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

Advanced Micro Devices, Inc. (NYSE:AMD)

Q1 2008 Earnings Call

April 17, 2008 5:00 pm ET

Executives

Ruth Cotter - Director, Investor Relations

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

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

Derrick R. Meyer - President, Chief Operating Officer, Director

Analysts

Srini Pajjuri - Merrill Lynch

Patrick Wang - Wedbush Morgan Securities

Krishna Shankar - JMP Securities

Cody Acree - Stifel Nicolaus

David Wu - Global Crown Capital

Tim Luke - Lehman Brothers

John Pitzer - Credit Suisse

Glen Yeung - Citigroup

Ross Seymore - Deutsche Bank

Uche Orji - UBS Warburg

Joanne Feeney - FTN Midwest Securities

Doug Freedman - American Technology Research

David Wong - Wachovia Capital Markets

Operator

Good afternoon. My name is Matt and I will be your conference operator for today. At this time, I would like to welcome everybody to AMD’s first quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Ms. Ruth Cotter, Director of Investor Relations for AMD. Please go ahead.

Ruth Cotter

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; Derrick Meyer, our President and COO; Bob Rivet, our CFO. This is a live call and will be replayed via webcast on amd.com. There will also be a telephone replay. The U.S. number is 888-266-2081. The international replay number is 703-925-2533. The access code for both is 1221534. The telephone replay will be available for the next 10 days starting later this evening.

I would like to call your attention to our Q2 2008 earnings quiet time, which will begin at the close of business on Friday, June 13th.

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

The semiconductor industry is generally volatile and market conditions are particularly difficult to forecast. Therefore, we 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 expectations.

You will find detailed discussions in our most recent SEC filing, AMD's annual report on Form 10-K for the year ended December 29, 2007.

Now with that, I would like to hand the call over to Bob Rivet, our CFO.

Robert J. Rivet

Thank you, Ruth. Good afternoon, everyone. The first quarter of 2008 was a difficult start to the year for AMD. In a seasonally weak quarter amplified by a challenging global economic environment for consumers and softening demand for our previous generation products, we experienced lower than expected revenues across each of our business segments.

And while we are obviously unhappy with these results for the quarter, looking ahead we are pleased with the customer response to our new offerings across all of our major product segments.

In our graphics business, independent benchmarks continue to show the strong performance and value of our AMD Radeon HD3000 series of graphics products. In our microprocessor business, our innovative triple-core technology is gaining traction for its unique performance and value proposition.

With our upcoming Puma and Perseus platforms in the second quarter, we continue to execute our desktop and notebook strategy with solid customer support. And we are particularly pleased with our customer response to the B3 version of our quad-core AMD Opteron processors in the last few weeks of the first quarter, with 23 SKUs available from multiple OEMs, including HP and Dell, with another tier one OEM coming on board in the second quarter.

All told, it was a quarter characterized by poor top line performance but a strong new product refresh in all of our major businesses that should pay solid dividends as the year progresses.

Total AMD revenue for the quarter was $1.5 billion, down 15% sequentially and up 22% year over year. We recorded a net loss of $0.59 per share in the quarter, including a charge of $0.08 per share related to the ATI acquisition.

Gross margin in the quarter was 42%, a two point decline from the prior quarter due largely to lower microprocessor unit shipments and an inventory drain on older generation products.

Our world-class manufacturing facility in Dresden continues to set benchmarks for operating performance, including yields and cycle types. We continue to execute our 45-nanometer strategy according to plan and we will start production at mature yields this summer.

Total operating expenses, R&D, and SG&A were up 6% over the prior quarter, in line with guidance.

Cash flow from operations was a positive $16 million for the quarter, and adjusted EBITDA was a positive $54 million. A reconciliation of GAAP to non-GAAP financial results are available in our press release.

Capital expenditures came in at $323 million for the quarter.

Now switching to the business segments, computing solutions revenue was $1.194 billion in the first quarter, down 15% from the prior quarter. The quarter-over-quarter decline was due primarily to lower microprocessor unit shipments across server, desktop, and notebook product lines in a highly competitive market.

Quad-core processor shipments were up while microprocessor ASPs were flat. Operating loss for the computing solutions group was $160 million.

Graphic segment revenue was $230 million, down 11% sequentially and up 17% year over year. Due to the strength of our new product mix, gross margins improved keeping operating losses flat at $11 million despite the drop in sales.

Consumer electronic segments revenue was $81 million, down 26% from the prior quarter, the result of seasonally down sales of products for handheld devices and DTV solutions. The consumer electronic segment reported an operating loss of $8 million in the quarter.

Now let me turn to the balance sheet -- our cash and marketable securities balance at the end of the quarter was $1.753 billion, down $136 million from the prior quarter. We sold some 200-millimeter tools in the quarter, generating proceeds of approximately $50 million. The remaining tool sale opportunities and potential administrative land and building sales continued to represent more than $400 million of cash generating opportunities in the future.

With days of inventory at 81 days, total inventory declined in the quarter to $785 million. In accounts receivable, DSOs remained flat at 33 days.

Now let’s turn to the outlook -- 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 decrease in line with seasonality. Operating expenses are expected to be flat to slightly down from the first quarter, as we see early effects of our cost reduction programs.

Acquisition related charges are expected to be approximately $50 million. We expect to have a tax expense of approximately $5 million in the quarter. Depreciation and amortization expected to be approximately $300 million.

We reduced our planned capital expenditures for the year to approximately $900 million, with our investment and focus primarily on 45-nanometer.

As previously announced, we will take a restructuring charge in the second quarter. Details of the amount will be disclosed as they become available.

In summary, we had another challenging quarter and in the context of an uncertain economic environment, we are taking big steps as quickly as possible so we can reduce our costs and restructure our business for future success.

At this point, I’ll turn it over to Hector for some brief closing comments.

Hector De J. Ruiz

Thank you, Bob. There are two things that Bob alluded to in his remarks that I want to underline that occurred in Q1 that are very important for us as a company. One of them is the continuation of great performance by our manufacturing operations in Dresden, Penang, Singapore, and Suzhou. And the other one is the general availability of our quad-core AMD Opteron processors, as evidenced by the announcement of systems by our tier one customers, HP and Dell, and later on this quarter another tier one customer.

However, it is clear that our business environment has changed from just the second half of last year where we saw some of our non-core businesses on a path to growth and profitability, that is now question. As a result, we are embarking on a significant restructuring of our company to address the following.

We need to intensely scrutinize all of our businesses in order to ensure that our core X86 and graphics products are on a healthy path to leadership and profitability.

We also need to intensely scrutinize our non-core businesses and revisit their strategic fit into our plans and their path to growth and profitability. Absent these, we will exit those businesses.

We will complete the 10% workforce reduction just announced as one of the elements of a program to reduce our break-even point by a couple hundred million dollars from where we are today.

All of these efforts are key to repositioning the company not just with a reduced break-even point but more importantly as one strategically positioned to sustainably grow and lead in those core areas that I mentioned before.

We have made significant progress in our asset smart strategy and I am personally driving this effort intensely and I am very hopeful that we will be able to communicate details of this rather complex effort in the near future. At that time, we believe we will also have an opportunity to further restructure the company for increased focus and added flexibility while placing us in a better position to deliver sustainable, profitable growth.

We have not deviated from our goal of achieving profitability in the third quarter of this year and our commitment to you is that we will take the appropriate actions necessary to achieve that.

Thank you for your patience and support and let me turn it over to Ruth for the question-and-answer.

Ruth Cotter

Matt, we would now like to open the call for questions, please, if you could poll the audience.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Srini Pajjuri of Merrill Lynch.

Srini Pajjuri - Merrill Lynch

Thank you. Bob, after you are done with the restructuring, could you help us understand where your OpEx will be maybe let’s say by Q4 of this year?

Robert J. Rivet

Well, as Hector outlined, we are trying to reduce the break-even point to get us in a zone of more -- we break-even at $1.5 billion. We probably won’t totally be there at the fourth quarter level but that translation would mean fairly significant cost reductions in the order of $25 million to $50 million per quarter less by the fourth quarter versus the current run-rates of today.

I don’t want to be overly specific because we are working at both manufacturing and OpEx but I think that’s a reasonable expectation of what we are modeling and working at right now, is 25 to 50 by the fourth quarter.

Srini Pajjuri - Merrill Lynch

Okay and Hector, when you mentioned that you are going to take another look at the non-core businesses, is it part of the restructuring that you announced or is this something new that you are talking about?

Hector De J. Ruiz

This is something in addition to what we just talked about.

Srini Pajjuri - Merrill Lynch

Okay, and any timeframe that you can put around it?

Hector De J. Ruiz

We are on a path to do this as quickly as we can and we will announce it as soon as we know, but we are on a fast pace.

Srini Pajjuri - Merrill Lynch

Okay, and one final question for Bob; when you say seasonal, I guess I just want to understand because your seasonality has been all over the place and also, it looks like you are ramping several new products. My question is why would you not grow a little better than seasonal in Q2? Thank you.

Robert J. Rivet

Well, seasonal from our perspective and to me it’s a combination of what our competitor says and us, because we are the industry. You know, second quarter kind -- the best any quarter has been in over a near-term period of time is about 0%. It’s been down as much as 10% and the average has been about 4 to 5.

Right now, we don’t see any reason, even though we do have a good product lineup to push that any harder than what the math says, also based on what our competitor said.

Srini Pajjuri - Merrill Lynch

Thanks.

Operator

Our next question is from Patrick Wang of Wedbush Morgan.

Patrick Wang - Wedbush Morgan Securities

Just a couple of questions, first off -- I was looking at the profitability of the different business units here and it appears that operating margins just on a unit-to-unit basis has gotten a little bit worse in computing. Can you give us some color just to get us a little bit more comfortable in terms of operating margin of the computing business?

Robert J. Rivet

Well, clearly volume drives that margin pretty significantly. That is a fixed cost business from our perspective and clearly you drop the volume and you’ve got that fixed cost issue that kind of plays through. So I’m not sure exactly what else I can say on that.

Clearly with the product refresh that we’ve started to introduce at the tail end of the first quarter and the continuation of the platform strategy we have, we feel like we will continue to make progress and grow the top line, reduce the cost per unit, particularly when we introduce 45-nanometer in the back-half of the year from in-volume production, that you’ll see cost per unit drop and margin improve.

Patrick Wang - Wedbush Morgan Securities

And that’s expected in the back-half of this year?

Robert J. Rivet

Correct.

Patrick Wang - Wedbush Morgan Securities

Okay, and then just some color on graphics because I mean, I think commentary just on the product portfolio on the graphic side is that you do have a stronger lineup there. Any color into when that starts seeing improvement?

Derrick R. Meyer

So what we saw in the quarter actually was better margins on the graphic side, again driven by stronger products and a mix shift that was favorable in that dimension, offset a little bit by pricing pressure on the low end. Looking forward, we clearly expect on the strength of products to start to grow share across the board and see that business improve.

Patrick Wang - Wedbush Morgan Securities

Okay, great, thanks. And then just one last question, just on 45-nanometer, I know that you said that you expect production of that material some time in the summer. Any more color you can provide there, just to help us better understand what’s happening?

Derrick R. Meyer

We’ll start the production ramp in the summertime and start to ship products in volume in Q4.

Patrick Wang - Wedbush Morgan Securities

Okay, great. Thank you.

Operator

Our next question is from Krishna Shankar of JMP Securities.

Krishna Shankar - JMP Securities

Yes, previously you had been talking about a $2 billion sort of break-even and now I think you are saying $1.5 billion, or is that $1.8 because Hector also talked about a $200 million reduction in that break-even point. Can you clarify that for us?

Robert J. Rivet

1.5 is the target that we are working on to reduce, so basically I would just keep it simple -- it’s the current quarter, the first quarter we just reported, that that $240 million loss would be zero, so that’s what we are working our way toward. So we’ve taken a much more aggressive stance than may be interpreted in the past.

Krishna Shankar - JMP Securities

I see. And then in graphics, you did have a pretty good mix with the 3000 product family and yet the business was not profitable. Can you talk about what leads that to becoming more profitable going forward?

Derrick R. Meyer

High order it’s more volume generated through share gains and we have pretty good confidence based on two things that will get there. First of all as we told this group at the December analyst conference, we did a very -- we are very good -- we were very effective at locking down OEM design wins on the mobile platforms, which refresh here in Q2, so a lot of that is locked.

And then beyond that, we’ve again got a strong product line and ought to be able to grow our share in the desktop space, both on the OEM side and on the add-in board side.

Krishna Shankar - JMP Securities

And the final question on Barcelona, it sounds like that is going to be a key vector in terms of profitability and margins. What’s been the response from customers and are you competing there in terms of performance, price per -- what are sort of the metrics that you are trying to win back business, given your late entry into the quad-core server market?

Derrick R. Meyer

The response from customers has been enthusiastic, as has the response from end users. We’ve talked about in the past some of the marquee cluster wins that we generated and served actually with Rev B2 of the product. Rev B3 is stronger. We’ll be able to increase frequency over time. The product is terrific in the high performance computing space where floating point intensive applications reside, and in addition in virtualized data centers, the product really shines.

Robert J. Rivet

And just to remind you, as I said, HP and Dell have launched so that product is available. You can go to the HP website and see the product that’s available with AMD products.

Krishna Shankar - JMP Securities

And my final question is for Hector; you talked about the asset light strategy and having details on that soon. I am trying to reconcile that with your excellent performance in manufacturing and can you give us a little more clarity on what asset light might look like, either in terms of share ownership of a fab or AMD becoming to some extent fab-less? I just want a little more color on your asset light strategy.

Hector De J. Ruiz

I know you would like it and I feel terrible that I can’t provide you details that I would love to and I hope to do it soon, but the obvious thing is that what gives us an opportunity to do things creative is the fact that we have incredibly strong world-class benchmark manufacturing assets and at this point in time, and I hope to tell you more soon.

Krishna Shankar - JMP Securities

Thank you.

Operator

Our next question is from Cody Acree of Stifel Nicolaus.

Cody Acree - Stifel Nicolaus

Gross margins for the second quarter, any color on direction or magnitude?

Robert J. Rivet

Well, you know clearly in a seasonally down quarter, if you don’t have the top line it makes it a little more challenging. But as I said, I would like to just give you a framework. I don’t give color on exactly what’s going to happen so we don’t give that kind of guidance, but I would like you to think of it in two dimensions. And the first dimension is we do have a bunch of new products. You know, we only had weeks of the B3 material take place for the first quarter versus we’ll have a full 13 weeks in the second quarter.

And the same thing goes in graphics. In graphics, we continue to be excited about the new products and we continue to have more new products coming, so those are the positives of the quarter.

The negatives is the seasonality, just the unit pressure you have of clients, particularly for us in the consumer space is a little bit of a challenge. So there’s a plus and there’s a minus. You need to quantify what you think that is.

Cody Acree - Stifel Nicolaus

Maybe could you also talk -- obviously this may also be an answer you can’t give but talk about the break even number. If you can’t talk about specifics, at least maybe the drivers that get you there. At $1.5 billion, you gave us a little bit of OpEx guidance. What kind of gross margins do we need to be getting to or at least what kind of mix shift helps you to get to the gross margin numbers to get to that break-even level?

Robert J. Rivet

Well, in the current business model, so I’ll call it pre-asset smart, we have to be -- and using fourth quarter as a proxy, we have to be pushing the north of 45% kind of level. Clearly though we are trying to reduce the burden in the OpEx category and also see if there is some room we can in reducing the cost of manufacturing so it’s easier to get to the north of 45.

So kind of a -- you know, but in a perfect world, we’re going to try to shift fixed cost to variable cost so that weekend weather storms a lot easier at $1.5 billion than we currently are today.

Cody Acree - Stifel Nicolaus

Okay and then lastly, you mentioned 13 weeks of B3 and GPUs ramping in. When are volumes large enough that we really start to see some drop-through to the bottom line to impact on operating profits? Is it late, late in the year or is it sooner?

Robert J. Rivet

It’s really this summer, so to me we’ll see server improvements right now in the current quarter and continuing in the third quarter and fourth quarter, so it’s definitely happening. Desktop is happening right now also as we continue to increase the lineup of Phenoms available.

Triple core is another opportunity that we just started again in the first quarter. That will continue, so really that quad-core architecture that we also use for triple-core will have good benefit right away.

The wildcard issue is the environment we are in in the consumer space, which is the world we play in mostly.

Cody Acree - Stifel Nicolaus

Perfect. Thanks, guys.

Operator

Our next question is from David Wu of Global Crown Capital.

David Wu - Global Crown Capital

I was wondering about the fact that your Puma platform is also coming out, would that enable you to turn that notebook volume around, since that’s a completely new platform.

And in the second quarter, considering your lineup of products, I would be surprised if your market share would not go up in the calendar quarter relative to what you had suffered in Q1 because of a product freshness issue. Can you talk about that a little bit?

And the other one I was wondering about is Hector was mentioning about what were the core technologies and I think graphics was one of them, but the graphics portfolio that you have today is a very broad one and can you dissect or discard part of the graphics core without hurting the part that you want to keep?

And lastly, maybe Derrick can help me on this, the Barcelona platform apparently is a straight 45-nanometer die shrink of the -- sorry, the Shanghai platform is a straight 45-nanometer die shrink of today’s Opteron, but I was wondering whether you may change in architecture bit to help your industry performance by having say a four issue per clock kind of thing as opposed to current generation of three issues?

Derrick R. Meyer

I’ll try to take those, all three of them, in the order you asked them. So first of all with respect to Puma, the way I would characterize that one is as follows; first of all, that platform has enjoyed great design win success across our customer base. Certainly in our historic consumer segment but also in the SMB area. It will be hitting the market in Q2.

Clearly relative to notebook share, the exposure we have to the consumer market makes us swing a little bit more seasonality than the overall notebook market and due to that, we’ve got the opportunity to gain serious headwind in the back half of the year, again due to seasonality.

And in addition, as I said the fact that that Puma platform is also enjoying some success in the form of design wins with SMB gives us an opportunity to further grow our share in the back half of the year.

You asked about what do we consider core and what do we consider non-core, you know, high level the way we think of this is the technological foundation of our core businesses is our X86 technology together with our graphics technology. And the business outlet for those is primarily computing. Servers and PCs and markets that are very adjacent to PCs. So hopefully that clarifies that a little bit.

And then finally you asked about Barcelona; if I understand your question, it had to do with are we going to be substantially changing the core when we move to Shanghai. And first order, there are some core improvements but not major ones. I would call them incremental improvements to the core. But other improvements on the die, such as caches and so on.

David Wu - Global Crown Capital

I see. Thank you.

Operator

Our next question is from Tim Luke of Lehman Brothers.

Tim Luke - Lehman Brothers

Just to clarify on that, you are suggesting that Puma should see some volume at the end of the second quarter or you think it will be more volume in the calendar third quarter on the notebook side?

Derrick R. Meyer

The platform refresh happens on the consumer side in what’s called the back-to-school cycle. That cycle typically starts with machines showing up in retail channels in North America, as an example, in July, and we start shipments to prepare for that in late May and June.

Tim Luke - Lehman Brothers

Okay, and then just on Barcelona, you had shared some metrics in terms of units for that at the analyst day in New York, fourth quarter, first quarter. I was wondering if you had anything else to share in terms of how we should think about the ramp in terms of units or volume or revenue as you move into the second and third quarters.

Derrick R. Meyer

Tim, just for clarification, when you say Barcelona, I here that being a server question. Is that right?

Tim Luke - Lehman Brothers

That’s right.

Derrick R. Meyer

Okay. Rough math, our quad-core server shipments in Q1 represented about 25% of the mix, roughly. That ought to grow quickly to 50% in the current quarter and go beyond 50% after that point in time.

Tim Luke - Lehman Brothers

You’re assuming that with that you get -- that having seen a flat ASP overall in the first quarter, it is improved or flat or overall for the company lower in the calendar second quarter?

Derrick R. Meyer

Good question and first of all, the flat ASP comment was relative to the entire microprocessor product line -- server, desktop, notebook. Clearly to the extent that we start to grow our server volumes and improve our share in servers, that improves our overall mix and is a good factor relative to the overall ASP and profitability of the product line.

Tim Luke - Lehman Brothers

And lastly, this is for Hector; in framing your expectations that you thought you might be able to provide some incremental color on asset light in the near future, should we think about that being so by the time you get to the call in July being the next sort of near future, near-term event, that will be when you might be looking to have news to share or do you think there is potential for it to move out beyond into the second half of the calendar year?

Hector De J. Ruiz

Good try, Tim, good try. You know, I am not really trying to be evasive but I think we are truly tremendous progress in this area and I -- I do not want to be flippant but to me, near future is any time in the next 90 days to the rest of the year. I can’t call you any closer than that.

Tim Luke - Lehman Brothers

Maybe just [on top of that], Bob, on the cash balance, you’ve got $1.75 billion of cash and you have taken down your CapEx a little bit. How should we think about you planning for the cash balance and what is your expectation as you move through the calendar year? Any color there?

Robert J. Rivet

Sure. Well, clearly we are trying to run the business very cash focused to try to manage capital investments versus how much cash from operations will throw off. Clearly that’s why we are stepping up to deal with excess employees and those kind of things, so I am trying to weather the storm and be prepared for whatever storm presents myself -- presents us.

Second is we still are monetizing tools and that administrative building and land we’ve talked about, so that’s over $400 million, so I feel pretty good that I’m in an appropriate liquid position to manage my way through this pre asset smart.

Tim Luke - Lehman Brothers

Thank you very much, guys.

Operator

Our next question is from John Pitzer of Credit Suisse.

John Pitzer - Credit Suisse

Just quickly on the guidance for seasonal for Q2, if you look at sort of the IDC and Gardner data that came out for Q1, despite the macro headwinds, the overall PC unit growth was about seasonal and clearly you guys underperformed. So I’m just trying to understand why you feel comfortable guiding to normal seasonal going into the June quarter, given that the macro headwinds are still there. Are you expecting a better than seasonal overall market or are you expecting sort of in-line PC seasonality with you guys gaining share? If you can give me some color on that, that would be great.

Robert J. Rivet

Well, here’s the way we kind of look at it. To me, if you add up our competitors’ results and our results and just look at microprocessors sold into the marketplace, we are down about 9%. The industry is down about 9% quarter to quarter, first to fourth, which is on the low end of seasonality. Clearly we did poorly in that performance which we believe is due to our exposure in the consumer space, though total PC units, an interesting phenomena, appear to be okay from I’ll call what PC units are selling, but clearly there’s a lot of people very cautious.

So our position for second quarter is we are cautious. We clearly still see I’ll call it the consumer pressures but we don’t need to forecast stronger or worse than at this point in time. We’ll just kind of try to hit it down the middle of the fairway.

And we’ve got a new product lineup which we believe will help us but again, I need to reestablish credibility versus throwing out a big number or a small number.

John Pitzer - Credit Suisse

So Bob, just to clarify, you hold share in a seasonal market in the June quarter, is kind of the way you are looking at things?

Robert J. Rivet

Again, our consumer exposure makes that a little tough but our goal is to hold share, not lose anymore share than we have and if anything, try to gain some of it back that we lost, particularly in the server space.

John Pitzer - Credit Suisse

Bob, as you take break-even down another 200 from 1.7 to 1.5, is that just executing on stuff that you’ve already announced or would we need to see more announcements for you to get to that break-even level?

Robert J. Rivet

You’ll see more announcements, so there is more for you to be told on the specificity of actions.

John Pitzer - Credit Suisse

And then lastly for Hector; Hector, you mentioned that having world-class capacity is critical to your MPU strategy. Do you need to own that world-class capacity I guess? And if you didn’t, do you think that would put you at a competitive disadvantage?

Hector De J. Ruiz

First of all, I don’t think that the ownership of the capacity is necessarily a reflection of the leadership in technology needed. Our partnership with IBM has demonstrated that we are able to hang in there relative to technology without having to own the R&D, for example, totally. We’re sharing it.

So I’m a strong believe that especially for us, we demonstrated it in the past, we’ll demonstrate that going forward, that partnering with people is very important to our future and particularly in the area of technology.

John Pitzer - Credit Suisse

Thanks, guys, appreciate it.

Operator

Our next question is from Glen Yeung of Citigroup.

Glen Yeung - Citigroup

Can one of you guys address the departure of your CTO and just whether or not that has any implications for the longer term roadmap, either from a design or manufacturing standpoint?

Derrick R. Meyer

The second part of the question first -- it doesn’t have any implications for the roadmap or our ability to execute on that roadmap. Beyond that, it wouldn’t be appropriate for me to comment on any specific person’s departure but I can tell you we are focusing on elevating our game and fixing some of our execution problems and in so doing, we’re going to bring into the company people with better talent and better experience, and you’ll see more. I’ll cite as an example the recent addition of a new CMO and a new CIO to the company.

Glen Yeung - Citigroup

Okay, great. And then just sort of another little point here, I did notice that you bought out the ownership of Xander in your fab -- I think it was 36. Maybe just address what the strategy is there.

Robert J. Rivet

Well, it’s always been our plan -- you know, when we originally set up Fab 36, we did that through a process of some help from our friends, I’ll call it, of the State of Saxony and MMW as minority partners and then some loans with some help from the government.

Our plan has always been at the appropriate times, and we have different sequences in time, is to take out the minority partners. That first opportunity presented itself on April 1st and we’ve executed that.

It will help us on the cost, our interest expense on a go-forward basis and we felt it was the right thing to do and has been our plan and every opportunity we have, we will wind our way out of those minority interests.

Glen Yeung - Citigroup

Okay, thanks. I just wanted to clarify those two things. So the next question I guess is for Derrick; just thinking about channel inventories or processors first, but I’m actually more interested in graphics and what your thoughts are there, both of your inventories and your competitors’, how you feel the channel inventories fit.

Derrick R. Meyer

On the graphic side, we’ve been very carefully managing -- I’ll call it the inventory levels in our AIB partners and we feel like there is absolutely no issue. What we’ve got is what we plan to have, period.

You know, likewise on the CPU side of the business, we don’t feel like the inventories are particularly unhealthy and I will say that with the availability of B3 late in the quarter, a lot of that product was absorbed by the channel and is out there in the sub-distributors, no doubt, but we don’t know of anything that causes alarm.

Glen Yeung - Citigroup

And then actually sort of in that vein, I wonder if you saw any geographic changes over the course of the quarter, and I’ll be specific -- we’ll a little worried that Europe is getting weaker and again, we did see the data on PCs that looks pretty healthy for Q1. I’m just wondering if you’ve seen any signs at the turn of the quarter from a geographic perspective that raises any question markets.

Derrick R. Meyer

You asked about Europe specifically -- there is no question that we are hearing from our customers signs of a little bit of weakness in the Western European countries -- U.K., France, et cetera. But that’s largely offset as we understand it by strength in Eastern Europe, so overall the market seems to be hanging in there in Europe.

Glen Yeung - Citigroup

Okay. Last question, Derrick either for you or for Hector, just if there is such a thing, your strategy on ASPs, what your intentions are for the remainder of the year. Is this an area where you feel like you can try to hold -- particularly with the new products coming out, do you feel like pricing is something you are going to have some advantage with this year?

Derrick R. Meyer

Overall, the pricing strategy of the company hasn’t changed and that is to deliver good value to our customers into the market on the strength of good technology, and do so in a way that is responsible financially to the company and generates appropriate margins.

We’ve got some things going for us from Q1 looking forward and that is the introduction of quad-core to both our server and desktop lineups, which clearly gives us an opportunity to play across a wider breadth of the marketplace, get back in ahead of the game on the server side and have a richer mix on the desktop side, which are both positive factors on ASP.

Glen Yeung - Citigroup

Thanks, that was really helpful.

Operator

Our next question is from Ross Seymore of Deutsche Bank.

Ross Seymore - Deutsche Bank

Just a couple of questions on the cost reduction strategy -- I think that you guys mentioned there’s another round of adjustments coming to get to that break-even number you talked about. Is that simultaneous with what Hector was talking about, looking at every segment? Or is there like a middle step between those two?

Hector De J. Ruiz

First of all, let me separate the two pieces and then Bob can come in. One of the things I said and let me hopefully clarify it is that we are very confident that when the time comes for us to implement our asset smart strategy, that we will have the opportunity to go through another run of cost reductions relative to restructuring the company. This will be something very much tied to the opportunity that we will have when the asset smart gets implemented.

But as Bob pointed out, between now and then we will also have a continuation of other cost reduction activities and one of them is the intense scrutiny that we are putting in our businesses to ensure number one that our core businesses continue to be healthy, and especially as it relates to leadership and profitability, and that those businesses that are not core get really scrutinized relative to whether we want to continue depending on their outlook relative to growth and profitability.

Once we accomplish that, there will be an announcement made relative to the impact that that will have in reducing our OpEx.

Ross Seymore - Deutsche Bank

So is the asset smart strategy a prerequisite to the break-even or is all three of them, the 10% plus the scrutinization and the asset smart?

Hector De J. Ruiz

No, the asset smart strategy is not a prerequisite to the break-even. All of the other actions are part of a continuation of reducing the break-even.

Ross Seymore - Deutsche Bank

Okay, and I guess the final question on the restructuring would be I believe we’ve just hit the one-year anniversary of hearing about the asset smart or fab light strategy and really haven’t seen much to do with it. I know it’s a difficult and complex strategy. Is there any reason to believe that that scrutiny of your core and non-core businesses would happen any sooner than that sort of one-year anniversary we’ve already run into on the fab light side?

Hector De J. Ruiz

I can assure you that it will happen a lot sooner.

Ross Seymore - Deutsche Bank

Okay. Moving quickly away from the housekeeping, or excuse me the cost cutting side of things, any difference in what was happening in the graphics business between the desktop and the notebook side of things?

Derrick R. Meyer

Could you clarify the question? Any difference --

Ross Seymore - Deutsche Bank

On your GPU side of things. It looked like the ASPs were down but the units were up. I wondered if there was any -- if it was a mix related thing or an apples-to-apples thing, especially considering some of your new product introductions.

Derrick R. Meyer

I would think of it just as a mix related thing, you know, strength in the high end and pricing pressure on the low end kind of offsetting each other.

Ross Seymore - Deutsche Bank

Okay, and then similar to an earlier question, the ASPs being flat in your microprocessor business, were there any out-layers as far as the three main segments -- servers, desktops and notebooks -- that change quarter over quarter to cause that, or is it really just about the same in each of the three segments?

Derrick R. Meyer

It was pretty similar across the three segments, really. There wasn’t -- not any two big offsets, in other words.

Robert J. Rivet

The data is all fairly consistent, you know, piece by piece, a slight improvement, slight decline, but all within the noise level of plus/minus 1%.

Ross Seymore - Deutsche Bank

Okay, and then the last one was a bit more of a housekeeping question -- depreciation came in below what you guided to and it looked like it actually went down sequentially. Could you just talk about the mechanics of how that actually drops, given your past CapEx?

And then, if you could remind us of full year depreciation guidance, that would be helpful too.

Derrick R. Meyer

Well, we continue as we -- we’ve been on a ramp to add additional capacity in Fab 36. We also are converting Fab 30 from 200-millimeters to 300-millimeters. We stopped production at the beginning of the fourth quarter on the 200-millimeters, so tools have been coming in. That’s where the $322 million, which is split between Fab 38 and Fab 36, but clearly I’m not turning on the tools if I don’t need to execute them in the manufacturing environment, and so that is why depreciation is a little bit less. We didn’t feel like we needed to turn them all on as fast as we originally forecasted based upon the economic view and the current realities of the first quarter.

From a balance throughout the year, it will be a little bit less. We’ll drift down from the levels we talked about before from guidance of $1.4 billion. Probably at this point in time, I’d say it’s probably more 1.2. But I’ll give you more updates on a quarterly basis. Right now, I’d say a little bit of growth as we put, we bring on 45-nanometer tools as we start in the summer 45-nanometer production.

Ross Seymore - Deutsche Bank

Great. Thank you very much.

Operator

Our next question is from Uche Orji of UBS.

Uche Orji - UBS Warburg

Thank you very much. Just a couple of questions, first of all on graphics. Given the lineup of products you have now, do you anticipate that you will start to regain market share through the rest of the year? That’s the first question.

And also secondly, at the analyst day you showed us a mix of your share gain within the [inaudible] platform, and I think back then you had said you’d get 60% of the design wins. Can you update that for us now if possible, please?

Derrick R. Meyer

First, we do anticipate gaining share across both desktop and notebook starting in Q2, and I’ll say accelerating through the second half of the year.

On the notebook design win front, really the story hasn’t changed from the good one that we told you back in December.

Uche Orji - UBS Warburg

A different question within graphics also -- I noticed in the press release you talk about having a full lineup of FireGL products. Now granted you’ve not been a big player in the professional solutions market here. NVIDIA does very well here. Is this a new attempt at strategy within the professional solutions because of the margins there?

Derrick R. Meyer

I can’t speak to the new factor in the sense that the ATI team has been part of AMD only for a year-and-a-half, roughly. But I can tell you there’s no question that’s a focus for the company. That’s a big margin pool in the graphics business. We are pretty optimistic about our ability to have bigger access to that pool based on two things. One is the very good OpenGL drivers that we announced a couple of quarters ago, which are very robust, very solid, and offer great performance. And number two, the capability of the hardware products themselves. Now clearly there’s a lot of other things we’ve got to do right, specifically engagement with a couple of big tier one OEMs who really drive volume in the workstation space but also evangelizing our technology in enterprise and also partnering appropriate with ISVs.

Uche Orji - UBS Warburg

I’ll just ask a different question -- let me switch to microprocessors. You know, you described the environment as competitive and yet ASPs were flat. Now, is it safe for us to assume that there are conditions in place now for ASPs to rise for you and for the industry through the rest of 2009? Of course this is not assuming that you know what Intel is going to do but just from what you sense of the environment, and you’ve been able to give us some color in the past about what you think will happen. So Hector, is there any sense from your side that we are passed the whole [inaudible] pricing and we expect pricing to stabilize and able to rise through the rest of the year?

Hector De J. Ruiz

We haven’t seen a -- you know, we saw a -- we call it a stable environment in the fourth quarter, or in the second half of last year and I would call it very competitive. And we don’t see any change from that, at least in the near future in the marketplace. We expect the environment to continue to be very competitive.

In talking about ASPs, the key at the end of the day really is the ability to improve our mix with the new products that both Bob and Derrick have been talking about, the fact that Barcelona, the quad-cores are ramping both in the server and the client, and the introduction of new platforms. All of that and our ability to ramp those volumes higher will have a bigger impact on ASPs than any minutiae on the market changes relative to the ASP environment.

So we expect and our plans are to see a stable but competitive environment in the next couple of quarter.

Uche Orji - UBS Warburg

And just one last question -- given that 45-nanometers will be -- we are looking at shipments in Q4, and I’ll assume that for the mainstream, we are now looking maybe Q109 for the 45-nanometer in the mainstream. Your restructuring measures, would they include any other measures to reduce cost per unit in the meantime? I’m assuming right now that most of the efforts you are going to make on restructuring will be more on the OpEx line but will that include any other strategies to reduce cost per unit, you know, [inaudible] when 45-nanometers will kick in because if not between now and then, when 45 becomes available in mass, I just worry that you may not be able to remain competitive against Intel.

Robert J. Rivet

No, I mean clearly the cost reduction effort is across the board. It’s in manufacturing. I mean, we are turning over every rock to find every penny for the amount of units we ship to see if there’s ways to save more pennies. You know, whether it’s test time reductions, changing burn-in times -- I mean, everything you can imagine in the manufacturing environment to streamline flows, et cetera, to save more pennies per unit, besides in the OpEx category of how we become more efficient in our R&D investment or in our G&A operations, so it’s an across-the-board type issue, not just waiting for 45-nanometer to happen. It’s all areas.

Uche Orji - UBS Warburg

Thank you very much.

Operator

Our next question is from Joanne Feeney of FTN Midwest.

Joanne Feeney - FTN Midwest Securities

A bit more on the Barcelona detail and what your hopes are, maybe you could help us identify the end market segments, whether it’s DP servers, two-way servers, or multi-way servers, where you think you are likely to have the most success with your future customers and where you might see the best shipment growth. Or where in the desktop and notebook segment you think you are going to get the best traction over the course of this year.

Derrick R. Meyer

First on the server side, as you probably know, we’ve retained a pretty good position in the four-piece space, even with the dual-core products that we have, on the strength of -- I’ll call it system architecture superiority and the introduction of quad-core to the 4P product line certainly helps us out there.

In addition, we’ve got the opportunity to grow back some of the share that we lost in the two-piece space really across many segments in the server space, whether it’s web serving, that is the outer tier, HPC, you name it -- getting back on an even playing field certainly helps us and gives us an opportunity to grow share.

On the client side of the business, as you know we’ve got kind of historic strength in consumer retail and refreshing the product line at worst keeps us whole in an area of historic strength and gives us an opportunity to get a little bit richer mix on desktop. The same statement with GPUs, by the way.

And then finally the area where we really are under penetrated is the commercial client market generally. We kind of think of that market in three broad buckets, I’ll call it -- government education, one; enterprise, that being big business, two; and SMB number three.

The big opportunity for us is SMB first because that’s the biggest of those three segments and it’s the one where we are aligned with OEMs near-term to penetrate. Does that help?

Joanne Feeney - FTN Midwest Securities

Sure, that does but you did reference the big architectural difference between yourself and your competitor and that’s one difference -- one big part of that difference that may evaporate at the end of the year with their release of their next generation product. So where do you think you might be able to still retain an edge despite that introduction and do you see the introduction of 45-nanometer based products as essential to your doing that?

Derrick R. Meyer

Clearly we’ll give our product line a good pop when we introduce the 45-nanometer quad-core products, code named Shanghai. And then we’ll be introducing a new platform architecture later 2009, early 2010.

Joanne Feeney - FTN Midwest Securities

And then finally, if I could, just how much of the B2 version of Barcelona have you guys left in inventory?

Derrick R. Meyer

I can’t quote you a number but the way I would think of it is this -- we’ve been selling the B2 quad-core pretty successfully in desktop and despite B3 being in the marketplace, have plans to continue to do that through all the channels that we have, so we’re not particularly worried about the B2 inventory position.

Robert J. Rivet

And we flipped manufacturing clearly to the B3 in the first quarter, so I am comfortable with the B2 inventory that we’ll be able to move it at the appropriate speed, particularly in the client space.

Joanne Feeney - FTN Midwest Securities

So with your slow down a little bit of ramping Fab 36 and filling it out to full capacity, how much extra room do you have to increase your unit shipments if you were to increase your CapEx again? How much extra output could you get if you did that?

Robert J. Rivet

Well, I mean, to give you a framework, Fab 38 has the capability of about 20,000 starts per month and we are at zero, so I mean -- forget about Fab 36 because Fab 36 really has all the equipment in place. It’s just a utilization issue and transitioning to the appropriate technology node, but Fab 38 is an asset that’s sitting there with a little bit of equipment that will be built out at the appropriate time for unit growth.

Joanne Feeney - FTN Midwest Securities

And what kind of timeframe, Bob, would be required to outfit that facility at this point?

Robert J. Rivet

You know, it’s -- I mean, the lead time for equipment is anywhere from three to 12 months. It depends on the piece of equipment so it’s that kind of a zone. Clearly we push and pull on that number all the time. As you’ve seen, we can back off capital fairly quickly, we can ramp up capital pretty quickly. But it does take a while to -- I’ll call it if we needed that kind of capacity tomorrow, it takes a while to put in place.

Joanne Feeney - FTN Midwest Securities

And are you currently running Fab 36 flat out? Are you 100% utilization?

Robert J. Rivet

No.

Joanne Feeney - FTN Midwest Securities

Okay.

Robert J. Rivet

So we have room to build more units in Fab 36 alone, if we want to and the market wants them.

Joanne Feeney - FTN Midwest Securities

Okay. Thanks.

Ruth Cotter

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

Operator

Our next question is from Doug Freedman of American Technology Research.

Doug Freedman - American Technology Research

A lot of good questions asked and answered -- if you could focus a little bit on the 45-nanometer products. Congratulations on seeing samples already and have you been able to get a measure of sort of how they are going to measure up benchmark wise and what your expectations are there from a performance perspective?

Derrick R. Meyer

Is that a -- you are asking us to draw comparison between our 45-nanometer products and what we think the other guys --

Doug Freedman - American Technology Research

Or even your own, if you could just benchmark what type of performance improvements do you expect to achieve with those products.

Derrick R. Meyer

Okay, a couple of dimensions; one is clearly by going to 45-nanometers, we’ve got an opportunity to put more function on the die, to the benefit of performance, which is something we do clearly in the server space, so that would drive architectural improvements. Also by going to 45-nanometers, we get improvement in transistor performance and power efficiency, which kind of raises all boats, both server and desktop. In addition, in the 45-nanometer generation, we’ll be doing die variance with the interest of having products that are targeted to the appropriate cost points as they exist in the marketplace. Does that help?

Doug Freedman - American Technology Research

Yes, somewhat. Can you also talk a little bit about where you stand on the development of the new cores, the Bulldozer and Bobcat that were talked about at the last technical analyst day?

Derrick R. Meyer

The Bulldozer core is in development in 45-nanometer technology and we’ll be sampling that in 2009.

Doug Freedman - American Technology Research

All right, great. Thank you.

Operator

Our final question today is from David Wong of Wachovia.

David Wong - Wachovia Capital Markets

Thank you very much. First, just a clarification -- you said earlier about ASPs being flat, so you meant they were flat in each individual segment, right? Server, notebook, and desktop and there wasn’t a mix shift that helped hold the ASP flat? Is that what you said?

Robert J. Rivet

Yes, that’s correct, David.

David Wong - Wachovia Capital Markets

Okay, great. The other thing is can you quantify how much it will cost you in cash to get to break-even? Will you have significant cash restructuring charges? What do you reckon your cash balance might drop to before you hit neutral cash flow?

Robert J. Rivet

Not ready to disclose that information. We continue to work through it. As we’ve said, we’ve got many steps in the process that we are working our way through but as I said before, we feel like with the current cash balance and the other opportunities we have, we are in fine shape to manage our way through even cash restructuring costs.

David Wong - Wachovia Capital Markets

Okay, great. And just one final one -- in the December quarter, you said you shipped about 400,000 quad-core processors. Can you give us the number for the March quarter for quad-cores?

Robert J. Rivet

In excess of 0.5 million.

David Wong - Wachovia Capital Markets

Great. Thanks very much.

Ruth Cotter

Okay, Matt, that concludes the call. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Good day.

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

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

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

Source: AMD Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts