MANAGEMENT DISCUSSION SECTION
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the AMD Q3 Earnings
Announcement Conference Call. During the presentation, all participants will be in a listen-only
mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a
question, please press the “1” followed by the “4” on your telephone. As a reminder, this
conference is being recorded Thursday, October the 16th, 2003. I would now like to turn the
conference over to Michael Haase, the Director of Investor Relations. Please go ahead, sir.
Michael Haase, Director of Investor Relations
Thank you, and good afternoon, everyone. The format of the call today will include prepared
comments followed by Q&A. The participants are Hector Ruiz, our President and CEO; Bob Rivet,
our Chief Financial Officer; and Henri Richard, our Senior Vice President of Worldwide Sales &
Marketing.
This call is a live broadcast and will be replayed at www.amd.com and www.streetevents.com.
Telephone replay number is 800-633-8284. Outside of the United States, the number is 402-977-
9140. The access code for both is 21161730. The telephone replay will be available for the next
10 days starting at approximately 6 p.m. Pacific Time tonight.
For your planning purposes, I'd also like to take this opportunity to remind you that we will be
hosting the 2003 Analyst Day the morning of Thursday, November 6th in our Sunnyvale
headquarters. If you’ve not yet RSVP'd, please contact either Ruth or myself. Our contact
information is on today's press release. Before we begin the call, I’d like to caution everyone that
we’ll be making forward-looking statements about management's goals, plans and expectations.
As you know, the semiconductor industry is generally volatile.
Our product and process technology development projects and our manufacturing processes are
complex. Current worldwide economic and industry conditions make it especially difficult to
forecast product demand at this time. Because our actual results may differ materially from our
plans and expectations today, I encourage you to review our filings with the SEC where we’ve
discussed in detail our risk factors and our business. You’ll find detailed discussions in our most
recent SEC filings, including the annual report on Form 10K, and our second quarter Form 10Q.
With that, I’d like to now introduce Hector Ruiz, AMD’s President and Chief Executive Officer.
Hector Ruiz, President & Chief Executive Officer
Thank you, Mike. I’ll start by reporting on our strong progress to profitability, and then I'm going to
ask Bob to discuss the financials from the past quarter and our prospects for the fourth quarter.
And once again, I will close with comments on our longer-term prospects going forward before
taking your questions. Our progress this past quarter was an excellent example of what I hope
you’ll recognize as the new AMD; an AMD that will have consistently demonstrated winning
strategy of customer centric innovation, innovating with our customers needs in mind; continued
world class design and manufacturing performance and a strong discipline of operational flexibility.
I’d like to take the moment to comment on each of these as a way to put our third quarter in its
proper context for you. Starting with operational flexibility, you can see that we’re putting in place a
strong cost-management discipline, holding operating costs in the quarter to $984 million. Please
note that this includes the costs previously associated with Fujitsu flash memory operations, and
now consolidated in our global flash business. In short, we managed to hold our baseline business
to Q2 cost levels, while both absorbing our new operations from the consolidation of assets of the
Flash side, and growing the top line significantly in both of our core businesses.
Going forward, we expect to capture even more efficiencies, as we integrate the major elements of
our flash business. We finished the quarter with over $1 billion in cash and now we begin the
strongest quarter of the year with our most competitive product portfolio in recent history. And we
believe, after our aggressive value chain inventory management in our processor business, that we
have arrived at steady state levels. We have improved this stability into our value chain, which will
allow for tighter efficiencies and more real time responsiveness to market dynamics.
In design and manufacturing, AMD continues to demonstrate world class operating performance in
both our flash and processor business. In September, we sampled the highest density NOR flash
memory product to-date, a 512 megabit expansion flash memory device. Once again, we shipped
a record number of units out of our flash facilities in the last quarter. And we’re poised for
continued demand growth in the coming quarter.
In processors, we continue to demonstrate world class manufacturing performance in our Dresden
facility, and are particularly pleased with our SOI yields. As a result, AMD 64 processor wafer
starts will exceed 50% of the total starts in FAB 30 in the first quarter of 2004. We continue our
steep ramp to 90 nanometer technology, remaining on track for production wafer starts in the first
half of 2004. Our major strategy of customer-centric innovation, and this approach continues to
produce a strong growing portfolio of customer relationships and improved top line performance
across our businesses. Customer acceptance of our new Spansion brand of flash memory
solutions has been outstanding. In fact, in our third quarter of operations the Spansion brand is
now the leading NOR flash memory brand in the world. And we’re well positioned to achieve our
strategic goal of being the number one provider of flash memory solutions worldwide.
Asian markets were healthy this past quarter, leading to strong wireless segment growth and solid
customer demand for our high density Spansion products and solutions. We believe Spansion
devices are now in roughly 40% of all the cell phones shipped worldwide. More specifically, we
continue to see record growth in unit shipments of devices based on our innovative MirrorBit™
technology as we expand its footprint beyond the original success in wireless applications.
In our processor business, I'm very pleased to report that we generated an operating profit in the
third quarter based on increased demand in each of our major businesses and all geographic
regions, as well as an improved product mix. Success in our processor business is, in large part, a
reflection of the strength of our AMD Athlon XP franchise. As an example of our continued success
with enterprise customers, H&R Block (NYSE: HRB), a Fortune 500 corporation, announced plans
to standardize their 15,000 plus units desktop platform on Athlon XP-based systems from Hewlett-
Packard. Demand for AMD Opteron processors continues to exceed expectations among OEMs
and partners. For instance, IBM (NYSE: IBM) continued its support by collecting our AMD Opteron
246 processor for its eServer 325-product line, and announced an availability of their DB2 database
for the AMD 64 platform. Microsoft (NASDAQ: MSFT) released a better version of Windows XP 64
edition, designed specifically to support the AMD 64 platform. Los Alamos National Laboratory and
the University of Utah selected AMD Opteron processor as the basis for their next-generation
supercomputing systems. In China, the Dawning Information Industry Corporation announced
plans to launch a comprehensive series of AMD Opteron processor-based 1 and 2-way servers.
Oracle (NASDAQ: ORCL) announced plans for a 64-bit version of Oracle9i database on the AMD
64 platform. And we’re pleased that Sun Microsystems (NASDAQ: SUNW) recently announced
plans for Java support for the AMD 64 platform, and disclosed plans for developing a version of
their Solaris operating system for AMD 64, as well.
In the first two quarters of availability, AMD Opteron processors continued to out ship our main
competitors’ 64-bit processor by a wide margin. In September, as promised, we introduced the
world's first and only Windows-compatible 64 bit PC processor family, our AMD Athlon 64
processor. The launch was supported by over 100 third party hardware and software partners.
Fujitsu, Fujitsu Siemens, Hewlett-Packard (NYSE: HPQ) and NEC Packard Bell all presented
systems based on the new processors and all of them will be shipping in the fourth quarter.
Perhaps as exciting was our introduction of the AMD Athlon 64 FX brand, designed to introduce a
new wave of innovation around what we call the “cinematic computing experience.” The AMD
Athlon 64 FX processor has stirred great interest among gamers, enthusiasts and digital content
creators, and this represents a continued commitment to the discipline of creating and sustaining
the strong premium product brands at AMD, first with AMD Opteron processors, then with
expansion Flash memory, and now with the AMD Athlon 64 and Athlon 64 FX processors.
The AMD Athlon 64 processor family is a totally differentiated product, and represents a great value
to our customers and their customers. We are attaining increased confidence among our growing
portfolio of customers about AMD and our leadership role in driving the pervasive adoption of 64-bit
computing around the AMD 64 platform. In fact, we shipped tens of thousands of AMD 64
processors in the third quarter, and we are confident that this will go out to hundreds of thousands
of processors in this quarter. We are taking our rightful place as the leading NOR Flash brand in
the world. We are taking our rightful place as the only supplier of tomorrow's industry standard 64-
bit processors. At this point, I would like to now ask Bob to review our current quarterly financial
results. Bob.
Robert Rivet, Chief Financial Officer
Thanks, Hector. A year ago, we outlined our operational flexibility plan for the investment
community, an ambitious and aggressive plan to get AMD back to financial stability. Since then, we
have made significant progress, both reengineering our operating model, and investing only in
areas that build sustainable competitive advantage for ourselves and our customers. Our third
quarter results are a clear demonstration of our progress in these areas. I'd like to remind you that
AMD began consolidating FASL LLC’s financial results as of the beginning of the third quarter. The
minority interest reflected in our financial statements shows Fujitsu’s 40% share of the new
subsidiary’s financials, and our second quarter 2003 numbers did not include FASL LLC.
Starting with the top line, our third quarter sales were 954 million dollars, up 88% compared to last
year, and up 48% compared to the second quarter of this year. Top line growth was a reflection of
increased demand in each of our major businesses and all geographic regions. The combination of
top line growth and our operational flexibility measures resulted in a $30 million operating loss in
the quarter, down 76% from the second quarter. Gross margin was 34% for the quarter, flat
compared to the second quarter. Consistent with our prior guidance, our total operating cost
structure was $984 million in the third quarter. Our net loss for the third quarter dropped sharply, to
$31 million or 9 cents per share and 88% reduction from a year ago, and a 78% reduction from the
second quarter. We generated positive cash flow from operations this quarter, and grew third
quarter EBITDA to $277 million, a greater than 100% improvement over our second quarter
performance. Now, switching to the business overview for the quarter.
I'd like to start with Computational Product Group or CPG, which consists of our microprocessor
and chipset businesses. Third quarter sales in CPG were $503 million, a 91% increase over the
same period a year ago, and a 24% increase over the second quarter. Increased sales were due
to solid growth across all processor product lines, an improved product mix, and increased sales to
our largest OEM customers. We shipped more units and improved our ASP significantly compared
to the second quarter. As a result, the CPG business unit was profitable in the third quarter, with
operating income of $19 million. In the third quarter, Flash memory sales grew to $424 million, up
125% from the third quarter of 2002, and up 101% over the second quarter. This performance is a
result of the consolidation of FASL LLC operation and strong organic growth. The memory group's
operating loss was $49 million in the third quarter. As Hector mentioned earlier, devices based on
our MirrorBit technology are becoming a bigger piece of AMD's flash memory portfolio, achieving
record growth in the third quarter.
Turning to the balance sheet. Cash balances ended in the third quarter at over $1 billion, up 370
million from last quarter. This includes the securing of $238 million of new capital leasing financing
in the quarter. Capital expenditures were $138 million in the third quarter, compared to $103 million
in the second quarter. Accounts receivable days’ sales outstanding were at 54 days, up slightly
from second quarter levels of 52 days. AMD’s headcount at the end of the third quarter was
approximately 14,400, up 2,700 people from the second quarter due to the consolidation of FASL
LLC operation.
Now, I'd like to discuss the outlook. AMD believes that sales in the fourth quarter will increase
based upon the following: Microprocessor sales are expected to increase, based on normal
industry seasonality and growing demand for the company's enhanced portfolio of AMD 64
microprocessors. Flash memory sales are expected to increase based on normal seasonality and
increasing customer acceptance of MirrorBit technology. AMD anticipates its fourth quarter
operating costs will remain approximately $1 billion, depending on volume and mix.
In summary, we are very pleased with our progress in the third quarter, as we increase sales and
continue to tightly manage our cost structure. With improving fundamentals going forward, we are
pushing to return to sustainable profitability as quickly as possible. Now, I’ll turn it back over to
Hector.
Hector De Ruiz, Chief Executive Officer
Thank you, Bob. Over the past few quarters, we have been beating a steady drum on the
significant and very difficult disciplines that are the basis for what we call the “new AMD.” First,
establishing an operationally flexible business model. Our cost management performance is a
demonstration of that discipline. Second, advancing our world-class design and manufacturing
capabilities. Our AMD 64 platform and leading edge flash memory technology are demonstrations
of that discipline. And third, our continued world class manufacturing performance in our Fab 25
and 30, as well as our assembly and test sites in Singapore, Penang, Bangkok and Suzhou. Third,
delivering customer-centric innovation. Our AMD optimum processor, Spansion Flash memory and
AMD Opteron 64 and 64-FX brands are a demonstration of that discipline.
But perhaps a more important demonstration is the growing portfolio of top-tier companies, who we
are honored to say are choosing to partner with us as we move to a leadership roll in the markets
we choose to serve, which with acquisition of the Geode processor family of integrated solutions,
helps us extend our x86 footprint into new growth segments, including thin clients, smart displays
and set-top boxes, among others. At AMD, we see our role in the industry in very simple terms.
We're here to work with our customers to help them deliver on their dreams, to help them create
differentiating value for their customers, and to create sustaining successful businesses. We know
that our customers’ success is our success, and that this discipline has been missing in our
industry. With our commitment to the discipline of customer-centric innovation, we believe we are
bringing it back. We’re new AMD, and we are very proud of the progress we have made, and of the
leadership opportunities we have created with and for our customers.
I want to recognize and thank the thousands of AMD employees who continue to do millions of
amazing things everyday to transform our company into the earnings machine that we're working
so hard to become, the new AMD. Their rewards and yours are soon to come. We hope you can
join us on November 6th, either in person in Sunnyvale, or on the web for our annual financial
analyst briefing, where we will look forward to sharing more of our vision of the future of the
semiconductor industry. We thank you for your attention and I would now like to turn it back to
Mike Haase for the Q&A.
Michael Haase, Director of Investor Relations
Thanks Hector. Let's go ahead and start the Q and A, please.
QUESTION AND ANSWER SECTION
Operator: Thank you. Ladies and gentlemen, if you would like to register a question, please press
the “1” followed by the “4” on your telephone. You will hear a three-tone prompt to acknowledge
your request. If your question has been answered and you would like to withdraw your registration,
please press the “1” followed by the “3”. If you are using a speakerphone, please lift your handset
before entering your request. One, moment, please for the first question. Our first question comes
from the line of John Barton of Wachovia Securities. Please proceed with your question.
<Q – John Barton>: Yes, good afternoon. Thank you. Hector, it seemed like you went out of your
way in your prepared statements to make the comment that Spansion is the number one supplier
NOR Flash, and then well positioned to be the number one Flash supplier worldwide. How should I
be interpreting that with respect to NAN verses NOR? Does the company get into NAN Flash, do
you think NOR outgrows NAN, or am I trying to read too much into that statement?
<A – Hector Ruiz>: Probably yes, to all of the above. But let me be more specific in the following
sense. We know that, in the NOR Flash side of the house, which is based on all the reports that
have come out already, that we are the number one NOR Flash brand already, and expect to
continue to stay that way. We are committed to the Flash memory business. We think the storage
solutions that Flash provides are incredibly helpful and pervasive to so many products, not only
wireless, but across a huge plethora of applications. And if that demands some changes in our
technology and product strategy, we are alert and prepared to make those changes. But at this
point in time, we do not plan to make any announcements relative to anything beyond NOR.
<Q – John Barton>: Okay. And just digging further into the numbers for Spansion, and probably
for you Bob, looking through it, it looked like it was a $49 million operating loss and if you kind of
reverse calculate your 25.4 million-minority interest, you know, take the 40% backwards calculation,
that would imply a net loss of 63 million or a non-operating increase of 14 million there. Am I
looking at those numbers right? And if so, where does the 14 million come from, interest expenses,
et cetera?
<A – Bob Rivet>: Yes, you’ve got to decode. The minority interest is of the full P&L, which would
include interest expense, taxes, et cetera. There also is cross-charges between the parents that
will take place. Obviously, those get eliminated, but they are in the FASL P&L. So you will never
get exactly nailed, we’ll take the operating income times 40% and get the number. It will be always
relatively close, but not perfect.
<Q – John Barton>: And the last question if you could, could you just comment on Flash, ASP
please?
<A – Hector De Ruiz>: You know, I’m going to ask Henri, our World Sales & Marketing Executive
to make a comment, but I'd like to say that the market has become strong, and as a result of that,
prices have stabilized. Henri, would you like add on?
<A – Henri Richard>: Our Flash and ASP continued to remain strong, actually grew quarter-toquarter
and this is across all regions.
<Q – John Barton>: And the growth driven by mix?
<A – Henri Richard>: Absolutely, particularly driven by high-end devices and MirrorBit technology.
<Q – John Barton>: And If you were to look at constant density quarter-on-quarter, and a basic
slight erosion there?
<A – Bob Rivet>: There was a slight erosion in density but that’s due to the addition of the Fujitsu
business to the overall operation.
<Q – John Barton>: Right. Thank you very much.
<A – Henri Richard>: Fujitsu had a very strong presence in the embedded market space.
<Q – John Barton>: Thank you.
Operator: The next question is from John Lau of Banc of America Securities.
<Q – John Lau>: Thank you. In terms of the Athlon 64, I was wondering if you could give us more
color on how the Athlon 64 designs are going on a geographical basis, and also if you, how it is
positioned for the higher-end corporate market? So in other words, where is the adoption rate
growing the fastest for the new high-end Athlon 64? Thank you.
<A – Hector De Ruiz>: I would like to maybe just make some general comments and ask Henri
again to comment further. First of all, we have made some assumptions on the introduction of
Athlon 64, which of course is at the very highest end of the performance of the client side. And it’s
anticipated that demand, given the assumptions we made relative to all the customers, and we
under-anticipated demand. The reception and acceptance of the client has been very strong. And
as a matter of fact, we are ramping as fast as we can to try to improve on that for this quarter.
Henri, could you elaborate a little more on that?
<A – Henri Richard>: Yeah, sure. John, we have a demand that’s really across all regions, but
particularly driven by regions where you have PC enthusiasts and gamers to start with. Regions
like Korea, Europe, the US, Japan. As far as the corporate market, the partner there’ve announced
platforms, and essentially announced consumer platform for the time being. We expect to see
enterprise platforms announced sometime in the beginning of 2004.
<Q – John Lau>: So, a lot of that has to do with the highest performance, using, utilizing the
graphics for the gaming section of accounts?
<A>: One thing here you have to remember that this is the fastest 32-bit platform in the
marketplace. And of course, today most of the applications are still 32-bit. However, we've had
support from numerous software vendors, particularly in the gaming space that have already
announced or pre-announced availability of 64-bit version of their leading games for the Christmas
season. So, it's not only, you know, high-end graphics performance, its high-end CPU
performance, its memory bandwidth, and all of the above that drives really the cinematic computing
experience that if you’ve ever experienced it, it is second to none on that platform.
<Q – John Lau>: Great. Thank you.
Operator: The next question is from Michael Masdea of CS First Boston.
<Q –Michael Masdea>: Thanks a lot everybody. And we like the new AMD better than the old
one, so keep it up. In terms of pricing first, you talk about AMD’s strength in pricing. Is that on an
apple to apples basis, or is it more of a mix shift?
<A _ Hector Ruiz>: Again, if Henri wants to add at the end of my comments, is that we have
worked very hard with our customers to try to ensure that we understand exactly what they expect
from us and that we can deliver the mix that they would like to see from us. And in the last quarter,
in particularly, our customers have been pushing us – pushing us up toward the performance side.
And we have been responding, and as a result of that, the mix in the quarter was richer than in
previous quarters, and as a result of that, it improved ASP.
<A - Henri Richard>: Yeah Hector, and just to add that we’ve obviously introduced with the Athlon
64FX and Athlon 64 products, new price points in the marketplace where AMD traditionally didn't
participate. And that, of course, helped the ASP.
<Q –Michael Masdea>: Thanks. And speaking of pricing for a second, there is always the concern
in that when your large competitor loses share in flash, that prices could go Southeast. Are you
seeing that, or is it not having traction, or have you not seen that yet?
<A – Hector Ruiz>: Well, the flash market continues to be very competitive. There are number of
players besides just number one and number two. And we haven't seen the rather deep and broad
price erosion that we saw a year ago, but they are stabilized. However, it is very competitive. If you
look at pricing per bit, it continues to go down.
<Q –Michael Masdea>: Yeah. Fair enough. On the manufacturing side, any update on your
thoughts on manufacturing partnerships 300-millimeter and what are your thoughts for ‘04 in terms
of need for 300-millimeter?
<A – Hector Ruiz>: I’ll do it backwards; in '04 we don't anticipate needing 300-millimeter. We think
that the crossover point for us, at least in 300-millimeter, will be at the 65-nanometer node, which
means that we need to have a factory in place, ready to ramp in 2005 for production in 2006. As
far as the partnership and our plans, as I said before is, we will be able to be public as to how we're
going to do that in the details surrounding that before the end of the year.
<Q – Michael Masdea>: Great. Thanks. And final question, just on the cost structure side,
obviously impressed with what you guys have done so far. But we always want more. Just curious
as to with the consolidation of FASL LLC, if any more room there, you know, now that you’ve had a
little time under your belt to take a look at the overlap?
<A – Bob Rivet>: Yes, actually it’s 90 days since the transaction took place. We have actually
spent the first 90 days making sure we can get the team completely integrated and operating. We
have found some synergies and some opportunities, which will be executed in the next six months
to take out those redundancies. In a lot of cases it’s just implementing best in class that we see in
the two different partners as we put it together.
<Q – Michael Masdea>: Thanks a lot. Congratulations.
<A – Bob Rivet>: Thank you.
Operator: The next question is from Krishna Shankar of JMP Securities.
<Q – Krishna Shankar>: Yes. Nice quarter folks. Was the strength in ASPs and the better
performance in processor driven both by desktops and servers? Can you give us some sense for
whether notebooks and service contributed materially to the increased revenue and ASPs?
<A – Hector De Ruiz>: You know, I won’t comment on the mix as to what each section contributed
to the ASP mix. I do want to point out that in the quarter that just ended, we had the largest
shipment of mobile units into the marketplace. So, there is definitely a healthy uptick on the mobile
segment of the market.
<Q – Krishna Shankar>: In mobile are you seeing acceptance of the Athlon XP mobile both in the
full-size notebook, as well as the thin and light? Can you talk about your efforts in the faster
growing thin and light notebook market?
<A – Hector De Ruiz>: Sure. I am going to ask Henri to comment on the Athlon 64 mobile portion
of it. Let me just make a general statement on mobile. I think we've been fortunate to have a
strong offering that has resulted in record units in this quarter for mobile shipments. That’s based
on Athlon XP. It turns out to be that the product and technology that customers are looking forward
on the Athlon 64 side has gotten pretty exciting. And I think we are anticipating a very strong
reception for that.
<A - Henri Richard>: Absolutely, Hector. We have today more models of thin and light notebooks
based on Athlon XP based machine shipping in the market then ever, over 10 different systems in
this quarter. And we are seeing strong demand for these products, as they provide a very
competitive alternative to our competition infrastructure. Moving into next year, we're seeing
demand for the same products based on an Athlon 64 core that will be available in the second half
of the year.
<Q – Krishna Shankar>: Okay. And my final question is, Hector, you said in Q1 of '04 you expect
40% of your wafer starts to be Athlon 64-based. When could we see, sort of, the crossover
between Athlon 64 units and Athlon XP units for next year?
<A – Hector Ruiz>: Let me just correct a couple of numbers. We expect, in first quarter that half of
our wafer starts will be on the AMD 64 architecture. That’s a mixture of servers, workstations and
clients. And we anticipate, you know, given the projections that we have, that the 50% crossover
will occur by end of next year.
<Q – Krishna Shankar>: Thank you.
Operator: The next question comes from Ben Lynch of Deutsche Bank.
<Q – Ben Lynch>: Yeah, I’ll second Michael's comments on the new AMD versus the old AMD.
Could you maybe comment please, in the flash growth, give us a feel for the organic elements of
that, the market share gain element of that. And also you said that AMD and MirrorBit products will
be on top of the seasonal growth that you’re expecting in Q4. Could you give us a rough feel for,
you know, how much they may contribute to the growth you expect in Q4, please? And I do have a
follow-up.
<A – Hector Ruiz>: Yeah. I may have missed part of the question. I was trying to answer what I
thought you asked. And you thoughtfully talked again but I think that the organic growth, that
mean’s the regional memory Flash business experiences very healthy growth quarter-on-quarter
and year-on-year. So, when you add of course, consolidated FASL numbers, it’s even much
stronger. I'm not so sure that I got the balance of the question I don’t know if any of you...
<Q – Ben Lynch>: So, you don't have a number for the organic growth versus the consolidated
growth?
<A – Robert Rivet>: We don't think that’s necessary to give – hand out at this point. We're just
one company.
<Q – Ben Lynch>: Okay. And how much do you think you picked up share wise in the third
quarter?
<A – Hector Ruiz>: Don't know the numbers, yet.
<Q – Ben Lynch>: Okay.
<A – Hector Ruiz>: We know we did, only just based on the growth in the comparison to the
competition that we feel confident, we believe, we picked share.
<Q – Ben Lynch>: And then on the other question, please, I’ll try. What do you think might be
incremental Q4 contribution from both AMD 64 and MirrorBit; you’ve highlighted them as being on
top of seasonal growth you’d expect.
<A – Hector Ruiz>: In all, we’re not going to give the granularity other than that I will make a broad
statement that as we ended the quarter, our MirrorBit contribution was already in the double digits
in terms of revenue, and growing fast. And as I also mentioned in my remarks, we're going from
the third quarter shipping tens of thousands of AMD 64 products, to hundreds of thousands in the
fourth quarter. So, that gives you some idea.
<Q – Ben Lynch>: Okay. Thank you.
<A>: Next question.
<A – Hector Ruiz>: Christy.
Operator: The next question is from Joseph Osha of Merrill Lynch.
<Q – Joseph Osha>: Hi, guys, congratulations and well done. On the microprocessor business,
obviously ramping the 64-bit architecture is additive to ASP. But if we leave that out for a second,
looks like very good things were happening with existing Athlon, as well. Leaving 64-bit out, were
ASPs up for the 32-bit line of products as well? Also I’m curious did Duron tail off a lot this quarter
and so did that also contribute to some of the strength in ASP?
<A – Robert Rivet>: First, to the first part of your question, yes the Athlon XP brand continues to
derive more value for us and was actually seeing a shift in customer demand to the higher portion
of the offering. So, we had increase in that portion of the product line, independent from the
acceptance of the AMD Athlon 64 brand. For the second part of your question, can you tell us what
you precise exactly what you’re looking for?
<Q – Joseph Osha>: I guess, we’d understood that you were getting, you know, sort of end of life
in Duron, is that true because if it were then that would obviously tend to have a positive impact on
ASP as well?
<A – Hector Ruiz>: Yeah, we saw, you know, the Duron product line is really a target of the
emerging markets. At this point in time it represents a very small portion of our product offering.
<Q – Joseph Osha>: Okay. Now, are you willing to make some kind of rough comment in terms of
what unit volume for the microprocessor did quarter-on-quarter?
<A – Robert Rivet>: No, not at this point in time. We'll pass on that.
<Q – Joseph Osha>: Okay. Thank you.
Operator: The next question is from Quinn Bolton of Oppenheimer and Company.
<Q – Quinn Bolton>: Yeah, congratulations on a strong quarter. First question on just the MPU
business, you had talked at the end of last quarter and, I think, in some of your public appearances
during the quarter that the channel inventory distribution was about four weeks. I was wondering if
you could give us an update on that? And can you also comment on how you feel about the mix in
distribution channel heading into the stronger fourth quarter and then I’ve got one follow-up?
<A – Henri Richard>: First, our mix in the channel has gone up and continues to reflect the value
of the brand. And our channel inventory at end of third quarter was less than four weeks.
<Q – Quinn Bolton>: Great. Okay. And then the second question just on the Flash business it
sounds like things may be getting a little bit tight in that market. Can you comment on your lead
times and just sot of overall capacity utilization or capacity issues?
<A – Hector De Ruiz>: You know, the demand for Flash is strong, and it is particularly strong on
the high-density, high-performance part of the equation. And that happens to be an area where
AMD is particularly well positioned for a couple of reasons. One is, we have a leadership product.
As mentioned earlier, when we introduced the half a gigabit or 112-megabit product. And also,
MirrorBit is being much more rapidly accepted in the wireless segment than we had anticipated.
And so, that's also contributing to that. The other reason we are well positioned is the
manufacturing side. In our joint venture with Fujitsu, it turns out to be that each company
contributed a phenomenal asset. On the Fujitsu side was a factory called JV 3, which is a state-ofthe-
art factory that is not fully utilized. It’s a small factory; significant capacity expansion capability
existing in the factory. And then we have 525 in Austin, Texas, which is also a state-of-the-art
facility that is rapidly converting to leading edge technology. And as a result of that, improving its
ability to deliver high-volume, high-performance product. So I think, despite the fact that demand is
tight and growing, we see that as an opportunity for us.
<Q – Quinn Bolton>: And any comments on just where lead times are? Where they are on an
absolute basis and whether they are stable or stretching out?
<A – Hector De Ruiz>: For us, I know you speak only for AMD. We are seeing our lead times
being stable and we’re working very intimately with customers because the demand is, not only
robust, it actually is very dynamic. It tends to move from one product line to another very fast. So
there is a lot of intimacy required and we believe that we are doing a very good job of that.
<Q – Quinn Bolton>: Okay. Thanks.
Operator: The next question comes is from Andrew Root of Goldman Sachs.
<Q – Andrew Root>: Great. Thank you very much. I had a question regarding your $1 billion
operating cost assumption. What type of unit growth can that support before you would have to
scale that up? What’s your baseline assumption there?
<A – Bob Rivet>: This is Bob. I'm going to probably not answer the question from a unit
perspective, but obviously, I’ll kind of give you a little bit of granularity. You know. operational
flexibility was about trying to change the mix between variable and fixed. Clearly, the two
businesses are different. The microprocessor is a little more variable than the memory business,
so it kind of depends on the mix assumption of both. So, as each of those grow at different paces,
they will have different follow through and different incremental cost required to both businesses.
<Q – Quinn Bolton>: Okay. Do you guys have – or one you are willing to share at least, an
assumption for what you think the PC-unit end market grows in the fourth quarter, in terms of units?
<A – Bob Rivet>: All that I can say on that, is you know, normal seasonality is someplace between
10-15% expansion between third and fourth quarter. It appears that’s the kind of quarter we are
looking at from an industry perspective.
<Q – Andrew Root>: And I'm assuming you would expect to continue to pick up a little share in the
fourth quarter?
<A – Bob Rivet>: We always try.
<A>: We always try.
<Q – Andrew Root>: That's fair. And then, for the microprocessor business last quarter, the 24%
growth, which obviously was terrific. We're guessing that about a third of that came from ASP, is
that close?
<A – Hector De Ruiz>: No. Not. There is some ASP involvement, but I would say, I am not going
to comment on that, but that’s not …..
<Q – Andrew Root>: Not close.
<A – Hector De Ruiz>: Not close.
<Q – Andrew Root>: Okay.
<A – Hector De Ruiz>: Can I just add something to the comment before we – I think it’s important
as we anticipate what our costs might be in the fourth quarter, that part of the mix issue that Bob
referred to, and it also has to do with how we do Flash. The power of Flash business is what we
call the multi-chip module products. And these are products where we actually put two or three or
four, sometimes, die on one package. Therefore, the costs that’s associated with how much of that
you have to acquire to be able to make the product. But we’re very sensitive on mix and as also
Bob pointed out, the processor Flash mix has got quite a different cost model. And so, I just
wanted to underline that the mix issues can make that cost very – significant amount plus or minus
a significant number.
<Q – Andrew Root>: Okay. That makes sense. Do you know what percentage of the product
goes out as in multi-chip package at this point?
<A – Hector De Ruiz>: Not off the top of my head.
<Q – Andrew Root>: Okay. And then the final question. When the Athlon 64 was launched at the
launch event, there was suggestion that there might be some other key OEM and channel partners
that would eventually become involved which just declined to participate in that particular event.
Should we expect other announcements over the next quarter or so?
<A – Hector De Ruiz>: We're working hard with all the major computer makers to launch products.
And I think what you are seeing and as we had reported in my remarks earlier, we got some fairly
heavy weights already launching product this quarter, and others anticipating to launch in the first
quarter. There is not a single computer maker that’s not working with us and trying to see if this
platform makes sense. All of them actually have serious plans and committed to develop some sort
of a platform that they can launch in the early part of 2004, except for one.
<Q – Andrew Root>: Okay. Now, that’s great. Thank you.
Operator: The next question is from Ramesh Misra of Smith Barney.
<Q – Ramesh Misra>: Hi. Good afternoon, gentlemen. Could you provide some milestones on
the 90-nanometer plans for your microprocessor in terms of what proportion of wafer starts can we
expect by next year? And I had a follow-up.
<A – Hector Ruiz>: You know, we’re going to let the market drive that part. Because we – that's
going to be the continuation of how we exploit the AMD 64 family of products. And as I mentioned
earlier, we expect to begin – as a matter of fact we are running right now, we call it engineering
runs. And we are very happy with where we are, and expect to begin production starts by the
middle of next year on 90-nanometer.
<Q – Ramesh Misra>: Okay. And then for the sub 3-pound notebook category, when do you
expect or anticipate having products for that? Or would that only come after the 90-nanometer
transition?
<A – Hector Ruiz>: Yeah. For that segment, it really requires 25-watt and below. We’ll have to be
moving to 90-nanometer technology to provide a product based on the AMD 64 architecture.
<Q – Ramesh Misra>: So that would be a second half of '04 and later phenomenon?
<A – Hector Ruiz>: Correct.
<Q – Ramesh Misra>: Thank you.
Operator: The next question is from Adam Parker of Sanford Bernstein.
<Q – Adam Parker>: Yeah, hi. Can you tell me what the impact on the revenue from the National
Semi IA acquisition was? Is that included in the incremental 100 million you got in your
Computational Product Group growth?
<A – Robert Rivet>: No, revenue in the current quarter. That will not be classified. That is the
Other category of the segment reporting.
<Q – Adam Parker>: Okay. I’m trying to ask an earlier question a different way. You originally
guided to 180 million in Flash from the JV. Did the actual revenue from the JV exceed that, or was
your original forecast accurate?
<A – Robert Rivet>: It was within the zone.
<Q – Adam Parker>: I'm sorry.
<A – Robert Rivet>: It was within the zone.
<Q – Adam Parker>: Within the zone?
<A – Robert Rivet>: Yeah, it’s close to that number.
<Q – Adam Parker>: Within the zone, you said?
<A – Robert Rivet>: Yeah, close to that number.
<Q – Adam Parker>: I was bit surprised you’re gross margins didn't improve more sequentially,
kind of, given the processor growth and your comments about improved mix and pricing. So I’m
trying to figure out just related to more COGS than you thought from the JV Flash business or from
– can you just tell us what were the factors on the margin sequentially?
<A – Robert Rivet>: Well, the part – if you were listening before, both businesses, the cost
characteristics are very different, the memory business and the microprocessor business. And
obviously, by now we have effectively 50-50 between the business. Before we were two-thirds,
one-third. So those are some of the dynamics that took place in the quarter, and will take place
going forward as you model which business grows faster or slower.
<Q – Adam Parker>: Right. Well, Bob, you guys originally said 180 in revenue from FASL and if
you assume the same, kind of, cost structure that you alluded to, it looked like about 135 million in
COGS. And if you do that now it has a bit of drag, I think about 250 basis point drag on your
margins. But if you look at the – your organic growth from the, you know, from the other businesses, it implies actually more margin expansion. So I’m just trying to, you know, kind of
match up those two thoughts. Can you help at all there?
<A – Robert Rivet>: No. Not at this point.
<Q>: All right. Thanks guys.
Operator: The next question is from Hans Mosesmann of SoundView Technology.
<Q – Hans Mosesmann>: Thank you. Microsoft apparently yesterday pushed out the introduction
for the Windows XP support for the AMD 64. What is the impact of that push-out, if you can
confirm it?
<A – Hector Ruiz>: First of all, there is no – right now, we are working with Microsoft very closely
to continue to stay on track with their release of the software needed. And I don't really know if
there is anything substantial to add beyond that.
<A – Henri Richard>: No, except that, you know, today, consumers and enterprises that are
looking at the AMD 64 platform and doing it because they want 32-bit performance today with a
protection of their investment tomorrow, it is well understood in the marketplace that the operating
system will be available later in 2004. And you know, frankly, a delay of one or two months doesn't
change really the value proposition for the consumer and the enterprise.
<Q – Hans Mosesmann>: Okay. And one follow-up. Can you comment on inventories that you
see out there in the PC space, in the channel?
<A – Hector Ruiz>: Right. Are you – did you mean inventories from a microprocessor point of
view?
<Q – Hans Mosesmann>: Yes.
<A – Hector Ruiz>: As Henri pointed out a bit earlier, and so we have been pleased where we
have managed that and we’re happy with the current situation. We believe we call it stable. We
have less than four weeks inventory in the channel. We’re happy with that. We intend to manage it
tightly and keep it that way.
<Q – Hans Mosesmann>: Thank you.
Operator: The next question is from Eric Rothdeutsch of FBR.
<Q – Eric Rothdeutsch>: Thanks. Most of my questions have been answered. Just one question.
Last quarter, you had given guidance for the Flash memory revenues from FASL would be 180
million. Can you say how you do relative to the guidance for FASL Flash sales?
<A – Robert Rivet>: Yes. The question was actually asked before. But that was relatively close.
<Q – Eric Rothdeutsch>: Okay. Thank you.
Operator: The next question is from Michael McConnell of Pacific Crest Securities.
<Q – Michael McConnell>: Yes. Regarding the comments, which were very helpful on the PC
side for the fourth quarter, looking at the industry unit growth of 10% to 15%, could you just
characterize maybe from an industry outlook what you would expect on the Flash side; what is
typical normal seasonality on the Flash side for the fourth quarter?
<A – Hector Ruiz>: The fourth quarter is traditionally a very good quarter for cell phones. And as
you know, wireless drives a lot of demand in the NOR Flash market. So, we expect to see, you
know, solid demand from that segment, probably double digit, very similar to what we were going to
expect on the – on the PC side.
<Q – Michael McConnell>: Okay. And given your capacity you have currently, if we were to look
at maybe double-digit growth in PCs, even Flash, do you think you have enough capacity right
now? Do you feel looking through 2004 to meet the needs of the market, should it continue at this
pace?
<A – Hector Ruiz>: I believe that looking out into 2004, we’re well positioned to address the growth
in the market, you know, could occur. And in the two angles for that: on the microprocessor side is
because of the migration in technology from 130 nanometers to 90 nanometers gives a significant
boost in our capabilities for next year, particularly in the second half. The same is true in Flash with
a double barrel there, because one is, we are also aggressively moving to leading-edge technology
in Flash. And at the same time, we have as I mentioned earlier, an underutilized leading-edge
factory in Japan where we could expand capacity fairly rapidly.
<Q – Michael McConnell>: Okay, thank you very much.
Operator: The next question is from Tom Thornhill of UBS Warburg.
<Q – Tom Thornhill>: Thank you. The microprocessor performance was outstanding, up 24%.
Can you give us a little idea on which was the larger driver there, units or ASPs? Or were units and
ASPs both up about the same or one larger – up more than the other?
<A – Hector Ruiz>: I know you really want to know the granularity of that. I can tell you that both
contributed to the revenue being up. We had a growth in units as well as a growth in ASP.
<Q – Tom Thornhill>: But you’re unable to disclose which was the larger contributor?
<A – Hector Ruiz>: That is correct.
<Q – Tom Thornhill>: Thank you.
Operator: The next question is from Chris Stanley of J.P. Morgan.
<Q – Chris Stanley>: Thanks, guys. I think most of my questions have been answered. But just a
couple – can you give us a sense on your mix of Mobile versus desktop processors?
<A – Hector Ruiz>: I’m sorry. Could you repeat the question?
<Q – Chris Stanley>: Sure. Could you give a sense of your mix on Mobile laptop versus desktop
processors, the percentage?
<A – Hector Ruiz>: We normally don't do that. Other than we have a healthy segment of our
shipments in the Mobile space, and as I mentioned earlier, we did accomplish record shipments
last quarter.
<Q – Chris Stanley>: Sure. And then sounds like the Flash business is tightening up. Do you
guys have plans to try and raise pricing there?
<A – Hector Ruiz>: You know, we believe strongly that we are making a lot of very strong
commitments with our customers to product plans that go beyond just this quarter. And we do not,
you know, anticipate a change in our philosophy.
<Q – Chris Stanley>: You don't have plans to raise prices?
<A – Hector Ruiz>: On this program, we are already working with customers.
<Q>: Okay. Thanks.
<A – Hector Ruiz>: We’re going to take two more questions, please.
Operator: Certainly. The next question is from Mark Lipacis of Prudential Equity Group.
<Q – Mark Lipacis>: Mark Liposis. Two questions. The first one is, do you guys have some sort
of long-term operating model you guys are targeting? And the second one is, you guys talked
about inventory, distributors, what do you think inventories look like at OEMs? Thanks.
<A – Hector Ruiz>: I don’t – I'm not so sure if that I know what the inventories look at OEMs right
now, other than anecdotal evidence. But maybe Henri can add some more solid background. I just
got back from Europe visiting a number of customers. And all I can tell you is that they are all
seeing a healthy growth and as a result, managing their inventories very tightly. Henri.
<A - Henri Richard>: Well, just to clarify Hector, with most of the large OEMs, we are with on a JIT
model, so we have very inventory, and from what can tell there, they were experiencing strong
demand for their systems. So I would expect from an AMD perspective that our inventory at an
OEM is minimal.
<A – Bob Rivet>: As far as your question on operating model, you know, our goal in life is to get a
return on capital. You kind of work backwards from that, as I think we’ve stated before. So that
kind of requires an 18% operating income level. So that’s what we continue to drive to. There are
slightly different cost structures, operating models between the two businesses. But in general, you
know, we're racing to get back to where we were in 2000, which was 18% operating income level.
<Q – Mark Lipacis>: Thanks.
<A – Hector Ruiz>: And take the last question, please.
Operator: The final question is from Kevin Rodinghalf of Midwest Research.
<Q – Kevin Rodinghalf>: Thanks for getting me in here. You mentioned a couple corporate wins
here. Are you seeing a general broad-based corporate pick-up at all, or were those just kind of
added on comments?
<A – Hector Ruiz>: You know, I think from our perspective, the acceptance of AMD products in the
corporate space has been growing and increasing. We see significant wins in Europe, Latin
America and the United States. We expect that to continue. Now, that is a space where we have
not been as strongly a participant in the past and therefore, our growth in that space may not
necessarily be reflective of a significant growth in corporate spending.
<Q – Kevin Rodinghalf>: Okay. So, more market share gains than just a broad-based pick-up?
<A – Hector Ruiz>: Correct.
<Q – Kevin Rodinghalf>: Okay, another question. You mentioned a couple different geos there,
any particular geo’s where you are seeing strength?
<A – Hector Ruiz>: I’m sorry. I missed the question.
<Q – Kevin Rodinghalf>: Any particular geographies that appear to be stronger than others?
<A – Hector Ruiz>: You know, this past quarter, it was across the board. We saw pick-up across
all geographies. I couldn't pin one strongly over another one.
<Q – Kevin Rodinghalf>: Thank you.
<A – Michael Haase>: Want to thank everyone for participating. Take care.
Operator: Ladies and gentlemen, that does conclude the conference call for today. We thank you
for your participation and ask that you please disconnect your line.
END
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