the fullness of time. Sure, but make no mistake, in the near term, GLOBALFOUNDRIES is our first and foremost MPU partner and will be until further notice.

Christopher Danely - JPMorgan

Yeah. I guess, the point I'm trying to make is if you guys start to give TSMC more and more capacity, isn't that bad for GLOBALFOUNDRIES which will be bad for you guys?

Dirk Meyer

Well, at the end of the day, competition in the supply base is a good thing. Clearly, it's incredibly important for us to see GLOBALFOUNDRIES to be big, prosper, execute well for AMD, for our roadmap and also support other customers. We’re going to do everything we can to make sure they do all of those things. On the other hand, having TSMC as a supplier of chipsets and GPUs, it is a good thing, they’ve been a good partner and having them in competition for that part of our portfolio versus GLOBALFOUNDRIES is also good for us.

Operator

Our next question is queue comes from Patrick Wang with Wedbush Securities. Your question please.

Patrick Wang - Wedbush Securities

I guess Derrick, I just want to follow up on Chris’ question earlier, could you help us maybe understand how the graphics portion of Ontario and Llano is supposed to line up? I guess or looked at it from another way, did they line up with some of your current integrated or discrete graphics version today?

Dirk Meyer

I don't want to launch both products here on the phone. What I can say is that compared to each other, Ontario versus Llano, you know Llano had a step up in CPU performance and a step up in graphics performance, and Llano will clearly deliver better CPU and graphics than today’s platforms that AMD has available. But that’s about as granular as I want to get because again I don’t want to launch all these products here on the phone.

Patrick Wang - Wedbush Securities

So it’s basically stay tuned on that one. And then I guess you also had mentioned that you had big expectations for server in the third quarter. Could you touch on that? I just want to get a sense of what you thought specifically, how you felt about that Magny-Cours ramp in the back half of the year, just any color there?

Dirk Meyer

Well as we’ve said, we think that what we know Magny-Cours is the most competitive and best server offering that we’ve had in three or four years. The headline has been more cores, more memories for more money. We’ve got a four socket value proposition that’s unbelievable, and even in the Volume 2 socket space, we’ve got clear performance leadership in some categories, such as high performance computing and memory intensive application categories, like virtualization and database. We can show customers clear performance per dollar, advantage and performance per watt, advantage versus the competitions’ contemporary offerings.

So you’ve put all that together and it suggests as we sell in market appropriately, we ought to be able to gain share. I’m personally disappointed that these OEM ramps have been what they have, and we only got a month of advantage out of that for Magny-Cours in Q2. But I think that spells opportunity in Q3 and beyond.

Patrick Wang - Wedbush Securities

So you see the builds and the forecasts of the third quarter and you feel comfortable with that, at this point?

Dirk Meyer

Yes.

Patrick Wang - Wedbush Securities

Okay, and then I guess Thomas you know you guys had great margin performance here in the second quarter, I guess you said most of that 200 basis point improvement is driven by high utilizations. Can you talk about some of the moving pieces as we go into third quarter?

Thomas Seifert

Yes, I think that is what I said in the beginning. I think we see opportunity clearly increasing the utilization of the Global Foundry capacity. We see opportunity in the product mix moving forward, and we will see some headwind coming out of the consumer demand driven revenue upside and also the reversion of the currency development.

Patrick Wang - Wedbush Securities

Does that mean we should expect margins to be slightly up in the third quarter? That’s what it kind of sounds like.

Thomas Seifert

We will see how the two things work out, but we are happy with where we are today. And we are looking forward to another to develop in the direction that we have given in terms of the guidance for 2010.

Patrick Wang - Wedbush Securities

And just from a utilization standpoint, it sounds like there’s more headroom to go on that?

Thomas Seifert

We always said that with the P&L was burdened in the first and also in the second quarter was under utilization, with improved utilization at second quarter, but there is still room to improve going forward.

Patrick Wang - Wedbush Securities

Okay, last question here, the higher marketing expenses in the third quarter, that’s kind going to persist for two or three quarter?

Thomas Seifert

Currently, we estimate that we will have all the customers on board by the end of this year and it’s more in the cool driven topic, not so much cash topic. And we foresee two quarters of that effect at this point, maybe two and half.

Patrick Wang - Wedbush Securities

And then it would drop first quarter next year?

Thomas Seifert

All other things being equal, it will normalize again.

Patrick Wang - Wedbush Securities

Terrific, congrats so much guys and thanks so much.

Operator

Our next question in queue comes from Srini Pajjuri with CLSA. Please go ahead.

Srini Pajjuri - CLSA

Couple of questions on the graphics phase, it kind of sounds counterintuitive to me that on one hand you have capacity being very tight, on the other hand you are seeing price pressures, I’m just wondering if you could give me a bit more clarity as to why you couldn’t have either raised prices or kind of utilized the capacity tightness to your advantage to improve the mix?

Dirk Meyer

Yes, that’s a good question. So, we're capacity constrained and therefore had to make choices about which customer is to serve to the utmost. And we generate a lot of notebook design wins over the past couple of quarters from major OEMs and once those design wins are done, the designs actually have to correct the GPUs designs down on the motherboard and therefore for OEMs to ship, they need supply from AMD. Therefore we leaned more towards the OEM notebooks in terms of supply delivering.

What that means is we shipped a lower mix than what the demand was because the notebook OEMs tend to use the lower two products in our four product stack, and therefore in effect we didn’t supply the AIB channel with all the volume we could have and hence didn’t supply the upper two products in the stack to the degree we could have which brought our mix lower in effect.

Srini Pajjuri - CLSA

And then Dirk, you know given the capacity tightness and the fact that you are coming out with another new product Ontario at the same node and the same foundry, how do you feel about supply once you launch that product?

Dirk Meyer

Yes, good question. What we said in the opening comments is that we see the supply constraints diminishing through the back half of the year and we made that statement in the context of the accelerated Ontario ramp.

Srini Pajjuri - CLSA

Okay and then finally, could you talk about, any thoughts on the design win traction for Ontario and also if you have any expectations for what kind of market share you expect in the netbook market?

Dirk Meyer

I don’t want to set market share expectations but I will say that we've been happy and quite surprised at the enthusiastic response that our customers have given Ontario. You know frankly we went back to them in Q2 and asked them to accelerate their plans pretty dramatically to support our goal of moving Ontario into the market sooner and we've gotten a very good and enthusiastic response. I think in large part because OEMs want competition in every category including netbooks, number one and number two, they see the potential that we see given the outstanding graphics capability that we're bringing into that form factor.

Operator

Our next question in queue comes from Krishna Shankar with ThinkEquity, your question please.

Krishna Shankar - ThinkEquity LLC

As you look back, what was sort of your historical high-end server market share and you said you may have lost a little bit of market share here in Q2? How rapidly would you expect to sort of regain market share with the new Magna-core server chip and are you also pursuing the strategy of giving more cores for the same dollar to the customer versus your competitor, in other words six cores for a four core price et cetera?

Dirk Meyer

On the share, I'll just stick to the facts. Our historic share peak for server processors, this is not a server system statement, it’s a server microprocessor statement, was about 25-26% if memory serves. We left Q1 at just under 10%, okay? I won't speculate on where the share ended I believe in Q2, and I don't want to predict how rapidly we claimed back our market share. You asked about the strategy and all I will say is that our strategy in every market has really been to bring the market differentiated features and great value at every price point, and that's certainly what we do with both the Opteron 6000 and 4000 series. Whether it’s more coarse for the money, more memory support for the money, lower power, or better performance per watt, the goal is always to deliver a better value for the dollar.

Krishna Shankar - ThinkEquity LLC

Okay, and my second question is on the 32-nanometer yield challenges. Is that an SOI 32-nanometer high-k/metal gate process and other sort of changes being implemented there to improve the yields or is it just the learning curve?

Dirk Meyer

It is SOI high-k/metal gate as we have announced previously and yeah sure there are process tweaks that we make all along as we climb our way up the yield curve and up the learning curve.

Krishna Shankar - ThinkEquity LLC

But there was no sort of dramatic change in the process architecture, gate first, gate last and things like that.

Dirk Meyer

No. No, no these are just the kind of the standard yield learnings that one encounters as one introduces a new technology.

Krishna Shankar - ThinkEquity LLC

And my final question is, given the importance of graphics and notebooks, it seems a little counterintuitive as to why you would position Ontario at the low end of notebook, consumers care about graphics and high-def video so if you can afford that at low power why wouldn't you strive to address higher price points in the consumer notebook marketplace rather than just netbooks and the low end of the notebook market?

Dirk Meyer

Well, I’m not sure I understand the question. What I will say is first Ontario has differentiating features and capabilities at lower price points, lower power envelopes and hence small form factors, that's a big in growing market and one we don't participate in broadly. So that’s a good thing. Across more mainstream client platforms, we think the Fusion architecture is going to being differentiating features and performance into those markets by virtue of bringing the GPU and the CPU together on one die, delivering better power efficiency and also a more effective GPU computing which will drive much better visual applications in future.

Krishna Shankar - ThinkEquity LLC

And finally are there any special hooks that Microsoft or other browsers have put in place for the GPU component on both Fusion and any differentiating factors you would have in terms of operating system or browser support for native GPU or features on the CPU?

Dirk Meyer

In a sense yes, in that we are seeing Microsoft in IE9. I think it is Internet Explorer 9 enabling compute offload, as well as other ISPs doing the same and to the extent applications are written to take advantage of the GPU for things other than 3D graphics. That plays right into the sweet spot of Fusion, because Fusion by virtue of having the CPU and GPU together on one die will execute those GPU optimized applications even better.

Ruth Cotter

Operator, we will take two more questions please.

Operator

Our next question in queue comes from Hans Mosesmann with Raymond James. Your question please.

Hans Mosesmann - Raymond James

What is the update in terms of your graphics refresh? Is it going to happen Fall this year, or the next year, can you give some details on that? Thanks.

Dirk Meyer

Yes Hans, we will start introducing the second generation of our DX 11 products before the end of the year.

Operator

And our final question for today comes from Frank Jarman with Goldman Sachs. Your line is now open.

Frank Jarman - Goldman Sachs

Great, thank you. I guess I have two questions for Thomas. First, on the quarter, you bought back $200 million of the converts and you stated that debt reduction continues to be a focus, can you just provide some more details around what you would like to do with the CAP structure? And how much flexibility you feel like you have right now?

Thomas Seifert

We were very outspoken from, all year that working on the debt is a top priority, we would like to come into net cash position over time. We are not going to talk about how and which tactics we employ, how we get there but we will continue to work on the debt towers as they are. We are now down to $2.4 billion, so way to go. You can also see if you look at the cash generation that we have seen in the first half, $258 million of free cash flow and that a significant.

We have promised that we would deploy any free cash flow that we generate and any free cash that we and any cash that we can free up on the balance sheet will deploy towards re-structuring and so far, we’re living up to that guidance. And this is what we are going to continue to do moving forward.

Frank Jarman - Goldman Sachs

Great, thanks. And just on the free cash flow, I know you show an adjusted free cash flow versus your GAAP free cash flow and I think it has to do with the IBM credit facility, can you just help me think about how I should think about the difference between adjusted free cash flow and GAAP free cash and how that credit facility has an impact on it?

Thomas Seifert

That is the only difference

Ruth Cotter

That concludes AMD’s second quarter earnings conference call and we would like to thank everyone for participating today.

Operator

Thank you Miss Cotter, ladies and gentlemen this does conclude today’s program. Thank you for your participation and have a wonderful day. Attendees, you may now disconnect.

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Source: Advanced Micro Devices Inc. Q2 2010 Earnings Conference Call
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