超微半導體 (AMD) 2003 Q2 法說會逐字稿

Welcome to the AMD Q2 earnings conference call.

During the presentation, all participants will be in a listen listen-only mode.

Afterwards we will conduct a question and answer session.

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

As a reminder, this conference is being recorded Wednesday, July 16th, 2003.

I would like to turn the conference over to 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 and A. The participants are Hector Ruiz our President and CEO, Rob Herb, our EVP of Sales and Marketing and Bob Rivet our Chief Financial Officer.

This call is a live broadcast and will be replayed at streetevent.com and AMD.com.

The telephone number is 800-633-8284.

Outside of the United States the number is 402-977-9140.

The access code for both is 21154161.

The telephone replay will be available for next 10 days starting 6 p.m.

Pacific time today.

For your planning purposes, I'd also like to take this opportunity to inform you that we will be launching our AMD after Athlon 64 processor for the desktops and mobile PC sectors on the 23rd of September here in San Francisco.

Again, that's September 23rd, here in San Francisco.

We will be sending out invitations to this event over the coming week, so keep an eye out for further details of the launch.

I'd also like to share with you the date of our 2003 analyst's day.

It will be held the morning of Thursday, November 6th, here in our Sunnyvale headquarters.

Before we begin the call, I would like to caution everyone that we will be making forward- 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 discuss in details detail our risk factors and our business.

You'll find detailed discussions in our most resent SEC filings, including the annual report on form 10-K and our first quarter form 10-Q.

I would like to introduce Hector Ruiz.

Thank you, Mike.

Once again, I would like to begin with a report on our continued progress to profit profitability.

I will then ask Bob to go into some detail on the past quarter with some comments about our near-term outlook.

I will then close with comments on our longer-term prospects before taking your questions.

Let me start by saying that while we're pleased with the progress we've made on a number of very important fronts, we're more disappointed than anyone with our top line performance and I will get to that later.

I want to summarize some of the progress that we've made on our baseline priorities.

We continue to manage well our PC value chain inventories to very tight levels.

We're now down to about four weeks, which is right where we would like them to be.

We're actively managing our capital base, financial shall the second quarter with $739 million in cash, despite a very challenging quarter.

And we continue our companywide effort to reduce our break-even and make our cost structure more variable in nature.

In fact, I'm very pleased to report in the second quarter, we've made or $800 million cost target by a full $31 million, and this is over $128 million per quarter or 14% below our break- break-even only four quarters ago.

We will continue to drive this discipline across into our organization, as we intensify our attention on growing our top line.

I mention our breakthrough technology agreement with IBM as an example of our operational strategy gee.

We are thrilled and happy with the progress of our relationship with IBM as we expand our flow of engineers to their Richfield facility.

Our insulin silicon insulator yield and performance are at mature levels, faster than any note in technology than we have ever done and as we align ours and IBM's trajectories, our nanometer process technology is looking very robust at this point in time.

We're looking at one of the steepest -- in history with our product shipments beginning for 90 nanometers– in the mid year 2004.

Another example of our operation of flexibility effort is our flash memory joint venture with Fujitsu.

We have expanded in this access to new assets, markets and revenues and we fully expect to be able to exploit the same operational efficiency as our consolidated flash memory business continues to expand.

The leadership team is in place and we're well on our way to integrate in operations.

We believe we're on track to be the world's largest flash memory provider in the very near future.

In a few moments, I'll ask Bob to outline how this agreement will affect our financials in subsequent periods.

While channel softness and the SARS epidemic undermine our ability to reach our aggressive top line projections for the quarter, we're still able to make strong progress on key revenue initiatives, new ones, which include servers, where our AMD family continues to show impressive gains.

With our partners, for our growing list of top tier participants, including IBM, Microsoft, Sun, Oracle, Computer Associates, and many others.

With awards recently honored [inaudible] at best of show on the world conference in San Francisco.

And more importantly, with customers, we're early -- we're exceeding our own partners expectations.

In this past quarter we were chosen as the basis of high profile super computer projects at the University of Michigan , Manchester University and Texas A&M University.

Continuing in the high performance computing segment.

We're looking forward to IBM and Fujitsu in the near future.

In the first quarter of its existence, we have shipped more processors than our leading competitors 64 bits processor family shipped in all of 2002.

China is another key target for top line growth.

And despite the adverse effect of SARS in our flash and processor channel business in quarter, it is important to know that AMD revenues in china were up by 60% year on year.

Building on our momentum, AMD and its 64 processors remained best IC innovation for 64-bit processors by the China Semiconductor Industry Association.

In addition, our new partners Amora (ph)Sonic and CHINGWA Unit Splendor (ph) will be shipping mobile processors this month.

And in the mobile segment, or in addition to our recent success in China, we announced our new XP mobile 3000 Plus and 1900 plus processors for [inaudible] light computers.

We launched our Apple XP mobile 28 plus into the growing desktop replacement segment.

And we continue to advance our solid position with consumers in the retail channel.

Finally, in flash or in addition to closing our landmark deal with Fujitsu, we were honored by Samsung in 2002.

We are ramping demand and record shipments of our breakthrough technology with first shipments to a major cellular customer in the second quarter.

We continue to strengthen our leadership position in the strategically important wireless arena, an important driver of high density demand.

We remain one of the two or three companies that are poised to deliver the high density flash memory as evidenced by our half gigabyte sampling this quarter and we will deliver first shipments of 133 nanometer flash from our 525 for the balance of the year.

Servers, china in the mobile segment are three important areas of folk focus that will fuel both top line growth and the strength of our customer relationships.

In our refined flash joint venture for both immediate and the promise of future top line growth as well.

To close, I would like to assert that we're making a strong progress to reduce our restructure on our coast and improve our operational flexibility and position ourselves for success with the carriers we have targeted for revenue growth the balance of this year and into 2004.

At this point, I would like to ask Bob Rivet to review the current quarter results.

Thanks, Hector.

I will start with the review of our second quarter results and conclude with some forward- forward-looking guidance that will include the effect of the integration of Fujitsu’s flash memory business into AMD (ph).

Second quarter sales were $645m up 7% year over year.

In what is typically a seasonally weak quarter, sales are down 10% compared to the first quarter.

The effect of the SARS epidemic and weaker than anticipated channel sales in some of our international market segments impacted second quarter sales.

AMD's operating launch in the second quarter was $123 million, down 59% from the same period a year ago and down from $125 million in the first quarter of this year.

Our reduction in operating loss in the quarter was driven by continuous progress in our ongoing cost reduction program.

Compared to the first quarter, operating margin follow through was excellent as evidenced by reduction losses despite the $69 million sales decline.

And as we set out to accomplish in October of last year, we reduced our operating loss by more than $200 million.

Gross margin improved for the 5th consecutive quarter in a row to 34% for the quarter, up from 31% in the first quarter.

Operating expenses were virtually flat with research and development spending of $209 million for the quarter, and marketing general and administrative expenses of $135 million for the quarter.

That launch in the second quarter improved $140 million, or 40 cents per share, compared to $146 million or 42 cents per share in the first quarter.

Year over year, net loss improved 24% from $185 million dollars over 54 cents loss per share.

We're pleased to report that our operating break-even point for the second quarter was $769 million, exceeding our October guidance last year while we embarked on our operational flexibility program and set an aggressive goal of operating break-even point below $800 million by the second quarter of this year.

We achieved this.

There is no material currency effect on the second quarter as most of our currency was reasonably covered.

While switching to the business revue for the quarter -- second quarter PC processing revenue was $402 million, a decrease of 14% as compared to the $468 million in the first quarter and an increase of 6% over the same period of a year ago.

Increased sales with our tier 1 customer base were not high enough to offset weaker than anticipated channel sales in our Asian and European market segments during the quarter.

Accordingly, we reduced shipments in those channels and tightly managed inventories in the PC supply chain.

As a result we believe AMD's base inventories in the supply chain are now at four weeks.

In the second quarter, flash memory revenue was $211 million down slightly compared the first quarter.

Year over year memory sales were up 20% compared to the $175 million dollars in the second quarter of 2002.

While the SARS epidemic caused the decline in demand for cellular handset and resulted in significant lower flash memory sales for AMD in Asia, this decline was almost entirely off offset by an increase of memory sales in North America and Europe.

With our continued share gains in the high end cellular hand set market, along with our leadership position in high density flash memory, the shipments grew for the second consecutive quarter, once again to record levels and our average density nearby doubled compared to the second quarter of 2002. -- seven consecutive, excuse me.

With continued cost structure our EBITDA in the second quarter continued to improve to $97 million from $87 million in the first quarter.

Again, this was consistent with our prior guidance of positive and growing EBITDA in the second quarter.

Now, let's turn to the balance sheet.

Cash balances at the end of the second quarter are at $739 million, down only $61 million from last quarter's closing balance.

We successfully renegotiated and extended our $200 million revolving line of credit, currently untapped, during the quarter, which now expires in July of 2007.

Capital expenditures were $103 million in the second quarter, compared to $181 million in the first.

And once again, quarterly depreciation was larger than capital expenditures.

Accounts receivable sales out outstanding were relatively flat at 52 days from the first quarter was well over 50 days.

The AMD's headcount was 11,700, down from 12,100 in the first quarter, and 13,700 in the second quarter of last year.

Now I'd like to discuss the out outlook and discuss some of the changes of AMD's and Fujitsu's flash memory operations into FASIL, LLC a consolidated subsidiary of AMD we'll have on our future.

AMD will consolidate Fasil's LLC financial results in an income statement and balance sheet.

There will be a provision in the AMD’s financials below the operating profit and loss line to reflect FUJITSU's 40% share of the new company's profits and the appropriate minority interest on the balance sheet.

At the start of the third quarter, AMD's consolidated balance sheet will take on incremental assets and liabilities from FASIL, LLC of approximately $1 billion dollars, which includes $180 million in cash, and $190 million of debt.

Headcount will increase in the third quarter by approximately 2700 people, due to the consolidation of FASEL, LLC, memory operations.

We believe that third quarter process sales will be up based on normal seasonal -- normal industry seasonality along with enhanced product position on increased shipments of AMD processors and initial shipments of AMD Athlon 64 processors.

AMD expects its flash memory business to improve based on continued market share gains in the high-end cellular handset and recovery of the Asian markets.

On top of our expected growths from the existing AMD flash memory business, we believe that the combination of AMD's and Fujitsu's combination into FASIL, LLC will add an incremental $180 million of consolidated sales.

With the consolidation of Fasil, LLC/ Operations the company anticipates its third quarter cost structure to be approximately $1 billion.

First half 2002 capital expenditures were $283 million.

Our capital expenditures planned for the second half of 2003 will now include Fasil, LLC, and we expect the expenditures to be approximately $725 million.

Depreciation and amortization for the first half of 2003 was $423 million.

Depreciation and amortization considering FASIL, LLC, is expected to be approximately $975 million for the full year.

Consistent with our prior guidance, our quarterly tax rate will be zero until we return to profitability.

Once profitability, we anticipate the tax range to be within the 10%to 20% range.

And finally, with the third quarter opening cash balance of $919 m, made up of $739m from AMD's second quarter ending cash balance, plus $180m cash contribution by FIJITSU, plus continuing growing EBITDA, we expect cash to be minimal for the third quarter.

In summary, we believe our costs are under control, and we're seeing improving fundamentals going forward.

We're doing everything possible to return to profitability as quickly as possible.

I'll turn it back over to Hector.

Thank you, bob.

In summary, I want to share with you our reasons for being increasingly optimistic as we enter the second half of the year.

First, we're well positions to succeed in our flash business.

With the consolidation of AMD And Fujitsu , we enter the second half with the leading position in the strongest growth segment of the business, cellular handsets.

We believe that the SARS phenomena is largely behind us.

We believe AMD is uniquely poised to capture an increasing share of the rapidly growing high density portion of the market.

We expect our new expansion brand to be the number one flash memory brand in the world, and we expect to see a continuation of our strong second quarter growth trajectory.

Second, we're looking for a solid ramp on processors.

We have demonstrated benchmark performance in both 2P and 4P mode.

We have secured Microsoft's commitment to develop native versions of 64windows XP and the windows server 2003 operating systems.

We have commitments from top tier enterprise including Oracle, IBM and Computer Associates, as well as others.

We have IBM and Fujitsu in the future.

And our violator server program makes it easy for anyone for to minimize mayor product development cycle.

Third, we have your upcoming launch of our AMD Athlon 64 processor family.

It will build on the momentum of our -- and you will signal the beginning of our new era of 64 bit computering. (ph) We hope you can join us on September 23rd, either in person or in San Francisco or on the web for the upcoming launch of our Athlon 64 desktop and mobile processor family.

Before I close, I want to do my best to acknowledge the in incredible effort of each and every AMD employee to bring this company back to profitability.

Their capacity to drive operating costs down by over $120 million per quarter in the past year, while delivering year and year revenue growth of $45 million is a testimonial to the drive, desire and commitment to our great company.

We have great people.

We have great products, and we have world class processing manufacturing expertise.

And we have an opportunity for greatness in this business.

We've set our mind on cutting costs, and we did it, resulting in our highest growth margins in microprocessors in recent history, despite a lower revenue base.

We've set our minds on Guam becoming number one in the flood warning flash business and we did it.

Closing our landmark agreement with FIJITTSU.

We will be number one in the very near term, if not there already.

We set our mind to reinventing the server business and we did it, launching arguably the most exciting and highest performing processor platform to hit the enterprise server arena in years years.

We set our minds in moving the whole industry forward to a new standard of computing, and we did it with our after Athlon processor family which will deliver new capabilities, the world's high highest performing desk desktop systems and a new cycle of innovation in the industry.

With one-tenth the resources of our competitors, we're driving the industry to new standards in manufacturing, performance and user experience.

We've done everything that we said we would do.

We have with one key exception.

Going forward, we need to do a better job on getting compensated for the performance we're delivering our products and the value that we bring to the industry.

But as we responded to this prior challenges in past, we will do it again, and we'll do it by improving our customer profile, becoming more relevant to our customer and by participating in the enterprise segment to the introduction of the soon to be announced Athlon 64 processor.

Like COPTERON, we will manage our assets to get what we deserve for the innovation and value that we're providing our customer.

We're strategically important to this industry, a point for a better alternative to a monopoly monopoly.

We're poised to Chang the industry, the combination of our people, our technology and the support of our customers and partners is a combination with great potential in both the immediate and long-term future.

Thank you for your attention and I would like to turn over to Mike for the Q & A.

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 like to withdraw your registration, please press the 1, followed by the 3.

If you are using a speaker phone phone, please lift your handset were entering your request.

One moments, please, for the first question.

Our first question comes from the line of Joe Osha, with Merrill Lynch.

Please proceed with your question.

Hey, I made it right up front front.

A few issues.

For starters, Bob, talking about this $180 million sequin recall delta in flash revenues, how much of that flows from organic, growth, full, and how much simply from the mathematics of consolidating the business?

You got it wrong, Joe.

Here's what you should do.

AMD and what growth you want to apply to AMD, plus $180 million to get your answer.

I'm sorry, say that again?

So, AMD's existing business, plus whatever growth you want to assume, plus $180 million.

So that $180 is purely driven by the consolidation?

You bet.

Okay, thank you.

Second question, as you talk about the billion dollar operating cost structure, can you, you know, hypothetically, can you talk a little bit about how that would be apportioned between cogs and R&D and SG&A or talk about how R&D and SG&A.

Might look.

I don't want to give you that because we're working through that.

Obviously, one of the things we're entitled to do as we put this operation together is go work through some of the cost synergies and redundancy issues.

Most of the cost is manufacturing.

So we should think billion dollar break-even for the near term?

That's right.

And then third and final, can you give us some very rough sense as to what OPTERON revenues look like?

There was a comment relative to Intel, but maybe a little bit more to work with there?

Joe, I don't think we're prepared to give you any granularity at the moment.

They intent of the comment on our competitor was really just to show that we're getting an awful lot of traction on OPTERON, and frankly many of us expected, perhaps, and we should see the impact of that mostly next year, much more than this year.

Tears fair to say that it's fairly diminish?

On the OPTERON side, yes.

Thank you very much.

Our next question comes from Andrew Root [inaudible].

You said process inventories are around four weeks.

Is there any distinction between inventories at OEMs versus the rest of the channel?

Are they lower at the OEM level?

Robert, would you like to comment on that?

Four weeks is as aggregate statement based on sales information.

We've decided that overall, that we do have different models for each of the different businesses businesses.

I can't tell you from a profits standpoints if you went through Q2, our sales to our tier 1, our largest OEMs is up quarter on quarter.

And that offset the decline we saw in the channel.

So we very aggressively manage the shipments in the channel to maintain the inventory position we want at the end of the quarter.

The good news is, the last week or two of the quarter, we saw a fairly substantial increase in the resale activity which carried through into this quarter.

So, you know, we're heavily dependent upon that tier 2 and reseller market to drive our business and this was a difficult quarter particularly in Asia related to SARS, but also in Europe, it looks like that appears to be on the rebound here at least early in the quarter.

On an order of magnitude days base sis, on sequential growth, week over week, was it single digits?

Was it double digits?

Was it just order of magnitude sense.

Without getting further into the details, it's double digits.

That's why it was a fairly strong last quarter. [inaudible]

What proportion of your revenue would be tier 1 OEM versus the other?

I don't think we want to get into providing that level of detail and guidance.

Okay, that's fair.

Maybe a more macro cost question for Bob.

In terms of your overall break- break-even, the $769m for the quarter, I know this might be tough to tell, but the -- I think the break even target was originally if you are at $800m you would be at break even.

Does that apply to incremental revenue from here to $800m revenue you would have a gross margin of 80%, so if you were at $800m, maybe you would have broken even this quarter?

That's not too far off.

That's been the model.

We've been trying to move the variable cost component from about 20% to 30%.

We're about halfway through that that, so it's someplace between 80 and 75.

So that's -- as we model in in -- I mean, we have to figure out FASIL, but as we model it, AMD that's where we should be for incremental gross margin?

Yes.

Thank you.

Our next question comes from the line of Bob Ritsus (ph) with Bear Stearns?

Did you arrange your revenue numbers like Intel does for the Q3 or are you going to let us guess at that?

No, we don't -- we do what we think makes sense at the end of the quarter.

Right now the best he can tell you with the tremendous challenge.

Assimilation of the flash operations, we feel very confident that due to seasonality and the signals we get from our customers that as Bob pointed out in his comments, processor revenue will be up in the third quarter, flash memory will be up also in the third quarter.

And at this point in time, that's all we can tell you.

Okay.

Our next question comes from the line of Quinn Bolton.

Please proceed -- from Oppenheimer.

Please proceed.

I was wondering if you can give us detail on this sort of unit and ASP pricing trends on the processor business.

I'm sure you can't give us tools, but maybe a percentage and then just wanted to come back to the international channel weakness.

It sounds like it's China or Asia and Europe, I think SARS explains Asia, but if you could give detail as to why you think Europe slowed down in the second quarter, that would be helpful.

Thank you.

Okay.

Let's see, trying to remember your other question.

The first question was the ASP and unit differences from quarter to quarter.

I can tell you that unit shipments in were actually down, and A -- was down slightly although to a lesser extent.

As far as what we can see relevant to PC consumption, our actual consumption was down a little bit as well.

Particularly we were hit hard in Asia and Europe.

You can relate some of that to SARS in that we had somewhere in the neighborhood of 50% share of what they called the DIY, which is basically the small market in china.

That certainly had a big impact on our business there, although in total numbers, the actual revenue hit was bigger in Europe.

We had a much larger share -- a much larger numbers in Europe to start with.

Europe was sit hit hard for a couple of reasons.

Part of it, one of the largest markets from a PC standpoint in Europe is Germany and the German economy still is going through difficult times.

We saw substantial shortfall to our expectations there, and in general, you expect Europe to slow down as you enter into the summer quarters.

After you take -- you take it a little sooner than expected.

We're hoping that we see a rebound coming out of those quarters coming faster as well, yet to be seen.

I don't want to hang our hat on that, but looks like there is an opportunity there.

Okay, then just one quick final question on the inventory.

It looks like inventory of processors is at healthy levels, but your inventory on your books looks like it ticked up slightly slightly.

Are you comfortable with the inventory currently sitting on your balance sheet?

Yes, we are.

And one of the changes -- I like to ask Bob to elaborate as I finish here, we have been running the K8 family of processors or the so-called OPTERON and Athlon 64 for sometime, and we made the decision now that we're shipping product to actually put some value in that inventory, and a significant chunk of that was a result of evaluating that.

Bob, do you have anything to add to that?

No, I think Hector answered most of that.

We're comfortable with our inventory levels.

As Hector said, we take a pretty conservative evaluation posture on new products and not until we're shipping in some significant volume do we value that inventory.

We value the hammer value of inventory in the third quarter and feel pretty comfortable with our inventory level and particularly comfortable with our inventory levels in the channel.

Great, thank you.

Our next question comes from the line of Hans Mosesmann (ph) Soundview Tech.

When is the ramp going to occur for -- and will it be 90 nanometer and will it be at the beginning and not .13 micron and then I'll have a follow-up, thanks.

Let me try to answer what I think the question is.

Our joint development agreement with IBM is to design, to coalesce the company's road map at 65 nanometer.

So beginning with the 65 nod (ph) nanometer mode, both companies will be on the same technology road map.

What we've learned in working with IBM, which has been a positive experience, is that there is a lot that we could benefit mutually both companies.

We actually started interaction at 90 nanometers not 65 only.

So we have actually exchanged some technology modules, both companies, we picked up some of the pieces we're doing in some parts of our 90 nanometer effort and we're taking some of theirs, and as a result of that, we're ending up with a [inaudible] bust map.

We're taking some of the risk out of that robustness in the technology, and we're beginning to run 900 nanometers.

As we speak, we're beginning to run some product, and we're starting ramping that up towards the end of the year.

We expect to make weaver production starts in the first half of next year.

That would be on Fab 30?

That will be on Fab 30, 200 millimeter, 90 nanometer.

And the IBM65 nanometer will kick in 2005; is that correct correct?

That is correct.

Thank you.

Our next question comes from the line of Michael Masdea (ph) CS First Boston please proceed.

It seems like you guys have got your cash burn down, your growth margins going up and if you hit your Athlon64 on time -- is your next major step to focus on driving volume here?

Big time, big time.

We're redirecting a lot of the energy that we put in the past, with the downturn in the economy economy, things being slow for the last couple of years, we've put an awful lot of effort in reducing cost, restructuring how to run the businesses, and as I stated in my remarks, we're at the highest they will level we're been in years in the mark.

Of microprocessors with a little wind in our sales and volume, we really have very optimistic out outlook for the future.

All right, if you look at the mobile strategy, how important is getting tier 1, OEMs -- if it's not important, how feasible is a white book market?

Well, I think it's very important to get tier1, OEMs.

I think one of the key stones to our strategy going forward is to be able to participate in a meaningful way in the enterprise commercial space of which mobile are a big part of it.

Therefore a lot of our effort in looking ahead is making inroads in that arena.

Short term, of course, we're going to do that with our products based on Athlon XG mobile.

Longer term eventually will have the introduction of mobile pros and Athlon 64 and that's our agreement to eventually bring 64 bit computers to the enterprise all the way through the client.

We expect that to have significant impact.

All right, thank you.

Our next question comes from the line of Chris Stanley with JP Morgan.

Please proceed with your question.

Thanks, guys.

Nice job on the margins.

Just trying to look at the gross Marge b levels for the second half of the year.

Can you talk about what your expectations are for utilization rates, how much you think the OPTERON ramp is going to help and flash pricing and how much that contributes to the margin boost.

I'll make some comments and maybe Rob can answer some of the market issues.

But first of all, intuition is really the result of experiences that are accumulated over many years.

My intuition says that business is getting better, that we expect to recover in the marketplace for the second half i.e., that results in higher involve, improving margins as the volumes go up, as revenue goes up, so we expect that our operations to continue to improve for the next couple of quarters.

The challenge in the next quarter near term is to obviously assimilate this Fujitsu flash memory business effectively and be able to recognize that one of the reasons we find this exciting is there is an economic entitlement to this venture with Fujitsu, that we believe is going to be greatly beneficial, i.e., improving in operational efficiency as well as margins going forward.

We expect pricing to continue to be competitive despite any modest recovery in the economy, both in processors and in flash memory.

So our plan, going forward, are based on the continuing price pressures that you normally expect on this environment.

Rob?

Yeah, from the market standpoint, Bob commented on how that affects margins.

From the plaque pricing stand point, we see the market to be relatively stable, this doesn't mean prices are flat or going up, but they are staying in a normal pricing I guess.

Over a year ago now, a tremendous amount of effort growing in our share of the wire wireless market.

We've been very successful at doing that.

If you look back 50 years, we doubled our flash density in the product we sent.

As I think Bob mentioned in his comment, he had 7 consecutive quarters of good shipment growth.

That was another record for us.

So our progress in flash has been very, very strong, and we see a continued opportunity there, and particularly with our technology. (audio gap) It's on a ramp up.

It's a major cellular manufacturer, so that helps drive the growth in that space as well.

We're feeling good about the second half of the year, relative to the market opportunity and the combination of the consolidation.

Fujitsu should help that.

A couple of comments, in the flash business, we have two trends that'll help on the gross margin side, as volume continues to pick up.

Higher utilization rates.

We're not fully utilizing, as an example, Fab 25.

Utilization rates will continue to pick up there, and also the transition and the technology nodes to 130 nanometer in Fab 25, and in JV3.

So there's -- we've got multiple angles that continue to make gross margin improve on a continuous basis going forward.

Give us a sense of margin contribution from the Opteron or how much better the margins will be there versus normal processors?

We expect to obtain the appropriate compensatory effort for our OPTERON family, but as we said earlier, it doesn't have a significant impact in this year.

Okay, thanks guys.

Our next question comes from the line of Dan Scovel (ph) with Needham & Company..

Please proceed with your question.

Yeah, good job on the cost savings there.

Question in terms of flash memory.

I was wondering if you can characterize sort of what's going on in the competitive environment there.

You've given us a good flavor for sort of your approach and what you're doing in the market.

I was wondering if you could help us make some sense.

Clearly we've heard from major competitor there that they did well in Japan, but seem to do weak a lot of other places.

And there's rumors of new entrance going in.

I was wondering again, can you sort of qualify what the customers are looking for and maybe what some other regional shifts are that are happening in flash?

I'll make the comment on technology and Rob can comment on some of the market issues, but flash, you know, requirements for flash have become pretty stringent from a technology point of view.

Being able to do what we do. ,We actually are taking it and doubling up, if you can say that that, on single transistor (ph) to store two bits of information, and the technology requirements where we're migrating rapidly already to 130 nanometer and pretty soon beginning to make the migration to 90 nanometers and beyond.

Those are becoming pretty challenging for people that are participating in the high end, high performance, high density kind of technology.

We see only a handful of companies, really, able to first of all have the core competency to do that, and the access necessary to produce them.

There are only three or four companies --

And then there are small players addressing much smaller densities, very come moderate did I advertised -- some are too many and I expect some consolidation eventually to take place.

The key point I wanted to make is the demand on technology from the fundamental building blocks as well as the design capabilities is pretty awesome.

It's not something that's easy to come by.

And then there is a market the customers and applications and all of them go into.

Rob, will you comment on that?

I'll try to follow up on the second part of the question, the geography.

If you ask me what the customers are looking for, they are looking for a broad based supplier.

They can supply product top to bottom, high dense, it density, high performance and AMD has the broadest product important portfolio in the industry.

Secondly they are looking for a company that can provide them with ongoing cost reductions.

We've done a good job of demonstrating the track record to do that.

As Bob pointed out, the consolidation should allow that to continue as we go forward.

And third, they are looking for someone who provide them a road map for high density, high performance flash.

This makes AMD distinguishable.

They are the leader in high density, high performance flash product.

As we look at the opportunities that affords us, we've seen pretty strong growth.

Bob mentioned in his comments that we saw an offset of decline in sales in Asia.

With an increase in sales in both North America and Europe.

So pretty broad based.

The only reason I don't comment on Japan is not because I don't think AMD can do well there, but remember, under the current arrangement, AMD did not have the opportunity to sell flash in Japan, that was handled in the partner, which is FUJITSU.

We have an access to Japan as well and probably we can give you better guidance on what's going on there in the future.

Also, in terms processors, can you comment on utilization of Fab 30?

The utilization of familiar 30, I would say for all practical purposes, fully utilized.

But take into account that is going into technology transition have an incredibly rapid pace, as a matter of fact the 130 nanometer technology is going to be the shortest lived technology in the history of the world.

It rapidly came and went, but taking into account the fact that there is technology changing and transitioning, the you utilization of weaver capacity is constant and pretty much fully utilized.

Finally one last question on your non-windows compatible processors, kind of noticeable by its absence of comments here today?

(audio gap) I really think it's a positive part of our story too, although much smaller.

You know, that business actually started with a fairly aggressive plan for the year, relative to revenue and an opportunity.

And I have to tell you that they are actually ahead of plan, and I'll go on a smaller basis for quite different aside from processors.

We continue to see a performance cost and power from the point of battery power, still being strongly positioned as a leader and gaining designs at a pretty healthy pace.

But as we mentioned before, usually the time to market from design to product volume in this area, you're talking about argues such as automotive, and the GPS system in a car, people start planning their car model years in advance, so the time to volume on this thing is usually no less than 18 months, usually, even longer.

So we expect those volumes to occur in the fourth quarter of this year.

We will see some rather healthy significant volumes and much more next year.

Thank you.

Our next question comes from the line of John Barton with Wachovia securities.

Yes, thank you.

In terms of integration of Fasil , LLC, you commented that operating expenses will go up to $1 billion sequentially which would imply a $231m increase.

Other than the organic growth driven could goes and you commented somewhere on 20% to 25% on the incremental dollar, is the complete balance of that $231m as a result of the integration of Fasil, and how do I compare that to the $180m revenue increase which would imply a loss versus the benefit that you've taken from the JV ventures in previous quarters.

Thank you.

This is Bob.

You've got the decode right. $180m additional sales, $200m plus of additional cost.

Obviously that's our challenge, our entitlement is to go fix that on a go-forward basis.

That's what we're working on currently in the third quarter to realize both top line opportunities and the cost synergies that are now available to us on a go-forward basis.

It'll take us a while to work through those issues, and the statement we made on the billion dollar cost is for the third quarter.

So by compare that to previous quarters, the gain you took as a result of your 40% exposure to the JV, I guess that implies that there is a costs that weren't showing up on the J JV is showing up in the income statement.

Is that an accurate statement?

No.

Before -- I mean, history, we had a 50-50 joint venture with F Fujitsu, in manufacturing, only in dye die manufacturing.

Now we have a fully consolidated business unit from top to bottom that shows shares products to both parents and both parents distribute that product.

It's 60/40 owned by AMD and 40 per by Fujitsu.

So there is new cost and new people coming into the AMD umbrella and responsibility with 60% owner ship and the 60% trips it to full consolidation.

Excuse me for the incorrect percentages.

If I look at the below the line item with respect to getting 40% back to Fujitsu going forward in the Q3 time frame, it will be a loss that you're sharing with them; correct?

Correct.

Correct.

It will be the loss of the Fasil operation and we'll take 60% of it and Fujitsu will take 40%.

And when it turns profitable, which we think is accretive in 2004 they will get 40% of the profit.

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

Please proceed with your question.

How much capitol captain capital spend something required to tool the flash in Japan.

Your 10-K says $2.1 billion was required.

You spent $1.6 I'm looking for a bit more color there.

Well, one, we have capitalized on the get-go, which was effective June 30th, this month of June, I guess we're in July.

The two parents have capitalized the new company appropriately, which included the $180 million of additional cash contributed by Fujitsu, to set up FASIL, LLC So we have think it has the capital assets and resources to afford the appropriate capital expenditures on a go forward basis to build out the capacity in JV3, in particular, which is where there is some expansion capabilities capability on a go forward basis.

So we think we've capitalize the the business to handle that cash outlay.

The capital expenditure numbers I gave you include the incremental second half of Fasil incremental expenditures.

Can you break that out a little bit?

The $725m is now total AMD, including the second half piece of FASIL.

Can you hope with how much of it is for FASIL?

I guess the real answer is no no.

We're not going to give you that that, because it's really a combination.

Some of it was already in our original 650 as we've been working through ours, we continue to tighten our pencil on the 650.

So some was in our number and then there is an increment.

I would rather talk about that after the quarter is over from that perfect.

Okay, switching gears.

You guys commented a couple of times that the distribution in Asia and Europe were a little bit soft.

How would you characterize your sales and inventory in the U.S. distribution channel during the second quarter and heading here in the 3rd quarter?

Actually, pretty well.

If you look at Latin America was actually up almost across the board, whether it's OEM, resale, distribution, et cetera, et et cetera, et cetera.

How about in the U.S.?

U.S. was actually down a little bit, but above what we expected.

The U.S.

OEMs were stronger.

Our business was relative three Lee flat, actually up a little bit, and our standard trade distribution business was down a little bit.

Are you expecting it to be up in Q3 along with your guidance?

Yes.

And lastly, a longer term question for Hector.

You know, it looks like big round numbers by the end of the year, your revenue compensation will be close to 50/50 flash and processors.

I'm looking out over the next three to five years, do you figure flash or processor business is going to grow faster from here an do you think either or both will go faster than the whole industry?

Well, first of all, on a very very, you know, just high level general picture, you're right.

We're moving the company here in the near term to being roughly 50/50 flash in terms of revenue, 50/50 flash and microprocessor.

We have chosen to participate in those segments and those pieces where we believe it has the largest potential for growth.

In the case of processors, for the market in general, you've got OEM growth for example, may not look very attractive.

We're aiming to be in segments where we don't participate at all.

So our expectation is that we will grow faster than the market for PC processors as a result of that.

And the same thing on flash.

Mainly there because we're going to be a leader.

As we said before, that's a market maker and a market leader leader, we expect really benefit significantly from being on the high growth segment of the market.

I meant absent of shared gains say I grant you the share gains in both segments for the sake of conversation, do you think processors as a business can grow faster than the overall semiconductor industry and the same for flash?

I think flash is an opportunity in the near term to be faster than the industry is much more cyclical.

But let's say we've been on a downturn for flash for quite sometime.

So it's very possible that in the near future, two years out, we might grow faster than the industry by industry, meaning the semiconductor industry.

Processors, frankly, I don't know.

We've been looking at modest growth in processors ref, if any any, over the next two years, and I as I mentioned earlier, our opportunity there is being able to participate in segments where we're not in today.

Thanks a lot for your insight insight.

Our next question comes from the line of Clark Westmont, with Smith Barney.

Please proceed with your question.

Most myself questions have been answered, but I want to see see, is there a way to split that incremental cost, you know, the $200 million plus from the change in the flash share?

Can you split that incremental cost between cost of goods and operating expenses?

I'll just give you a directional -- I mean, it's typical in the memory type business.

It's very manufacturing oriented.

So the bulk of the number is in manufacturing.

More than 50% of it.

And in terms of trying to par back costs, is there opportunities on both the cogs and the operating expense side from that additional money or is there more one or the other?

Well, again, since most of the cost is manufacturing, obviously, it has a higher opportunity, but the opportunity is actually across the board.

I mean, there are redundancies, as you would anticipate, in every category of the business, and that's what we're working through as we speak.

Okay.

And last question on flash, I think you've touched on this a little bit, but the flash improvement that you're expecting for the third quarter, excluding the $180 million addition, that is partly market share.

Is it also handset unit driven?

Are you seeing a pickup in both SARS unit demand for hand sets or could you help me out with that?

Well, there are a number of things happening, maybe Rob can add to that what I'm going to say.

First of all, the quarter to quarter improvement, there is no question that we believe that SARS in china will have a positive impact in the sense that flash for all practical purposes goes almost totally into consumer electronics products which are heavily affected be people walking into the streets and into the stores in places like China.

Early in this quarter, we're seeing evidence that customers are heavily exposed to consumer electronics in china being somewhat more upbeat in the third quarter than they were in the second quarter.

The other part is we do have technology and products that are going to allow us to gain share in the handset market, because we offered solutions and a value that our competitor cannot offer offer, so we will see a shared gain there, too.

We're not anticipating any significant increase in handset units.

As a matter of fact, we're taking a rather conservative view on the handset units type.

Okay.

And I'm sorry, did I cut you off off?

No, no, I just wanted to see if Rob had anything to add.

Go ahead.

Just wondering in terms of Intel, you know, they did make that pricing move earlier in the year that back fired.

Is there any comments you have on that to mention?

Has that ended up helping you?

Or has is it kind of old history now.

I was trying to be really nice and not bring that up.

I guess my comment is clearly that was a tactical arrow.

That was not looking at it from the customer perspective.

I think, you know, it certainly created the opportunity for us and we're just now starting to see some of the benefit of the opportunity.

We talked about growth in both Europe and the U.S Clearly that was because of some new opportunities in both our consumers commerce and people who are not customers of ours back before that happened.

We're benefiting somewhat from that.

But I think we're benefiting from the fact that our technology is starting to drive some opportunity share for us, and that's where I expect we'll see a good portion of our growth going forward.

Thanks very much.

We'll take two more questions questions, operator.

Our next question comes from the line of Mark Edelstein with Morgan Stanley.

Please proceed with your question.

Good afternoon, guys.

This relation again to flash.

I guess the first question there is there a reason why Fujitsu is not taking half of the output in this last quarter and secondly, can you give us a general sense as to where you think you can take the break- break-even revenues to for the flash business going forward?

You know, Mark, I have to apologize.

I don't think I got the first part of the question.

Would you mind asking it again?

Yes, I would guess by the numbers that your providing that FIJITSU did not take half of the output.

You said $211 million, it sounds like they are shipping something less than that.

Was there a reason for that?

Okay, I'm going to, Rob is going to make comment here.

You should not read that into those numbers.

Prior to this creation of the company, the 50-50 joint venture in manufacturing allow both companies to have flexibility in their capacity and their number of reasons why that went back and forth, but you should not read into it anything other than that's how the -- that's how they set it up when we decided to join the companies and it makes sense for the joint venture to be 60/40, not because we were taking 60% of the product and they were taking 40% of the product.

Yeah, as a matter of fact, Mark, I don't have a lot of -- we both took half of the output and get different revenue results.

So I don't want to you to read too far into that.

It doesn't have much to do with the numbers you are trying to refer to.

Isn't it possible that the $1 $180 million forecast you have for there, their contribution for you in Q3 would be conservative?

I'll let Bob handle it.

It's our best call.

It could be -- we say it's approximate.

It's not the real -- the final number, obviously, until the quarter is over, so it's our best call based on all of the information we know, from them as a customer and their end markets they serve.

The second question there was just on what you think the break break-even can be once you got a chance to get this under a better management overall?

Mark, what we would like to do is we want something that is actually not thought of being possible.

We concluded the whole thing just a couple of weeks ago, and we need to really spend a lot of time executing to what we think is possible, and being able to begin to access some range of possibilities to the synergies and the economic vitality of these units that we believe it has, and that's why we did this.

I think we can provide you a much better data at the end of the third quarter.

Fair enough.

If you guys had kept your days of inventory flat Q2 over Q1, what would the impact on gross margin have been?

I can do the math yourself, but we still met our $800m goal.

So even though we did have some inventory billed, we valued the OPTERONS.

We were south of our $800m goal.

We hit the target, obviously a lot of our improvement, as you can see on the P&L, quarter to quarter was in gross margin, which is where we had additional cost reductions kick in both from cost synergies, re renegotiating contracts, et et cetera, et cetera.

Thanks for the details.

We'll take one last question.

Our last question comes from Tom Thornhill with UBS Warburg.

Please proceed with your question.

Asked and answered, thank you you.

Well, thank you very much or participating in the call and we'll talk to you next quarter.

That does conclude your conference call for fade today.

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