Advanced Micro Devices Inc. Q1 2009 Earnings Call Transcript

Advanced Micro Devices Inc. (NASDAQ:AMD) Q1 2009 Earnings Call April 21, 2009 5:00 PM ET

Executives

Ruth Cotter – Director of Investor Relations

Dirk Meyer – President and Chief Executive Officer

Robert J. Rivet – Chief Operations and Administrative Officer and Chief Financial Officer

Analysts

Joanne Feeney - FTN Capital Markets

Uche Orji - UBS

Kevin Cassidy - Thomas Weisel Partners

Doug Freedman - Broadpoint Am Tech

David Wong - Wachovia Capital Markets, LLC

David Wu - Global Crown Capital

[Zinc Atamoony] – J.P. Morgan

[Unidentified Analyst] – Morgan Stanley

Ross Seymore - Deutsche Bank Securities

Patrick Wang - Wedbush Morgan Securities

[Tim Lutenbark – Capital]

Cody Acree - Stifel Nicolaus & Company, Inc.

[Serena Pajore – CLSA]

Operator

Good afternoon. My name is [Huey] and I’ll be your conference operator for today. At this time I would like to welcome everyone to AMD’s first quarter 2009 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded today.

I would now like to turn the conference over to Miss Ruth Cotter, Director of Investor Relations for AMD. Ma’am please go ahead.

Ruth Cotter

Thank you and welcome to AMD’s first quarter earnings conference call. Our participants today are Derrick Meyer, our President and CEO and Bob Rivet, our Chief Operations and Administrative Officer and Chief Financial Officer.

This is a live call and will be replayed by a webcast on amd.com. There will also be a telephone replay. The replay number is 888-266-2081. Outside of the United States the number is 703-925-2533. The access code for both is 1343745. The telephone replay will be available for the next ten days starting later this evening.

As you know on March 2 we closed our Asset Smart transaction resulting in the formation of GLOBALFOUNDRIES, a joint venture between AMD and the Advanced Technology Investment Company of Abu Dhabi. As a result of this transaction, AMD now consolidates GLOBALFOUNDRIES for financial reporting purposes. Therefore, references to AMD on this earnings conference call include consolidated operating results which are reported for GAAP purposes.

AMD Product Company refers to AMD excluding the operating results of our new Foundry segment and intersegment eliminations. The Foundry segment includes the operating results attributable to front end wafer manufacturing operations and related activity as of the beginning of the first quarter of 2009, which include the operating results of GLOBALFOUNDRIES from March 2, 2009 through March 28, 2009.

Intersegment eliminations consist of revenues, cost of sales and profits on inventory between AMD Product Company and the Foundry segment. While the operating results of GLOBALFOUNDRIES are consolidated in our financials, we also provide results for non-GAAP financial measures for AMD Products Company, such as a statement of operations and select balance sheet items. In addition, for AMD Products Company we are providing non-GAAP financial measures such as net income or loss, operating income or loss and gross margin which excludes certain adjustments set forth in the tables in today’s earnings press release.

AMD is providing these financial measures because it believes it’s important for investors to have visibility into AMD’s financial results excluding the Foundry segment, intersegment relations, intersegment eliminations and these adjustments.

So, before we begin today’s call, I would like to caution everyone that we will be making forward-looking statements about management’s expectations. Investors are cautioned that these statements are based on current beliefs, assumptions and expectations; speak only as of the current date; and involve risks and uncertainties that could cause actual results to differ materially from our current expectations. The semiconductor industry is generally volatile and market conditions are particularly difficult to forecast, especially in light of the current state of the economy.

We encourage you to review our filings with the SEC where we discuss in detail the current risk factors set forth, information that could cause actual results to differ materially from our expectations. You’ll find detailed discussions in our 10-K filing for the year ended December 27, 2008.

Now with that I’d like to turn the call over to Dirk Meyer. Dirk?

Dirk Meyer

Thank you Ruth and thanks for joining us everyone. The global economic contraction continued in the first quarter and while [entries] or IT demand continued to be sluggish, it appears that the severe inventory corrections of the prior quarter have stabilized and should play out completely in the coming quarter.

Against the backdrop of soft demand, our execution was solid across our major goals for the quarter. First, we completed the launch of GLOBALFOUNDRIES, bolstering the financial structure of AMD while introducing one of the most exciting new companies in the recent history of the semiconductor industry. As a result of the transaction we were able to immediately improve our balance sheet while insuring ongoing access to world class manufacturing capacity. Meanwhile, early customer interest in the new foundry company continues to be quite strong.

Second, as I outlined here last time, we completed a number of difficult yet important actions to bring our cost structure in line with our top line targets while preserving our core investments. I am particularly pleased with our capacity to reduce discretionary spending while maintaining our product development and go to market effectiveness.

Third, we continued to meet or exceed all of our major engineering and roadmap milestones in the quarter. In our graphics business, we will lead the industry to 40 nanometer technology. In microprocessors we are pleased with the execution of that 45 nanometer microprocessor roadmap and we are executing next generation programs according to plan.

On the product side, we believe the economy has triggered a rather important change in the buying psychology of today’s end user. Whether at work, home or play, people have become much more discerning about paying only for what they really need and getting the best experience for their dollar. In this environment, the AMD value proposition is well tuned to today’s value conscious consumer and business decision maker. In short, AMD base systems are designed to deliver maximum value across all price points.

For example, we enabled the industry to create a truly affordable, ultra thin notebook. Our new Yukon platform allows an uncompromised combination of high end graphics and small form factor at mainstream price points. As evidenced, the HP Pavilion dv2 is resetting expectations of what is possible inside an $800 system sized envelope.

Looking ahead, our upcoming Congo platform will extend the performance range affordable, ultra thin computing with the incorporation of dual core CPUs and our 7 series chip sets. Our popular Dragon platform, featuring the AMD Phenom II quad-core processor, is now available in systems from over 40 AMD partners worldwide, including Dell, Alienware and HP.

Continuing our market leadership in graphics, AMD announced the expansion of our award wining Radeon HD 4000 series into notebooks, with the 4860 and 4830, the world’s first 40 nanometer graphics processors. And as promised, we expanded our participation in the lucrative work station graphics segment with the launch of the FirePro 2450 and V7750. And, in the context of a soft enterprise demand environment, we are seeing solid OEM support for our new Quad-Core Opteron processors. The new designs are well positioned to deliver maximum value in both high density and highly scalable systems.

Our seamlessly upgradeable, six-core Istanbul processors are earning strong early reviews from our customers. And I am pleased to announce that because of our strong engineering execution, we are pulling in revenue shipments of Istanbul into May, with system availability in June. For more details on this announcement and updates on our server platform plans, please join our webcast tomorrow.

One quarter ago I outlined the plan to reduce our breakeven while protecting our core assets of people and intellectual properties. And I am pleased to report that we are executing well on these commitments. Most important, we are showing that we can be an even more agile and responsive company, one with the ability to succeed today and when the market makes a turn for the better.

With that, I’ll turn it over to Bob.

Robert J. Rivet

Thank you Dirk. First quarter revenues were $1.177 billion, flat sequentially. The first quarter of 2009 was as expected a challenging marketing environment. However, our enhanced product portfolio and strong market position allowed us to capitalize on a widespread flight to value across price point segments. At the same time, industry wide supply chains stabilized; desktop first, followed by notebook.

First quarter non-GAAP net loss for AMD Product Company was $97 million. After backing out unusual benefits and charges, the adjusted non-GAAP net loss was $189 million. First quarter operating loss was $159 million. Excluding the unusual items outlined in our press release, the adjusted operating loss is $124 million. Overall, both results represent a significant bottom line improvement from the fourth quarter.

Gross margin for AMD Product Company was 40%. This includes a five percentage point benefit from the sale of inventory written down in the fourth quarter last year. Therefore, the adjusted gross margin was 35%. Gross margin was impacted by lower microprocessor ASPs and under utilization of our manufacturing assets.

Now let’s switch to the business segments. Computing Solutions revenue was $938 million in the first quarter, up 7% compared to the fourth quarter. Microprocessor Units were up sequentially, driven by higher volume in the client segment. Overall ASPs were down quarter over quarter. Operating loss for the Computing Solutions group was $36 million, a significant improvement over the fourth quarter.

In the Graphics segment, revenue for the quarter was $222 million, down 18% sequentially and down 15% from the first quarter of 2008. Units and ASP were down quarter over quarter. ASPs were up year-over-year as a result of richer mix of the HD4000 family of products, and the Graphics segment broke even at the operating level.

Now turning to the AMD product balance sheet, cash and marketable securities balance at the end of the first quarter was $1.6 billion. Depreciation and amortization was $105 million. Capital expenditures were only $17 million for the quarter as we continue to manage and scale our business according to current market conditions. And adjusted EBITDA was $99 million.

Long term debt outstanding as of the first quarter was $3.7 billion as we transferred approximately $1 billion of debt to GLOBALFOUNDRIES. In addition, we continued to repurchase convertible bonds in the period.

Now let’s turn to the outlook. The following statements are forward-looking and actual results could differ materially from current expectations. Considering current macroeconomic conditions, limited visibility and historical seasonal patterns, AMD Product Company expects revenue to be down for the second quarter of 2009. We continue to drive toward our product company breakeven model with $1.3 billion, and we are on plan to approach the cost structure during the second quarter. As a reminder, the breakeven model was built on the gross margin goal of 40% or more, R&D spending of about $300 million per quarter, SG&A spending of $200 million, and depreciation and amortization of approximately $100 million per quarter.

As reported in our 10-K, capital expenditures for 2009 will be about $150 million for AMD Product Company and about $760 million for GLOBALFOUNDRIES. Please keep in mind that both targets continue to be evaluated and will be adjusted as necessary to levels appropriate for market conditions.

Due to the GLOBALFOUNDRIES transaction, we now have approximately 665 million shares outstanding today. You can use this number for your second quarter EPS calculation.

In closing, we are executing well on every major element of our strategy. From launching GLOBALFOUNDRIES to reducing our cost structure to delivering growing portfolio platforms tuned to today’s increasingly value conscious end user mindset.

As Dirk mentioned in his opening comments, we entered 2009 a very different company than the one you were following as recently as a year ago. AMD the Product Company is a much nimbler operation, right sized to respond to today’s economic uncertainty as well as the dynamic demands of our world class global customer base.

At that, I’ll turn it back to Ruth.

Ruth Cotter

Huey, we’d like to welcome calls from our audience now please.

Question-and-Answer Session

Operator

Thank you Miss Cotter. (Operator Instructions) Your first question comes from Joanne Feeney - FTN Capital Markets.

Joanne Feeney - FTN Capital Markets

I guess I’d like to try to get some clarity on the gross margin situation, both for the last quarter and going forward. So you were targeting 40%, came a little bit short of that, and I’m just wondering whether the under utilization in the first quarter was sort of passed on to you guys and whether you see a recovery here in the second quarter and whether you might return to that 40% target going forward.

Robert J. Rivet

Hi Joanne. This is Bob. Good question and thank you. Clearly in the first quarter we built a lot of inventory. Let’s back up. We built a fair amount of inventory in the second half of the year in anticipation of a much stronger year than it, you know, than the fourth quarter kind of signaled to us. We began dropping our factory run rates pretty significantly in the Christmas kind of time period to late in the fourth quarter. That continued in the first quarter. We’re trying to deplete inventory as you can see on the balance sheet, we did a pretty good job in the three month period of time. So I expect utilization rates kind of like the supply chain. It will improve a little bit in the second and third quarter, mostly third and fourth. It kind of depends on the visibility of what we see in the second quarter of, you know, is it a strong second half or a casual second half or whatever. So utilization is a big piece of it.

We did sell a lot of 55 nanometer material also in the quarter. The majority of our starts today are 45 nanometer, so we’re still going to get some pick up benefit from 45 nanometer shipments I’ll call it starting in the second quarter. So a combination of both of those areas will help the cost part of the equation and continue to, you know, play in more price bands as we continue to rollout all the different versions of product, whether it’s [insertable] mobile desktop or graphics.

Joanne Feeney - FTN Capital Markets

So are you suggesting then, Bob, that because of the shift over from 65 to 45 in your mix that your ASPs might actually improve next quarter, despite the pressures we’re starting to see in GPU pricing and CFU pricing?

Robert J. Rivet

You know, pretty hard to call, you know, whether it’ll improve. We would like them to improve. Hard to say if they will or not, so we’re definitely working on what we control which is all the cost structure part of the equation. Continue to work with the OEMs, we need merchandise to cross all the SKUs and we believe we deliver a real, you know, powerful combination of CPU and graphics to the marketplace.

Joanne Feeney - FTN Capital Markets

I’m wondering if you could comment on your cash flow projections? A lot of data to digest here in the release. Could you comment on whether you still think you’ll be able to achieve positive cash flow for the year?

Robert J. Rivet

You know, we made that bold statement in the fourth quarter and the beginning of the first. You know, I guess the best proxy is EBITDA for the quarter for AMD the Product Company at being at about $100 million. I’m confident we’ll be cash flow positive in the second half of the year, whether that recovers the cash flow negatives of the first half year is kind of to be determined. So we’re going to be close.

Operator

Your next question comes from Uche Orji – UBS.

Uche Orji – UBS

Two questions. Let me start by asking you about revenue. Just if I look into Q2, is it fair to assume that you are going to be [seating] market share to retail and with SAs be still declining on Intel coming out with a CULV, I just want to know what could drive your revenue growth and how it will flow off on a gross margin base.

Dirk Meyer

Dirk here. So first of all I don’t think you should consider our Q2 forecast as being any stated intention to lose share. You know, rather we’re simply communicating that one, the economy is still weak making it very difficult to forecast end user demand levels. And we’re heading into what is typically a seasonally weak quarter. So you know you put all that together and the outlook is murky at best, and that results in our forecast. It’s not a statement about the intention to [inaudible] share.

You mentioned CULV and an interesting topic, you know, really we view that as a response to our Yukon offering, which as you know is exploiting an opportunity in the marketplace to bring PC performance at an affordable price to ultra thin notebooks. And you know we’re happy with the momentum that we have with HP and we’re happy with the design win momentum that we have around Congo. So hopefully I answered those two questions and you said you had a follow up.

Uche Orji – UBS

Sure you did. Just on gross margins, you know, with the benefits we’ve had from the inventory write down of [inaudible] that was written down and sold, you know, I’m just wondering what will help. I’m a little surprised that it’s still at 37% just to follow on and I’m just wondering, you know, what will help to get it to 40%, especially now that you have to pay for [inaudible] from GLOBALFOUNDRIES.

Dirk Meyer

Sure. I can tell you, you know, the factors without being specific and giving you a timeframe. I mean, one is as Bob described, we still have a situation where our manufacturing assets all in are under loaded and they’re forbearing expenses that’s unabsorbed, I’ll say. Number two, as the mix of what we sell in the marketplace shifts more to 45 nanometer that helps our unit cost tremendously. You know, and the final point is mix and there, you know, we’ve got two opportunities. One, we are launching new platforms in the quarter. For example, our new mobile platform will come out which will provide better capability both in the dimensions of performance and battery life. And, you know, finally as I often say on this call, we always have an opportunity to sell up the stack and you know versus the competition. That’s an untapped potential for us.

Operator

Your next question comes from Kevin Cassidy - Thomas Weisel Partners.

Kevin Cassidy - Thomas Weisel Partners

I wonder if you could give a little more detail about what was happening in the server market through the first quarter? Can you say what your split was in multi-socket servers versus dual socket servers, etc.?

Robert J. Rivet

Yes, you know, good question; we don’t provide that granularity. I guess what I’ll say overall is you know to say that the enterprise server market wasn’t tremendously exciting in the quarter. We’ll see how Q2 unfolds and we’re not anticipating a dramatic turnaround in that space and, you know, unfortunately I can’t give you a mix breakdown.

Kevin Cassidy - Thomas Weisel Partners

How about as a follow up maybe you could just maybe speak to Cisco’s introduction of a server. Do you expect they’ll be a customer eventually?

Dirk Meyer

I look forward to that opportunity. Absolutely.

Operator

Your next question comes from Doug Freedman - Broadpoint Am Tech.

Doug Freedman - Broadpoint Am Tech

Can you offer any sort of color on what you’re seeing sort of in the computing market space where you mentioned that your ASPs were down? Can you give us some sort of magnitude of what’s going on there, whether there’s a shift notebook, desktop, any sort of clarity would be helpful.

Dirk Meyer

Yes. Dirk here. A bunch of moving parts, so first of all you know on the desktop side ASPs were flat to actually up a little bit. On the notebook side ASPs were down, you know, mostly driven I’ll say by mix shift in the marketplace towards lower end machines. In addition, as Bob said, we walked into the quarter with a pretty big inventory position so we clearly found opportunities, I’ll say, to move inventory which was also part of what drove the quarter-to-quarter ASP decrease. And finally, you know, stand back and look at it, our server business was down a little bit quarter on quarter while both the desktop and notebook businesses were up quarter on quarter, which affects the overall ASP and moves it down. Does that make sense?

Doug Freedman - Broadpoint Am Tech

Yes it does. Thanks. That was the clarity I was looking for. If you could comment a little bit, you mentioned 45 nanometer products and the fact that you’ve still been selling 55. When – can you give us a crossover period when you expect 45 to be the majority of shipments? Is it possible we see that by the end of the June quarter?

Dirk Meyer

Yes, I expect we’ll hit that point in the current quarter.

Doug Freedman - Broadpoint Am Tech

And then if I could, you know, a lot of legal issues in the quarter. Are there any specific dates that you guys have on your calendar that we should be making sure that we’re paying attention to? I know that you really can’t comment on ongoing legal issues, but maybe you can give us an idea?

Dirk Meyer

Yes, you’re right, I can’t.

Doug Freedman - Broadpoint Am Tech

At least on the calendar?

Dirk Meyer

No, I understand. I can’t comment on the specifics nor can I give you a specific mile post in the form of a date.

Doug Freedman - Broadpoint Am Tech

Bob, you mentioned a share count there, 655 is the new share count for Q2. Is that a basic share?

Robert J. Rivet

Yes, 665 basic share count, right.

Doug Freedman - Broadpoint Am Tech

And could you give us an idea of what the fully diluted would look like?

Robert J. Rivet

I don’t have that number at my fingertips. We’ll have to get back to you on it.

Doug Freedman - Broadpoint Am Tech

All right. Thanks guys.

Robert J. Rivet

It’s north of 700 though. I just don’t know the specific number. But I’ll have Ruth get back to you on that.

Operator

Your next question comes from David Wong - Wachovia Capital Markets, LLC.

David Wong - Wachovia Capital Markets, LLC

The sequential growth that you saw in the March quarter was very impressive. Were there any special sales that helped boost this number?

Dirk Meyer

Did you say were there any special?

David Wong - Wachovia Capital Markets, LLC

Yes. Were there any sort of once only deals or any particularly big transactions that helped push up that, the number. Or was this just general across the board strength that you saw?

Dirk Meyer

It was general strength across the client businesses.

David Wong - Wachovia Capital Markets, LLC

That momentum doesn’t – I mean that is significantly better than seasonal for March. We’re not seeing an ongoing momentum into the June quarter, we’re seeing something normal, seasonal into the June then?

Robert J. Rivet

Well, you know, honestly I would say that – I’d characterize it like this. We’ve seen the inventory drain that was occurring across the IT supply chain slow down in Q1 and we’re starting to see, you know, I’ll say normal inventory replenishment. I don’t expect that to be a major effect in Q2 and therefore [call] in Q2 relates really to [calling] end user demand for IT products which in the current environment is awfully difficult to do. And it’s that thought process that guides our guidance on Q2.

Operator

Your next question comes from David Wu - Global Crown Capital.

David Wu - Global Crown Capital

I was curious about two things. The first one is you know there seems to be a dichotomy between Q1 and Q2 relative to the competition and I assume that’s if I were to look at what is in the press release I assume that this is entirely due to the fact that you had some very good cost inventory to sell in Q1 which sort of boosted Q1 and Q2 we’re back to seasonality. Did I get that roughly right?

Dirk Meyer

I would say no in the sense that we didn’t do anything truly extraordinary in terms of pricing that resulted in us draining inventory. I mean, we were responding to opportunities in the market as we always do. You know, as I told you, we saw inventory levels kind of start to come back into balance in the past quarter which kind of explains the Q for the Q1 comparison. And you know frankly Q2 outlook is just awfully hard to call. You know, I’ve heard some say that we’ve hit bottom. I don’t know how anybody could say that we’ve hit bottom given the continued uncertainty that we have in the macroeconomic climate. And as a result of that I would say we’re simply being cautious in our outlook.

Robert J. Rivet

Dirk, I would add also you know if you break it into supply and demand, supply we have plenty of supply, plenty of capability to run more material. So we’re running fairly under utilized today which is reflected in our gross margin today. So supply is not our issue. It’s really demand which is what Dirk just said. It’s, you know, where is the demand and when will it materialize? And then we can execute the manufacturing plan and give them the right supply.

David Wu - Global Crown Capital

Maybe you could help me with one more thing, which is in terms of the three segments desktop, notebooks and server, what are the relative level of demand for these three class of products?

Dirk Meyer

When you say relative level of demand, relative to what?

David Wu - Global Crown Capital

Well, let’s put it this way. If the mean, you know, if an average for example Q1 you achieve sequentially flat revenue and I was wondering relative to that flat comparison with Q4, did any of these three categories were up or down relative to that average number? That was what I was trying to drive at.

Robert J. Rivet

I’d kind of answer it this way, which would be as Dirk already outlined, server was definitely the weak spot. The enterprise, you know, spending has been clamped down pretty hard so you know server was actually a decline quarter on quarter. Strongest growth was in notebooks. And then desktops were reasonable but still grew a positive quarter on quarter.

David Wu - Global Crown Capital

I see.

Robert J. Rivet

And those added up to the positive for quarter on quarter for microprocessors.

David Wu - Global Crown Capital

And can you tell at this point how the second quarter demand looks for those three categories in?

Dirk Meyer

That’s where, again we’re you know second quarter I’ll just say it again, second quarter is seasonally typically a down quarter from first. And we still believe there’s still some supply chain issues to work through. And the visibility of end user purchases is still unclear so we’re just being cautious at this point that we think potentially we’ll be down.

Operator

Your next question comes from [Zinc Atamoony] – J.P. Morgan.

Zinc Atamoony – J.P. Morgan

Could you comment in general about your [inaudible] between the graphics and the CPU business? I know for the current quarter graphics is much worse than CPU, but do you see that trend continuing into the rest of the year? Or for graphics to get better over time?

Dirk Meyer

No, I would say I don’t see that trend happening for the rest of the year. You know, one of the factors I think that caused the GPU and CPU results for us to differ a little bit quarter on quarter were that, you know, our exposure to graphics on notebook is really, you know, exposure both to AMD and Intel platforms and you know one thing we talked about last time on the call is that the notebooks supply chain was taking quite a bit longer to recover versus the desktop supply chain. And we certainly saw that in our notebook GPU business. We think that process has largely corrected itself and looking forward I expect the overall market for CPUs and GPUs to kind of track in similar fashion. But again our graphics business is exposed to both AMD and CPU platform.

Zinc Atamoony – J.P. Morgan

And then you already talked about achieving breakeven cost at about $1.3 billion in revenue and that you’re likely to get that in the June quarter. Do you see a need for continuing OpEx reductions going forward or do you think that’s the level at which you will be comfortable and then see how the revenue breaks out in the next few quarters?

Robert J. Rivet

You know, right now we think the $1.3 model is the right model to chase. We worked on this pretty hard through the balance – end of the year and the beginning of the and the first quarter. So right now we’re holding to that.

Ruth Cotter

Next question Operator?

Operator

Your next question comes from [Unidentified Analyst] - Morgan Stanley.

Unidentified Analyst - Morgan Stanley

Two questions, first one on GLOBALFOUNDRIES. When should we expect GLOBALFOUNDRIES to actually have a fully qualified bulk seamless process? Is it still planned for 2010 or is it later?

Dirk Meyer

No change to the plan that we talked about in the Analyst’s Conference which was as you said qualified bulk process available to preferred third party customers in 2010.

Unidentified Analyst - Morgan Stanley

Can you tell us how we should think about the AMD Fusion Render Cloud noted in your press release? Would it disrupt your client side [discretely] for your business long term?

Dirk Meyer

Hard to predict because you used the word disruptive. I mean, the whole phenomenon of Cloud computing that is applications being hosted in a data center is both interesting and potentially disruptive for the market, and what we talked about with the Fusion Rendering Cloud is the idea that media intensive applications and graphics intensive applications could also be hooked on the Cloud. Exactly how that technology results in changes in our business is awfully hard to predict, because as you said it’s potentially disruptive.

Operator

Your next question comes from Ross Seymore - Deutsche Bank Securities.

Ross Seymore - Deutsche Bank Securities

I think this was asked before a little bit, but I just want to make sure I have the answer right. For your second quarter guidance for revenues to be down, quote unquote, do you expect there to be a delta between what your CPU business does sequentially versus your GPU?

Dirk Meyer

You know, it’s interesting if you look at historical seasonality patterns, the CPU pattern is potentially less growth, more negative than the GPU pattern. So they’re slightly different just based on the timing of when people buy those different components to go build systems. But our forecast comprehends that from that perspective. It’s still the visibility issue and what’s going on in the end market demand by IT technology.

Ross Seymore - Deutsche Bank Securities

And then as far as the first quarter business upside, especially in the CPU side of things, geographically could you give us any color on where the stronger and weaker geographies might have been if there was a big delta?

Dirk Meyer

Sure. You know, if I were to consider North America and Western Europe to being kind of in the center of the distribution, I would say that China was a little bit stronger. We saw kind of life return to the PC market in China after Chinese New Year. The Middle East I would say was also stronger than the average. And meanwhile Eastern Europe and Russia a little bit weaker.

Ross Seymore - Deutsche Bank Securities

And then the final question as you mentioned that you guys expect to have a lead going to the 40 nanometer on the GPU side of things, from kind of a qualitative perspective do you expect to use that shrink more so to lower your costs or add functionality?

Dirk Meyer

As you know that – the technology has actually been used for both those purposes, so, you know, we’ll deliver I’ll say equal performance and capability at lower cost. And that’ll be the story and part of the product line as well as in the back half of the year introduce product that have more performance and more features.

Ross Seymore - Deutsche Bank Securities

Generally how do you think the [die] side comparison of 40 nanometer might be versus your primary competitor versus where it was at the prior node?

Dirk Meyer

Well, the way we approach the business is to look at price points in the marketplace, to you know engineer our costs consistent with those price points, and to drive more performance and features over time into price points. So you know the game is at the high end more performance, better features, and you know at the bottom end as an example better performance, same cost.

Rather than opening up still lower price points because typically below the bottom end of the discrete GPU stack we start talking integrated graphics.

Operator

Your next question comes from Patrick Wang - Wedbush Morgan Securities.

Patrick Wang - Wedbush Morgan Securities

Just a quick question. I was hoping you guys could discuss your visibility now and perhaps maybe how you feel about channel inventory at this point.

Ruth Cotter

Sorry, Patrick, it was difficult to hear your question. Could you come off speaker please? Can you repeat your question please Patrick?

Operator

I think he may have disconnected.

Ruth Cotter

We’ll take another question and maybe he’ll queue again. Thank you.

Operator

Your next question comes from [Tim Lutenbark – Capital].

Tim Lutenbark – Capital

I was wondering seeing the GPU down 18% do you feel that you would have [ceded] some share in the first quarter there? And I was just wondering how you see it going forward in terms of the shared dynamic and maybe just more broadly when you – I think you touched on this before, when you think about seasonal guide, are there areas that you would expect to be somewhat stronger than others? Should we for example expect server to be a bit softer than seasonally than notebook and desktop? Where do you see it leading?

Dirk Meyer

Yes. First on graphics, no, we don’t at this point see our sequential decline as being driven by share loss. Rather it was predominantly driven by OEM notebook build coming down so it could drain inventory from the system. You know, over half of our sequential decline was driven by notebook graphics.

Tim Lutenbark - Capital

And graphics would be seasonal in the second quarter would it be seasonally lower?

Dirk Meyer

Interesting. It depends on to what degree we start seeing inventory replenishment. You know, I’m not smart enough to know whether the system has too little inventory, you know, walking into Q2. But that is a factor, you know, as OEMs start building notebooks for the back to school season. And as Bob said that with seasonality with GPUs is a little bit different than CPUs, Q2 is typically a little stronger for GPUs than CPUs.

You asked for me to comment a little bit on the share expectations overall for GPUs and there we feel very good. We feel great about the product roadmap that we’re out in the marketplace today. Just introduced a new product on the high end. We talked about our 40 nanometer products, still got feature advantages in the form of DX 10.1 and GDDR5 technology which makes the products distinctive. And we plan to lead the market with the X11 solutions coincident with Microsoft Windows 7 release in the back half of the year. So we feel very good about the GPU situation.

Tim Lutenbark - Capital

And the segments? The seasonality?

Dirk Meyer

It’s hard to talk about the seasonality. What I will say is the enterprise side of the commercial market is clearly still weak. Wallets are closed. And our big exposure there is really the server business. As you probably know our commercial client business is largely in SMB play and then of course we’re heavily exposed to the consumer market.

Tim Lutenbark - Capital

Could you just give some framework for where you think the sort of the key sensitivities are on the gross margin as you move out through the year and what you’re kind of monitoring there? And also when you expect Yukon to start shipping. Thanks.

Robert J. Rivet

Yes. We’ll start shipping Yukon at the end of this quarter. Sorry, Yukon is shipping now. I thought you were asking about Congo. So Yukon is shipping now to HP and others.

Dirk Meyer

You can buy that platform from HP today.

Robert J. Rivet

And we’ll have Congo designs into which we’ll be shipping in the back half of this quarter.

Dirk Meyer

To your question, Tim, on the gross margin I kind of think of it this way is, you know, on the top line is clearly the ASP. You know, what is the end in mix end up to be in server or mobile desktop graphics, and even in graphics it’s the split between how much is the AIB channel versus directly to an OEM. It feels like based on our current line up and all of the continued refreshes, new introductions, that we continue to have a deeper spread across all the SKUs that you could play in. So definitely could play more in the higher ASP points. But that’s on the ASP side of the equation.

On the cost side of the equation, you know, to get simple it’s two big levers; factory utilization which today is very low, so clearly as I said we’ve got plenty of supply. We just need to run the factories a little bit harder if we see the demand. And then shipping 45 nanometer and 40 nanometer stuff whether that’s a CPU statement or a GPU statement. Those are the two big levers on the cost side of the equation.

Operator

Patrick has queued back up. Sir your line is open.

Patrick Wang - Wedbush Morgan Securities

Sorry about that. My apologies. First can you kind of discuss your visibility out there and I guess perhaps how you feel about channel inventory?

Dirk Meyer

We actually feel good about channel inventories. Clearly we’ve got the best insight into our own component distribution channels and the graphics add in board partner channels where we feel like, you know, we’re where we need to be. It’s a little harder for us to know definitively what is the inventory situation beyond our OEM customers, but first order from what we hear there’s nothing terribly alarming there either.

Patrick Wang - Wedbush Morgan Securities

And then in terms of visibility here, is your visibility any better today than it was I guess maybe a month or two ago?

Robert J. Rivet

Could you repeat? We lost you right at the end.

Patrick Wang - Wedbush Morgan Securities

Just curious about visibility here, if your visibility is any better today than it was perhaps a month or two ago?

Dirk Meyer

Well, I would say visibility not substantially better, but the climate is certainly a little bit easier to deal with in the sense that in Q4 we were dealing with simultaneously an economic contraction driving a reduction in end user demand, and a very strong, very quick reduction in inventory levels that our customers were driving across their eco-systems. At this point the latter situation has largely stabilized and we’re left with simply the macroeconomic climate and our relative inability to predict that and thus the effect on end user demand for IT.

Patrick Wang - Wedbush Morgan Securities

Can you talk about some of the industry trends you’re seeing out there and perhaps how you see mix and margins trending over the course of the year?

Dirk Meyer

Good question, and one of the things that we get asked a lot about is are we seeing any change in discrete graphics attach rates on either desktop or notebook. And I’ll say the first order answer is no, not much change, which is kind of interesting given the backdrop of decreasing system price points and so on. So on notebook as an example we’re still seeing I’ll say consistent attach on GPUs and likewise desktop. Nothing notable in terms of changes in the market climate.

Patrick Wang - Wedbush Morgan Securities

But you’re not particularly seeing a shift towards the kind of the lower end, lower cost add in boards and away from kind of the mid-range?

Robert J. Rivet

Not really. No. And it’s been true for quite some time that the growth in the PC market – discrete graphics has been largely a concept, right, in terms of size and much of the unit growth has been at price points and integrated graphics place. But we’re not seeing any big shifts in the size of the discrete GPU market and who knows with Windows 7 being released in the back half of this year and all the benefits that come along with that in the form of DX11 and improved graphic quality, compute off load and so on, we might see a spike in interest for a richer graphic experience. And certainly that’s one of the things that we’re trying to drive as a company.

Patrick Wang - Wedbush Morgan Securities

I might have missed this earlier, but can you talk about your server ASPs last quarter? And also maybe how you feel the competitive landscape looks in the back half of the year, particularly with the [sample] out there in terms of pricing and positioning?

Dirk Meyer

Again I lost you in the back half of your question. I’m sorry.

Patrick Wang - Wedbush Morgan Securities

First part of the question was could you just talk about how server ASPs trended last quarter? And then also if you could talk about the competitive landscape in servers in the back half of this year, especially when you’ve got Istanbul out there and the other guys out there with a couple of new chips?

Dirk Meyer

Yes. So first server ASPs were actually up quarter on quarter. That is sequentially. What I would characterize the rest of the year as is you know one of technology leapfrog. I mean, Intel came out there and announced availability of Nehalem. Of course that’s going to take quarters to ramp across the marketplace. Meanwhile as I said in my introductory remarks, Shanghai the Quad-Core Opteron played extremely well and offers great value, particularly in highly scalable systems and high density, i.e., Cloud computing installations. So that’ll be our two market focus areas.

Also as I said in the opening remarks we’ve pulled in substantially our shipments of Istanbul and we’ll provide more detail tomorrow on other accelerated plans for server platforms. So I expect the market will be competitive. The over arching question is what’ll be the end user demand situation in [inaudible]?

Operator

Your next question comes from Craig Berger - FBR Capital Markets.

Craig Berger - FBR Capital Markets

How do we think about the gain loss on Foundry operations in the second quarter?

Dirk Meyer

You know, it’ll be at a loss. I guess I would frame it this way. It’ll be in a loss position as Doug outlined at the analyst day as it continues to try to build out the requirements to become a separate company, to hire a sales force, buy or build the right technologies to sell to somebody else besides AMD. So it’ll incur losses, not of the magnitude probably of the current quarter because there was the one time issue on taxes in the current quarter. That’s not a repeatable type event. But we anticipate for 2009 GLOBALFOUNDRIES will lose money.

Craig Berger - FBR Capital Markets

But improving losses you think? I mean does business improve?

Dirk Meyer

I’m not going to provide that level of detail.

Craig Berger - FBR Capital Markets

And the $500 in quarterly OpEx, do we hit that in the second quarter?

Robert J. Rivet

We will be very close to that number. Yes.

Craig Berger - FBR Capital Markets

And did you guys talk at all about your graphics transition to 40 nanometer?

Dirk Meyer

We did and what we said is we launched notebook GPUs in Q1. We’ll launch another product here soon and follow that up with I’ll say a wave of DX11 compatible products in the back half of the year on 40 nanometer.

Ruth Cotter

Operator, we’ll take two more calls please.

Operator

Sure. Your next question comes from Cody Acree - Stifel Nicolaus & Company, Inc.

Cody Acree - Stifel Nicolaus & Company, Inc.

Just a couple quick ones. Looking at next quarter, if you had to rank the three primary issues, the inventory burn, the seasonality and lack of visibility, how would those stretch out as far as impact on your guidance?

Dirk Meyer

Could you repeat the question? We had a hard time hearing.

Cody Acree - Stifel Nicolaus & Company, Inc.

Yes. Sorry about that. If you had to rank the three areas that are impacting your second quarter guidance, the inventory burn, the seasonality and then of course just the questionable visibility, how would you rank order those and give a magnitude of impact.

Robert J. Rivet

I would say that the inventory correction is largely behind us and what we’re left with is just uncertainty about end user demand of which, you know, seasonal patterns and the over arching economic question kind of playing offense on each other.

Cody Acree - Stifel Nicolaus & Company, Inc.

And can you give any details to – I know this is a number that we haven’t really talked yet, but just typical GPU seasonality? Typcial CPU seasonality for Q2?

Dirk Meyer

Sure. I’ll kind of start with GPUs and kind of give you a flavor. And I’ll give it to you in this framework of kind of the maximum we’ve seen over the last say five years, the best case, worst case and then kind of what’s the average. Just to give you a flavor. It does bounce around but you know on the maximum, so I’ll call it the best case scenario, we’re talking you know double digits plus 10, pushing 15% between both mobile and desktop. And both of them have slightly different. And then you go to the I’ll call it worse case scenario, that number is actually approaching 9%. So you’ve got a pretty big spread there and no surprise the average approaches close zero. So that’s kind of in that ballpark.

We go to CPUs, you get a different answer. It’s been changing over time from that perspective. Give me one second. The range is, you know, again a plus 12ish to a minus 10ish to a couple down on the average. So it is – which is kind of gets to back to our guidance. You can see – you can drive trucks through some of those numbers, whether it’s a positive 10 or a minus 10. So it’s hard to figure out in a normal pattern what’s with average, what happens in second quarter. And then you add into it the current economic environment and it really becomes a little bit foggy.

Operator

Your last question comes from [Serena Pajore – CLSA].

Serena Pajore – CLSA

Hey, Bob, just a question on gross margins. You said the factory utilization is impact in the gross margin both on a consolidated basis as well as for the Product Company. I’m just wondering, I was under the impression that the Product Company is more or less a [fabulous] company and I’m just wondering how the fixed cost is allocated between these two entities?

Robert J. Rivet

Well, think of it this way, I mean, you know, we’re in that early stage where the manufacturing assets that were in place are to build microprocessors because we’re the only customer. And what we cut I’ll call it in the initial stages of the deal is responsibility to manage costs and to manage the loading, and therefore also pay for that cost. So that’s why I kind of said that, you know, utilization does affect us. It’s not the extreme we’ve had with an OSAT or I’ll call it a typical foundry that a GPU has. So it’s a more tightly coupled relationship since we put in all that capacity, and we’re the only customer, and we kind of work our way through that. And manage the costs collectively with GLOBALFOUNDRIES and also pay for the costs.

Serena Pajore – CLSA

Okay. Thank you.

Robert J. Rivet

The utilization definitely impact us and we’re running pretty low rates and Dirk definitely would like to improve it.

Ruth Cotter

This concludes our call. We’d like to thank everybody for participating today and encourage you to tune in to our webcast tomorrow for our server event. It will be available on amd.com on the Investor Relations home page and we look forward to speaking with you next quarter. Thank you.

Operator

Thank you ladies and gentlemen. This does conclude today’s program. Thank you for your participation and have a wonderful day. You may now all disconnect.