超微半導體 (AMD) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to AMD's Q2 '04 earnings conference call.

At this time all participant lines are in a listen-only mode.

Later we will conduct a question-and-answer session with instructions being given at that time.

If you should require any further assistance, please depress star then zero and we will assist you offline.

As a reminder, this conference call is being recorded.

I'd now like to turn the conference over to the Director of Investor Relations, Mike Hassi(ph).

Please go ahead, sir.

Thank you and good afternoon, everyone, welcome to AMD's second quarter earnings conference call.

The format of the call today will include prepared comments followed by Q&A.

The participants are Hector Ruiz, our Chairman, President and CEO, Bob Rivet, our Chief Financial Officer, Henri Richard, our Executive Vice President of Sales and Marketing.

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

The telephone replay number is 800-475-6701.

Outside of the United States the number is 320-365-3844.

The access code for both is 736792.

The telephone replay will be available for the next 10 days starting tonight at 7 p.m.

Pacific time.

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 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 detail our risk factors and our business.

You'll find detailed discussions in our most recent SEC filings, including AMD's annual report on Form 10-K for the year-ended December 28, 2003 and AMD's quarterly report on Form 10-Q, for the quarter ended March 28, 2004.

With that, I'll turn it over to Hector Ruiz, AMD's Chairman, President and CEO.

Thank you, Mike.

The second quarter continued a very important trend for AMD, delivering on our promise of sustained profitability.

This was our third consecutive quarter of operating profits with solid contributions from both our memory and computation products groups.

We continue to demonstrate the three important fundamentals that define this new AMD as strategy of customers centric innovation, world-class design and manufacture and performance and a strong discipline of operational flexibility.

These three part approach is generating a strong positive momentum across our Company and in the market that we choose to serve.

Our memory groups set another record for sales in the quarter, with strong growth in every region in both wireless and embedded segments.

Products based in our revolutionary MirrorBit technology continued to earn strong customer acceptance.

We remain on track to doubling bit capacity in our Flash memory business by the end of the year.

And our ramp to 110 nanometers technology in each of our leading edge fabs continues on plan.

And in line with growing market demand, we begun production of our first 110 nanometer MirrorBit product in the second quarter and AMD is the first to have commenced NOR flash production below this 130 nanometer level.

In only one short year of existence our expansion operation has taken the number one position in NOR flash market.

We have grown dramatically in each major segment and we have doubled our revenues year-on-year while keeping our headcount relatively flat in that time frame.

In our microprocessor business, our focus on penetrating segments of most strategic value to our customers is progressing well.

Both our server and mobile franchises grew at a healthy rate quarter-on-quarter and they continue to be the fastest segments of growth in our processor group.

Our AMD Opteron processor family is redefining the competitive landscape of the four peak categories in servers and as announced we plan to lead the way to dual core processors and solutions for the X86 server and workstation markets in mid-2005 and for high-end client PCs later that year.

With a recent launch of our AMD Japan engineering lab, we underline our commitment to serve the unique customer requirements of the mobile segment as well as those of the Japanese market.

We now count hundreds of computer manufacturers as AMD 64 customers worldwide, including four of the top five OEMs in the industry and we were pleased to add China's Lenovo Group to our stable of world-class customers and to report that Lenovo Systems, based on AMD Athlon 64 processors, are already well received in that vibrant and expanding market.

AMD 64 technology is being implemented by a growing number of global enterprises and Fortune 500 companies, including two of the leading financial institutions in the United States, two of the top-five internet infrastructure leaders, and five of the top ten international players in the automotive industry.

As well as one of the largest lab sciences companies in the world.

The AMD 64 ecosystem is taking off and our customers and their customers are delighted with the performance, reliability, simplicity, and security advantages of solutions based on AMD 64 Our transition to volume 90 nanometer production is proceeding on plan.

We began 90 nanometer volume production in May and we're on target to ship 90 nanometer microprocessors for revenue this quarter.

In addition, construction of our new 300 millimeter fab 36 in Dresden, Germany, is on track with production plan in the first half of 2006.

Across AMD, our customer centric innovation approach is working in the growing list of markets we choose to serve.

We continue to demonstrate world-class design in manufacture and performance in each of our core businesses and we remain committed to the discipline of operational flexibility across and throughout the organization.

At this point, I would like to take -- turn this over to Bob Rivet to review the results of the quarter.

Thanks, Hector.

As detailed in our press release earlier this afternoon, second-quarter sales were $1.262 billion, up 96% compared to the second quarter of last year and up 2% compared to the first quarter of 2004.

In what is typically a seasonally down quarter, this was an all time quarterly sales record for AMD.

Major highlights for the quarter were: One, solid profitability highlighted by a more than tripling of the the Memory Group's operating income and, two, very strong growth in our next-generation technologies as demonstrated by record Spansion flash memory sales and a greater than 50% quarter-on-quarter sales increase of our AMD 64 based processors from the first quarter.

The combination of top-line growth and solid execution resulted in another profitable quarter with net income at $32 million or 9 cents per share, per diluted share for the second quarter.

These results incorporated tax rate of 10%, double the rate applied in the -- from the first quarter.

Operating income was $72 million in the quarter and an improvement of 11 million from the first quarter representing a 44% fall-through on incremental sales.

This improvement was driven by higher sales, strong execution of the Company's technology transitions and solid manufacturing performance.

Compared to the second quarter of last year, operating income improved by $196 million on $617 million of incremental sales, a reflection of our operational flexibility strategies we put in place over a year ago.

Gross margin was 38% for the quarter, equal to the first quarter and a 4 percentage point improvement from the second quarter of last year.

Below the operating margin line are two noteworthy charges to point out: One, the foreign exchange loss of approximately $6 million was recorded in the interest and other income line and, two, an expense of $6.5 million for minority interest, reflecting the significant profit improvement in our Spansion operation this quarter.

Cash flow from operations was a positive $240 million for the quarter, which represents our fourth consecutive quarter of delivering positive cash flow from operations.

EBITDA was $353 million.

Now switch to the business overview for the quarter.

First I'll start with our memory group.

In the second quarter sales grew to $673 million, up a strong 220% from the second quarter of 2003 and up 7% over the first quarter.

Spansion flash memory sales grew in all major regions and across both the embedded and wireless segments driven by continued strong demand from tier-one customers.

The Memory Group tripled its operating income to $45 million, this is a $31 million improvement over the first quarter, on $45 million of incremental sales or a 69% fall-through.

Memory Group's gross margin improved a couple percentage points in the quarter, due to the successful transition to 110 nanometer technology and benefit recognized from the integration of the AMD and Fujitsu flash memory businesses.

Computation of product groups, sales were $554 million in the quarter, a 36% increase over the same period a year ago and a slight decrease from the first quarter.

Unit sales were slightly higher in the second quarter compared to the first and ASPs were modestly lower.

Sales of AMD 64 based processors grew by more than 50% sequentially.

CPG's operating income in the quarter was $58 million or 10.5% of sales.

Now, let me turn to the balance sheet.

Cash balances ended the second quarter at $1.14 billion, down from the first quarter by $166 million.

This was largely due to ongoing investments in new technologies and facilities, resulting in second-quarter capital expenditures of 600 -- $361 million, up from $202 million in the first quarter.

Inventories increased from the first quarter by $34 million, a planned 5% modest increase in anticipation of a seasonally strong second half of 2004.

Now let's talk about the outlook.

AMD's current outlook for the third quarter of 2004 is that we expect sales in both our major business to increase and that we expect total AMD sales in aggregate to increase moderately.

For your modeling purposes please consider the following: We expect second-half 2004 marketing, general, administrative costs to increase approximately 10 to 15% from the first-half levels as we accelerate our marketing investments across AMD 64 products.

We still expect fiscal 2004 capital expenditures to be around $1.5 billion and we are confident they will be largely funded by cash flow from operations and partner contributions both from the Free State of Saxony and M&W, our building partner associated with Fab36.

In summary, AMD is executing solidly to its financial and technology road maps.

We had another profitable quarter with record sales for Spansion flash memory and our AMD Opteron and Athlon 64 processors.

We continue to focus on our core competency to deliver solid results and remain committed to growing AMD across all business lines.

With that, I'll turn it back over to Hector.

Thank you, Bob.

In conclusion, I want to place the new AMD in a broader context, because beyond the fundamentals of the quality of our relationship with key customers, our worklife(ph) design and manufacturing capability and the streamlining of our overall cost structure, something transformative is going on at AMD.

Something that can be explained perhaps more by the growing independence of our financial performance than by any other metric or measure.

If you look at our financial performance over the last few quarters, it is becoming evident that we're increasingly defined by our innovations, designs and technologies, our manufacturing, execution, and our customers and partners.

In short, by AMD's ecosystem and trajectory, we have deliberately and methodically positioned ourselves to be in more control of our own destiny.

In each of our core businesses, we have moved to strengthen our customer relationships, particularly with our tier-one customers.

We have worked with them to create solid customer centric innovations that are truly differentiated and we're constantly working to accelerate our capabilities to ramp new processes and technologies in the manufacturing realm.

AMD is gaining widespread recognition as an industry leader.

And in leading the company industry to -- computing industry to pervasive 64-bit computing and in establishing MirrorBit as a new industry standard in Flash memory, and in empowering a new generation of capable consumers around the world.

We have the design in manufacturing expertise to deliver on these and many other promises in the years ahead.

We're very proud of the progress that we have made and of the leadership opportunities we have created with and for our customers.

We look forward to demonstrating our capacity to exercise increasing control over a destiny defined by the AMD ecosystem in the quarters ahead.

As I always do, I would like to thank the thousands of AMD employees around the world for all their hard work to get us back to sustained profitability in this past quarter.

Now back to Mike for the Q&A.

Thank you very much, Hector.

Let's start the Q&A process, please.

Ladies and gentlemen, if you would like to ask a question, please depress star then one on your touchtone phone.

You will hear a tone indicating you have been placed in queue and you may withdraw yourself from this queue at any time by depressing the pound key.

One moment, please, for the first question.

And our first question is from the line of Krishna Shankar from JMP Securities.

Please go ahead.

Yes, even though AMD 64 revenues are up, I guess, more than 50% sequentially, ASPs declined modestly.

Can you elaborate on pricing pressures you're seeing in the processor marketplace?

Um, Henri, would you like to comment on that.

Yes, Hector.

As you recall, a majority of our shipment of Athlon XP have been based on the same technology for over a year.

We haven't introduced new speed rates.

We've done excellent brand management and we've maintained our ASP and actually grew it a little bit at the beginning of that cycle.

But eventually the forces of the market prevail and we've had to admit the fact that the wonderful performance of the Athlon XP needed some price adjustment so what you're seeing is a modest decline of ASP on the Athlon XP line and a strong progression on the Athlon 64 which result in a blended slight decline in ASP.

Okay.

And in Flash, your large competitor, I guess, grew Flash revenues almost 40% sequentially, can you talk about the environment for NOR Flash pricing both in embedded and wireless applications?

Um, let me make a few comments about the Flash.

We -- we've -- we've focused significantly on tier-one multinational customers who I believe are providing tremendous opportunity for us to grow.

That allows us to grow from a year ago from about $200 million to the current level of 687 or so, uh, which is the significant growth in -- in our position of marketplace which led us to become the number one NOR player in the market.

We see this multinational tier-one players continuing to have a very strong participation in this market in the quarters ahead and our strategy will be, uh -- will continue to be to focus on them in particular.

What we've seen in pricing and we think will continue into the third quarter is somewhat of a stabilization in pricing, not a degradation and not a significant increase at all and so we expect, uh, pricing to be fairly stable going into the third quarter.

Thank you and congratulations on a great quarter.

Thank you.

And our next question is from the line of Mark Edelstone from Morgan Stanley, please go ahead.

Good afternoon, guys, and nice job on the quarter overall.

A couple quick questions if I could.

The first one was on manufacturing.

Hector, if you look at the 90 nanometer ramp that you have in place right now for microprocessors, when do you expect to see that crossover, point one three and when would you think that the majority of that transition is over?

And I'm looking at that question both on an outs basis.

Um, Mark, I think that, um, you know, we -- we're off to an awfully good start in the transition and if I look at the experience we had from, uh, 180 to 130 and what we're seeing from 130 to 90, uh, I believe we'll be able to make that transition reasonably fast.

I think the -- if -- if I assume that the customer transition on some of the products, because we're making not only a technology transition but also a product -- and number of product transitions, that the customer acceptance is in line with our ability to ramp.

Physically we should be able to ramp totally to factory by the end of next year to be totally converted to 90 nanometers.

If there is not total conversion it will be mostly because there might be some remnants of products that cannot be transitioned from a few customers.

And when would the crossover be, do you think, in terms of outs, Hector?

I don't remember the exact time frame but I would say we're probably talking about a crossover sometime in the summer, second quarter summer, next year.

Okay, great.

And then just another question, if I could, on the processor business, either for you, I guess, or Henri.

If my data is right here it looks like this might be the first quarter in a few where you guys actually gained some unit share and I know you've obviously been gaining some dollar share, but you did gain some unit share here in the quarter, uh, can you talk about what the factors were that drove that from your perspective?

Mark, you know, we just serviced our customers.

As you know we're very focused at increasing our business in the server space, in the mobile space, um, I guess we had some significant growth in those two areas.

And if you were to look, you know, for where some of the growth happened in units, I would look in those areas.

Great.

Thanks a lot, guys.

And we have a question from Michael Masdea from Credit Suisse First Boston, please go ahead.

Thanks a lot.

Can we get a gauge of what you mean by moderate, are we talking -- how does that relate to seasonal and we talking kind of mid-single digits or any guidance there at all.

Mike I believe that the second half of the year will be a good -- a good second half.

I think it'll improve over the first half.

I believe we're looking at both the third and the fourth quarter that will give us an opportunity for growth.

We're excited, optimistic, looking forward to it, and frankly, um, I think a moderate increase in revenue in one quarter is a very good performance.

I don't want to pin it down to a number because, frankly, nobody knows what the market exactly is going to do but we'll be in line and we expect to perform in -- in the expectations of what the market will do.

Always keep share for whatever -- whatever the market's growing.

Actually, we -- our plans are to grow share.

Great.

Um, you addressed a little bit your focus on the tier-one customers, um, if -- if we see a bunch of -- in the Flash side, if we see a bunch of Flash on up in the distribution channel, I mean how much impact does that have on your pricing situation and contracts and relationships with the tier-ones, are they going to start turning some of that into your products and go into distribution channel, or how do you see that plan out.

This is Henri.

Frankly, everybody knows that the distribution channel prices are on average higher than the tier-one contracts and so we're nowhere near our situation of demand, supply and balance that would drive the distribution channel to offer better prices than the tier-one OEM contracts.

So I don't see this happening, I don't see this being a factor.

Okay.

I guess another followup kind of in the same sort of vein.

If you see -- you know, with the processor inventory from your competitor out there needing be to be worked down, if you see a substantial pricing coming down, how much impact do you think that will have on your business, will it be substantial or do you find yourself not really in price-to-price competition on your -- on your -- on your -- on your customer relationships on the PC side?

You know, as I mentioned on the comments, um, Mike, we -- we have spent a considerable amount of time trying to create our own financial ecosystem, our economic ecosystem, to build a partnership with our customer and I think that we're seeing a situation where the bulk -- even though our inventory increase was very modest, practically all of it was really AMD 64 products, there is no competitor in that space at the moment and, uh -- and so I don't see that, you know, being in any way affected.

Uh , frankly, also, I believe that -- personally I think the inventory build in our competitor, perhaps, it's overblown and these guys might actually be delighted to have built that inventory if the second half of the year turns out to be healthy.

Great.

Appreciate it.

This last question on the Flash side.

Can we get any sort of idea what's happening on the -- on the bits per handset side given that we've seen some continued outgrowth relative to end markets.

Does that just continue to go up or have you seen stabilization there or any comments would be helpful.

Right now, and, again, Henri can add to this, we -- we see a rather healthy continued, uh, need for bits in hand-held devices and, uh, the applications go from larger software systems these devices need to accommodate, which increase the demand for NOR, to larger data, uh, uses such as, uh, better pictures or whatever you -- which also increases the demand for LAN-like product, not necessarily LAN, but products that can offer the -- the cost performance advantages.

So we see at least in the foreseeable future a continued explosion of bit density.

Thanks a lot.

And our next question is from the line of Chris Danley from JP Morgan.

Please go ahead.

Hey, thanks, guys, just a couple quick questions.

One quick thingie on Flash.

Do you guys have any sales written down inventory on Flash in this quarter.

No.

Okay.

And then you said you expect both Flash and CPU sales to increase in Q3, do you expect, um, operating income to increase in both in the third quarter, too?

Yes.

And the last question, uh, have you seen any, you know, irrational pricing behavior by Intel out there yet?

Absolutely not.

Great, thanks.

And our next question is from the line of Glen Yeung from Smith Barney.

Please go ahead.

Thanks.

Just also a followup on the Flash.

Can you talk about what percentage MirrorBit was in the second quarter, what you think it'll be in the third quarter and maybe how you think that factors into your -- your outlook for a stabilized pricing environment.

Yeah.

First, you know, MirrorBit was a record, uh, performance for us in the second quarter in the sense that we almost quadrupled our pipeline of opportunity, so the momentum of this product line within our total portfolio is really strong.

It continues to be a double-digit contribution and we see that continuing, particularly with the introduction of the second generation MirrorBit.

And -- and when you -- when you talk about a stabilized pricing is that sort of mix adjusted, in other words, are you talking across your entire output of NOR that that price will be stable because I'm under the assumption here that MirrorBit's selling at a premium.

Well, you know, our -- our ESD went up slightly quarter-to-quarter so that gives you a good indication that pricing was stable.

As I mentioned in the past calls, you know, we have a very large proportion of our wireless business with tier-one customers, which are long-term engagements, strategic in nature, and so that has a stability factor on our overall pricing.

Um, we're also in the embedded space under tight constraint, frankly there's a lot of demand out there for Spansion Flash, particularly new MirrorBit design and so by nature that also provides us with a fairly stable price environment.

Great.

And just one last question, which is, um, in the balance sheet I see this line for deferred income to distributors and that seemed to go up pretty substantially in the quarter, I wonder if you could just elaborate a little bit on what went on there.

Yeah, this is Bob.

That reflects -- obviously that's the amount of product that we have out there in the distributors' shelves that we don't record as revenue until they actually sell it through.

What you're actually seeing is the continued shift to AMD 64, you know, as we continue to migrate and get more traction on the AMD 64 based products, they carry a much higher value, uh, to both us and the end markets, so therefore that's what you're kind of seeing on the balance sheet.

Well -- so, that was up 15% quarter-on-quarter and looking just back in the past, it's usually down something like 20%.

If we were to take out the price issue and just look at a unit basis, I guess your suggestion is that the unit growth is not as much as 15%.

Right.

The unit growth is actually relatively flat.

Great.

Thank you very much.

Question from the line of Ben Lynch from Deutsche Bank.

Please go ahead.

Yeah, thanks very much.

Just -- in recent quarters, you guys have, one, been outgrowing Intel processor revenues and, two, guiding in line with Intel because, you know, they're the big guy and, you know, whatever they say probably goes.

Um, it's not the case this time.

What's going on and is this a trend?

Could you elaborate on your question a little bit more.

Well, you know, on the last few quarters you guys have managed to, uh -- prior to Q2, where you just outgrew Intel in process, looks like about 1% or so, but in prior quarters you'd been outgrowing them a lot and now, you know, that's slowed down and the numbers you have reported and also in the guidance, uh, Intel is -- for their processor business I guess seems like they're guiding up 7% or 8%, they haven't been explicit about it but you guys don't seem to be guiding up anywhere near as much.

You know, who -- who's wrong here, or who's losing out here?

No, I don't think -- you know, let me just -- and Henri can add when I finish.

First of all, I think the one thing you're absolutely correct on is they are the behemoth and they are the market in the sense and in the near term, you know, they -- they can call their number fairly accurately because of, first of all their size and -- and their -- the type of customers they have.

Longer term, you know, as I mentioned before, we had intend to grow share over a long period of time.

But calling a number, uh, you know, on a quarter-to-quarter basis is -- is not really what we're about.

What we're about to is that like you to judge us at the end of each quarter about what we do relative to how the market did and I believe that our guidance in saying that we'll be, uh -- will have a moderate increase in revenue, I think that's an indication of a good quarter expectation ahead of us.

And, uh, nothing -- bad quarter or not, it's just a good expectation for a good quarter and I expect that we will continue to modestly gain, uh, share.

Okay.

It just seemed like in prior quarters you were, you know, happy to, you know, give guidance that was referenced to Intel's own guidance because they are the market in a, as you say, a (inaudible) this quarter your guidance seems, uh, you know, a lot less robust than theirs is and, um, you know, that -- that's really where I'm coming from.

Maybe I'll come at it from a another angle, Hector, if that's okay.

How do you feel about visibility in general now versus how you, say, you felt three months ago or so, um, in both CPU and Flash and on top of that, you know, how was the linearity in the current quarter and then coming out of the quarter so that -- that's like two -- two questions there?

Well, we feel -- let me start with Flash and I'll cut to CPUs in a second, but, you know, we are -- the demand for Flash is strong.

We continue, as Henri mentioned, to engage heavily with tier-one players who give us some visibility beyond what you normally get from other players.

And we see going into the third quarter is fairly, uh, you know, a good quarter ahead of us in terms of Flash.

And the processor side, perhaps one of the things you might be sensing has to do with some of the comments I made in my opening remarks, is that, uh, we've created an ecosystem now based on the AMD 64 and we have partners now that are partnering with us to take product to market, infrastructure, supplies, motherboard, chipsets, who are also part of the AMD 64, you know, ecosystem.

So we almost have to now project what we think is going to happen based on our customers' needs, plans, etc., not so much based on our competitor does.

And, uh, you know, we are in a eighth generation product growing fast and rapidly.

Our competition is still in the seventh generation product and so the comparisons become less -- less important and, frankly, uh, maybe somewhat irrelevant at some point in time.

So Henri, is there anything you'd like to add?

Just the point that, specifically to the Q2 question, um, then, you know, we have a higher proportion of our business in Europe than our competitor, as a total of percentage total revenue and as you know Q2 is seasonally more affected in Europe, so that has a play, but you also noted that we still managed to outgrew them in both revenue and unit.

So, not as much as in the past but the trend continues to be very positive.

Okay, thanks, Hector, thanks Henri.

And we go to a question from the line of Tom Thornhill with UBS.

Please go ahead.

Yes, with the acceleration in the 64-bit processors within the processor business, um, approximately what percentage of, uh, shipments or unit shipments now are accounted for in the 64-bit families?

Well, we -- we're not going to provide you the granularity but obviously we made the comment earlier that by the end of the year we would have flipped the 50% mark on the change to AMD 64 from the older K7 and we're on a fairly fast ramp, so, you know, we -- we're happy with our progress type, happy with our rate and ramp.

So that's to reach 50% of processor, so the 64 -bit family would reach 50% of unit shipments by the end of this calendar year?

Of -- 50% of the dollar revenue will be from AMD 64 by the end of this year.

Okay, the end of '04.

Yeah.

Okay.

And you mentioned the ASP being down slightly was largely an issue with the Athlon XP, uh, what was the AS -- is there an ASP trend that's noticeable for the 64-bit families as well, Opteron and the Athlon 64.

Though the -- on both Opteron and Athlon 64 the ASP was stable, um, and, uh, in particular, uh, it was up in the mobile space.

Okay.

And that's a blend on higher -- on higher speeds, or --

It's a blend -- it's a blend on the higher mix for the overall line, absolutely.

Okay.

And -- and if you could, one comment I'd like to get your opinion on, an end-market comment.

Now that you're with Opteron participating in the server market to a larger degree, can you provide any insight into the trend that you see in IT spending in the corporate market?

Um, we've -- we believe that IT folks are -- are very eager to, um -- to improve the productivity of their businesses and they want to do it to investments in -- in products that, uh , return, of course, a significant better return than they've been accustomed to and they're looking for value more than anything else.

And what we see, it's modest signals coming from the IT community that they are going to increase spending but extremely focused on return of the value, you know, the value equation.

And as a result, one of the reasons I think Opteron is getting a lot of traction and credibility in that space is because the value question is just so strong and it's pretty difficult to -- to ignore.

And I'd like to add just to the -- to the previous comment that -- the previous question you had, is that, you know, as we increase our participation in that space, which goes from a zero a couple years ago and growing rapidly, that the -- the impact on ASPs will be in the upward print, because the mix will change, not because the ASP on a particular product will improve, but because the mix will improve for us.

And we're in a unique position to be able to do that because we're going from, as I said earlier, a mix of almost zero servers a couple years ago to an expectation that we'll play a big role in that in the quarters ahead.

Do you expect the blended ASP in processors to increase, stay flat, or decrease again in Q3?

I would say we're going to be modestly up in the -- due to the AMD 64.

Thank you very much.

And we have a question from the line of John Lau from Banc of America Securities.

Please go ahead.

Yes, thanks.

Looking ahead, is there any significant divergence or weakness in PC demand from normal seasonality or region or -- and could you give us a color as to what is happening out there?

And also if you can comment on what the -- what you believe our inventory levels are out in the channel?

Thank you.

To the first part of your question I believe we're going to walk in a very solid second half of the year, um, clearly the -- the demand is shifting from, uh, desktop to notebook and that's the only trend to watch out for.

Um, as far as the second part of your -- of your question, um, our inventory management is very tight, we don't have any concern with our direct inventory management.

As far as our OEM customers, I think you really have to ask themselves what their position is.

There was a glut of inventory at the beginning of the year in the notebook space that I believe has been resolved, and, um, we're looking for very solid second half because I think that there's no particular issues with that inventory position.

Okay.

And then, Henri, thank you.

I had a followup question.

With regards to the different product segments that you have, traditionally AMD has -- has, you know, participated in the value segment.

What do you see, uh, going on in that value segment?

Because there was a comment by the competition that they are seeing a mix shift.

Can you give a little bit more color on those shift dynamics?

In the value segment, what's happening is that you have a little bit of, what I would call, a good-enough phenomena.

Clearly, you know, as the performance continues to waterfall down, the product that you could buy in the -- at the low end of the value space are -- are increasingly performing, um, most of the tasks that you would want to do with a PC can be done today, uh, with some of these products.

And so, um, I believe that the features and function are going to go, um, increasingly enriched in terms of the audio, the video capabilities of those products, the display and so the out-of-the-box value, um, in the value space may increase, uh, significantly in the -- in the second half of the year and going into next year.

Henri, if you can comment on that,, too.

This is an important segment for us, we intend to be a -- a significant player in the value space and one of the reasons we introduced Sempron as a value brand in that space is we believe we can bring a lot of that, uh, learning we've had in, uh -- in the products we've built, particularly as we have migrated to 64-bit eventually, to bring a lot of value to that segment, uh, at a reasonable price.

Yeah.

We have -- as you know, we've introduced the Sempron brand which is clearly aimed at the value space, it's going to allow us to be more competitive in that market.

And to service the needs of the customers that have expressed the interest of having an AMD based technology to address the opportunities in that market.

And -- and as the Sempron launches, are we anticipating that it will have a -- a pretty neutral affect on the ASPs, or is that value propositioned on higher performance with higher ASPs associate with it.

Thank you.

Well it's going to have -- as we just told you, we expect the ASPs to continue to grow, um, so obviously it would have a -- a neutral to positive effect, uh, and again the rest of the ASP growth will be driven by AMD 64 and the high end of our offering.

Thank you, Henri.

Our next question is from the line of Tim Luke from Lehman Brothers.

Please go ahead.

Luke, your line is open, do you have your phone on mute?

Once again, Mr. Luke, do you have a question, sir?

We will move on, then, to the line of Hans Mosesmann with SchwabSoundview.

Please go ahead.

Thank you.

A couple of questions.

Going back to the Athlon XP.

Is the issue Durons, are the Durons now out of the product lineup and is that why ASPs could have been down?

No.

So, first, the Duron have been out of our product for quite some time, um, as we indicated, you know, we are launching Sempron and some of the business that -- that Duron brand was interesting in the past is going to be covered by the Sempron new brand in the value space.

Okay.

Can you give us a sense on gross margins, there seems to be an improvement in operational efficiencies and gross margins should improve, can you give us a sense of what kind of improvement we can see in the second half?

This is Bob.

I'll give you a little directional first and I'll break it down by business.

As we've stated repeatedly, uh, in our memory business, we see continued gross margin expansion.

Uh, as we enjoy the benefits of, uh, full implementation of 110 nanometers, that's a positive.

As we convert to more MirrorBit, that's a positive.

Uh, we're already at fairly good, I'll call it factory utilization, so we're seeing that benefit but we see margin expansion in both those businesses.

And also we continue to offer higher and higher density products, which definitely carry the premium ASP in the product portfolio.

In the microprocessor space, as we talked about, we just launched a 90 nanometer product in May.

That output will take place in the third quarter.

That will become as time goes on a bigger portion of the output, clearly the die costs is way cheaper at 90 nanometer and so -- and so the margin expansion is also available in the CPG product line.

Also as we continue to, uh, penetrate the server market and the mobile space, as we've demonstrated over the last couple quarters, in the next couple quarters you'll see margin expansion there.

So we think we were set in both major businesses for good margin expansion in both businesses.

Okay.

Thanks a lot.

Joe Osha from Merrill Lynch, please go ahead.

Hi guys, I just wanted to first hit this issue of average selling prices.

You said that you expected them to be up in the September quarter, uh, moderately, is that correct?

Modestly, yes.

Modestly, sorry, okay.

But I understand that there's a pretty dramatic shift going on towards, uh, Athlon 64, why -- why -- is Sempron sort of counterbalancing that?

It seems as if ASPs should be moving rather dramatically, what am I missing?

Well, as we continue to move forward, we are addressing more and more price band with the Athlon 64 product and therefore you have access to Athlon 64 at lower price points than we did in the initial ramp of the product line.

As an indication, starting in Q3, there's price parity between Athlon XP and Athlon 64.

Okay -- okay, that -- that clears it up.

So what you have is, you have a very -- a large increase in the volume is coming from price bands that are at the bottom of the stack.

And therefore although you have expansion of ASP on the Athlon 64 product line as well, you have to remember a lot of the volume is going to come from the volume price bands in the market.

Okay.

That's -- that's helpful.

The second -- just to clarify something you said earlier, you talked about, uh, 64-bit being more than 50% of revenue in the fourth quarter, does that include the server business or not?

It does.

It does.

Okay.

You mentioned in the third quarter that you expected profits to -- operating profits for both groups to go up, right?

Yes.

Okay.

Just some back of the envelope math, I believe you said that, uh, SG&A was going to be up second half of the year, um, that the total was going to be up 15, 10 to 15% on the first half, is that correct?

That's right, Joe.

Okay.

So the implication, then, would be that you've got some pretty significant expansion in gross margin occurring in the third and fourth quarters to cover that?

Revenue and gross margin, correct.

Okay.

But clearly -- I mean, you know, you're adding, by my math, you know, almost, uh, you know, $40 million, that's $20 million a quarter, so, um, you know, the -- are you saying here that gross margins are -- are going to increase in the third and fourth quarter.

Yes.

I'm sorry?

Yes.

I mean, you know, a combination of revenue and continued margin expansion opportunities that I just went through a couple seconds ago.

Okay.

Fair enough, I'm just wanting to make sure I'm getting the -- I'm getting the numbers -- the numbers right here.

And then, finally, I -- I hate to -- I know Hector gets a lot of credit for his determined sort of clinging to the term moderate in the third quarter here, but, um, what -- what has -- what has changed?

I mean, you -- this is the first time I've seen you guys this -- this skittish on -- on -- on the guidance.

Is it simply that you've identified some higher margin opportunities and you don't -- you don't want to grow the business, uh, as quickly?

It seems something has to have changed in terms of you guys being more -- more cautious in terms of putting a number out than you normally are, can you help me understand what that is?

Um, well, John, I don't want to debate you totally on the phone, but we've used words like last quarter modestly so I'm not sure we're changing anything besides saying, as Hector said, back half of the year we see for both business to be seasonally up and very strong and that we see moderate growth in the third quarter, decoded it's a good quarter, as Hector said.

Okay, great.

And you did indicate that your R & D expectations hadn't changed, right.

That's right.

Okay.

Thank you very much.

Thank you.

And we go to the line of Simona Jankowski with Goldman Sachs, please go ahead.

Yes, hi, thank you very much.

This is on behalf of Andrew Root at Goldman Sachs.

I just wanted to get your perspective on the end-demand environment as far as the consumer side and how are you seeing the back-to-school season shaping up as of this point?

Well, as AMD, you know, as you know we're very involved in the consumer space.

Um, we are seeing very strong demand for our AMD 64 based architecture in the consumer space.

Um, but it's -- it's too early to say how it's going to pan out because, uh, the back-to-school season really is starting in three weeks in the U.S., uh, will not start in Europe until the beginning -- the end of August, beginning of September.

But so far the indication is positive.

So you're seeing right now a normal seasonal demand as far as the back-to-school season is concerned, or is it just too early to tell?

No.

The -- the demand -- the demand is absolutely seasonal.

Okay.

And just a quick followup on the NOR side, as well, just wanted to see if you can provide a date on your 90 nanometer transition in NOR?

Um, all I can -- I guess all I can do is repeat what I said because I don't know what other thing I could provide you, but, uh, it's going on plan, it's going well.

We started production in May, we expect to ship product, uh -- I'm sorry.

Use 110, 90 nanometer.

Oh, I'm sorry, I thought you meant CPU.

Oh no, 90 nanometer in flash.

Flash I apologize for that.

We will begin that conversion at the end of the year, begin -- start converting some of our factories.

We will start with our leading most advanced factories which are one in Japan and one in Austin, Texas and then we will ramp as fast as we can in the year 2005.

Great.

Thanks very much.

And our next question is from the line of David Wong, AG Edwards, please go ahead.

Thank you very much.

Can you give us any idea of plans for new products on the notebook microprocessors aside, especially low-power products.

As we -- we had mentioned before that, you know, the K 7, which is our, I would call it, quote, whole, unquote, generation product, was, uh, running into the point where the -- its ability to deliver a power performance at the right wattage level was limited.

And that we had to wait til we introduce both 130 as well as 90 nanometer Athlon 64, which we just started doing, and we started providing -- our customers started shipping the first, uh, thin and light as well as portable and transportable products in that space and they are doing very well.

So they're doing, uh, very, very well.

We have a -- a road map that continues to get stronger on K8, our eight-generation product.

We -- we -- we believe that in the next, uh, couple of quarters we will see, uh , some new products that will continue to improve that performance, uh, power dissipation equation.

Henri?

Just, you know, the -- today the -- the thermal envelope that you can have on the K8 is 35 wet, we'll introduce the 25 wet part in the fourth quarter.

Right, thanks.

Which will allow us to address specifically the thin and light market.

Great, thanks.

And next we go to the line of Adam Parker from Sanford Bernstein, please go ahead.

Yeah, hi, just a couple of questions.

First of all, did you see any slowdown in processor demand in the second half of June?

No.

As a matter of fact, the second half of June was just modestly better than the first half of June.

Okay.

And have you seen any improvements in July so far in the processor space relative to the back half of June?

Too early to tell, frankly.

Okay.

Bob, this might be a semantic that was unattended that I'm picking on but in talking about the 1.5 billion in CapEx, I think you said the word was it would be largely funded by CFO and partners.

Did you not earlier say it was your expeciation(ph) it would be entirely funded by CFO in the past, or am I just splitting hairs here?

I think you're splitting hairs.

I probably wasn't as granular as that in prior statements.

Just because this whole modest versus moderate language has got me focused on every word you saying now.

Okay, can you remind us also what, uh, is going to happen to your share count here in the next couple of quarters?

Well, it really depends on profitability, uh, you know, if there's a triggering point at about the 8 cent level for the first $402 million convertible, which is in the current quarter's EPS calculation, uh, I think the next price point is about, uh, 27 cents and the other shares associated with the $500 million convertible will kick in.

So it kind of depends on how profitable you think we'll be of how many shares you throw into it.

Okay, fine.

One last question.

Hector, maybe just a long-term question, you know, because it -- it kind of occurs to me when you -- when I look at Intel, you know, trying to, you know, build some capacity for unknown demand a couple of years out.

Maybe you can just help a little bit with what you think PC unit growth is, you know, over the next two to three years and as you try to allocate capital given your building a big facility in Dresden, what do you think PC unit growth is going to be over the next couple of years?

Well, I think that we believe, as the rest of the industry does, that the PC market is somewhat mature and stable and I don't think the PC unit growth in total is ever going to be, uh, as it was back in the late '90s of double-digit growth.

Uh, but you've got to remember that we are coming from a position wherein our share in dollar terms is less than 10%, and therefore our focus is more in the customers that we serve and growing our business in that -- in that space.

And, uh, we in a -- in our technology and product road maps are based on a -- on quite a different approach than others have taken in terms of -- you know, we put all our energy and resources in X86 and when we cover X86 from consumer products, hand-held devices to servers, uh, and you'd realize that our share participation in dollars is under 10%.

Right.

We have a tremendous opportunity for growth just by gaining customers to accept our product.

And that's the focus we have on as opposed to -- I just expect in the overall number units to go up.

Based on that, uh, we need to have perfect execution in our factory.

We have -- fab36 must come on-line when we said it's going to be because we're going to need it.

So I guess just from the other side of the equation, though, I mean, is there any -- with -- with the Intel quarter still fresh in mind, I mean, is there any risk that you, you know, um, you know, create manufacturing capability that by 2006 or so is, you know, well in excess of what you would need?

We have a -- our confidence and expectations on the products we've created, AMD 64, X86, every (inaudible) strategy and all that, frankly we have a fairly high degree of confidence that this capacity will be fully utilized.

Okay.

Thanks for your time, guys.

Operator we'll take two more questions, please.

Very good and we will go to the line of Cody Acree.

Please go ahead.

Thanks.

You talk about normal seasonality here in Q3, but obviously your positioning is a little different with 64 bit than maybe it's been in years past.

Can you talk about what is your normal historic seasonality into the third quarter and maybe how you see things, uh, a little differently now from the competitive front and from your product as well?

Well, historically, our seasonality is in the range of, uh, you know, 7% to 9%, second to third quarter.

Um, clearly we have opportunities to grow our business, as Hector just pointed out, we, you know, we have a relatively small market share, the PC microprocessing market, the AMD 64 architecture, that's some momentum.

So there's an opportunity, but historically our growth has been in the 7% to 9% range.

And can you talk a little bit about your dual-core processor strategy?

You talked about, uh, a timeline in the second half of next year starting to get those into, uh, really into, uh -- into revenue.

When would you expect that this becomes more of a mainstream application that really begins to drive growth and not just kind of the early adopter status.

Let me -- if we could answer that question in two parts and I -- Henri can comment on the market and the rate at which customers and consumers will -- will adopt the dual-core products.

And I'll just mention, now, because it's so important to know that the -- that the multi-core strategy, the first of these products, which is the dual-core, uh, was really conceived from the moment that the K8 was designed.

The hammer K8 architecture was conceived with this feature we call a direct-connect architecture.

And this is part of the HyperTransport technology, the onboard memory controller, all those things that is going to allow for this multicore capability to be implemented and developed as the technology migrates to 90, 65 nanometers, etc.

So from day one this was, you know, birthed with that in mind and therefore what you're going to see is a very powerful scaling of performance and features with this kind of technology.

And perhaps Henri can comment on our view, our opinion as to how fast we think the marketplace will accept that.

Hector,well you know our view is really shaped by our customers' view and what you have to remember is that what we've introduced with the Opteron processor is a positive disruptive technology that really allows us to move to 64 bit very quickly while maintaining this legacy to 32 bit and getting performance improvement.

One of the interesting factor in our current business is that the distribution of speed is towards the high end of what's available.

So that shows that the appetite, from our customers at least, the appetite for the best performing parts is -- is non-stop.

Clearly, um, they will like to have, um, our dual-core products as early as possible and, uh, I believe that the ramp will be very, very fast because by then, uh, Opteron will be an accepted architecture and will be in full swing in terms of 64 bit application availability and therefore the immediate improvement in performance and the enablement that this performance will provide end-user customers in terms of new applications or ways to use that computing power that they didn't think they could in the past, will drive, I think, very fast acceptance of the multi-core strategy.

And we should be -- begin to see meaningful revenue late '05, early '60.

Yes.

I think that's a fair assessment.

Thanks, guys.

And our final question comes from the line of Tim Luke with Lehman Brothers, please go ahead.

Thanks.

So just within the context of your, um -- the guide of -- of modest growth given that normal historical seasonality one should anticipate that the -- the process should -- growth should come in a little stronger than the Flash growth, is that the way we should see it sequentially?

Um, I don't -- if you mean that the Flash growth will be less than the processor growth, is that what you meant?

Yeah, whether --

No, I think right now, frankly, we expect both businesses to have a reasonably equal shot at growing from second to third quarter.

At somewhat below historical seasonality, that's the direction that we should anticipate.

No.

And like I said before we're not going to pin down on a number but we believe a good quarter.

Okay.

And then just with respect to, um, the gross margin dynamics, is that something with a better revenue we should think about a framework for that moving somewhat higher?

Yes.

As I outlined earlier, we have opportunities for gross-margin expansion in both businesses, um, and, uh, you know, we've demonstrated that in both businesses this quarter, so I think that's -- I mean we believe that trend will continue.

Uh-huh.

And I think last quarter on MirrorBit you did say -- you gave a range for MirrorBit as a percentage of Flash.

Could you give any more sort of precise a range for where it was this quarter?

No.

It stayed in the same range, the double-digit.

The same kind of range as a percentage.

That's right.

Okay.

Thank you very much.

Thank you.

Thank you.

We'll conclude the call now.

Thank you.

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