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

Advanced Micro Devices, Inc. (NASDAQ:AMD)

Q2 2008 Earnings Call

July 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

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

Analysts

John Pitzer - Credit Suisse

Ross Seymore - Deutsche Bank

Tim Luke - Lehman Brothers

Joanne Feeney - FTN Midwest Securities

Krishna Shankar - JMP Securities

John Lau – Jefferies & Co.

Srini Pajjuri - Merrill Lynch

Uche Orji - UBS Warburg

Doug Freedman - American Technology Research

Chris Danely – JP Morgan

Glen Yeung - Citigroup

David Wu - Global Crown Capital

David Wong - Wachovia Capital Markets

Operator

Welcome everybody to AMD’s second 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.

Ruth Cotter

Thank you every body and welcome to AMD's second quarter earnings conference call. Our participants today are Hector Ruiz, our Chairman of the Board and CEO; Dirk Meyer, our President and COO; Bob Rivet, our CFO. This is a live call and will be replayed via web cast on www.AMD.com. There will also be a telephone replay. The number is 888-266-2081. Outside of the U.S. the number is 703-925-2533. The access code for both phone numbers is 1240774. The telephone replay will be available for the next 10 days starting later this evening.

I would like to call your attention to our Q3 2008 earnings quiet time, which will begin at the close of business on Friday, September 12. In addition I’d like to take this opportunity to remind you that we will be hosting our annual Financial Analyst Day on November 13 at our [Seattle] offices.

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 current date and involve risks and uncertainties that could cause actual results to differ materially from our current expectations.

The semiconductor industry is generally volatile and market conditions are particularly difficult to forecast. 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 quarterly earnings report on Form 10Q for the quarter ended March 29, 2008.

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

Robert J. Rivet

In the second quarter revenues declined 7% from the prior quarter affecting both of our businesses and reflecting the challenges of the current consumer macroeconomic climate. Looking ahead the good news is we are gaining traction with our new products as evidenced by a steep increase in unit growth in our triple core and Quad-Core offerings and strong market response to our new graphics products.

More specifically on the product side we expanded our Quad-Core offerings with eighteen new products this quarter including four energy efficient and four high performance processors. In servers, all four leading OEM’s are shipping systems based on our quad four AMD Opteron processors and we are regaining server momentum and winning back business with key customers on the strength of our superior performance in floating point and memory intensive workloads as well as in the context of virtualization solutions.

It is noteworthy that three of the top five and seven of the top 20 super computers in the world are built on AMD Opteron solutions. Finally, our graphics leadership position continues to build with the successful introduction of our next generation ATI Radeon and HD4800 family of graphic processors which have earned outstanding reviews and include the world’s first graphic chip to break the teraFLOPS performance barrier.

In addition we continue to focus on delivering increasing differentiated platforms optimized for every use and scenario at work, at home and at play at leadership price performance points. We launched the AMD business class commercial desktop and notebook solution powering PC’s from Acer, Dell, HP, Fujitsu Siemens and [inaudible].

Our AMD Live and AMD Game platforms continue to gain customer momentum in the client space. We also launched our next generation Puma notebook this quarter and have seen over 100 design wins to date on the basis of its superior 3D graphics and HD image quality. Before I proceed with the financials I’d like to remind everyone that last quarter we signaled the review of our non-core businesses. This resulted in a decision to divest the handheld and DTV divisions and classify them as discontinued operations for financial reporting. Prior periods have been recast for comparability. For the purpose of my remarks this afternoon I will refer to continuing operations unless stated otherwise.

A reconciliation from GAAP to non-GAAP financial results is available in our press release. So let’s begin.

Revenue for the quarter was $1.35 billion, down 7% sequentially and up 3% year-over-year. We reported a net loss of $1.96 per share in the second quarter. Losses from continuing operations were $269 million or $0.44 per share which included a net favorable impact of $97 million or $0.16 per share. This favorable impact consists of a gain of $193 million from the sale of 200 mm Tools partially offset by $96 million in charges. Our loss from discontinued operations was $920 million or $1.52 per share. This was largely made up of non-cash goodwill and intangible asset impairment charges of $876 million.

Reported second quarter operating loss is $143 million but on a non-GAAP basis was $276 million compared with $185 million last quarter. For comparability I have excluded the Tool sales, arc and restructuring charges as are outlined on the table in our press release.

Gross margin in the quarter was 52% including a 14 percentage point positive impact associated with the sale of 200 mm Equipment. Therefore gross margin was 37% compared with 41% in the prior quarter. This decline was due to lower unit volumes and ASP’s and changes in product mix as we sold older generation products to make way for our new offerings.

Now switching to the business segments. Computing solutions revenue was $1.1 billion in the second quarter, down 8% from the prior quarter and flat compared to the same period a year ago primarily due to weaker sales. The server business saw 5% unit growth over the prior quarter and a 19% increase over the same period a year ago, a positive sign in light of the recently launched OEM products. Quad-Core and Triple Core processor shipments were up significantly while microprocessor ASPs were down. The result of sales of older generation products.

Operating loss for the computing solutions group was $9 million; however this includes a $192 million gain from 200 mm Tool sales. In the graphics segment which now includes game console royalties revenue for the quarter was $248 million, down 5% sequentially and up 18% year-over-year. Operating loss for the graphics segment was $38 million in a very competitive pricing environment particularly on our older generation products. However, our new highly acclaimed HD4800 series has been well received in the market since its launch in late June.

Now turning to the balance sheet. Our cash and marketable securities balance at the end of the quarter was $1.57 billion, down $186 million from the prior quarter. Adjusted EBITDA was $119 million. Capital expenditures were $104 million for the quarter down from $322 million in the prior quarter. We still have an excess of $200 million in future, non-operational cash generating opportunities based primarily on administrative assets. This does not include any proceeds from the sale of our discontinued operations or the execution of our asset smart strategy.

Now let me turn to the outlook. The following statements are forward-looking and actual results could differ materially from current expectations. Last quarter we set a goal to reduce our break even point at the operating level to approximately $1.5 billion. We have made progress in that direction this quarter with a break even approaching $1.6 billion. We expect to make ongoing progress on this front as we continue to focus on achieving this goal early next year.

In a seasonally up third quarter, AMD expects revenue from continuing operations to increase in line with seasonality. Operating expenses are expected to be approximately 4% down from the second quarter. Amortization of acquired intangibles is expected to be approximately $30 million. Depreciation and amortization is expected to be approximately $300 million and we remain on track with our planned capital expenditures for the year of approximately $900 million.

In summary the second quarter was a tough one. However, we remained focused on transforming the business for future success as we continue to roll out new and exciting platforms positioning us for success in the second half of the year.

At this point I’d like to turn it over to Hector.

Hector de J. Ruiz

Three years ago under my leadership the AMD Board of Directors began putting in place a succession plan to transfer the reigns of this company to my good friend and colleague, Dirk Meyer. I am pleased and excited to announce on behalf of the AMD Board of Directors that we have elected Dirk as President and CEO of the company effective immediately. The time is right.

Barcelona is shipping. Product momentum is picking up in both our graphic and microprocessor business and our conversion to 45 nanometers technology is well on track. We have made enormous progress on our asset smart strategy. This is why the time is right to turn the company over to a new leader, one who as earned the trust and respect of AMD customers, partners and employees worldwide and one who I know will do what it takes to earn your confidence as well.

You know what most of us know of Dirk is that he is a very prolific engineer. He has over 40 patents and over a dozen chip designs to his name including the ground breaking DEC Alpha Processor. He also lead the design of our industry transforming AMD64 architecture and Dirk took the reigns of what was then the computation product business where under his leadership he was able to double revenue and expanded its customer base, partners and R&D footprint. I think we all know that changed the face of the microprocessor industry as we know it.

What a lot of you are going to get to know in the near future is that he is an incredibly talented business executive who makes decisions quickly, decisively and just as quickly turns those decisions into action. In short, he is the right leader at the right time for this company. I will remain as AMD’s Executive Chairman, focusing my full time energy on driving our asset smart strategy through its exciting conclusion. I will also continue to lead our initiative to break our industry free from the grips of an illegal monopoly.

Dirk, my friend I congratulate you on your promotion. AMD is in great hands.

Dirk Meyer

Thanks both to you and to the AMD Board for your support and your confidence in me. You know, AMD is a great company comprised of great people dedicated to serving our customers and transforming this industry. Hector, we have come a long way in the last six years since you took charge of this company. With you at the helm we took AMD into enterprise with the strength of the AMD64 platform. We built AMD’s global presence with bold expansion efforts in China, Latin America, India and the Middle East.

We re-established partnerships with many of the greatest OEM’s and software firms in this industry; HP, IBM, Sun, Dell, Microsoft and Oracle to name a few. You courageously launched a global initiative for fair and open competition. A battle we are winning for the benefit of the industry and consumers everywhere.

We have a company rich with great people, great products, a great spirit and a lot of great potential. Looking to the recent past we have not been living up to that potential. Looking forward we will. We will demonstrate a pattern of sustainable profitability. We will focus on our unmatched combination of X86 and leadership graphics technologies and we will execute, execute and execute.

We have been able to attract some outstanding new leaders to our team. Examples: Nigel Dessau, our new CMO; Ahmed Mahmoud, our new CIO; [Shakei Bakrout] who joins Jeff [inaudible] in leading our newly formed central engineering team and Emilio [Gilardi] who joins us next month to join sales and marketing in our EMEA region. Great people motivated to join a strong team in one of the most compelling professional opportunities in the high tech industry.

I want to thank Hector for the great progress we have made on our asset smart strategy and for accepting the Board’s request to stay on and drive it to completion. I know I speak for all AMD employees when I say I am really looking forward to the challenges and opportunities that lay ahead.

With that Ruth how about the Q&A.

Ruth Cotter

We are now happy to take questions so if you could please call out participants and announce each question accordingly we would appreciate it. So we are ready to go when you are.

Question-And-Answer Session

Operator

(Operator Instructions) We’ll take our first question from John Pitzer - Credit Suisse.

John Pitzer - Credit Suisse

Dirk you talked a little bit about demonstrating a pattern of sustainable profitability. What kind of timeline would you be willing to share with us? You guys have talked in the past about some goals as being seen in the second half of 2008. I’m just wondering if you can elaborate on those.

Dirk Meyer

We still believe on the strength of the momentum we’re seeing in the marketplace based on the new products we introduced in Q2 that we can expect to remain profitable at the operating level in the second half.

Bob do you want to provide further commentary?

Robert Rivet

Yes to me we are not backing off on that. We still believe that. We have made progress on the break even point as I talked about. Our goal is to get to the $1.5 billion in the beginning of next year. We are making progress to that. We’d like to split the stake in the ground that we don’t want to look back so start making money in the third quarter and move forward from there.

John Pitzer - Credit Suisse

Relative to those targets does that imply more work around the asset smart strategy or do you think the strength in the top line demand in the back half of the year kind of gets you there?

Robert Rivet

It is really a combination of both. Clearly we believe that new products will give us traction to increase the top line. Our strategy of continuing to execute on 45 nanometer improves our cost structure but also it does incorporate asset smart execution by Hector to bring it to conclusion.

John Pitzer - Credit Suisse

The last question, if you kind of project out for the balance of the year your capEx to rev ratio this year is going to fall at about 15% which is almost half of what it has been running for the last three years. I’m just curious as to what kind of confidence level or milestones you can throw out around 45 nanometers to make us feel more comfortable that you are spending at an appropriate level to stay competitive?

Dirk Meyer

First let’s talk a little about 45 nanometers in general. We are well on track with the 45 nanometer plan as we have been telling this group about in the past. We have actually started production late last quarter and are on track to start buying shipments early in Q4. Typically it takes us 3-4 quarters to flip the factories once we start so that would say it would be largely converted roughly in the middle of next year. Much of the capital expense we are bearing now is in support of that plan.

Operator

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

Ross Seymore - Deutsche Bank

Dirk with your new role can you talk about any sort of differences in the strategic direction that might ensue?

Dirk Meyer

Two comments. One is Hector and I have been sort of partnership leading the company to this point looking forward to certainly some changes. As I said in my opening remarks we are a company with great potential and really distinctive capability relative to having both X86 and leadership graphics capability in hand. I think looking forward you are going to see us focus a little bit more narrowly on some of the big volume sweet spots in the marketplace particularly in the PC space and the volume server space. We are certainly going to increase our focus on execution, dependable delivery of products to our customers and focus on efficiency.

Some of my personal focus by the way given my background is to work with the team and ensure we have the right product and solution roadmap entering the front end of our R&D funnel and to focus on ensuring dependable R&D execution. Likewise I have been focused up to this point and will continue to focus on building a great team of people around to help lead the company particularly in the sales and marketing area.

Ross Seymore - Deutsche Bank

Maybe a follow-up on the $200 million remaining asset sales and then whatever potentially will happen with the handheld side. Bob can you just give us a rough idea of timing on those? Do you think just generally the second half of this year some of those actions will be taking place just so we can factor it into some of our cash burn assumptions?

Robert Rivet

Sure. The majority of the 200 million left is associated with administrative buildings. To be honest the market is a little bit choppy to go execute a transaction in that space but I anticipate that is a back half of the year/beginning of next year type execution of that $200 million bucket that is still left which is the majority of the bucket.

Ross Seymore - Deutsche Bank

What about the discontinued ops? What should we think about there? I obviously know you can’t give any real specifics.

Robert Rivet

No. We are quite well down the path and we believe you will see something before the end of the year.

Ross Seymore - Deutsche Bank

The last question from me for you Bob is put some takes on gross margin in the third quarter. It sounds like your mix would improve but given the pricing environment we are hearing about in graphics and any other kind of variables would be helpful.

Robert Rivet

No, if you kind of think of it clearly the second quarter was characterized of a little bit of traction in the server space as I outlined some unit growth but the OEM line up took place more into the quarter so it takes awhile for that to turn into volume. We expect some of that volume opportunity to present itself in the third quarter so the mix will enrich towards the server space. Also we will have more of the new architecture affect the third quarter which clearly gives us the ability to have some higher ASPs. More unit volume and higher ASPs from that perspective and it is kind of the same story with just different words in the graphics space. We launched the first new series of products really with only about two weeks to go in the second quarter so we will have a full quarter with traction and as you know seasonally this is a strong quarter for graphics from that perspective. So it is really top line and change of mix which is what drives us in the appropriate improvement direction.

Operator

The next question comes from the line of Tim Luke - Lehman Brothers.

Tim Luke - Lehman Brothers

Hector I was wondering if you could provide us with some of the parameters around which you are considering that the asset light strategy you talked about some of the progress there. Maybe you could share with us some of your thoughts around how we should think about the progress and how you perceive that developing. Is it something you think you would be likely to conclude in the calendar third quarter? Separately, Bob perhaps you could give us some color on how you perceive your balance sheet in terms of any needs for incremental capital going forward.

Hector de J. Ruiz

I can tell you we are very pleased with the progress. We have made enormous progress. We are looking forward to being able to share that with you. Certainly have incredibly high level of expectation we will be able to do that before the end of the year.

Tim Luke - Lehman Brothers

In terms of progress could you give any color on how you measure that or what you consider to be the elements of that progress?

Hector de J. Ruiz

I really can’t.

Robert Rivet

The balance sheet question as I have said repeatedly in prior quarters I get nervous I’ll call it on the cash for the business when I start approaching the $800 million level. I am 2x that is the level set from that perspective. So therefore I am not nervous. I believe in the business and the business plan for the second half of the year. I don’t see a need to go do anything to raise capital from that perspective based upon the business plan we have in front of us and execution of asset smart and execution on the discontinued operations.

Tim Luke - Lehman Brothers

Maybe you could just say as a reminder you believe in normal seasonality to be roughly what sort of range up for the calendar third quarter and did I get that right you were eluding to break-even in the third quarter?

Robert Rivet

First on the seasonality question our data would suggest we have seen a range of 2-14%, so it is a fairly big range. The average continues to settle around 8-10% as seasonality pick up in the third quarter from the second for the microprocessor business. It is actually a little bit healthier than that in the CPU business but it is in the same zip code because clearly it is going to the same space from that standpoint so that is the seasonality question.

Our comment is it is too close, I am not going to forecast as I normally do. I don’t forecast profitability for the next quarter out but we clearly will be profitable in the second half of the year.

Tim Luke - Lehman Brothers

You are inferring from that having seen the gross margin move to the 37% level you are comfortable that obviously to get back to these targets it is going to be in the low 40’s shortly then as you move throughout your new products.

Robert Rivet

Clearly your math is right. We’ve got to get back to 40+ which is where we were last quarter. Clearly in the microprocessor business it is still a very success oriented business and how you run the factories and how many units you sell have a big impact on that gross margin. The current quarter’s low level just drove gross margins to not be very good. We expect them to pick up through the seasonality process and most important through all the new products.

Operator

The next question comes from the line of Joanne Feeney - FTN Midwest Securities.

Joanne Feeney - FTN Midwest Securities

I just have a question really on the top line and the combination to gross margin and how that played out this quarter. You were saying you ended up with more legacy products selling and I guess I’m just wondering if the mismatch of what you were trying to sell matched with the demand from the market and how do you see that changing in the third quarter? Have you gotten rid of those old products? Are you seeing demand for the new ones? What should we expect gross margin really to look like?

Robert Rivet

Clearly with the introduction I’ll call it of the new Quad-Core architecture which really took place at the beginning of this year and servers at the end of the first quarter that is what we’re talking about as I call it the new microprocessor architecture. Clearly the prior architecture was focused on single and dual core so we moved out a lot of single core type products in the second quarter which definitely demanded a lower ASP from what the marketplace had. We are also seeing the continued shift to people wanting to buy value based computers that are at the right price points. So the price points typically are moving down in the lower direction.

Putting that aside, third quarter with servers contributing more to the top line, so I’ll call it a mix shifting toward the server business because we’ll now have a full quarter of traction with all the major OEM’s and a better merchandising of our new architecture in the desktop line up and the Puma platform starting to get some traction based upon the 100 design wins we have. We believe that will drive the top line which will also drive gross margin.

Joanne Feeney - FTN Midwest Securities

So on the graphics side you have seen some [moving] recently with the new product that has come out. Do you see and you said Q2 was dominated by older graphics processors at lower prices. How much money do you expect to contribute to gross margin and then looking forward beyond that it seems like good execution on graphics and graphics sort of becoming perhaps more important to the company. How big can the graphics be for AMD over the next few quarters?

Robert Rivet

Clearly you are back to the thesis of why we purchased ATI which was the graphics and chip set part of the business and then IP. Clearly we are starting to see some progress from the team’s phenomenal efforts to bring a bunch of new products out. The new 4800 series we believe will be the best product in the marketplace and you will see that continuation happen throughout the second half of the year. It will definitely contribute to gross margin. It is very similar to the microprocessor business. You’ve got to be in the right price points. You’ve got to be fully merchandising the whole stack. It is not just about having volume and the value into the equation. You have got to have it all. We believe with the new series of product we will.

Our first, as we talked about, we feel very comfortable with what is going on in OEM notebooks and desktop. The channel we continue to make progress and you’re starting to hear a lot of chatter to the goodness so gross margin expansion driven by top line expansion on the backs of all new products.

Joanne Feeney - FTN Midwest Securities

In the end it sounds like sort of a mix shift across the board is something that would push your gross margins to a level by the end of the year to reach that break even point. Is that correct?

Robert Rivet

Correct. Actually make money for the back half of the year.

Operator

The next question comes from the line of Krishna Shankar - JMP Securities.

Krishna Shankar - JMP Securities

A couple of questions. Previously you have talked Bob about a $2 billion break even level and now you are sort of talking about $1.5 or $1.6 billion level. Can you talk about that and also you said profitability in the second half? Is that profitability at the operating profit level or what do you mean by profitability here in the second half of the year?

Robert Rivet

Sure. I’ll kind of do it in my order but answer all your questions. First, since we are so far away from profitability the first order of magnitude is operating profit at the operating income level. Not at the net income level. First get to that level and then we’ll work to get to net. That’s what I talk about when I say $1.5 billion at the operating income level.

Yes indeed we actually used to say $2 billion was more kind of our break even point. Then we realized in the current environment and in reviewing our own portfolio of products that didn’t make any sense. We revised it down to $1.5 billion. We are still not at that goal. We expect to be at that goal at the turn of next year. So kind of in the first quarter. We are making progress. Right now if you do the math we are a little bit north of $1.6 billion.

Krishna Shankar - JMP Securities

Also can you give us an update on Puma? I know you have 100 design wins. We have seen some delays on the competitor’s platform. How is Puma looking and will that have a material impact on Q3 revenues in terms of the back-to-school time for notebooks?

Dirk Meyer

Certainly Puma is going to be a big contributor to revenues and margins in Q3. As you know the notebook platform refreshes happen in the so called back-to-school cycle as it is called in U.S. retail. That is a cycle where machines start to show up on shelf in July. We have had some of our OEM’s already announce those machines and others will do so shortly. We have shipped some Puma platforms into OEM’s in anticipation of that retail cycle but really the volume starts taking off in Q3.

Krishna Shankar - JMP Securities

My final question Dirk is can you give us an update on fusion and the fusion architecture for 2009?

Dirk Meyer

Absolutely. Just to re-introduce the term, fusion represents the idea of bringing together in distinctive ways our X86 CPU and graphics and video technology. One of the ways we do that obviously is to bring together the platform level which is what Puma represents. Looking forward we will integrate those technologies into a single piece of silicon. That development is underway and will be sent to customers next year. So we are very excited about it and our customers are really excited about it.

Operator

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

John Lau – Jefferies & Co.

You mentioned seasonality. I was wondering if you can give us a little bit more color as to what you are seeing in the marketplace. There has been a lot of concerns out there. Do you see anything that would change your thoughts about the normal seasonality pattern for Q3?

Dirk Meyer

Obviously everyone we talk to is watching the macroeconomic environment kind of wondering what is going to happen in the PC market but interestingly the signals we get from our customers still indicate the market on a global basis is healthy. Obviously some of the more developed areas, the U.S. and Western Europe are weaker but the emerging markets are still going strong. So in aggregate based on what we hear we expect normal seasonal patterns walking into Q3.

John Lau – Jefferies & Co.

As a follow-up you mentioned EBITDA. Can you give us the cash flow from operations for the last quarter?

Robert Rivet

Sure. It was negative $240 million.

Operator

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

Srini Pajjuri - Merrill Lynch

I have two questions on gross margin. First of all in the quarter despite the fact that you saw a better mix in almost 400 basis points I am just wondering did you see any unusual price pressures on the client side or was it anything else there?

Robert Rivet

Actually we’re probably the most unusual price pressure was in graphics. Clearly our competitor took some pretty aggressive actions to try to maintain their position as we came out with our new products and slow things down. I also think it had a lot of inventory in a very seasonally weak quarter so there was more pricing pressure in the graphics space. Processors always has pricing pressure but I wouldn’t say it was anything beyond normal. Like I said before there is a tendency shift that we see going on. This pushes more geared toward the value space that is kind of where the world wants to go and you have to remember particularly for AMD we are much more exposed to the consumer than the commercial space. We are trying to change that mix but that is the reality of the world we live in today is the consumer space.

Srini Pajjuri - Merrill Lynch

But you seem comfortable that gross margins can get back into 40% level in the next couple of quarters?

Robert Rivet

Yes.

Srini Pajjuri - Merrill Lynch

Bob one more time for the break even of $1 billion what are the different elements? I’m just looking for your opEx you expect by Q4 of this year.

Robert Rivet

As I signaled, Q3 will go down so I’ll get a full quarter impact of the restructuring process in the quarter. To be honest we are going to try to stay at those levels for quite a long period of time to get back to what Dirk talked about as sustainable profitability. So we have done a pretty thorough investigation of how do we spend the money. Where do we spend our money? We’ll stay at those levels plus or minus a little bit for awhile.

Srini Pajjuri - Merrill Lynch

My final question is on the gross margin again once you are done with the asset smart strategy and once you execute that what kind of impact and how should we think about your gross margins longer term? Also do you have a longer term target in mind once you close the asset execution?

Robert Rivet

I’ll say a 50,000 feet with specific details to me doesn’t make sense to give to me until we actually have a deal with all of the pluses and minuses of a deal. But in reality today if you think about it from a cross of business I spend two things in the R&D category or three things I’ll call it in the R&D category which is process development, bringing up factories and chip design. Clearly there are two of those that will go away in an asset smart strategy. So one, there is cost reduction in that area. Clearly there is going to be cost increases in the gross margin as you pay for the cost of that technology on a per wafer basis and the cost of capital on a per wafer basis. So it is kind of trying to figure out the math of working those two angles that we will talk about once we have a deal.

So gross margin down, R&D down. That’s about all I want to get into at this point.

Operator

The next question comes from the line of Uche Orji - UBS Warburg.

Uche Orji - UBS Warburg

Just a couple of quick questions. In terms of your design win in graphics for the new platforms you announced a number awhile ago about the level of design wins you have had. Is there an update to that?

Dirk Meyer

Those were design wins all that were locked down last year actually so now is when they start to pay off.

Uche Orji - UBS Warburg

What estimate of what share you are getting in those platforms?

Dirk Meyer

As we said at the analyst conference we were very happy with our design win momentum with 60+% design win share.

Uche Orji - UBS Warburg

A different question we talk about pricing going up at the foundries just for your process business. Is there any way you are able to protect yourselves from a cost push pressure coming from private business [inaudible]? I think the first question is are you seeing it yet and also what extent are you going to try and manage the expense? All the comments you made about ASP pressure as well as graphics competition?

Robert Rivet

Sure. On the one reality that is always a supply/demand debate the foundries have to work their way through. Clearly for people like us who are a big user of the foundries and are big strategic customer of the foundries we work our way through those cost increases. Most of those cost increases are I’ll call it for the smaller players, not for us. Not that they don’t ask for price increases. So we are working our way through that. We don’t see that instantaneously. We work our way through that because we have a long-term strategic relationship with these guys. That was a long answer to your question. We are not seeing significant cost increases coming from our foundries.

Operator

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

Doug Freedman - American Technology Research

Can you talk a little bit about newcomer acquisitions? A company while Hector you were sitting in the CEO role added quite a number of major OEM’s to the AMD stable. Can you talk about if there is opportunities to continue to add to that and if so is it something we can expect to see in the next 12 months?

Dirk Meyer

Good question. With Hector at the helm we did a great job of acquiring new customers and in fact if you look at the big players in the PC market there is only a couple left with whom we don’t do business on a CPU basis although we do business in other product lines. So looking forward clearly there are a couple of opportunities left relative to customer acquisition on the CPU side but really the big opportunity we have is to enjoy a broader base of business with the customers we have already acquired. That is what we are focusing on.

The big example there is really the commercial client business. Bob referred to it a little bit. We have got a number of design wins actually announced in Q2. I think the number was 15 overall in our business class platform. So that is an area of incremental opportunity for us.

Doug Freedman - American Technology Research

Can you talk a little bit about the next generation 45 nanometer server chip Shanghai and are we close enough yet to start to get some performance benchmarks whether to industry standard or to your own present line up?

Dirk Meyer

We’re close enough to know exactly what we’ve got in hand and we are really excited about it and look forward to telling you about it when we launch the product.

Doug Freedman - American Technology Research

Any projections on when it will launch?

Dirk Meyer

As I said we are in production now and we will ship for revenue early in Q4.

Operator

The next question comes from the line of Chris Danely – JP Morgan.

Chris Danely – JP Morgan

Can you give us a sense on what units versus ASPs did in Q2?

Robert Rivet

Directionally units were down a little bit, ASPs were down more. So kind of the mix. It was both of them contributing to the drop in revenues quarter on quarter but more ASP than units.

Chris Danely – JP Morgan

A little bit of an itchy question but in terms of the Barcelona speeds are you guys shipping 2.4 ghz now and when will you begin shipping 2.5 and 2.6?

Dirk Meyer

The answer to the first question is no, not yet in volume. On the second question I’d like to hold off until we talk about future products and actually launch them rather than pre-launch announce.

Chris Danely – JP Morgan

Dirk can you give us a sense for when you will begin shipping in volume?

Dirk Meyer

On Shanghai?

Chris Danely – JP Morgan

The 2.4 Barcelona.

Dirk Meyer

I don’t want to pre-announce product introductions on the call.

Chris Danely – JP Morgan

I might strike out on this next question because it is in that same vein. Your competitor has talked about success with its stripped down, notebook processor. Are there any plans for AMD to launch a similar product and why or why not?

Dirk Meyer

Are you referring to Atom?

Chris Danely – JP Morgan

Yes.

Dirk Meyer

The first thing to point out is we are a much smaller company, not nearly to scale that our competitor has so clearly we don’t intend to do absolutely everything they do in the marketplace. Atom as I understand it is intended for a range of products below what I’ll call traditional notebooks and form factor size ranging from handhelds to global internet devices. It is a smaller factor and more inexpensive notebooks. Clearly when you talk about smaller form factor notebooks and inexpensive notebooks that is a market segment we are interested in. It is actually a segment that we are starting to offer products to our customers in support of now. We actually haven’t talked in public about that but I expect we will be talking about it and doing the math when we get together in November at our Analyst conference.

Chris Danely – JP Morgan

Hector you have been talking about the fab light asset, light asset smart for awhile now and last quarter you promised us some details in the near term. So, I know you are not going to talk about details but what is taking so long on this thing?

Hector de J. Ruiz

First of all the near term is coming. It is getting closer. All I can tell you right now is that if it were something as simple as going to a foundry it would be very easy to do and talk about it but it is actually something we believe is uniquely tailored to AMD and uniquely tailored to our customers and our company and therefore much more complex to do than just a general outsourcing scenario. For that reason it is taking longer than we thought.

Chris Danely – JP Morgan

Do you guys expect a major improvement to margins with this or something a little bit more minor?

Dirk Meyer

It will be a major reformation of the company from that standpoint. I don’t want to get into those kinds of specifics but it is definitely going to improve the balance sheet.

Operator

The next question comes from the line of Glen Yeung – Citigroup.

Glen Yeung - Citigroup

Dirk earlier you said that one of the changes we might expect from you was that AMD would focus more on what you could do in the volumes market. I wonder if you could just define for us what you think those markets are.

Dirk Meyer

Yes. What I mean by that is traditional markets that AMD and ATI frankly are focused on for a long time. So the PC market, the traditional desktop PC market. What we know today is the notebook PC market and that market as it evolves particularly on the low end of that market and finally the volume server market especially one and two socket servers. Not to say four sockets is not interesting. We actually have a great position there and intend to defend that. In addition markets that are adjacent technologically. So for example, there would be the enterprise embedded market, networking and storage being an example. We have got participation in the living room game console space. We intend to continue that participation. Does that give you a feel for it?

Glen Yeung - Citigroup

It does. One of Intel’s energy is to try to proliferate X86 beyond just the traditional PC and sort of by definition that opens up an opportunity for AMD. As you see that evolve and I think it is kind of hard to see where it might evolve at this point, but as it does start to evolve do you think that is something AMD is in a position to take advantage of?

Dirk Meyer

Yes. First of all it is kind of interesting we started talking about X86 everywhere 3-4 years ago maybe prematurely. Since that time we have seen Intel cast off their arm based business and follow us with this idea. Now being a big company they have got more money to create markets for X86 technology. As I said in answer to an earlier question, given our scale we can’t afford to lead into every market but to the extent Intel creates opportunity for X86 technology by growing new markets that is good for us over time.

Glen Yeung - Citigroup

Can I clarify one thing you said before about pricing and mix in the second quarter? So you suggested Bob ASPs were down more than units. Just to be clear was that a functionality of pricing environment or is that a functionality of mix?

Robert Rivet

It is really a combination of a little bit of both. I’d say it is not solely on one side of the table or the other. It is a little bit of both. Pricing environment and just mix more in the lower end of the stack.

Glen Yeung - Citigroup

The other question I had was on SLY. If you guys think forward into your roadmap particularly as the asset smart strategy starts to evolve does SLY have to be part of that strategy?

Dirk Meyer

Going into every technology transition 90 to 65 and 65 to 45 as examples we reevaluate the technology choices we make including SLY. Going into 45 nanometer we are very confident that the SLY choice made is the right one and we will make that same judgment as we go into 32 and beyond and that is not really influenced heavily by the asset direction.

Glen Yeung - Citigroup

Actually one last question on kind of stretching a little bit here but you mentioned at some point about ATI that you bought ATI for the graphics and the chip set business. When I kind of think about things like the consumer business is that to suggest that is something you don’t really want?

Dirk Meyer

First comment is we are declaring those businesses discontinued operations and offering them for sale so I think that is probably the answer. That is not to say that they are not good businesses with great technology and good people but to be honest they are not funding themselves today and we think they will be more successful in the hands of a company that is more focused on those markets.

Operator

The next question comes from the line of David Wu - Global Crown Capital.

David Wu - Global Crown Capital

I actually have two questions. One on discontinued operations and one on discrete graphics business and finally on the clarifying. To get to the break even operating level I guess the precondition for that is asset light a precondition of that or are the designs of the products you have on the roadmap running on 45 nanometer is the key to hitting the break even point either in Q4 of this year or Q1 of next year.

On the ATI side of the house I was thinking about the discontinued operation. Do you intend to sell the whole thing to one buyer or separate pieces of the discontinued operation to essentially different buyers?

The last question is the 4800 family is a different track from ATI’s past experience in the last two generations and I was wondering if in fact the gross margin you can achieve with the 400 should be higher than the sort of mid 30’s when ATI was an independent company. Those were the goals that were set for discrete graphics business. Could you actually if you have architectural leadership this time around can you achieve a 4 in front of it?

Robert Rivet

I think Dirk and I can work our way through this. I’ll call it the simple one, the ATI question, we’re going to get out of both of those businesses which is hand held DTV. Don’t feel compelled to talk about how we are going to do that if it is one or two separate transactions. We will just figure out how to exit those appropriately so that there is a seamless transition for the customers and there is a place for this great team of people and technology to find an appropriate home. So we’ll just leave that one where it is.

On the break even question assets smart is not a precursor to the break even equation. We are trying to set the cost structure in place today that will achieve that break even and actually make money in the back half of this year so in the next few quarters. But to get to the $1.5 billion will get us to some of the asset smart type transactions. So we believe we are on a path to continue to make progress and work our way down but then make a significant transformation as we execute asset smart.

So hopefully that answers your question. Then I’ll take a shot at the 4800 piece. Clearly you can see based on our competitor since there are only two of us in the graphics space he who has the good goods gets the better margin. Invidia has enjoyed nice margins in their graphic business. We believe we can enjoy those same kinds of margins and anticipate that will happen as this new family of products kind of takes over in the marketplace. So gross margins north of 30 to the 35-40 is definitely where we have said we desire the business to be operating at and the way to get there is to have the right products that are better than our competitor in the marketplace.

David Wu - Global Crown Capital

They have over 40.

Robert Rivet

Well you have to get to the mid 30’s before you get to 40.

Dirk Meyer

The other thing I will point out is dollar margin and percentage opportunity is workstation graphics market. We have talked about that in the past as being an opportunity for AMD.

Operator

The final question comes from the line of David Wong - Wachovia Capital Markets.

David Wong - Wachovia Capital Markets

Your discontinued operations do you have high confidence you will actually sell them and get cash for that or are you also considering the possibility of having a cash outlay because your need to shut that down?

Robert Rivet

We have no plan for a cash outlay. Clearly we have a plan and believe highly we are highly confident there will be cash input.

David Wong - Wachovia Capital Markets

Further on the expense front can you give us an idea of what your legal expenses are associated with the suing antitrust action?

Robert Rivet

We don’t give that level of granularity but they are not insignificant.

David Wong - Wachovia Capital Markets

Last thing. If I understand what he said just now about breaking even without needing asset smart so we can’t assume we will learn about asset smart but that it will be implemented in the next six months? You expect to break even regardless?

Robert Rivet

You are misinterpreting two things. We will make money in the back half of the year so make sure you are clear on that. That is not a statement about asset smart and we are not trying to give any indication that asset smart is a 2009 event. It is soon as we can get it down which is what Hector is focused on.

Ruth Cotter

That concludes the call and we’d like to thank everyone for participating. Thank you.

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: Advanced Micro Devices, Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts