Advanced Micro Devices Q1 2007 Earnings Call Transcript

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 |  About: Advanced Micro Devices, Inc. (AMD)
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Advanced Micro Devices, Inc. (NASDAQ:AMD)

Q1 2007 Earnings Call

April 19, 2007 5:00 pm ET

Executives

Mike Haase - Director, Investor Relations

Dirk R. Meyer - President, Chief Operating Officer

Robert J. Rivet - Chief Financial Officer, Executive Vice President

Hector J. Ruiz - Chairman of the Board, Chief Executive Officer

Henri P. Richard - Executive Vice President, Chief Sales and Marketing Officer

Analysts

Tim Luke - Lehman Brothers

JoAnne Feeney - Midwest Research

Chris Danely - JP Morgan

Uche Orji - UBS Warburg

Michael Masdea - Credit Suisse

Joseph Osha - Merrill Lynch

Mark Lipacis - Prudential Securities

David Wong - AG Edwards

Krishna Shankar - JMP Securities

Glen Yeung - Citigroup

Michael McConnell - Pacific Crest

Sumit Dhanda - Banc of America Securities

Jim Covello - Goldman Sachs

Kevin Rottinghaus - Cleveland Research

Gurinder Kalra - Bear Stearns

Presentation

Operator

Good afternoon. My name is Jeane and I will be your conference operator today. At this time, I would like to welcome everyone to the Advanced Micro Devices Inc. first quarter earnings conference call. (Operator Instructions)

It is now with great pleasure to turn the floor over to your host, Mr. Mike Haase, Director of Investor Relations. Sir, you may begin your conference.

Mike Haase

Thank you, and welcome to AMD's first quarter earnings conference call. Our participants today are Hector Ruiz, our Chairman of the Board and CEO; Dirk Meyer, our President and COO; Bob Rivet, our Chief Financial Officer; and Henri Richard, our Chief Sales and Marketing Officer. This call is a live broadcast and will be replayed at amd.com. The telephone replay number is 877-519-4471. Outside of the United States the number is 973-341-3080. The access code for both is 8584000. The telephone replay will be available for the next 10 days starting later tonight.

In addition, I would like to call to your attention that our Q2 2007 earnings quiet time will begin at the close of business Friday, June 15th. Also, for your planning purposes, we have scheduled the AMD technology analyst day for Thursday, July 26th. More information will be sent out at a later date.

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 our forward-looking statements are based on current beliefs, assumptions and expectations, speak only as of the current date and involve risks and uncertainty that could cause actual results to differ materially from our current expectations as set forth in the forward-looking statements.

The semiconductor industry is generally volatile and market conditions are particularly difficult to forecast. Because our actual results may differ materially from our plans and expectations today, I encourage you to review our filings with the SEC where we discuss in detail our business and risk factors, setting forth information that could cause actual results to differ materially from those in our forward-looking statements.

You will find detailed discussions in our most recent SEC filing, AMD's annual report on Form 10-K for the year ended December 31, 2006.

With that, I will turn the call over to Dirk.

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Dirk R. Meyer

Thank you, Mike. After 14 consecutive quarters of gaining share in the CPU business, the first quarter was a major setback in the strategic transformation of our company. But we know the only way to get healthy is to fully understand our problems and fix them. First, it is important to note that with our remarkable success has come much more complexity in our business -- more customers, more channels, more products. The game is really quite different and frankly, that complexity has led to some challenges.

In the first quarter, our challenges were caused by a few key things. First, we suffered some major growing pains. Starting roughly the middle of last year, we suffered occasional mix and delivery issues in the course of serving new and expanding relationships with global OEMs. This led to challenges in our properly serving the component distribution channel.

Second, the pricing pressure that started in Q2 last year continued in the mainstream of our CPU business as our competitor did everything in their power to protect their monopoly.

Third, we saw an increasingly competitive product environment in both CPUs and GPUs, and finally, weakening demand in the consumer electronics businesses added to our pain.

While any one of these problems might have put a damper on our performance in the quarter, the sum total of all four was something of a perfect storm for us.

Our plan to fix these problems is fairly straightforward. We need to grow the top line, change our cost structure in line with the competitive environment, and execute flawlessly on our product and technology roadmaps.

To regain momentum on the top line, we have accelerated some key initiatives. We have simplified our sales and marketing organization in order to improve our responsiveness to customer demand. We have restored our value proposition in the channel and refocused marketing spending on demand generation programs, and we have increased our emphasis on acquiring new customers and broadening our portfolio with existing customers.

Now, while we know we cannot cut our way to prosperity, we realize we need to make some significant adjustments to our business model in order to succeed in the current competitive environment.

Among the efforts already underway are: reducing 2007 CapEx spending by approximately $500 million, largely by slowing the rate of the fab 38 conversion; we are reassessing our overall staffing plans, specifically we are going to limit ourselves solely to critical hires, and to the extent that we add resources, we will focus primarily on doing so in lower cost geographies.

We plan to leave the year with a lower headcount than we have on board today. In addition to those staffing actions, we will be reducing discretionary expenses by over $100 million annually.

Finally, we need to deliver on our product and technology roadmaps -- on time and on budget. Specifically, we need to deliver on the promise of Barcelona later this year. And by the way, our customers are increasingly excited about what they are seeing.

We need to successfully convert fab 30 to a 300-millimeter toolset. We need to start the ramp to 45 nanometer technology beginning in mid-2008 -- and by the way, 100% of our fab 36 wafer starts are on 65 nanometer technology today.

We need to and will successfully launch the 600 Series graphics products next month and over time, deliver and maintain GPU leadership in the dimension of performance per watt per square centimeters of silicon, and we need to continue to deliver leading edge technology through our best-in-class customer engagement in the CE businesses.

In summary, we know what our challenges are, have a good grasp on what to do, and are well underway with programs to put us back on track. Best of all, our customers want us to win and are expanding our relationship on the basis of our unmatched technology portfolio and commitment to helping them succeed.

With that, I would like to turn it over to Bob.

Robert J. Rivet

Thanks, Dirk. As I said in the press release, the first quarter was totally unacceptable, but as Dirk outlined, we have a good plan to address and fix our issues.

Before I start, I would like to remind everyone that as a result of the acquisition of ATI in the fourth quarter of last year, first quarter 2007 results do not correlate directly.

AMD's revenue in the first quarter of 2007 was $1.233 billion, down 30% sequentially and down 7% compared to the first quarter of 2006. We recorded a large net loss in the quarter at $1.11 per share.

Three noteworthy items to highlight in these results include: one, ATI acquisition related and integration charges, which I all ARC, of $113 million, or $0.21 per share; two, employee stock-based compensation expense of $28 million, or $0.05 per share; and three, a tax expense of $23 million, or $0.04 per share, primarily due to the need for a deferred tax liability related to the large tax deductions AMD receives for the amortization of good will from the purchase of ATI.

First quarter operating loss was $363 million, excluding ARC charges and stock-based compensation expense. EBITDA was a negative $196 million.

First quarter 2007 gross margin was 31%, excluding ARC charges and stock-based compensation expense, compared to 40% in the fourth quarter of 2006. The decrease from the prior quarter is attributable to significantly lower microprocessor unit sales, lower microprocessor ASPs, and the inclusion of the former ATI operations, which generally have lower margins for the entire quarter.

I will switch to the business segments. First, computing solutions revenue, which includes the former computation products, embedded products and the former ATI chipset business, was $918 million, down 38% from the prior quarter, primarily due to significant lower desktop, mobile and server unit sales and revenues.

Microprocessor unit shipments declined in all product categories and ASPs declined in both desktop and mobile.

Chipset sales increased 15% sequentially, reflecting a full quarter of operations. The computing solutions segment had an operating loss of $321 million in the first quarter.

Switching to the graphics segment, revenue was $197 million in the first quarter, a sequential increase of 19%, reflecting a full quarter of operations. Operating loss in the graphic segment was $35 million.

In the consumer electronics segment, revenue was $118 million, down slightly from the previous quarter and also reflects a full quarter of operations. Handheld and gaming revenue declines were offset by sequential growth in the DTV category.

The operating loss in the consumer electronics segment was $4 million.

Now turning to the balance sheet. The cash balance at the end of the quarter was $1.2 billion, approximately $600 million above our minimal acceptable levels. We continue to be focused on increasing liquidity for the business and expanding our financial flexibility.

Our plan continues to include: one, selling our 200 millimeter fab equipment; two, monetizing our investment expansion; three, collecting our grants and subsidies from our investments in Dresden; and four, selling administrative land and offices.

In addition, we continue to evaluate a wide range of financing opportunities that are available to us.

Total inventory at the end of the first quarter was $937 million, up $123 million from the fourth quarter, driven by our sales miss in the microprocessor business. About 40% of this inventory growth was 65 nanometer microprocessor products.

First quarter capital expenditures were on plan at $586 million, focused on the capacity ramp of fab 36.

Now let’s turn to the outlook. AMD's outlook statement for the second quarter is based on our current expectations. The following statements are forward-looking and actual results could differ materially from current expectations.

In a seasonally down second quarter, AMD expects revenue to be flat to slightly up. Operating expenses, which include R&D and SG&A, will be in the range of $750 million, reflecting only a small impact of the restructuring efforts we have undertaken. You will see a much higher impact in the second half of the year.

Employee stock-based compensation expense is expected to be approximately $30 million for the second quarter. ARC charges will be approximately $80 million for the second quarter. We believe we will have a tax expense of $25 million in the second quarter.

As Dirk outline, our capital plan for 2007 is now $2 billion, down $500 million with the reductions coming out of the back half of the year.

In summary, the first quarter of 2007 was a terrible start to the year, but we are confident we have a plan to put ourselves back on the right track. With that, I will turn it over to Hector for some final remarks.

Hector J. Ruiz

Thanks, Bob. Dirk and Bob have highlighted many of the programs and initiatives that we have put in place to address our near-term business challenges. While the complete package is strong, including capital spending adjustments, sales and marketing restructuring and headcount adjustments, I would like to take time to put all of it on a much larger context.

Because I want you to know that this quarter was more than a miss, more than a series of concurrent issues or challenge. This quarter was a major inflection point in our timing of action plans to continue to innovate effectively on behalf of our customers. I want you to know that it has only served to accelerate our efforts to complete our work -- that is, to reinvent the dynamics of our industry.

The quarter proved that the job is only half done and that now is the time to accelerate our efforts to finish the other half.

Today, what you have heard Dirk and Bob describe is immediate and somewhat tactical in nature, but make no mistake -- it is also the beginning of a major restructuring of how we intend to run our company going forward, one that would reflect the natural growth and stratification of the processing solutions customer base, accommodate the business model distinctions between good enough entry level markets and performance-hungry mature market solutions, and reduce our capital intensity by exploring deeply more asset light business models in order to fully execute our plan.

Most important, it will be based and driven on a single core competency -- customer-centric innovation.

We plan to share more details at our upcoming analyst conference this summer. In the meantime, in order to provide intense oversight to this transformational process, and also to ensure strong support across the company for the various initiatives, Dirk and I are forming an executive task force, including Bob Rivet, Henri Richard, and Dave Orton. I will chair this task force and provide a strong oversight of this company-wide effort.

While I expect this task force to be temporary in nature, lasting no more than a year, I expect this transformation to be bigger and more dramatic in impact than the one we undertook in 2002. As I mentioned earlier, it will be the transformation needed that allows us to fully complete the transformation of our industry, to put the customer back in charge, to put competition back in our industry, and to put sustainable value creation back in the hands of real innovators.

Now let me turn it back to Mike for our question-and-answer period.

Mike Haase

Thanks, Hector. Operator, let’s start the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question is coming from Tim Luke of Lehman Brothers. Please go ahead.

Tim Luke - Lehman Brothers

Thanks so much. Could you just clarify how we should perceive your pace of investment in capacity, vis-à-vis prior plans, and also if you could give us any clarity on how you perceive with the elevated inventory level, how you would look at potentially clearing that. And then also, if there were any updates with respect to the timeline associated with Barcelona that Dirk was alluding to in terms of the second half of the year. Thank you.

Dirk R. Meyer

I will respond to both of those. First of all, going into Europe, our capacity plan was to fully facilitate the fab 36 building and start the conversion of fab 30 to is 300 millimeter toolset roughly the middle of this year, with the so-called fab 38 beginning to produce output early in 2008. And then, of course, we had chartered as a flex source of capacity.

As compared to that change, the only real change going forward is that we will reduce the rate at which we convert fab 30 to a 200 millimeter toolset, so specifically we will still completely ramp fab 36.

With respect to Barcelona, we started shipping pre-production -- oh, three questions. So with respect to Barcelona, we started shipping pre-production samples to customers in Q1. We anticipate shipping production samples in the current quarter and we will see customers shipping their products based on Barcelona in Q3.

Finally, you had a question on inventory; to the first order, the products that we have in inventory are still products that are good in the marketplace. The market wants them. Our customers want them so we will just modestly adjust our production plans over the balance of this year and work off our inventory position over the next couple of quarters.

Tim Luke - Lehman Brothers

In conjunction with that, your guidance for revenue is somewhat better than normal seasonality, and somewhat stronger than your larger competitor. Could you just reconcile how we should perceive the businesses that might be flat to slightly up, given the general context?

Robert J. Rivet

Sure. Clearly, if you have not picked up, we are pretty disappointed in our performance. The channel in particular, while we were optimistic we would see more improvement in the first quarter, we did not. We do see progress toward the end of the quarter and continuing in the second, and so that is part of the rebounding effort from that perspective, to give us confidence that even in a seasonally down quarter, we can power our way through that.

Plus, we launched new products in the graphics business. So we have things, definite things to recover from from the first quarter, and new product introductions on the ATI classic side of the house that gives us a lot of confidence from that perspective.

Also, in the C2, we know the design-ins we have and that product will start being shipped in the second quarter.

Operator

Your next question is coming from JoAnne Feeney of FTN Midwest. Please go ahead.

JoAnne Feeney - Midwest Research

Good afternoon. I have a question. I would love to hear a bit more about the restructuring. You mentioned the asset light strategy, and with such challenges to profitability going forward, it would seem like Texas Instruments has adopted, perhaps you could also use more of an asset light strategy to lower costs and to give yourselves more flexibility during these cyclical times.

Hector J. Ruiz

That is a very broad question and a challenging one, because as I mentioned in my talk, the level of restructuring that I am envisioning is very significant, and so it would be difficult to outline it on a phone call. But let me give it a try as to what we intend to discuss later on in the year.

For example, four years ago, we had one product in the company that, through tweaking and maneuvering, we could actually make it serve various segments of the market. Today, we have proliferated on a product line towards goodness. We have a broad array of products, but now we are serving segments in the industry that each of these segments are large in size. For example, an entry level segment in an emerging market is a very large segment. All on its own, it actually requires its own separate business model in how to address that segment. Compare that to a workstation or super computer segment, which all on its own requires a completely different business model.

Today, up to now, we have been running the company well. As a matter of fact, we ended last year at 26% share in units, as a result of a fairly successful four-year run that we had in doing it that way.

But now as Dirk outlined, when we increase the complexity of going from a largely channel company to now one with a very heavy weighting towards OEMs and a complexity of products, we have to restructure how we address them. The way we manage the accounts is going to be different. Over the next few weeks, we will be internally announcing those changes methodically, all aimed at managing much more effectively this much more complex world that we live in.

As part of that, one of the things that has become pretty clear in our experience, we have had now for a number of years had some experience in partnering with people such as, for example, IBM in joint development programs. That has started a lot about how you can do some asset light strategies, since we did not have to build an R&D laboratory to do that.

We have had also an experience now for a number of years with some of our friends in the foundry business, and in particular the charter semiconductor. We have learned a lot of that.

Through the acquisition of ATI, we now have a perspective into a very asset light model that we are pretty excited about learning more and more about it. When we look at all these things, we see a tremendous opportunity for us to really do something different going forward, but it’s unique for us.

I think, for example, what Texas Instruments has done, as you said, is very good for them and is uniquely tailored for what they do. Whatever we do is going to have to be very uniquely tailored for us, because we have to be on one hand, in the workstation super computer environment at the leading, bleeding edge of technology, but on the entry level part of products is not quite as necessary.

I think we are in a unique segment in the industry, the microprocessor industry where an asset light model may require a considerably different look and feel that you might recognize when you look at somebody like Texas Instruments.

We are pretty pumped up about the opportunity. We think it is obviously not something you can do in a quarter or two, but we certainly intend to give you a stronger perspective in our summer analyst meeting.

JoAnne Feeney - Midwest Research

Is this then what you referred to, Hector, when you remarked that the second half of the transformation of the company really will begin now?

Hector J. Ruiz

That is exactly right. We are making the organizational changes needed to address our business models more effectively. We are doing that now as we speak, and the broad action plans to do the much more complex issues, we actually started them sometime back. What we are doing today is accelerating them and putting in place an executive task force to oversee the execution and implementation of those plans.

JoAnne Feeney - Midwest Research

Thanks very much.

Operator

Your next question is coming from Chris Danely of JP Morgan. Please go ahead.

Chris Danely - JP Morgan

Thanks, guys. Could you just go through what your rough expectations are for pricing in the rest of the year? Do you think it is going to ease up a little bit? Also, maybe talk about gross margins and how to get those back up?

Henri P. Richard

I think we have seen some stabilization in the domain of pricing since the beginning of the year. For us, of course, there are a lot of dynamics. Our mobile business is growing. Our commercial business is growing. Our channel business, as it recovers will represent a larger portion of our shipments. Those are positive factors.

But of course, we also expect the market to continue to be extremely competitive. So as a result, I think more stability but still a very complex and competitive environment.

Chris Danely - JP Morgan

How do you expect gross margins to trend, given that type of environment?

Robert J. Rivet

From a gross margin perspective at a high level, clearly we are very disappointed in where we ended the first quarter. But the plans we have in place, I will call it from the product and technology standpoint of introducing new products, whether it is next month in the GPU world or in the Barcelona category, that is first and foremost.

Second of course is just to remind you we are still in the early stages of 65 nanometer. As Dirk outlined, we have actually got to all the wafer starts but it takes you a good 10 weeks to pull all that product through and get it out the door. Quite a bit of our shipments in the first quarter were 65, but everyday more and more 65. Our inventory is well-positioned in 65 and that clearly will give us some margin opportunity because that die is 30% to 40% smaller on an equivalent basis between 90 nanometer and 65 nanometer.

We feel like we will make progress every quarter to improve the gross margins as we continue through the year.

Chris Danely - JP Morgan

That makes sense. And then, Bob, you mentioned that -- it sounds like this is not going to be the last of the restructuring. Should we expect op-ex to remain flattish in terms of dollars in the second-half of the year or will there be bigger changes?

Robert J. Rivet

You know, we are still working a lot of details on that but it will probably be less in particularly the G&A category in the second half of the year. We are watching ourselves very closely in the R&D investments, since that is the pipeline for the future. But in general, we are hoping we can get that bucket to be a little more efficient than it has been, therefore less in the second half.

Operator

Your next question is coming from Uche Orji of UBS. Please go ahead.

Uche Orji - UBS Warburg

Thank you very much. Just on the -- if I look on the pricing -- a question for Henri, your ASPs for server did not do so well in Q4. If I look out with the launch of Barcelona, how should we think about what that could do for your price, your ASPs on the server front?

And you are talking about volume in Q3. Will that be significant volume in Q3? How should we think about what impact that could make?

Henri P. Richard

As I said, the pricing environment has stabilized, a little more complex. Our server ASP went up actually in the first quarter. Clearly the arrival of Barcelona, which we know is an extremely competitive product, will help us but we really are more focused on getting back to the volumes that we deserve than just being focused on ASPs. Those two come together.

Of course, you are looking at revenue for the first quarter and those are important, but I am looking also a lot on design-in. Although Q1 has been a very disappointing quarter from a revenue perspective, it has been a very fruitful quarter from design-ins, both in the server market, in the desktop market, and in the mobile market. Now those will materialize in the marketplace in the second half of the year, along with our new products.

Again, I feel that -- of course, Barcelona cannot come quick enough because of the excitement that the customers are showing based on what they have seen of the technology.

Uche Orji - UBS Warburg

That’s very helpful. In the channel, you referred to having lost some share in the channel. What efforts are you making to win that back and when should we start to see that bearing fruit?

Henri P. Richard

Well, you know, one of the important things in the channel is predictability and stability. Frankly, in the second-half of 2006, we have been challenged, particularly because of a very rapid shift from desktop to mobile. As you know, on an overall basis it is still an interesting shift for the industry but for the channel, it is seldom good news and we were challenged being as reliable as we used to be.

We took the actions really at the end of Q4. Those actions started to pay a little bit in Q1 but it was a very difficult quarter for us. Frankly, one of the advantages of adding a little more inventory is now I am in a position to serve my customers on a timely basis in the product mix that is desired.

Now, we do not expect this to turn around immediately. I think we will see, as Bob was pointing out, sequential improvement in the second quarter. I see no reason why we should not be again the franchise of choice that we used to be in the second-half of the year.

Uche Orji - UBS Warburg

Just a couple more questions; on the computing side, Bob, are you able to give us an idea of the split between MPU and chipset? Is that something you can tell us?

Robert J. Rivet

No, that is not a detail we want to get into.

Uche Orji - UBS Warburg

Finally, if I look on the detail of the asset light model you plan to embark on, are there any restrictions as to how much you count [inaudible] foundries?

Henri P. Richard

All of the plans that we are considering are all within the context of making sure that we meet the needs and requirements of all of our key agreements that we have.

Uche Orji - UBS Warburg

Thank you very much.

Operator

Your next question is coming from Michael Masdea of Credit Suisse. Please go ahead.

Michael Masdea - Credit Suisse

Thanks a lot. I guess questions on the pricing strategy. It is a pretty aggressive pricing quarter generally and it did not seem to have a lot of fruit. Clearly there were some channel issues this quarter but is that any sort of indication that you should back off the current pricing strategy, or is that even an option?

Henri P. Richard

Our pricing strategy has not fundamentally changed. We are pricing our products for what we believe is the value they provide in the marketplace. Now, one of the dynamics that is new is that we are now a platform company and the fact that we now have GPU technology, chipset technology, along with our CPU technology is allowing us to do more interesting things than we did in the past. Furthermore, this is placing an increased focus on graphics and that becomes a very important aspect of each platform.

So as we look at design-in sockets in the future, we are in a position today to have a slightly different pricing strategy than we had in the past because instead of being a point product, we have a complete platform.

Michael Masdea - Credit Suisse

I guess that begs another question, which is you look in the past and when you were successful and you had real incremental drivers, whether it was power per watt, I think you focused on that earlier, dual core, 60 bit extensions or what have you. It does not seem obvious that that is out there in the future right now. Is it just that we are not seeing it yet or is there something you would point to that really can get you the differentiation to kind of keep decent ASPs and market share?

Dirk R. Meyer

First of all, we are very excited about the products that we have coming out near-term. In the dimension of performance per watt per square millimeter of silicon, both in the GPU category and in the CPU category, so I do think we are going to be very compelling in that dimension.

Beyond the near-term, the whole motivator for the ATI acquisition was one of having the opportunity to deliver a solution with an optimized balance of CPU, GPU, video and media technology tuned to the task at hand. So we are not announcing any products based on that vision yet but longer term, that is absolutely the vision.

Michael Masdea - Credit Suisse

Got it. Maybe just a quick one for Bob; it looks like there was a little bit of financing that sort of came from the balance sheet in terms of your receivables. Is that -- some of that can’t repeat. Should we start to think about cash coming down a little bit more rapidly here? What is that threshold where you feel like you have to go out and raise some money as opposed to doing some of the other things you talked about?

Robert J. Rivet

Sure. First, I will start backwards and just remind you what I said. I have always said $1 billion is where I am very comfortable. $600 million is where you really have to go do something just for making all the machinery work appropriately, so we are still a little bit north of that at $1.2 billion, $600 million high. Clearly, thank you for noticing, we have been working on working capital, except for the inventory part of the equation. So we will continue to figure out how to utilize and get working capital to be as robust as possible from that standpoint.

Then, we will start monetizing the four things I listed. Some of that you will see in the second quarter, whether it is the expansion issue or the 200 millimeter tools, selling land, et cetera, collecting grants and subsidies.

Like I said, we are very focused on making sure we have the appropriate liquidity and I will be opportunistic in the market to go deal with that.

Operator

Your next question is coming from Joseph Osha of Merrill Lynch. Please go ahead.

Joseph Osha - Merrill Lynch

Hi, folks. Back to Barcelona, you talked about that being available here in sample form in the second quarter. Are we going to see some of the Barcelona derivatives in the client products, in particular desktop, in the third quarter? I am also curious about this mix of Barcelona and Barcelona derivative versus the existing Brisbane 65 nanometer stuff. How do you see that toggling as the year progresses?

Dirk R. Meyer

First, you will see desktop variance of Barcelona in both two core and four core form in Q3 as well.

Joseph Osha - Merrill Lynch

On the desktop side?

Dirk R. Meyer

Yes, on the desktop side. And relative to mix, we are not going to go to that level of detail.

Joseph Osha - Merrill Lynch

Okay, that makes sense. May I ask a follow-up?

Dirk R. Meyer

Sure.

Joseph Osha - Merrill Lynch

If I look at the mobile business, there you are going to be with Turion obviously on 65, but clearly that area is up for refresh. Could you talk a little bit about when we might see a new architecture show up in that segment of your business?

Dirk R. Meyer

We have a product lined up for the refresh cycle in 2008, which is a 65 nanometer product that will introduce both a new CP and a new platform.

Joseph Osha - Merrill Lynch

That will show up later this year but effectively it does not really become part of the plan until 2008?

Dirk R. Meyer

Yes, it hits the OEM chassis refresh cycle in the first half of ’08.

Joseph Osha - Merrill Lynch

Okay. Thanks very much.

Operator

Your next question is coming from Mark Lipacis of Prudential. Please go ahead.

Mark Lipacis - Prudential Securities

Great, thanks for taking my questions. A couple; first, on the cash flow side, Bob, could you remind us how many grants and subsidies you could expect to get for Dresden and anything on the timing there? And how much you think you could get for the 200 millimeter tools?

Robert J. Rivet

Both of those, just in broad terms, both of those are north of $200 million each, from that perspective.

On the grants and subsidies, each of them actually we have started, so we have collected a little bit in the first and we will collect additional money in the second, third and fourth, so it gets spread out throughout the year.

Mark Lipacis - Prudential Securities

Okay, great, and then going to the asset light and the stratification comments, Hector, that you were making, are there limitations on how much you can outsource? Can you help us with parameters for us to think about when we think about the options that you guys have there? When you talk about stratifying your product sets, does that suggest that you could be developing microprocessor technology on both SOI and bulk CMOS? Does that even make sense? Thank you.

Hector J. Ruiz

As I said a little bit earlier, we have a broad array of IP licensing agreements with many people in the industry and every one of the options that we are considering for an asset light business model takes all of those into account and incorporates those into the agreements that we have.

We have a lot of flexibility in those agreements. As a matter of fact, I would put it in the category of damn near infinite. Our plans are to start really narrowing down the choices and exploring the opportunities with the various possible partners that we could have in exploring that.

It coves a whole gamut of opportunities, from everything like I mentioned earlier, we already have a joint development agreement with IBM which we view that as an asset light strategy from the point of view that we do not have to build an R&D facility, and all the way in to any aspect of the rest of the work that we do.

The rest of it that you referred to as the stratification of our products is really more along the lines of the business models that we intend to focus on to be able to structure the organization such that it optimizes what is important for each of those business segments. As I used as an example, which is a good one to use, is perhaps an emerging market entry level product. It is a segment that needs to be managed with a very low level of overhead and an N-minus-one or N-minus two technology, perhaps even consider a bulk solution and, on top of that, perhaps the whole business can be run out of parts other than the United States.

We are really going all across the possibilities and aggressively making those plans. We will share more of that with you as the year develops.

Mark Lipacis - Prudential Securities

That’s very helpful. Thank you very much.

Operator

Your next question is coming from David Wong of AG Edwards. Please go ahead.

David Wong - AG Edwards

Thank you very much. Can you tell us what mobile’s ASPs look like? You said that servers were actually up sequentially in the March quarter. Were mobile ASPs also stable throughout?

Dirk R. Meyer

They were marginally down.

David Wong - AG Edwards

Right. Could you give us any quantification of sequential microprocessor units growth or declines in any of the segments?

Henri P. Richard

We typically do not give you those indications.

Robert J. Rivet

The only comment I would make to give you the best color would be ASPs were the small piece of the equation in the sequential movement quarter to quarter. It was mostly units. ASP were a piece of the equation but the driver was the unit drop quarter on quarter. That was in all segments, whether it is desktop, mobile, server.

Henri P. Richard

I would like to add one point. We need to wait a couple of weeks until all the analysts are publishing the sales out figure for the quarter, because we know that customers really dispose of inventory that they had built in the fourth quarter, and so you might be actually surprised by our sales out market share numbers versus what you are looking at today, which is sales in.

David Wong - AG Edwards

Okay, great, and the last thing, can you tell us what your current schedule, expectations are for 45 nanometers?

Dirk R. Meyer

We will be starting 45 nanometer production in Dresden in the first half of next year, and shipping product early in the second half, and working every day to pull that in.

David Wong - AG Edwards

Great. Thank you very much.

Operator

Your next question is coming from Krishna Shankar of JMP Securities. Please go ahead.

Krishna Shankar - JMP Securities

As you look at the quarter, did you see the pricing pressure growth in the consumer and the corporate market? Can you give us some sense for the success you had in the corporate notebook and desktop market, now that you have API under your fold?

Henri P. Richard

Sure. So the first part of your question, which is there was no real significant difference in terms of the overall pricing environment, but of course we have different participation. I would say that in the consumer market, there is a broad level of competition in both mobile and desktop across all geographies, where today in the enterprise market the bulk is in the server segment.

Now that leads to the second part of your question, which is what is going on with our commercial clients. We are, as planned, continuing to increase quarter after quarter the number of platforms offered by our key OEMs in increasing number of channels and increasing number of geographies and sales are growing quarter after quarter.

Furthermore, there is another indicator which is a leading indicator of success, which is the latter part of your question which is since now we have ATI and therefore are able to offer a more complete platform, is that giving us some traction? As I indicated earlier in the call, I am very pleased with the level of design-in wins in the first quarter, even though I am not pleased with the level of sales in the quarter.

Krishna Shankar - JMP Securities

Thank you. Hector, a lot more strategic question; there has been some speculation about private equity investors looking at AMD. What are your thoughts on getting out of the public spotlight and really working on this major restructuring phase two that you talked about out of the public eye? What does it take for AMD to do that? Would you seriously consider that?

Hector J. Ruiz

Well, as Bob has pointed out many times, we have absolutely no prejudice or bias towards the source of capital as long as it makes sense for us, and we are very open to any of those ideas. Bob is continuously looking and alert as to any opportunity that might come up for us to take advantage of it.

As for the difference between -- I think your question was being a public company versus a private company, it is like everything else. If it is something that we think makes sense for our shareholders, we will certainly consider and look at it.

Operator

Your next question is coming from Glen Yeung of Citigroup. Please go ahead.

Glen Yeung - Citigroup

As you come through this first quarter and obviously it is a difficult one, and you go through this restructuring, have you given any thought yet to what the target model for AMD is going to be? Has anything changed if we look one, two, three years out?

Dirk R. Meyer

Actually, no. We have looked at that pretty hard. Clearly depending on -- I will call it the extent of the asset light model, that could change the mix of how you deliver the end result, which I still believe needs to be in that 18% kind of range, but clearly if you have no assets, that number would change. So it will be worked and we will disclose that as soon as we have more specificity on the asset light strategy, but right now I would say it is business as usual. We are still driving to the model that I showed right after Thanksgiving.

Glen Yeung - Citigroup

Okay, that’s helpful. The other question I had is so you are now slowing down the transition of fab 30 to 38, which essentially means you are going to have a bit more 200 millimeter than you might have thought. What is the change to your output that we should expect from this? I think you have talked in the past about a unit potential in terms of your capacity. What is the change we should expect then?

Dirk R. Meyer

First of all, we are not going to change our plan relative to 200 millimeter output, so we will still start taking down 200 millimeter starts in fab 30 in the current quarter. We will simply lower the rate of 300 millimeter tool insertion into that shell. So the plan relative to unit output capacity is not going to change at all in 2007. It is going to change only modestly in 2008 and represents about a 10% potential change in 2009, if we stick to the plan which of course we have the opportunity to reevaluate.

Glen Yeung - Citigroup

Okay, and then the last question is just thinking a little bit near-term on Barcelona. Between now and -- I guess we are now mid-second quarter and you are expecting first ships out in the third quarter. Are there any milestones you have to hit? Are there any critical points we are going to need to see between now and then?

Dirk R. Meyer

There won’t be things that you will see necessarily. Of course we will be demonstrating Barcelona later on this summer. As I said, we will be shipping production samples to customers this quarter, but what really matters is customers turning around and shipping systems based on that technology.

Glen Yeung - Citigroup

It sounds like you guys are ready and it is really getting designed and moving the thing off the shelf.

Dirk R. Meyer

Simply want to -- qualifying our customers’ systems and getting those systems out the door.

Operator

Your next question is coming from Michael McConnell of Pacific Crest. Please go ahead.

Michael McConnell - Pacific Crest

Thank you. Regarding the asset light model, are there any restrictions to the amount you can outsource? Do you see any covenants within the X-86 license that you brokered with Intel back in the day?

Henri P. Richard

We have a number of broad IP licensing agreements with many companies, including Intel. Every one of the models we are looking at to implement takes all of that into account. We have an awful lot of flexibility, as I said earlier, so we feel pretty confident on what we want to do.

Michael McConnell - Pacific Crest

Are there any restrictions in terms of percentage of production that you could quantify?

Henri P. Richard

We do not talk about the details of IP licensing so the asset light model we are talking about is well within all of the guidelines that we have.

Michael McConnell - Pacific Crest

Okay, fair enough. Any chance we could get some comments on the breakout in Q1 between units and pricing?

Hector J. Ruiz

I think as Bob pointed out, we are disappointed that the pricing was not as stable as we would have hoped. Although it has firmed up, as Henri pointed out, the main issue we had frankly was volume. The volume was significantly below where we wanted and that is 80% or so the driver of the challenge.

Michael McConnell - Pacific Crest

Looking at the graphics business, any way we could get an apples-to-apples comparison between Q4 and Q1? I know there was a limited amount of revenue in Q4, but is there any way we could get an idea of what the growth was quarter to quarter there, full quarter to full quarter?

Henri P. Richard

I will give you -- basically the revenue was slightly down. Units was up and ASP was slightly down. Frankly, it is logical since we are waiting for the launch of our brand new R600 line of products, which will enable us to restore the price positioning in the marketplace.

Michael McConnell - Pacific Crest

Okay, and just on that note -- last question and I will go away -- the R600 stack coming out in late May, is that enough time for the window before back to school, or should we be thinking about this more for the holiday season?

Henri P. Richard

Well, you know, when you think about back to school, a large majority of those machines use integrated graphics, so there is very little impact of discrete graphics. As you know, the launch of the R600 is essentially a discrete graphics launch. Those cores will find their way into integrated chipsets later in the cycle.

I feel that when you have the right technology, particularly in the enthusiast space, it gets gobbled up pretty quickly and those people do not actually march their purchases based on cycles.

Operator

Your next question is coming from Sumit Dhanda of Banc of America Securities. Please go ahead.

Sumit Dhanda - Banc of America Securities

I had a couple of questions. Your outlook for the second quarter, up slightly in the face of weak seasonality, but your channel inventory, at least for what your deferred revenue line would suggest, does not seem to have improved. Can you help us reconcile that discrepancy? And then I had a couple of follow-ups.

Hector J. Ruiz

Henri, you have been on top of this channel inventory issues. Perhaps you could comment on that.

Henri P. Richard

If you will recall, as we indicated, starting at the end of the second quarter of ’06, really into the third and fourth quarter, we ran our business with a really depressed channel inventory situations. We were able in the first quarter to restore that, so what you see as an increase is really in absolute just getting back to what we need to have out there to have, as I pointed out, consistency and predictability of supply.

I am not concerned whatsoever with our inventory position, either with our channel partners or our key OEMs, to be frank.

Sumit Dhanda - Banc of America Securities

The other question I have, I know you talked a little bit, Bob, about restructuring efforts, et cetera, but can you help us understand why the R&D line was up so significantly on a sequential basis for the first quarter?

Robert J. Rivet

The part you have to remember is we only had nine weeks of the ATI Corporation that we purchased on October 24th in the fourth quarter, so there was an unnatural nine-week to 13-week comparison. ATI is a very engineering-centric corporation that we purchased. That is what we really wanted in that acquisition, so that is why you saw that line move so much.

Sumit Dhanda - Banc of America Securities

The last thing in terms of the restructuring, you are in a difficult position, as you pointed out on the call. Your competitor, when it was in the same position last year, took some very aggressive actions but your rhetoric does not seem to suggest anything as aggressive from a headcount reduction perspective. Help us understand why that is not the case, or is this something you are going to flesh out in more detail on the analyst day?

Hector J. Ruiz

Well, first of all, let me make sure we put this in perspective. Our hats’ off to our competitor. They have done a good job in closing the gap in their product line. It took them four years to do it and I think they have done a good job. I think they were in to some difficult challenges and I certainly am sympathetic and understand them.

In our case frankly, we had four years of continuously every quarter out-performing our competition, and then to use the analogy of football, we had a non-defeated season and lost the first game of the play-offs. Well, we are not going to change dramatically what we were thinking of doing as a result of one lousy quarter.

We do have to make adjustments, as Bob pointed out. I think we are going to take advantage of this opportunity to accelerate our performance management culture. As a result of the further understanding of the integration with ATI, we now have ideas on how to better manage the company and therefore the results are more efficiencies.

When you combine all that between now and the end of the second quarter, we know we are going to have 500 plus people out that will leave the company. Going beyond that, we have not changed our goals, our objectives, our strategy, our technology plans. Our customers like our roadmaps and to execute those, we need the top talent in our engineering organization, which is really our company. We are an engineering company and we need the best and brightest, which we have, and we intend to execute to that. And that is the difference.

Sumit Dhanda - Banc of America Securities

One final question for you, Dirk, you said 100% of the wafer starts are 65 nanometers. Can you give us a sense of what the proportion is within microprocessors from a shift product perspective?

Dirk R. Meyer

I do not think we want to be specific, other than to say in Q1 it was not quite half, and I will remind you that comment was a fab 36 specific comment relative to the wafer start at 65 nanometers.

Sumit Dhanda - Banc of America Securities

What percent of your 65 nanometer starts are through fab 36 at this point?

Dirk R. Meyer

100%.

Operator

Your next question is coming from Jim Covello of Goldman Sachs. Please go ahead.

Jim Covello - Goldman Sachs

Thanks so much. A quick question -- the guidance for Q2, does that assume share gain, share loss, or no change in the microprocessor segment?

Henri P. Richard

From which quarter, from Q1 or from a year ago?

Jim Covello - Goldman Sachs

No, I’m sorry, the sequential guidance of flat to up slightly.

Henri P. Richard

By definition, given the guidance of our competition, it means share gain.

Jim Covello - Goldman Sachs

Okay, I wasn’t sure what the mix was relative to some of the other segments as opposed to pure microprocessor. So you think you will gain share in the second quarter?

Henri P. Richard

Yes.

Jim Covello - Goldman Sachs

What gives you confidence in that after the last couple of quarters?

Henri P. Richard

Well, again, if you look at the third and the fourth quarter, despite some of our challenges, we were gaining share. As Hector pointed out, we had a very difficult quarter. But as I also told you, our design-in pipeline has never been stronger. What is selling in the market is one thing. How many systems are your OEM proposing, how many countries are they offering your products in, how many customers are having access to your programs -- all of these things are not changing and we are seeing, particularly in the mobile space, we had a 30% year-on-year growth when the competition actually went down.

We are continuing to see good momentum on design win and that is why we are expecting that we could have a decent second quarter.

Jim Covello - Goldman Sachs

From a philosophical perspective, maybe you could help us. Obviously as you said, tough quarter. You did not see it coming. Any thought about maybe taking a little bit more conservative approach to the guidance, given that it has been a few quarters in a row that you have had some struggles meeting the top line guidance?

Hector J. Ruiz

Believe me, we are not happy with -- let me make it clear that we are doing all we can to make sure that on one hand, we are not ridiculously conservative but on the other hand, although we are pleased to see, to have confidence that we are going to do better in the second quarter, frankly it is increasing share off a really lousy quarter, so I would not put a big flag on top of that and wave it.

What I would like to point out, because again we have to be careful to put one quarter in perspective, is that a gain in unit share for 14 consecutive quarters, and last quarter, yes, there was a meltdown, we collapsed, we are very upset about it, we understand it, as Dirk pointed out. We know exactly the things that led to the perfect storm. We are going to fix them and we are making progress as we speak. Therefore, from such a lousy beginning, we expect to improve and throughout the year, we expect to improve quarter by quarter.

Jim Covello - Goldman Sachs

Okay, and then Bob, depreciation for calendar Q2, can you help us with that?

Robert J. Rivet

Sure. Depreciation will take another increase upwards in the tune of $25 million to $40 million quarter on quarter.

Jim Covello - Goldman Sachs

Great. Thank you very much.

Mike Haase

Operator, we are going to take two more questions, please.

Operator

Thank you. Your next question is coming from Kevin Rottinghaus from Cleveland Research. Please go ahead.

Kevin Rottinghaus - Cleveland Research

Thank you. Could you help us out with your thoughts on just general PC demand and maybe channel inventories of PCs?

Henri P. Richard

I think that in general, the first quarter was not a great quarter. Particularly, we saw a lot of softness in the enterprise market in North America. By contrast, I think greater China continued to show some robust demand. Overall, I would say not a stellar quarter, and certainly some pockets of heavy pressure, particularly North America and to a lesser degree, Europe.

Kevin Rottinghaus - Cleveland Research

Did you say your enterprise segment grew again in 1Q sequentially?

Henri P. Richard

I’m sorry, I didn’t get that question?

Kevin Rottinghaus - Cleveland Research

Did you say your enterprise segment grew again in 1Q sequentially?

Robert J. Rivet

No. The answer would be no. Enterprise did not grow.

Kevin Rottinghaus - Cleveland Research

How about on the platform wins? You are talking about a very strong pipeline. When does that start to convert into revenues? Is that a 3Q event? How far along are you with that?

Henri P. Richard

In terms of some of the -- we just announced a new series of chipsets. You will start to see platforms based on those chipsets sometime in the third quarter. It is driven mainly by the rapid adoption of HD standards in a lot of the consumer devices and it is widely known that with ATI we have a very strong position in the video space, and so we are seeing a lot of success with that particular aspect of what this platform offers.

Kevin Rottinghaus - Cleveland Research

On the core PC side, is that -- should we expect an acceleration in that business in 3Q based upon platforms starting to take off? When should that really start to hit?

Henri P. Richard

You have to remember that in that particular segment of our business, we have two contradicting trends. We obviously are increasing our business on AMD platforms but we also have some Intel business that we will continue to ramp down, so it is difficult for me to predict exactly how those two are going to gel into a total.

Kevin Rottinghaus - Cleveland Research

Okay, and then just lastly, I know there are still some OEMs you are not working with currently, particularly on the notebook side. Anything you could tell us there as far as traction you’ve gained or any expectations you might have for this year as far as new OEMs or new platform additions?

Henri P. Richard

No, other than repeating what Dirk said in his statements, which is we have an increased focus of continuing to not only deepen our relationship with existing customers but also create new relationships.

Operator

Thank you. Your final question is coming from Gurinder Kalra of Bear Stearns. Please go ahead.

Gurinder Kalra - Bear Stearns

Just a question on your R600 launch. Can you provide us more details in terms of timing, whether it will be a hard launch or a soft launch, how much product do you expect to have and in what categories? Would there be a performance product or a performance mainstream product?

Henri P. Richard

We are going to announce those products in the second part of May. The location has been picked. It is a series of 10 products covering the entire stack with DX10 capabilities, leading edge performance and more importantly, a solution that works with [WECO] qualified drivers.

Gurinder Kalra - Bear Stearns

Would you expect to have substantive quantities of product available at the launch?

Henri P. Richard

Absolutely. We do not do soft launches.

Gurinder Kalra - Bear Stearns

Thank you.

Operator

I would like to turn the floor back to Mr. Mike Haase for any closing comments. Please go ahead, sir.

Mike Haase

Thank you very much for participating on the call today.

Operator

Thank you. This concludes the Advanced Micro Devices Inc. first quarter earnings conference call. You may now disconnect your lines at this time and have a wonderful evening.

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