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Advanced Micro Devices Inc. (NYSE:AMD)

Q4 2007 Earnings Call

January 17, 2008 5:00 pm ET

Executives

Ruth Cotter – Senior Manager Investor Relations

Robert Rivet – Executive Vice President, CFO

Hector Ruiz – Chairman of the Board, CEO

Derrick Meyer – President, COO

Analysts

David Wu – Global Crown Capital

Tim Luke – Lehman Brothers

Krishna Shankar – JMP Securities

Christopher Danely – JP Morgan

Ross Seymore – Deutsche Bank

Srini Pajjuri – Merrill Lynch

David Wong – Wachovia

Joanne Feeney – Ftn Midwest

Analyst for John Pitzer – Credit Suisse

Mark Lipacis – Morgan Stanley

John Lau – Jefferies & Co.

Doug Freedman – American Technology Research

Analyst for Glen Yeung – Citigroup

Cody Acree – Stifel Nicolaus

Operator

Good afternoon, my name is Laney and I will be your conference operator for today. At this time I would like to welcome everyone to the AMD fourth quarter 2007 earnings conference call. All lines have been placed on a listen only mode at this time. After the speakers’ remarks, you will be invited to participate in a question and answer session. As a reminder, this conference is being recorded today. I would now like to turn the conference over Ms. Ruth Cotter, Senior Manager of Investor Relations for AMD. Please go ahead.

Ruth Cotter

Thank you and welcome everybody to AMD’s Q4 2007 earnings conference call. Joining me on the call today are Hector Ruiz, our Chairman of the Board and CEO, Derrick Meyer, our President and COO and Bob Rivet, EVP and CFO. The call is live today from Austen, Texas and is being webcast on AMD.com. A telephone replay will be available for the next ten days starting later this evening. The toll free number is 800-642-1687, outside of the US the telephone number is 6706-645-9291 and the access code for both is 29165551.

Before we begin 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 uncertainties that could cause actual results to differ materially from our current expectations as set forth in our 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 our forward looking statements. You’ll find detailed discussions in our most recent SEC filing, AMD’s quarterly report on form 10K for the quarter ended September 29, 2007.

Before I turn the call over to Bob Rivet for some prepared remarks, I’d like to advise you that our Q1 2008 earnings quiet time will begin at the close of business on Friday, March 14. Now with that, let me hand it over to Bob.

Robert Rivet

Thank you Ruth. Good afternoon. We achieved near breakeven performance in the fourth quarter. We again grew the top line in each of our businesses, leading to a 3 point sequential improvement in gross margin. As a result of those achievements, our overall non-GAAP operating loss was $9 million. Total AMD revenue was $1.77 billion, up 8% sequentially.

In the fourth quarter we achieved several new records, including record microprocessor unit shipments, record microprocessor unit shipments into the distribution channel, record desktop processor unit shipments and once again record notebook processor unit shipments.

We are seeing growing demand for new product offerings in each of our businesses and in particular for our quad-core processors. We shipped close to 400,000 quad core units across our desktop and server products segments, consistent with our guidance.

We recorded a net loss of $3.06 per share for the quarter. In December, we disclosed that we would be taking a material charge for the write down of good will and intangible assets associated with the acquisition of ATI. This charge amounted to $2.89 per share or $1.675 billion, of which $1.6 billion was non-cash. The components of this charge are as follows: a non-cash goodwill and intangible write down of $1.545 billion, or $2.67 per share associated with the ATI acquisition net of taxes; a non-cash charge for other ATI acquisition related costs of $61 million, or $0.11 per share; and a cash investment impairment of $69 or $0.12 per share associated with our remaining Spansion holdings.

Fourth quarter gross margin increased sequentially three percentage points to 44% driven by increased new product shipments, higher ASPs and cost containment. Manufacturing performance in Fab 36 remained strong, exceeding targets for output, yield and cycle time. Total operating expenses, R&D and SG&A were down $25 million from the prior quarter, lower than we projected as a result of continued strong operational discipline.

Cash flow from operation was a positive $114 million for the quarter and adjusted EBITDA was a positive at $203 million as compared to $60 million in the prior quarter. A reconciliation of GAAP to non-GAAP financial results are available in our press release.

Now switching to the business segments. The computing solutions side was profitable in the fourth quarter and we believe we gained share in microprocessors on the basis of it’s 11% growth in revenue. For the segment, revenue was $1.4 billion, up 9% from prior quarter. Microprocessor unit shipments increased 7% sequentially and ASPs grew 4% over the prior quarter. Operating income was $21 million, a $133 million sequential improvement. The segment returned to profitability on the strength of new products, cost containment and gross margin expansion.

Demand for quad-core AMD processors is strong. We continue to execute our volume ramp and in the first quarter we will more than double our shipments over the fourth quarter.

In the graphics segment, revenue was $259 million, up 3% compared to the third quarter. The operating loss in graphics segment was $12 million, compared to a $3 million loss in the prior quarter. Demand of our new ATI Radeon HD3800 and HD2000 GPU families is strong.

Consumer electronics segment revenue was $109 million, up 12% from the previous quarter driven by improved handheld sales and higher gaming console royalties. The consumer electronics segment reported an operating income of $12 million in the quarter, compared to an operating loss of $3 million last quarter.

Now turning to the balance sheet. Our cash and marketable security balance at the end of the quarter was $1.9 billion, up $361 million from the third quarter. In the quarter we netted $608 million from a strategic investment by Mubadala Development Company. We are pleased with our progress improving working capital metrics. Total inventory at the end of the fourth quarter was $821 million, down 4 days to 76. In accounts receivable, we improved DSOs to 33 days, down 5 days from 38.

Now turning to the outlook. The following statements are forward looking and actual results could differ materially from current expectations. In the seasonally down first quarter, AMD expects revenue to decrease in line with seasonality. Operating expenses are expected to be up approximately 5% compared with the fourth quarter. Acquisition related charges are expected to be approximately $55 million. We expect to have a tax expense of approximately $15 million. Depreciation and amortization is expected to be approximately $315 million and capital expenditures are expected to be approximately $425 million in the quarter.

In summary, in the fourth quarter, we achieved near breakeven at the operating line. We grew ASPs on the strength of new products. We believe we gained share in microprocessors. We managed costs well while growing the top line and we improved gross margin by three points, capping off an eight point gross margin improvement from a year ago. We are maniacally focused on our return to profitability. And as I said as last month’s analyst day, we plan to do so in the second half of 2008.

With that, I’ll hand it over to Hector for some closing comments.

Hector Ruiz

Thank you Bob. You know Derrick and I are not doing our usual prepared remarks today because we wanted to do a couple of things differently. One is to give Bob adequate time for an extended prepared remark explanation of our financials. We were very pleased with the progress and as you saw from Bob’s remarks, we came darn close to breaking even operationally in the quarter.

In addition we also wanted to allow at the end, a little more time than we usually do to make sure that we were able to address any and all of the questions that any of you might have as well as we can.

You know one of the things that we did in the month of December, we had an analyst meeting at which time we told you a number of things that we were planning to do, not only for the quarter but also for our goals and objectives for 2008. One of the things I would also like to underline today before we go to the Q&A is that everything that we told you at that analyst meeting is on plan and there has been no change in any of the information that we gave you and the projections that we gave you into next year.

One of the things that we talked about and I know we’re going to have some dialogue on this particular topics is the fact that we were determined to fix our Barcelona quad-core issues as soon as we could. I’m very pleased to report that silicone has been out of the factor with the fixes that we’ve put in place and we’re really thrilled with all of the work that’s being done and expect that within two to three weeks we will begin providing our customers the samples that they will then put in server platforms beginning the end of the quarter and well into the second quarter and beyond.

Our customers are thrilled about the progress that we’ve made and they’re looking forward to receiving this product. It is exciting to point out too that at the same time, we’ve had silicon on a quad-core 45 nanometer product that equally we’re as pleased with the results and look forward to being able to ramp 45 nanometer aggressively in the second half of this year.

In manufacturing, we continue to have an outstanding asset in our company in an organization that delivers high quality products, high yields, low cost and incredibly good quality. We are very pleased with the progress that has been made but equally important going into 2008, we have a flexible manufacturing plan that we believe is very strong. With incredibly great productivity in Fab 36 and the addendum we’re going to do in the factory in Fab 38 as well as the continued great performance of charters and the conductor in our foundry, we are planning to meet the needs of all our customers in 2008 with those plans. But on top of that, it is important to note that this plan is flexible in the sense that we have the opportunity to dial it up if we need it to, to be able to increase that capability quite significantly.

With that, I’d like to now turn it over to Ruth to monitor the Q&A for today, thank you.

Ruth Cotter

Operator, we’re very happy to take some questions if you could poll the audience.

Question-and-Answer Session

Operator

Your first question comes from the line of David Wu.

David Wu – Global Crown Capital

Hello, good afternoon, well congratulations on an almost breakeven quarter. I have three questions. The first one is, the notebook unit growth has been very robust in the early part of the year. It appeared that that seems to have slowed down and I wondered what has happened, is the market lower or all your OEMs have basically launched AMD Turion notebooks.

The second one I have is on the quad-core. There was something less than 400,000 units shipped and I was thinking whether the mix is sort of 80/20 where 80 is the desktop and 20 the server and what would the mix be like in Q1 of ’08 based on your B3 steppings going out the door.

And lastly, if I have a richer mix of server, what would that do to my gross margin. I assume that unit cost would be higher as your factory loading comes down. Would that be an offset?

Derrick Meyer

It’s Derrick here and I’ll take the questions in the order you cited them. First relative to notebook unit growth. We continue to see the PC market growth being paced by the notebook form factor and we expect notebook unit growth to continue to be very strong year on year looking into 2008. Going Q3 to Q4, because of the seasonally you often see lower notebook growth Q3 to Q4 because in fact Q4 shipments to OEMs are in support of Q1 OEM shipments and of course that’s a seasonally down quarter for notebook, so that’s the situation on notebook.

Relative to quad-core you asked what was the mix in our quad-core shipment units in Q4 between server and desktop. Round numbers, 2:1, desktop to server, very roughly. And I would expect that ratio to actually increase and become more representative of the market in Q1, that is the ratio of desktop to server would go beyond 2:1 in Q1.

And finally you asked about the server mix, clearly to the extent that the mix of our business increases in the direction of server, that’s a plus for gross margins.

David Wu – Global Crown Capital

I assume when you say the more normal ratio, I assume we go from 2:1 desktop to server to 2:1 server to desktop?

Derrick Meyer

No, the other way, so it’s 2:1 desktop to server in Q4, looking forward the ratio desktop to server would increase, 3:1, 4:1 and beyond. You know, round numbers the desktop is in excess of 100 million unit a year kind of market and server is more like 14 to 15 million microprocessor unit per year market. So the ratio long term will end up in that direction.

David Wu – Global Crown Capital

Okay, thank you.

Operator

Your next question comes from the line of Tim Luke with Lehman Brothers.

Tim Luke – Lehman Brothers

Thanks and congratulations on the margin progress as you moved to operating profit in the computing area. Could you give us any color Bob on which segments you have seen move into the black between server, desktop and mobile.

And then I was wondering with respect to your seasonal guidance, if Derrick or you have any color just on the general environment, obviously there’s been some weakness in some of your key partners in Europe and obviously you have the graphics area which was somewhat slow growth perhaps in the fourth quarter that is expected to ramp in the first quarter, if you could give us any color on how you would expect some of the different segments to perform within the seasonal guide. Thank you.

Robert Rivet

Sure, Tim this is Bob. First, thank you for the questions. On the first one, we don’t report that level of granularity of profitability but I can give you some flavor. Clearly our gross margins are the highest in the server business, followed by mobile, followed by desktop. So, that’s the profile, it’s been in the past, it is today and we expect it in the future, so clearly as we get back with Barcelona shipping and grow that position, that actually helps the gross margin from that perspective.

The color on the other ones, Derrick can answer a little bit there to kind of give you a little bit of flavor of what’s going on. From a seasonality, you know we’re still believing it’s someplace between 5-10% down quarter between fourth quarter and first quarter. That’s about all I’ll say at this point in time, it’s someplace in that zone.

Tim Luke – Lehman Brothers

But the graphics business would be up sequentially or not necessarily?

Robert Rivet

No it’s got a seasonal issue too, so it will have a little bit of a downtick also. It’s a little bit less of that range, it’s more on the lower end of the range but it’s still down quarter on quarter in the seasonal patter.

Tim Luke – Lehman Brothers

And what about service, given the ramp, is that seasonal as well?

Robert Rivet

There’s a little bit of seasonality, but clearly as we get more product out there we hope we’ll actually be able to power through the seasonality issue and gain some share in that space.

Tim Luke – Lehman Brothers

And just on the environment Derrick.

Derrick Meyer

Yeah, Tim you asked specifically about Europe. We actually saw pretty good demand in Europe in Q4 and we’re not seeing anything extraordinary on the negative side beyond normal seasonality in Europe as we head early into Q1.

Tim Luke – Lehman Brothers

And more broadly on that and the inventories that you see, just in the industry.

Derrick Meyer

I would echo the same comments worldwide. You know we saw a pretty healthy environment in Q4. We’re not seeing anything substantially different than what Bob referenced, normal seasonality in Q1. Clearly with all the economic noise in the system, we’re looking very keenly and constantly at the environment, but then again we haven’t seen any substantial change from norm.

Robert Rivet

As I said in my prepared remarks, we had record distribution, microprocessor sales, they went out of the quarter with very controlled inventories I’ll call it from that standpoint, so very different view than a year ago.

Tim Luke – Lehman Brothers

Lastly if I may for Hector, just if you have any color on what timeline we should think about for you being potentially able to provide us any updates on the AssetSmart strategies and how you think about that evolving? Thank you.

Hector Ruiz

No, Tim, I wish I could, all I can tell you is I’m more excited than I’ve been on this issue because it looks to us the strategies that is really key and very important to make progress on it and as soon as we can we’re going to be able to tell you, we’ll be delighted to tell you a lot of the details on it and that’s all I can tell you.

Tim Luke – Lehman Brothers

Thanks a lot guys.

Operator

Your next question comes from Krishna Shankar of JMP Securities.

Krishna Shankar – JMP Securities

Yes, congratulations on moving towards profit and profitability. I had a couple of questions on Barcelona. Hector you mentioned that the B3 rev is out of the Fab and it looks good. What things need to happen between now and the end of the quarter when your customers will be sampling platforms and can you sort of give us an update on both the speed ramp profile for Barcelona as well as the Fenom products going forward with the B3 subdivision.

Hector

You know I’m going to ask Derrick to do that, he’s very, very familiar with it, so Derrick.

Derrick Meyer

Sure, I’d be happy to. So as Hector said we’ve got B3 material out of the Fab and we’re putting it through its paces internally and in a couple of weeks we’ll be providing engineering samples to our customers and follow that quickly with production samples later in the quarter. We’ll be working with our server customers very diligently to accelerate as best possible the availability of their systems and the marketplace, you’ll start to see that very late in Q1 and most of the systems early in Q2 and later into Q2.

From a speed perspective, we’re focused on getting the high volume mid band power products into the market where the top speed right there is the 2.3 gigahertz part. The higher performance band, 2.5 gig part will follow in Q2.

On the Fenom side, the focus in Q1 is going to be largely around getting our triple core product into the market as well as our low power 65 watt device into the market and we’ll follow that up with higher speed Fenoms early in Q2.

Krishna Shankar – JMP Securities

So for the valuation of the engineering samples shows that the TLB problem has been solved and the chips look good.

Derrick Meyer

Yeah, absolutely. Yes that was a really focused issue. Very easy to validate internally, so we have high confidence we’re ready to go.

Krishna Shankar – JMP Securities

Great, thank you.

Operator

And your next question comes from the line of Chris Danely with JP Morgan.

Christopher Danely – JP Morgan

Thanks guys. Just a quick clarification, you said that the guidance you gave for ’08 at the analyst days is intact, so I just wanted to ask about the gross margins. You know you gave a target of 46-50% for the year so off of the current Q4 that would imply flattish gross margins in the first half and then gross margins getting pretty close to 50% in the second half of ’08. Can you just give us a sense of how you’re going to maintain flattish gross margins in the first half and then how do you get it to 50% in the second half?

Derrick Meyer

New products, as we said at the analyst day. I mean our plan is predicated on new products across the board, whether it’s in consumer graphics or the microprocessor area. Followed on in the second half of the year by 45 nanometer. So you know we’ll move up to stack of having a product offering in all the bands and you know it’s really new products is key to gross margin expansion. Besides the normal things we do on a daily basis of improving cost, yields and cycle time.

Christopher Danely – JP Morgan

Got it and then Bob, can you give us a sense of any kind of timeline or revenue level that would be a breakeven on a net basis?

Robert Rivet

Well as you can see from the financial statement if you peel through it, there’s a $90-$100 million of cost below the operating levels so that’s what I’ve got to get the operating income level to. As you can see in the current quarter, we did better than we expected, I kind of signaled more $2 billion versus $1.8, I’m rounding up, so you know we’ve got to get north of $1.8 billion to get the appropriate $100 million operating income to get the net to be zero. So it’s going to probably be in the $2 billion zone.

Christopher Danely – JP Morgan

Yeah, that makes a lot of sense and then last question for either Derrick or Hector, I guess guys from a broader sense, what are your goals for market share and profitability in the various segments and in other words, are you pulling back a little bit here and trying to shore up the profitability rather than go for market share in the various segments? Do you feel like you have a certain advantage in one? Can you just give us a little bit of color there on your goals?

Hector Ruiz

Well, our number one goal operationally, we said it before, is that in the fourth quarter, we’ll say it again, again and again, so that all of us know it is we got to return to profitability as soon as we can. We believe we have a plan that will let us do that in the second half of the year, beginning with the third quarter and our level of confidence is high.

Bu at the same time we also want to make sure that it is understood that also, very parallel to that is to serve our customers. Our customers are going to ask us for things they want and need, we want to make sure we have the capability in place to do that. Having said that though, I think it’s important to know that because our focus is return to profitability, that means we’re not going after unit share, just for the sake of unit share. We’re going to make sure that that is served and making sure that our customers get what they want.

Christopher Danely – JP Morgan

Great, thank you very much.

Operator

Your next question comes from the line of Ross Seymore of Deutsche Bank.

Ross Seymore – Deutsche Bank

Hi guys and also congrats on getting closer to breakeven. On the profitability in the first quarter Bob could you give us an idea of what you think gross margin is going to do or at least the puts and takes for that metric?

Robert Rivet

Yeah, clearly if you start at the top line, we have a little bit of pressure because we’re in a seasonally challenged quarter. So, I’ll call revenue is a little on the south side of the equation. Clearly we continue to have more new products in the mix, so that offsets some of that seasonality issue and new products I’d say almost exclusive in total have higher margins than old products in a general statement, I’d call it from that perspective.

So, we’ve got a little bit of a plus minus issue to kind of work our way through to kind of be relatively in the same zone.

Ross Seymore – Deutsche Bank

Okay and the SG&A or the op-ex rising sequentially in the quarters, can you just talk us through why that’s happening given the focus on returning to profitability?

Robert Rivet

You know there’s a few things we did in the fourth quarter, as an example we did a forced shut down, make people take vacation, we’re not making them do that in the first quarter, so there is a few things that we did from that perspective. We’re also trying to ramp as quickly as possible 45 nanometer, starting on FAB 38 and we continue to try to execute as quickly as possible to get new products out there, so we’re making those appropriate investments and as prudently as possible but right now our plan is not to be flat, it’s got a little bit of growth.

Ross Seymore – Deutsche Bank

And the last one from me on the ASP side, you mentioned that went up 4% sequentially on ASPs, was that only because of mix or was there actually some apples to apples price increases that you put through?

Robert Rivet

If you kind of look at it, it’s a little bit of both but the bigger piece of the equation is actually just improvement in the product segment of improving the ASPs. So you know not just a mix of how much servers of the total but actually improving the ASPs in desktop.

Ross Seymore – Deutsche Bank

Great, thank you.

Operator

Your next question comes from the line of Srini Pajjuri of Merrill Lynch.

Srini Pajjuri – Merrill Lynch

Hi, Hector just quickly, I guess Intel yesterday, they said their cap-ex is going to be up for the year and yours looks like it’s going to be down significantly, I guess as you move into the second half of the year given your capacity plans, are you concerned at all about Intel maybe putting a bit more pressure on the pricing side?

Hector Ruiz

You know, let me state my view of that, I think that first of all as I said before and it’s really critical to hopefully grasp the following. The combination of FAB 36 and FAB 38 the addendum that we have and the charter gives us a lot of flexibility to increase unit capacity if we need to. But we, thanks to the tremendous productivity of FAB 36 we are in a position to serve a unit growth that Bob mentioned that we’re counting on for next year and be able to meet the needs of our customers, so we think we’re managing our capacity well and so forth. But I also don’t think that there is an environment where there is an overemphasis on pricing pressure. We have not seen it, doesn’t mean it won’t happen and frankly we’ll have to wait till we’re closer to the second half to be able to answer your question accurately.

Srini Pajjuri – Merrill Lynch

Okay and just one clarification on the op-ex front, post Q1 and obviously you said Q1 is going to be up 5%, do you see anymore opportunity to bring it down further or are you going to stay at that level?

Robert Rivet

More than likely stay at that level I mean we continue to sharpen our pencil and try to be more efficient in every area as possible but you know we’ve done a lot of that work throughout ’07 so I don’t see any significant decrease in any are, it’s really trying to get to no growth and reposition in the appropriate areas where we can get a big return on it.

Srini Pajjuri – Merrill Lynch

Thank you.

Operator

Your next question comes from the line of David Wong of Wachovia.

David Wong – Wachovia

Thanks very much. I was very impressed with the total number of server chips you shipped including the number of quad-cores, now, are you under any obligation to replace any of the original quad-cores that you shipped here but that you’ve got stepping that seems to have some fixes associated with it?

Derrick Meyer

You know the answer to that first order is no. There are a few instances where we have agreed with customers, we’ll do some swaps but that’s a minor part of the overall shipments that we had.

David Wong – Wachovia

However, so therefore, but the quad-cores that you have already shipped on the server front, they aren’t being shipped in end systems, is that correct?

Derrick Meyer

They are being shipped in end systems into targeted large clustering installations.

David Wong – Wachovia

I see and the last thing, yours server processor shipments, the 22% growth, was it roughly the same growth for four-way and two-way server chips or was one greater than the other?

Derrick Meyer

I don’t think we get quite that specific you know in our disclosures.

David Wong – Wachovia

Okay, thanks.

Operator

Your next question comes from the line of Joanne Feeney of Ftn Midwest.

Joanne Feeney – Ftn Midwest

Thanks and congratulations on a great quarter. Couple more details perhaps on the ASP front, so I’m wondering whether within the mix of ASPs up 4%, whether you could clarify the different dynamics going on in the notebooks space versus the desktop space.

Derrick Meyer

Hi Joanne its Derrick here. Notebook ASPs were first order flat. Desktop ASPs were up a bit largely driven by mix, contributor to that was additional quad-core shipments in the quarter and then overall ASPs of course got some lift due to increased server business in the quarter.

Joanne Feeney – Ftn Midwest

That’s great, thanks for that and on the Barcelona progress, I’m wondering if the first quarter shipment outlook is going to exhaust these earlier version, the B2 stepping or will you still have some of those to send out the door in Q2 and perhaps you could elaborate on how much of the B3 might be going out the door in Q1 as a proportion of the total.

Derrick Meyer

Yeah, good question Joanne. So let me remind everybody that the issue with B2 can be mitigated with a very simple to implement Linux kernel fix which is something that’s very practical to do in targeted big cluster installations and because of that for those sort of customers, B2 is fine, it was fine from Q4 it will continue to be fine in Q1, so we’ll in fact ship lots more B2 product in the current quarter. And then the ramp of B3 really starts late in the quarter as we start bringing online our tier one OEMs.

Joanne Feeney – Ftn Midwest

And so then presumably you’ll be wanting to produce lots more of the B3 than the B2 and that would probably tend to fill up your FABs more, should we expect a gross margin expansion from that greater capacity utilization?

Derrick Meyer

Well, I would just reference you back to the comments that Bob made, you know we have the puts and takes, the overall unit volume being down in light of seasonality and then new products helping us in the other direction.

Joanne Feeney – Ftn Midwest

And then one last question if I could. Overall, I’m wondering how much unit growth your current capacity could support for 2008?

Robert Rivet

This is Bob, Joanne, as we showed at the analyst day, Doug showed that, I mean you know we’ve got a pretty respectable unit increase capacity push in the 80-90 million units capability this year, through a combination of our own factories and charter which of course you toggle up and down. So we’ve got pretty good respectable unit growth to support the market’s 15% growth plus.

Derrick Meyer

One other comment I’d make Joanne is remember the B2 inventory also services the desktop, so I mean that inventory is not exclusive for servers, that’s in the current quarter that’s what goes into desktop, that what will happen also in the first quarter and therefore our factory was, we built B2 inventory to actually service the desktop market.

Joanne Feeney – Ftn Midwest

Okay, that’s helpful, thanks very much.

Operator

Your next question comes from the line of John Pitzer of Credit Suisse.

Analyst for John Pitzer – Credit Suisse

Thanks, this Amit calling in for John. I was wondering can you just give us an update on your 45 nanometer run? You said that I think you have [inaudible] working, do you still expect to script products at the end of ’08, first half ’09, just any color you can give.

Derrick Meyer

Good question, Derrick here, yeah we’ve got internal samples of our 45 nanometer microprocessors, we’re putting them through their paces currently and we’re on track to, the plans we talked about in the past which is to start our ramp in the first half of this year and ship revenue product in the second half of this year.

Analyst for John Pitzer – Credit Suisse

Okay, thanks. And then just thinking a little longer term, I know you had announced a while back to build a Fab in upstate New York, is it too early to give color on, A, are you still planning to go ahead with those plans, when would that spending start or is that a, “we’ll see how the market goes over the next couple years but we have capacity for ’08,” just anything you can give on how you’re thinking about that.

Hector Ruiz

There has been no change in our plans. We’ve had the opportunity to wait on this until the summer of 2009 for us to make the decision. We believe that it’s going to be exciting to be able to demonstrate that the growth and share growth and opportunities for us is going to demand that we do actually execute on that plan so, no change and I have to say that we look forward to being able to do it.

Analyst for John Pitzer – Credit Suisse

Okay, thank you very much.

Operator

Your next question comes from the line of Mark Lipacis of Morgan Stanley.

Mark Lipacis – Morgan Stanley

Thank you for taking my question. Perhaps a question for Derrick, you talked about the B3 stepping getting put through the paces internally, what’s the risk that the new stepping has some type of a bug that needs more rework? Thank you.

Derrick Meyer

Well, first of all I’ll say that the risk that by changing the design we went in and we broke something is incredibly small, I mean this was a very simple to implement risk of fix. The risk that there’s something else lurking in the design is not zero but small. You know the fact of the matter is these are incredibly complicated devices that if you look at any microprocessor errata sheet you do find issues but again we’re pretty confident that the design is solid, the B2 version is actually undergone substantial validation by all of our OEMs so we’re quite confident of where we sit relative to hitting the plans I talked about earlier.

Mark Lipacis – Morgan Stanley

Great, thank you very much.

Operator

Your next question comes from the line of John Lau of Jefferies & Co.

John Lau – Jefferies & Co.

Great, thank you, I wanted to take a step back on some of the more macro conditions and see where your outlook is for 2008. We’ve heard a lot of commentary, do you see any concerns as you go into this new year in terms of excess inventory or double ordering.

And then to follow up with your outlook in 2008 in terms of what the industry is going to do, double digits and I have a follow up on that, thank you.

Hector Ruiz

Derrick and Bob might have some comments to add but we are very cognizant as Derrick pointed out of all of the trepidation that’s going on in the world about the economy, both in the US and on a global perspective next year. But I have to say we are in a unique segment of the market, it’s call the microprocessor market, where the need to drive the economic engines of growth in all the segments of the world, all the way from agriculture to automotive to computing et cetera, are incredibly demanding and the emerging markets in particularly, you know Eastern Europe, China, Middle East, Africa et cetera are in such a need of infrastructure growth and economic growth that we see those markets, even if they slow down, from 10% growth to 8% in some of those regions, we’re still talking about a significantly strong and healthy growth.

So as Derrick pointed out we’re alert as a management team, on top of every single change that occurs to ensure that if anything could affect our business we can react as quickly as we can. But the outlook for our business and I want to make sure that the microprocessor business has to be very positive. I think the need in the world economy for that to exist, we’re optimistic and at this point in time we have not seen anything yet that would indicate that not to be the case.

John Lau – Jefferies & Co.

Hector, as a follow up, you mentioned flexibility, what would the average response time be for you to modulate your capacity as you’re seeing demand build up, how quickly could you ramp up your flexible capacity to respond to that?

Hector Ruiz

It’s a function of the size of the increment, you know we could run, I mean we could adjust our capacity in the 5-10% range rather quickly. And by quickly I mean literally 30 days or so. But you go beyond that and it gets a little bit longer. What I think within the range of reasonableness for an expected growth beyond what we expect, I think we are in pretty good shape.

John Lau – Jefferies & Co.

Great, thank you.

Operator

Your next question comes from the line of Doug Freedman of American Technology Research.

Doug Freedman – American Technology Research

Thanks for taking my call. A couple questions for you, not sure who wants to handle this. If I look at the segment reporting it looks like the graphics segment didn’t improve its profitability. Can you talk to what went on there and when you’re expecting to see some improvement in that segment?

Robert Rivet

Yeah, obviously flat revenue makes it a little bit challenging from that standpoint. It’s really more just a function of inventory. Old products, new products kind of working your way through so the pressure was a little bit at gross margin to cause the profitability to slip from $3 million loss to a $12 million loss.

Doug Freedman – American Technology Research

Alright and when are the new products thought to be ramping that you should see the benefits from their gross margins?

Robert Rivet

We’ll see that beginning in the first quarter and continuing strongly in the second and third which there are two big quarters in the graphics space. So our product lineup continues to get refreshed with new product coming out on a pretty consistent cadence which definitely will close that gap.

But in that business, it is, I’ll call it less ASP issue, you don’t see a lot of ASP movement, it is really new products and get the volume on the new products. Derrick do you want to add anything?

Derrick Meyer

Yeah just to reiterate Bob’s point, a lot of what you saw Q3 to Q4 really to put in context, Q2, Q3, Q4 and the answer is just inventory valuation fluctuation across really all three of those quarters. Looking forward, as Bob said, we’re pretty bullish about the response the marketplace has on the 670 product, we come out with a 680 product in Q1. Very optimistic about our OEM share growth prospects based on design wins are already awarded so looking forward we expect to grow share.

Doug Freedman – American Technology Research

Alright and Derrick would you comment a little bit on the market that you participate in is very driven by platform wins, have you seen your customer base waver at all given the issues and execution you’ve had on the quad-core product that you’ve had in the market and since that is sort of the visibility that you have going forward, can you update us a little bit on where you stand on some of the major platform wins?

Derrick Meyer

Is your question server specific?

Doug Freedman – American Technology Research

Server and high performance desktop.

Derrick Meyer

Okay so relative to server, the neat thing about Barcelona is it plugs into preexisting Opteron platforms. So we’ve got a huge breadth of platforms already in existence across all the big OEMs, those platforms are all ready for Barcelona. Some of those platforms are being in fact updated to take advantage of the so called split power plane capability of that product. So the short answer on server is great platform breadth that Barcelona will be able to ramp right into.

On the client side of the business, we’ve actually seen our design win activity continue to increase. As an example the upcoming Puma platform has the most design wins behind it of any platform we’ve ever seen, desktop or notebook. There’s in excess of 100 design wins across all the big OEMs on that platform. On our quad-core desktop platform we’re seeing very good uptake and really happy with some of the uptake that we’re seeing on the commercial side of the desktop business there from some of our big OEMs.

So if anything I see our platform base in ’08 being broader across the board than what it was going into ’07.

Doug Freedman – American Technology Research

Great and Bob if I could a question for you. Getting hopefully closer to the AssetSmart or AssetLight plan, without knowing what the details are behind that plan or what it entails, is it safe to assume that there is some sort of a cash infusion that comes as a result of those actions and if so can you talk about where the priorities are to the company as far as the use of cash? Are you looking to sort of reduce the debt burden on the company?

Robert Rivet

And I wish I could be more helpful but right now I think that’s inappropriate to discuss if there’s cash associated with what we’re working on in AssetSmart. Clearly I continue to be focused on fixing the balance sheet and we’ll fix the balance sheet, however we do it.

Doug Freedman – American Technology Research

Alright, one more thing if I could. Guidance last quarter was for op-ex to increase and it didn’t, should we think that, the company for the last few quarters has sort of been conservative on their guidance, is that something that we should carry forward for the next few quarters that you guys are going to be operationally conservative?

Robert Rivet

I’m not going to answer that question to be honest. I mean we try to call it the way we see it. We do things to modify and adjust accordingly in a quarter. I mean a lot of things happen from both our costs to revenue, inventory management et cetera, so we’re trying to give our best shot of what we anticipate, what our plan is at this moment in time and then adjust accordingly.

Doug Freedman – American Technology Research

Alright, great, thank you.

Ruth Cotter

Operator, we’ll take two more please.

Operator

Your next question comes from Glen Yeung of Citigroup.

Analyst for Glen Yeung – Citigroup

Hi this is Peter for Glen Yeung. It sounds like for your 2008 gross margin progression I guess the question was asked a little bit around 44% first half of the year and maybe getting closer to 50 in the second half, can you give me a sense of how much of that would be volume based, in other words how much of the progression up from first half to second half is kind of predicated on the typical increase seasonally in volumes and I guess we have some pretty healthy year on year growth that we’re expecting as well.

Robert Rivet

Well just to remind everyone you know the typical pattern which has been followed, relatively, is 55% of the volume of a given year is in the back half of the year, 45% is in the first half of the year so that’s just a natural progression of however many units you want to cast, of what happens in the two periods.

Really our units are an important part of the equation but what’s really important is traction on the new products. The new products are what’s going to drive the margin improvement more than just shipping more units from that perspective, so it’s really, all the new product that we’re coming out with in the microprocessor space, graphics space and the CE space that is really going to drive the margin improvement on a quarter by quarter basis.

Analyst for Glen Yeung – Citigroup

So, to follow on to that, if I were to, let’s say just arguably the market grows somewhat below the 15%, how comfortable do you feel that with the new products you’re introducing, you can get enough movement up the price stacks that you’re still getting to the midpoint of maybe your gross margin guidance, I guess that’s really what I’m thinking about.

Robert Rivet

We’re pretty confident. We’re confident based upon, a lot of these products are not, I’ll call it early in the design stage or actually in the tail end of the design stage like Puma is a good example. That products not out there in the marketplace but as Derrick said that platform is getting designed in quite a bit. There will be incremental margin associated with selling that platform. So our confidence level is pretty high that we will maintain and improve gross margin as we go through 2008.

Analyst for Glen Yeung – Citigroup

And can I sneak in one last thing quickly. You may actually not have an answer to this but I’m just curious, when you think about, I know you have better visibility to how many platforms you’re designed into, but especially on the server side, do you have any visibility into let’s say the size of your installed base and I guess in the first half of the year how having quad-core might sell into the current installed base and how, kind of follow on, might be an expansion of your install base. In other words, how much of what you’re thinking about is sales into your current installed base versus an expansion of your installed base is what I’m looking for.

Derrick Meyer

Derrick here, it’s hard to answer that question quantitatively. But what I can tell you is within the enterprise community there certainly are a number of enterprises that have evaluated and adopted wholesale our Opteron technology and have therefore been looking eagerly for Barcelona so clearly those would be the enterprises into which we ramp up Barcelona the most quickly but we also plan to gain new customers in enterprise with Barcelona and extend our installed base.

Analyst for Glen Yeung – Citigroup

Great, that’s helpful, thank you.

Operator

Your final question comes from the line of Cody Acree with Stifel Nicolaus.

Cody Acree – Stifel Nicolaus

Thanks for fitting me in guys. Derrick, could we go back to comments you made about design wins in the graphics segment. Can you give any more color to where you’re seeing success there?

Derrick Meyer

Sure, what I think is best to do is to reference you back to the presentation that Rick Bergman gave at the analyst conference, I think he had a specific slide that actually provided numeric granularity there, all I can tell you is across both desktop and notebook we’ve gotten substantial design win activity and expect actually to have a fairly dominant share position on an OEM level in both desktop and notebook as platforms get refreshed in the spring.

Cody Acree – Stifel Nicolaus

So as we kind of head into Q2 and into the summer months we should see that drop to your bottom line?

Derrick Meyer

Exactly.

Cody Acree – Stifel Nicolaus

Great and then just very lastly, for Bob, can you give us any help on what you expect for taxes through ’08.

Robert Rivet

Roughly $15 million a quarter from that perspective of tax expense, which is pretty much what I talked to you about at the analyst day in December, but right around that $15 million a quarter.

Cody Acree – Stifel Nicolaus

Great, thanks and congrats guys.

Ruth Cotter

Okay and we’d like to thank everybody for participating in the call and there will be a webcast replay and a telephone replay of this call. Thank you.

Operator

Thank you all for joining, this concludes today’s AMD earnings call, you may now disconnect.

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