超微半導體 (AMD) 2002 Q3 法說會逐字稿

At this time, if you a question, please press the 1 followed by the 4 on your telephone.

As a reminder this is being recorded, Wednesday October 16th 2002.

I would now like to turn the conference over to Mr. Michael [Hosi], Director of Investor Relations.

Please go ahead sir.

Thank you and good afternoon.

The format of this call will include prepared comments followed by question and answer.

The participants of today's call are Hector Ruiz, our President and CEO, Rob Herb, Executive Vice President of Sales and Marketing and Bob Rivet, Senior Vice President and Chief Financial Officer.

This conference call is a live broadcast and will be replayed on the internet at two sites - www.streetevents.com and of course our own site - www.amd.com.

The taped phone replay number for North America is 800 633 8284.

Outside of the United States, please dial 402 977 9740.

The access code is the same for both - 20930385.

Before we begin the call I would like to caution everyone that we will be making forward-looking statements about management's goals, plans and expectations.

As you know the semi-conductor industry is generally volatile.

Our product and process technology development projects and our manufacturing processes are complex. current economic and industry conditions continue to make it especially difficult to forecast product demand.

Because our actual results may differ materially from our plans and expectations today, I encourage you to review our filings with the Securities and Exchange Commission where we discuss in detail the risk factors in our business.

You will find detailed discussions on our most recent 10 key filing with the SEC.

For your finding purposes let me remind you of AMD's analyst day at our Silicon Valley Headquarters on November 7th.

At this point, I would like to begin the call and introduce our CEO, Hector Ruiz.

Thank you Mike.

As part of my preferred comments, I would like to start with a discussion of what AMD is doing to address our current financial situation.

I will then Bob Rivet to go into more detail on the current quarter and I will finish with some comments on our outlook going forward before taking your questions.

In the last few quarters we have outlined for you a set of actions and activities that we believe will properly position AMD for success.

And while we remain highly confident about AMD's mid-term and long-term prospect, we are not as confident in the short-term, global economic climate [...] especially the information technology sector.

As a result we have accelerated our efforts to more aggressively taking control of our future.

I am pleased to report that we are well under way with an aggressive three-stage plan to both get AMD back to financial stability in the short-term while keeping us poised for success going forward.

There is one other plan which we have accelerated and expect to complete in the next 90 days is intended to ensure sustainable economic health in the current market.

In this phase we have focused on doing 3 key things - rebalancing channel inventories, bolstering our capital structure and reducing our break-even point.

Allow me to take a moment to discuss each of this in a bit more detail.

First, as we mentioned in the Second Quarter, we began a process of bringing inventories in our PC supply chain more in line with current market demand.

We made a decision to accelerate these efforts resulting in a sales adjustment over $100mln in the third quarter.

Predictively, this action has had a significant negative effect on our third quarter sales, margins as well as average selling prices.

In fact without these actions we believe our third quarter sales would have been greater than $600mln that was reported in the second quarter.

Second, while we ended the current quarter with nearly $900mln in the bank, we have taken some important steps to immediately bolster our capital position by reducing our capital spending and securing asset based loans which Bob will discuss in more depth in a few minutes.

Third, we have initiated the process of reducing our break-even point by more than $100mln per quarter.

We will realize a significant portion of this expense savings starting in the first quarter of 2003 with a full benefit realized in the second quarter of 2003.

This phase one activities are well under way and we are confident that we have taken the essential steps necessary to regain economic health in the short-term.

Given current progress in these actions and reasonable assumptions about the market trends, we believe it is within our grasp to be operating at break-even by the second quarter of next year.

Phase 2 of these efforts which will carry on through the first half of next year will build on the economic momentum of Phase 1.

It represents even a more proactive and sustained approach to creating what we call Operational Flexibility, coupled with strong new revenue opportunities.

We believe our future at AMD is going to depend on our strategies to create operational flexibility.

By definition, our capacity to be much more responsive to both up-turns and downturns in the market we serve without sacrificing our fundamental strategies for success.

This was the basis of our innovated joint venture agreement with UNC and it is the reason why we have so efficiently converted our 530-nanometer to 130-nanometers and found 25 from logic to high in memory.

And it is the principle we are applying to our extensive management efforts that I described earlier.

Going forward, we are re-engineering our operating models to keep base-line costs down and invest only in areas that either build sustainable competitive advantage or superior customer experience.

In short, operational flexibility reflects our commitment to [elevant] cost management from an event to a strategy and we will plan on providing you with more detail on our strategy both creating operational flexibility in our up-coming quarterly sessions.

Meanwhile, we have a portfolio of initiatives in place to generate meaningful, incremental new revenue opportunities in the first half of next year.

With MirrorBit we have launched a new technology and product cycle into a new market up-turn in the Flash business.

In the first half of next year, our China strategy formally kicks into gear based on our recent hiring on a new General Manager and Regional Vice President for China and the relocation of our regional headquarters to Shanghai as well as the formation of our joint venture with the China Basic Education Software Company.

And our moves into servers and then [...] with our next generation Hammer architecture will built up on our recent success in the commercial market.

Phase 3 of our 3 phased programme is centered around our realization that going forward the conditions for success in the semi-conductor industry have changed and that to survive and thrive then the conductor companies need to deliver new and better value propositions for the customers and their customers' customers.

I would like to save the specifics of that conversation for our upcoming annual analyst meeting briefing in early November.

At this point I would like ask Bob Rivet to go into additional depth in our occurring quarter results as well as additional details of some of the Phase 1 efforts that I outlined.

Thanks Hector.

As detailed in our press release issued this afternoon, third quarter sales were $508mln.

This was down 15% compared with second quarter, due primarily to the significant actions we took in the quarter to reduce inventory of AMD microprocessor inventory in the supply chain.

Without these actions, third quarter sales would have been in excess of $600mln.

The operating loss in the third quarter was £315mln compared with our £301mln loss in the second quarter.

A relatively small increase in operating loss giving a $92mln sales decline.

We continue to make progress on reducing our break-even point which is now roughly $875mln.

The net loss for the third quarter was $254mln or 74¢ per share and compared to the second quarter was impacted by a reduced tax credit of 22% compared with 40% in the second quarter.

The reduced tax credit was based on our global profitability dynamics leading to an 18% price change in the tax rate from the second quarter.

To make an apples-to-apples comparison, at the 40% rate, the third quarter EPS would have been a 57¢ loss per share or 17¢ improvement from the reported result.

Microprocessor [revenue] was $262mln, a decline of 31% compared with the $380mln in the second quarter.

The decline was due to the action taken to lower PC processor inventory in the PC supply chain.

In the second quarter it was widely reported we gave a 3 points of market share based on our microprocessor shipments into the channel.

However, [Data Quest] [...] PC out of the channel reported that our second quarter share was up 1% to 19% year-on-year and down only 1% from the prior quarter.

Based on PC sales we expect to see only minor share loss for the third quarter.

In the fourth quarter with most of the inventory management activities behind us, we expect these two waves of measuring share to be much more in line.

Revenue with our memory product line was $189mln in the third quarter, up 8% compared with the second quarter.

This was a second consecutive quarter of sequential sales improvement.

Flash Memory product sales improved in the third quarter based on the strength of the high-end mobile phone market, especially in Asia and Europe.

It's consumers are buying featureless phones built with high density, high performance AMD Flash Memory.

For the fourth quarter in a row, [...] has increased sequentially and reached a new record level in the third quarter.

Proforma gross market was 13% for the quarter, it was affected by the steep drop in sales both in units and ESPs of our PC processors.

This margin is clearly unacceptable, but it did improve 61/2 percentage points compared with the second quarter.

Expense management was on track for a plan.

Research and development spending was $221mln for the quarter, up 24% from the prior quarter.

The majority of the increase was due to increased Hammer development wavers and FAB 3. [...] an [administering] spending was on plan at $159mln for the quarter, down slightly compared to the second quarter.

Turning to the balance sheet and cash flow, EBITDA in the third quarter was $140mln negative.

Year-to-date EBITDA is $93mln negative.

Cash balances at the end of the third quarter were at $891mln.

This includes a receipt of $108mln in new financing which I will discuss later.

Capital expenditures were $196mln compared to $172mln in the second quarter.

Year-to-date capital expenditures were $567mln.

AMDs inventory was $420mln compared to $380mln in the second quarter with the increase easily split between our Flash and Microprocessing businesses.

The microprocessor portion of the increase was due to the supply chain actions we took in the quarter and a build-up in both of our businesses in anticipation of increased unit sales in the fourth quarter.

We are comfortable with our current inventory levels.

For our modelling purposes we anticipate fourth quarter R & D expenses will remain flat to down slightly compared to the third quarter.

I would now like to take a few minutes more to go into specific details regarding our Phase 1 actions as Hector outlined in his remarks.

First, we took aggressive action during the third quarter to bring better inventory alignment within our PC supply chain.

These inventory management actions include refreshing product and new inventory or swapping old for new and not shipping product into the channel.

These are the same type of actions we took in the second quarter, however, the magnitude of the unit reduction in the third quarter was about four times more significant than in the second quarter.

We believe the PC supply chain [...] are close to being in balance and we do not anticipate continuing actions at third quarter levels.

This has been comprehended in our outlook statement.

As Hector described earlier we have already started the process of reducing our operational expense structure by more than 100mln [...].

We will realize a significant portion of these expense savings starting in the first quarter of2003 with the full benefit realized in the second quarter of 2003.

For 2003 this action is anticipated to reduce our operating expenses by more than $350mln and will necessitate a restructuring charge in the fourth quarter.

We will provide more specific detail on this charge later in the quarter.

Operating losses of the magnitude realized in the second and third quarters are unacceptable.

The actions we have taken and will be taken are expected to significantly improve our operating model going forward and we expect to be operating at break-even by the second quarter of 2003.

In addition to our planned expense reductions we are taking other significant actions to improve our capital structure.

I want to start by reminding you that at the end of the third quarter we have almost $900mln in cash and a $200mln line in credit.

But we have taken a number of steps to create in effect a capital insurance policy for ourselves.

First, we reduce capital expenditures for 2002 to approximately $750mln from our original plan of $850mln.

In the third quarter we negotiated an asset based financing debt instrument of $155mln using FAB 25 as collateral.

To date $108mln of this has been received and is included within our third quarter financial statements.

The balance will be secured during the fourth quarter.

Our forecast for EBITDA in the fourth quarter of 2002 will be approximately break-even excluding our restructuring charge.

Transitioning to 2003, capital expenditures are expected to be significantly less than our 2002 forecast and specific gains for 2003 capital expenditures will be provided at the November 7th analyst meeting.

EBITDA is forecast to be at least $100mln [...] starting in the first quarter of 2003 and will continue to improve as the full effect of the $350mln of cost reductions kick in.

The combination of reduced capital expenses, a lower break-even point, an additional source of capital if the company would be at a minimum by cash flow neutral position and a self-sustaining business [rental] by the second quarter of 2003.

Therefore, with the action being taken we do not need to further improve our capital structure through 2003.

However, we have the capacity to raise additional capital if we so choose.

We believe that these actions position the company well towards a self-sustaining business model, yet do not majorly affect our planned product grow outs.

In summary, poor market conditions prompted us to take additional strong actions to better align microprocessor imagery in the PC supply chain, reduce our break-even point by $100mln per quarter and reduce capital expenditures and bolster our capital structure.

We believe these actions will result in the immediate improvement of our operating performance and going forward better conditions for sustainable economic health.

Now let me turn it back to Hector.

Thank you Bob.

In summary I would like to restate our commitment to bring in AMD back to sustainable economic health.

We are well under way with these efforts through an accelerated combination of rebalancing channel inventories, bolstering our capital structure and reducing our break-even points.

Our inventory alignment efforts in the PC supply chain in the third quarter were several times out of the second quarter in [...] our two products in the market place.

Especially in mobiles where we believe we have held unit market shares and the [...] where we increased shipment by 17%.

Based on PC market [seasonality] and a strong big shipment growth [...] current in our Flash Memory business, we believe that our revenues in the fourth quarter will be around 20% higher than the third quarter.

We begin the fourth quarter with almost $900mln in cash as Bob has not pointed out, yet our strength in our capital position but reducing capital expenses in the current year by an additional $50mln and will significantly reduce our capital [...] for 2003.

In short we are confident that we are completely capitalized through the coming calendar year.

We have set a target of reducing our break-even point by $100mln per quarter by the second quarter of next year [gap in tape] over £300mln in reduced operating expenses over the course of the coming year.

Again based on our current progress on these actions and reasonable assumptions about market brands, we believe it is within our grasp to be operating at break-even by the second quarter of 2003.

Note that despite these actions, they will in no way challenge our commitment to record strategic imperatives.

We continue to demonstrate manufacturing excellence as evidenced by the completion ahead of plan for our over 100% convergence to 130-nanometer technology 530.

Impressively our yields and 130-nanometer as a percent are the same as they were at 180-nanometers which has resulted in significant [...] way for improvement.

We remain on target to start ramping Hammer [...] later this quarter.

And our initial 90-nanometer test wafers are looking very encouraging.

They are converging of 525 from logic to flash has been [...] and they will play a key role in moving to 130-nanometer in volume Flash production next year.

To conclude, we are looking forward to elevating AMD to a new position of leadership based on a powerful portfolio of Hammer Processors, [...] technology and [...] solutions and we will make sure we are well equipped to achieve that profile in the market.

Thank you for your attention and I would now like to turn it back to Mike.

Thanks Mike.

Operator, we are ready to start the q and a session.

Thank you sir.

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 3 tone prompt to acknowledge your request.

If your question has been answered and you would like to withdraw your registration, just press the 1 followed by the 3.

If you are using a speakerphone, please lift your handset before entering your questions.

One moment please for the first question.

Our first question comes from the line of John Barton with Wachovia Securities.

Please proceed with your question.

Yes, good afternoon.

Hector you had mentioned that the cost cutting efforts that you are going through are not going to affect manufacturing capacities and that you highlighted FAB 30 and 130-nanometers during transition in the 90.

I assume that will start at the beginning of next year.

Acknowledging that, could you also talk about the UMC arrangement and if there has been any change there whatsoever?

Just to refresh your memories, you know the UMC arrangement has three parts to it - one with a very near term part which has to do with qualifying UMC as a source of supply of microprocessors on existing [...].

The second part of that was they joined development efforts where we would jointly look at the evolving technology so that the [...] risk would be capable of supporting our needs of 90-nanometers and beyond and the third effort was the joint venture was 300mm facility out in the year 2005 and beyond in Singapore.

None of those things have changed at this moment, we are still on target to qualify, UMC as a potential source of [...] for next year and we are moving forward.

And you commented that for Q4 you are looking at about a 20% sequential increase.

Could you give us some idea as to how that is supportive from a back-load perspective today, what do we require in turns, relative to previous quarters?

This is Rob Herb , maybe I can help with that one.

In terms of a back-log sample in Q4, I won't give you specific numbers but I will tell you, we've probably got the strongest back-log going in the quarter in [...] our Flash business and our processor business are [...] in the four and five quarters.

I would also like to follow up, you asked a question earlier about our own impact on 130-nanometer and 90-nanometer, on the logic side we are already 100% converted to 130-nanometer in FAB 30.

Obviously we will continue the migration of 90-nanometer next year as you suggested.

On the memory side the convergence of FAB 25 also is complete to 170-nanometer technology, we will be converting that to 130-nanometer technology which again I believe it's late this year, early next year.

Our next question comes from the line of Jack [Garrity] with Gerard Klauer.

Please proceed with your question.

Thanks very much.

I just wanted to check the inventory section again.

I understand it went up to $420mln and with Flash and microprocessors it was about 50/50 increase.

You said, if I remember okay, is that needed for the fourth quarter increase in sales, do we look for that inventory level to come down?

Yes, this is Bob.

Those inventories are required for our fourth quarter sales plan.

I anticipate they will be slightly less at the end of the fourth quarter than they are now.

Yes from a sales standpoint, we are clearly focused on two areas, we introduced our MirrorBit technology and obviously made great progress resulting from the market share in the wireless or cellular phone business.

If we acted this year I think we are going to have the highest markets we've ever had in the cellular handset market and clearly the rampant inventories in [A & G] are to support that and the MirrorBit activities.

From a MirrorBit perspective we shipped tens of thousands units a year in year three and we expect the plan currently to ship somewhere around the million in the fifth quarter, so a lot of that inventory is built on that ramp.

On the processor side, we've [...] delay in getting the volumes we want at a [24,000 plus] in those products.

As we enter into Q4 again there, we have the ability to manufacture more than 2mln units at 24,000 plus and above, it's actually more than I think the market can absorb, but much of the inventory build is on getting [...] process for that product for the market place in Q4 and it's why we are projecting our Q4 outlook as we did.

Just one follow-up.

You know we obviously listened to the Intel call yesterday and they were a little bit more conservative relative to the overall market.

I'm just curious, you guys obviously think you're going to take market share, I suppose if you think you're going to increase your sales gains 20% sequentially, is that a fair assumption?

Well I believe it's true, let me modify it a little bit for you or [...] it a little bit for you.

You know clearly the market share question is initially one [...] argument of shipments in versus PC sales out.

From PC sales out standpoint, if you look at the Data Quest numbers as Bob I think mentioned, you know we were actually up year-on-year on the most recently reported Q2 data and our market share was something like 19%, that is down to our all time highs which was actually in Q1 2002 which was 19.7%, so less than a percentage point down.

And in Q3 well our shipment again, are obviously significantly lower than we like and we will move share on that measure, I think you can see a similar result, I think the actual PC consumption rate, the [...] processors is likely to up from Q2 and I don't think we'll have lost any share, if we did it would be a very modest amount.

In Q4 I think you're going to see both our shipments in and the PC processors sales out more closely aligned and I actually believe that in Q4 we have a strength and position relative to our offering with the Model 24,000 plus and above again with the ability of a couple of million units, that allows us to play in a broader segment of the market.

I think the big question is how much market demand is there for those high performance desktop PCs.

That's not totally clear now and that was my only hedge on where we're heading.

The next question comes from the line of Jo [Oshay] of Merrill Lynch.

Please proceed with your question.

Hi thanks.

Bob, looking at the inventory and then looking at the gross margin and obviously you are looking for some Q4 improvement, but it looks like yes, you are making things at a higher rate than you are selling them here in the third quarter, so some of that sort of theoretical improvement and gross margin is already impounded in the current number right?

Or am I missing something?

No you're right.

I mean we built the inventory in the quarter which is the [...] costs.

So I guess as I look at this, can you help me understand maybe with that in mind, assuming that we do say get back to this $600mln number at the top line in the fourth quarter where we might want to think about gross margin?

Jo, as you know we don't try to give any granularity on gross margins since our numbers can swing wildly with just a couple of million dollars of movement in unit sales, but we continue to make progress on lowering the break-even point and we did from second to third, we will make progress from third to fourth.

We do also as Rob said, we will have a much richer mix, which I place in the equation that gross margins should go north.

To confirm my notes, you did say that your EBITs you will break-even at the EBIT level was going to drop by $100mln during the fourth quarter, is that right?

That's right, it will improve. [...] levels to break-even in the fourth quarter excluding the special charge we will have to take.

Excluding the special charge.

Okay thank you very much.

The next question comes from the line of Adam Parker with Sanford Bernstein.

Please proceed with your question.

Hi.

You guys said that your break-even point looks like it's 8.75 now and then you are going to maybe lower it to 7.75 in Q2, if I'm understanding you right.

Consensus if you look at the analysts are currently at $618mln revenue for Q2 so it looks like revenues are approximately 25% lower than your break-even point.

So I'm just trying to figure out where you think the upside is coming from versus the consensus opinion of the average analyst in terms of revenue growth from here to Q2?

Let me make some comments on Flash and then I'll ask Rob to comment a little bit on microprocessors.

We have started oh maybe a year ago to try to enhance our relationship with Fujitsu to become a much stronger competitor in the marketplace and gain in areas where perhaps we had not participated as much before.

That has worked well, continues to work well and going forward this enhanced relationship I believe is only going to get stronger, [...] to introduce technology faster, better, have the capacity in place to respond to ups and downs a little more flexible.

That has resulted in our somewhat more bullish outlook on Flash going forward, beginning this quarter even though we have increased the last two quarters sequentially, we expect that rate to go up, you know quite significantly more in this fourth quarter coming up.

We are looking at that success in the marketplace where our new technology and new products to continue to gain share and those are areas where we in the past we haven't been as strong, namely wireless.

The strong areas where we have strong up to now which is [...] we continue to be a strong player there and frankly the content of Flash and [...] is going up dramatically even although unit sales in [...] perhaps may not be going up, the content of Flash is going up phenomenally and we are key player to some of the leading ace technology companies in the [...] electronics business.

So I guess it's a fairly optimistic outlook on our Flash line and I would like to ask Rob to comment on the microprocessors.

So are you saying that Flash is going to grow more in Q4 than microprocessors with that statement?

No, I didn't say that, what I said is relative to Flash itself [talking over] single digit growth we are now going into the fourth quarter where we expect at least twice that rate.

The Flash business is clearly continuing the ramp and we are pretty bullish on the 2003 prospect both for the cell phone market and with the increasing focus on our MirrorBit shipments which is clearly a terrific product for us.

On the processor side of the business you know we are obviously expecting to see growth moving in Q3.

If you look into 2003, our competitive position again continues to look pretty solid, both in the desktop state and the mobile states we continue to do well and I think the server state offers and opportunity where we saw growth from Q2 to Q3 at the depressed levels we talked about.

Again as we go forward into Q4 and with the pre-production of the Hammer bit processors next year, I think it gives us some opportunity to increase the revenues on that side as well.

Clearly as you did the maths there is some opportunity to achieve break-even and that's clearly our goal at this point in time and that would require some top-line growth.

Okay so the 7.75 is sort of a correct rough benchmark for Q2 revenue if your assumption on break-even comes true?

No the correct benchmark is we claim that if those revenues are at 7.75 we will break-even.

Okay one last point, sorry.

How much an increase do you think you need in IT spending on PCs and workstations next year to get to your sort of internal view of the 2003 revenues?

Yes, 2003, certainly at this point in time doesn't look like it's going to be a hugely robust market.

We do think we've got some opportunity there, I probably would defer comments on our overall 2003 outlook until our analyst conference on November 7th, where we are going to talk about 2003 market strategy.

Our next question comes from the line of Tom Thornhill with UBS Warburg.

Please proceed with your question.

Thank you.

Can you elaborate a little bit more on the cost actions that are going to take place next year and what that impact is going to have on cash flow.

You mentioned you were going to take CAPEX down and you are going to take some actions on the operating level.

Would that imply that you should be positive cash flow in the second half of the year as you cross break-even here in the second quarter?

Yes, most of the cost reduction activities will be cash based activities, so we will be taking cash expenditures off the [...] both in capital expenditures and in operating expenses to lower the break-even point.

We are working on a path to have full realization of those efforts by the second quarter and we will have actually positive EBITDA in the second quarter and very positive EBITDA in the back half o next year, therefore total positive cash flow, also with our reduced capital expenditures.

As I kind of said, we are trying to work ourselves into a self-funding model where we don't have to go to the capital market unless we want to.

Can you elaborate a little bit about which line items are going to be most impacted, you talked about reducing the overall operating expenses by $100mln by Q2 and I didn't quite understand the number for the year, it was three hundred and something?

Can you elaborate on that number and in which line items really starts to show up whether it's SGNA or at cost of sales or R & D?

Yes, I've actually accepted the challenge to lead this programme called operational flexibility to AMD where we are looking at the business model and we are actually looking at all parts of the company and I will tell you [...] which pieces it's coming from today, that we are looking at all aspects of the company and the only thing that remains untouchable is our continued technology development and product development so that we achieve our product growing schedule.

So other than those two areas, all aspects of the company we are looking at, you will see cost reductions take place in just about every other [...] in the company.

The total number for the year was mentioned in the call as three hundred, but I didn't catch the whole number?

$350mln.

$350mln.

So sort of like $50mln in Q1 and then $100mln per quarter for the last three quarters?

That's close enough.

The next question comes from the line of Scott Randall with SoundView Technologies.

Please proceed with your question.

Great, thanks very much.

Bob, I wonder if you could talk a little bit more about what the unit trends were last quarter and then also the assumptions on both unit and pricing for next quarter to get to that 20% target price?

Again there is growth in both sides of our business, so I will try to split it up here a little bit.

Take a look at the Flash business, the largest single segment still driving growth is the cellular phone market.

We are expecting a fairly robust fourth quarter in that particular segment.

I will also make the comment that we saw growth in our Flash business across all geographies around the world in Q3 with the exception of the Americas, the Americas are still lightly impacted by the network infrastructure business which is just awful and the fact that we are still seeing quite a bit of migration off-shore, some of the outsourcing that's being done in all segments of the business.

But in Q4 I think the Flash growth is largely fuelled by the ramp of the MirrorBit technology and the market share gains and growth we expect to see in the cellular market which is largely due to the seasonal patterns you see there.

On the processor side, the biggest [...] for growth is quite frankly that much of the inventory actions we have taken are behind us.

We now get back to the mode of selling contemporary product into a contemporary marketplace and actually being able to ramp our 24,000 plus and above products into the marketplace.

Again, I don't think we are going to be limited by our ability to produce products and put it in the marketplace, I think we are going to be limited by how much demand there is in the marketplace for the high end desktop space and in particular processors.

I think the mobile business will continue to grow and I think the server business looks pretty strong.

I also believe that some of the changes we have made in China and with our Asian go-to-market scheme, we actually have some opportunity to look after some business in Asia we have not participated in to a great extent over these last couple of quarters as well.

That's sort of how I see the opportunities.

From a PC standpoint, in Q4 I still think that PC shipments are going to be up which we would expect with the seasonability, I think it's probably going to be at the lower end of the range, I think we're going to see, well I think we're going to see something, I [...] say between 10% and 14%.

What that means for CPU unit shipment typically in the fourth quarter that would mean CPU units shipments are going to be up somewhere between 8% and 12% is my guess.

Any your last question was what does that mean for [ASTs]?

I don't particularly see any anomalies relative to [AST], we seem to be on a fairly stable and continuing pricing curve to all [ASTs], I don't think that's going to change as we go into the fourth quarter.

Right, I wonder if I could ask one more follow up question on all of this.

Can you talk more about the Hammer schedule on [milestones] and where the confidence level is right now on keeping the schedule?

Yes, first of all Hammer, we did announce yesterday and the Microprocessor Forum we actually released our first test results on a 2GHz albeit pre-production [...] and the benchmarks were quite good.

We got a second SPECinc score of 1202 and a SPECfp score of 1170 and if you just put that in the comparison, that's about 20% better than a Zeon running at 2.8GHz.

We clearly think we're on track as to the capability of what this product can deliver.

Relative to the schedule, we are currently looking at mid first half 2003, our initial shipments to products we are focused right now on the server states, we think the server state gives us the best opportunity in particular to break into the enterprise class customers which we want to break into.

It also gives us the area that is absolutely the clean kill, it by far would be the best server product available in the market.

You will hear a little more this quarter and some as we go into Q1 and I'm not going to be the first to disclose them but I will tell you that as we look at our [...] measurements and as we look at net benchmark measurements, in both cases I think we are going to have a superior performance product whatever it is implemented in the market at that time.

So we are feeling pretty bullish about the opportunity there, the schedule issue [...] complex product, we believe we are on schedule for that mid first half kind of time frame, if we keep driving forwards it would mean our initial shipments would be late Q1 early Q2 kind of time frame and as of right now really they look good.

Our next question comes from the line of Tim [Mayhan] with Crédit Suisse First Boston.

Please proceed with your question.

Thanks.

Can you tell us how many new microprocessor units you actually shipped in the third quarter and what the potential sales adjustment charge could be in the fourth quarter, ballpark?

Well I'm not expecting any sales adjustment charge in the fourth quarter.

I don't think we will get into the specific units we've shipped [...] competitors never wants to release their information.

We certainly, I will confirm though that our unit shipments were depressed as a result of those actions and from the unit shipments into the channels you will see the decrease in market share, but again I don't think it's going to impact on a relative position in the marketplace as measured by Q3 that our ship based on A & D processor technology.

In other words there was plenty of inventory out there for the PCs to be built.

Is this going to be a new policy from AMD that you won't be disclosing [...] shipments quarterly?

Yes, we would like to get out of that discussion and move it to the industry analysts and their measurements of what happens there I guess.

Okay and I guess you have put some pretty aggressive numbers or very specific numbers on your forecast for next year on a break point.

I am curious, kind of leading back to some questions that have been asked previously, is what was your [unicore] consumption for PCs in Q1 and Q2 to hit that break point in Q2 because I think given that you have given very specific information, you must have something in mind of what you think PC [unicore] is going to be in those two quarters to hit that number?

We actually do as I said earlier, we are going to share some of our strategy and plans both on the market, product and technology perspective.

On November 7th as we agreed here earlier, I'm going to hold off and have those discussions as part of what I talk about on the 7th.

Okay, I'll try one more and maybe you will answer this one.

Did you guys lose less money in Flash in the third quarter than you did in the second quarter?

The answer is yes.

And just finally, what percent of your Flash shipped during the quarter was MirrorBit.

A very small percentage, we shipped tens of thousands of units in the quarter of MirrorBit, this the first quarter of real production ramp, our plan is for over 1mln units.

Our next question comes from the line of Evan [du Bais] with LRL Capital.

Please proceed with your question.

Thank you, can you go into the financing a little bit and just give us the numbers again and describe that a little bit?

From what perspective?

Who was the counter party and how is this going to work in the time line and all this other stuff, I think I got the number right, it was $108mln?

$108mln of assets financing we secured in the third quarter.

The total plan we were working towards is about $155mln, we will secure the rest of it in the fourth quarter.

I guess I'd rather not at this point discuss who is leading the effort, but it's your typical people that do that kind of asset financing kind of activity.

But we still have a little bit more to do before the end of the quarter.

I hear you.

So if I take that out, that means that cash flow was about $300mln gross of that right?

Correct, yes from the one, one down to that, that's right.

And then for next quarter, what are you guys thinking for cash flow?

Well EBITDA based on what we think sales are going to be, the actions that we are going to do to continue progress and break-even, etc, etc, we think EBITDA will be close to break-even excluding the special charge.

So there's maybe going to be less cash [...] on an ongoing basis.

See the one thing I maybe it will become more clear to me on November 7th, but the one thing I just don't understand at the moment is how you don't feel you are going to tap the capital markets in 2003, unless your CAPEX and your business model is going to completely change?

Well I think you need to play through the numbers we just talked about of $350mln of cost reduction which you play through, reduced capital expenditures and what that yields from our change in cash balance requirement.

And none of those expansions will be associated with the stuff that was delayed, potentially delay Hammer or anything?

No of course not.

Okay, thanks a lot.

Our next question comes from the line of David Woo with Wedbush Morgans Security.

Please proceed with your question.

Yes, I just have two questions.

Number one on the capital expenditure numbers, if it comes down to 7.50 I assume that with your UMC relationship on .13 for K7, that number could be dramatically lower in 2003 relative to 2002 7.50, did I get that correct?

That is exactly one of the motivations for doing the UMC relationship is that should we need additional volume beyond where we can internally produce, we can do it without any significant capital outlet.

Okay.

The second thing is can you help me a little bit on this, I never quite understood why there was this channel correction, because from what I remember there was never in history much of these kind of things or at least nothing of that significant magnitude that we see in Q2 and Q3 of this year?

Yes, well this is Rob Herb David, I'll take the [...] for that, call it a lack of foresight, I can tell you that in Q1 we had a pretty bullish quarter and we were projecting Q2 and Q3 to be a lot better than they ended up being, so most of that was an error in my part in [...] to what we thought the market was going to be.

And I won't take all the blame, I mean our customers were telling us some of the same things at that point in time.

So if you look at our shipment rate and what customers were holding, what it was and you know PCs finished, the inventory of our processors were various levels of the channel, the people who supply those guys, you know we were clearly in a situation where both in Q4 and Q1 [...] shipments far outtakes PCs hold in that timeframe and unfortunately what we had been projecting for Q2 and again for Q3 while Q3 was up from Q2, I will tell you that both Q2 and Q3 were well below the expectations we had in the first quarter of this year.

So at that point in time, we made the decision, you know, in a normal course of affairs, you will see as the business picks back up you absorb that on a quarterly basis, you know over several quarters at some kind of run-rate.

Well we got in a position where we decided we were going to take decisive action [...] that as this market does recover, we have the opportunity to make sure our customers and all of our channel partners have the material required in the contemporary market with the precious material possible.

So we took a much bigger and more decisive action in Q3 than we had planned even at the beginning of Q3 and I think it was the right thing to do and I think we are going to be very well positioned as we look into what's going to happen in Q4.

Thank you.

The next question comes from Quinn Bolton with CIBC World Markets.

Please proceed with your question.

A couple of questions.

One, there are some recent media reports discussing the potential that you may be negotiating with Fujitsu to restructure the [...] joint venture.

I wondered if you could make any comments.

And then a quick question for Bob, what kind of tax rate should we be looking at for the fourth quarter, it looks like that's been moving around here in the third quarter?

Let me just make a comment about Fujitsu.

We have had a relationship now for many years, I forget how long, 7 years and it has been incredibly positive and healthy for both companies.

But as markets change and things evolve there is a need for that relationship to be modified, to be more in line with what needs to happen going forward.

We are both, Fujitsu and AMD continue to do that on a regular basis, so there is nothing unique about us exploring that and we believe that the evolution in that relationship is getting healthier and stronger.

There is nothing beyond that, that we can say at the moment.

To your question on cash balance, oh I'm sorry tax rate, I'm sorry I missed it.

Tax rates for Q4, probably will be around the same as we are today, in that 20% to 25% range for the fourth quarter.

Thank you.

The next question comes from the line of Nathan [Goran] with the E [...] Companies.

Please proceed with your question.

I would like to ask you three following questions.

How much of your long-term debt is related to Dresden, what happens if you don't pay the Dresden interest and with your losses at the present time, are you in violation of any loan covenants?

Okay the total Dresden debt is $500mln, that's currently the outstanding balance.

There is a portion of it that is in the current [...] window, but $500mln is the total amount owed.

Obviously we have not and we don't plan to not pay the interest on that loan, the interest is actually government subsidized with a guarantee, so it's actually not a lot of interest, in fact the interest rate is quite low on that.

And there is no violation of loan covenant, sorry I forgot about that one, because we don't have any issues with it.

There are no violations of any loan covenants?

No.

Are you not near any violations?

No.

Thank you very much.

Good luck.

Thank you.

I would just like to add to that last question.

I think it's important that the loan we have on the Dresden facility.

It's a $500mln loan at base with an investment of $2bln so it's really a debt, to us it's quite low in ratio.

The next question comes from the line of Hans [...] with Prudential Securities.

Please proceed with your question.

On Hammer, it seems that your strategy has changed a little bit, in that you are going to address the server market first and foremost.

Why is that the case, is there an issue with the performance of the chip or is it a more attractive market?

Are you going to focus first on the Opteron family rather than Athlon Hammer core, if you can explain thanks.

Yes the first product that will be in the market is actually based on what was originally called the Sledgehammer [...] and we think the biggest opportunity for this product is in the [...] and when the Sledgehammer died [tape cuts off] whichever one is served first.

Also with the pretty [...] into our roadmap which starts to ship in the first quarter, we believe that the Athlon XP lineup based on that K7 core called [...] that we are going to be able to have a competitive performance product in the desktop phase and the mobiles phase through [...] with that products, so we will focus on getting the benefits of Hammers and be driven largely by the server space and the workspace [...] and as we go through the year, we will get into the high performance desktop space and this is where we become a player in the volume desktop space until sometime in the second half of next year.

So is this a change in the strategy over the past quarter or so?

It wasn't a change in the strategy in that we are trying to broaden AMD's presence in the marketplace.

You know every performance leadership in the consumer desktop states has been something we've been in and out of all the time, we believe we've got a very competitive product [...] going forward.

The place that we have not been a big player and we started making progress even with the current Athlon XP product is in the server space and we think it's a chance for us to step up, take a leadership position in enterprise class product offering and to go to market.

So yes, it is a change of strategy in that we have put a lot more focus on it based on the prospects we see going forward.

Okay and one follow-on to the last question.

Will you have design [...] or announcements at the end of this year or early next year before this product is launched in March or April?

Well in an ideal market, our attempt would be to start shipping the product and then line up with some launch partners relative to the availability in the marketplace, so sitting here [...] but yes that is the significant time.

The next question comes from line of Eric Ross with Investec.

Please proceed with your question.

Yes I was wondering what the value of the fourth quarter special charge is going to be for my model?

I'm not ready to talk about that at this point.

Okay, but I should just assume then break-even EBITDA otherwise for the fourth quarter?

Correct.

And then just quickly, traditionally you haven't been in the cellphone market very strongly over the last year in the Flash market.

I was wondering maybe where Flash, what sort of percentage of your share in Flash cellphone handsets for the last quarter and this quarter has been going and what densities are really shipping in to there?

Yes it's a whole high density product, 54Meg kind of products and above.

And our share, I won't give you our relative share in our own business, although it's a significant portion of our total shipment, not more than 50% however, and I will tell you that our share from an absolute market standpoint, we exited last year at less than 10%, right around 10% of the overall cellular market.

I believe we will exit this year at something around 20% share of the overall cellular market, so clearly a substantial growth from last year.

Great and set top boxes and automotives are still the other two largest shares in your Flash business?

Yes, and if you look at our Flash business, it's really four segments, cellular, which we've made great progress in and is now the largest share of our total business.

The automotive market, which is probably the most stable of the business, it was down a little bit last quarter, but overall it was relatively stable.

The set-top box, the consumer market which we see as relatively flat at this point in time, we are doing okay in it.

And last, this was our largest segment in terms of last year and has quickly become a much smaller portion of overall business is network infrastructure business, which continues to be extremely sluggish and that's probably the worst of the four segments we are engaged in.

Okay and then I guess the last question is maybe you can talk a little bit about the clock speed and performance dealings of Athlon over the next couple of years and what you are planning to do to extend this in the next couple of years?

Let's see, I don't want to talk about the next couple of years, I'll take advantage on November 7th, actually Dirk Meyer is probably going to present the programme at that point in time.

But I will tell you again, I will reiterate this quarter we are going to have in excess of $200mln of the 24,000 [...] products and quite frankly we avoid talking about frequency because it just doesn't matter, what really matters is performance but just to give you a sense, those products were also all over 2GHz, so the truth of the matter is we think our line-up is now back to being an extremely competitive across the [...] range and the introduction of [...] in the first quarter and subsequent increases in performance throughout the next year, we think the Athlon XP based product line largely on K7 cores will be very competitive in that timeframe.

But you won't switch to another processor architecture in the next two years in order to maintain your competitive performance?

Well in the next two years the answer is yes, we expect to have camera based Athlon products begin to come in the market next year even in desktop state and become a significant portion of our product offerings really in 2004.

Okay and last quick question.

Do you have any exposure to [Intergraph] pattern that you know of?

Not that we know of.

Thanks guys.

Operator, one more question please.

Thank you sir.

The last question comes from Jonathan Joseph with Salomon Smith Barney.

Please proceed with your question.

I'd like to clarify something, you suggested CPU is up 8% to 12% in the fourth quarter.

Is that in general for the industry and on average or is that the rates that your own CPUs are going to rise?

It's a general statement on how I think the industry is going to see it.

Now Hector had said that Flash was going to grow at about double the rate in fourth quarter from third, so that's about 8% become 16%.

If you sort of plug in the numbers, it looks like processor is going to have grow on a dollar basis about 30%, was there anything in the accounting process from Q3 to Q4 that through a swap or through you know, some replacement, higher ESPs for lower ESPs that revenues, microprocessor revenues were a little understated in Q3 and could be a little overstated in Q4, because of this inventory clearing issue?

First of all, I think Hector said he expected Flash to grow [...] that much, I won't get into the details of specific numbers on that.

I will say on the microprocessor side, our ESPs as well as our unit shipments both were absolutely impacted in Q3, so it is a negative overstatement of what happened.

In Q4 there is no positive impact coming back, we just get back into shipping contemporary products in the marketplace, so I do expect Q4 will be quite a bit better coming off of what is an overly depressed rate from Q3 as a result of the actions we took.

Okay and the products you are shipping in Q4 is there any zero [...] basis product?

I don't think so.

No.

And then just finally, Rob do you think that your ESPs can grow on a normalized basis, I understand that they were depressed in Q3, but when you sort of normalize it, are your ESPs likely to growth a little bit in Q4 as well as Q1?

Certainly, again I don't want to comment too much on 2003 yet, but if we look at our business and if we have modeled it based on what we think our current plans for shipment this quarter are, if you looked at the [...] growth [...] from Q2 to Q3 it was actually up for us and I think that Q3 to Q4 we have that same opportunity.

So it's a combination of the more competitive product line to my mind, again more of our overall shipments being in the mobile and server states than they have been in the past.

Again the fact that we are not going to have the factor of the inventory [...] ESP in Q4.

Okay and just before you run because this is the last question.

Servers as a percentile and mobiles as a percentile what would you estimate in Q3 and Q4?

I won't give you all the numbers, I will just say it's continued to grow, if you look at the mobile market, again if you look at the Data Quest numbers, we have doubled our shares from Q1 to Q2 from 6% to 12%, we believe that with our unit shipment being basically flat we are pretty confident [...] grow a little bit this year.

On the server side our shipments from Q2 to Q3 were up 17%, so a pretty strong exposure although the server total [...] units is a relatively small portion to the overall number.

Sort of a low single digit?

Yes, from a unit standpoint yes.

Okay thank you.

Ladies and gentlemen that does end the q and a session.

I would now like to turn the call back over to Mr. [Hosi].

Okay that concludes the call.

Thank you very much for attending.

Ladies and gentlemen, that does conclude your conference call for today.

We thank you for your participation and ask that you please disconnect your line.