超微半導體 (AMD) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the AMD Q3 '04 earnings conference call.

At this time all participants are in a listen only mode.

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

If you should require assistance during the call, please depress the star then zero.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Director of Investor Relations, Mr. Mike Hasi.

Please go ahead.

Thank you, good afternoon everyone.

Welcome to AMD's third quarter earnings conference call.

Our participants today are Hector Ruiz, our Chairman of the Board, President, and CEO, Bob Rivet, our Chief Financial Officer and Henri Richard, our Executive Vice President of Worldwide 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 74955.

The telephone replay will be available for the next ten days starting at 7:00 p.m.

Pacific time tonight.

As a reminder, AMD will be hosting it's analysts day in Sunnyvale, California on November 12.

We will be sending invitations next week.

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

Investors are cautioned that our forward-looking statements involve risks and uncertainty that could cause actual results to differ materially from current expectations.

The semiconductor industry is generally volatile, and market conditions are particularly difficult to forecast.

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 discussion in detail our risk factors and our business.

You'll find detailed discussions if our earnings release, and in our most recent SEC filings, including AMDs annual report on form 10-K for the year ended December 28, 2003, and AMDs quarterly report on form 10-Q for the quarter ended June 27, 2004 With that I'll now turn it over to our Chairman, President, and CEO Hector Ruiz.

Thank you, Mike.

The third quarter of 2004 was another solid performance for AMD despite challenging market dynamics in the flash memory business.

I'm pleased to report that we delivered on our fourth consecutive quarter of operating profits.

We achieved strong EPS growth, we improved the gross margin over the prior quarter, and we grew our top line 30% over the same period a year ago.

On another level, the quarter was one of the strongest in showcasing the three defining characteristics of what we have been calling the new AMD.

Allow me to elaborate.

We lead through our customer centric innovation approach.

There is no better example than our evolutionary AMD 64 technology.

Which offers our growing list of customers a completely different shaded, yet compatible path to pervasive 64-bit computing.

On the strength of AMD Opteron's superior performance and power consumption characteristics, AMD's enterprise customer base now includes world class companies like Credit Suisse First Boston, Merrill Lynch, Time-Warner's AOL, Microsoft's Treasury, Qualcomm, Labor Holdings, and many others.

AMD 64 processors now represent over 1/3 of our processor business on track to becoming 50% of our processor revenues by the end of the year.

Customer-centric innovation applies to branding as well.

As an example, we're very pleased with customer response to our new AMD Sempron brand.

Around the world, and particularly in China. we created the AMD Sempron family to reinvent everyday computing, and it is an important component of our commitment to deliver world class computing technology to the broadest possible customer base.

Because of our customer-centric approach, our processor business grew by 21% over the second quarter, and our ASP improved.

And we believe that we grew share in that period.

The second defining characteristic of the new AMD is world class design and manufacturing performance.

Construction of our new 300 millimeter Fab 36 in Dresden is on track with production plan in the first half of 2006.

We began shipping 90-nanometer processors for revenue in the third quarter as promised.

And we expect that approximately 50% of the total 8th generation wafer stars will be 90-nanometers by the end of this year.

In flash, we have completed the conversion of our a Fab 25, and substantially completed the conversion of JB3 in Japan to 110-nanometer, the smallest production geometry in the NOR Flash industry.

Finally, we continue to lead the industry on the path to mainstream multicore technology.

We were the first to demonstrate an X 86 dual core processor.

We have begun sampling customers with 90-nanometer parts designed to work in today's platforms, and AMD expects to be first to introduce dual core for the 1 to 8 weight server and workstation market by mid-2005.

Like pervasive 64-bit technology, multicore processing is the future, and once again, AMD is leading the industry there.

The third defining characteristic of this new AMD is what I refer to as a the discipline of operational excellence.

And I'm proud to report that despite declines in the in the Flash market, our Flash operation was not only profitable, we actually were able to improve gross margins.

This is a direct reflection of the (INAUDIBLE) to 110-nanometers, aggressive cost management, as well as another solid increase in MirrorBit shipments.

Across AMD our commitment to the disciplines of customer-centric innovation, world class design and manufacturing, and operational excellence results in strong overall operating performance and position us for success in the coming quarters.

I would like to ask Bob now to review the results of the quarter and provide comments regarding the outlook.

Thanks, Hector.

As detailed in our press release earlier this afternoon third quarter sales were $1.239 billion up 30% compared to the third quarter of last year, and down 2% compared to the second quarter of 2004.

The combination of a 21% sales growth in our computation products group improved Flash memory gross margin and excellent execution of our process technology transition both businesses helped drive sequential improvements in net income and . gross margin percentage.

Net income was $44 million, or 12 cents per diluted share for the third quarter.

These results incorporate the same tax rate from the prior quarter of 10%.

Gross margin improved to 40.5% for the quarter, 2.6 percentage points above the 37.9% reported in the second quarter, and a solid 6 percentage point improvement from the third quarter of last year.

As guided, third quarter marketing general and administrative cost increased 13% from the second quarter levels.

As we accelerate our marketing investments across Athlon 64, Opteron, and Sempron products.

Cash flow from operation was $263 million for the quarter, up 10% from the second of 2004.

EBITDA was $374 million.

Switching to our two businesses, a quick overview.

I'll start with our computation product group, CPG sales were $673 million in the quarter, a 34% increase over the same period a year ago, and a 21% improvement from the second quarter.

Unit sales and ASPs increased compared to the second quarter.

Unit sales of AMD 64 processors grew by more than 50% sequentially, and now represent over 1/3 of total CPG sales.

In addition, we successfully launched the AMD Sempron processor family in the quarter, enjoying particularly solid success in China.

CPGs operating income in the quarter was $89 million or 13% of sales.

This represents a a 53% improvement from the second quarter.

Switching to the Memory group business, third quarter sales were $538 million, up 27% from the third quarter of 2003, but down 20% from the second quarter of this year.

Flash memory sales declined due to softness in the wireless handset market supply chain, but embedded sales remain solid.

Unit shipments in ASPs declined for the second quarter -- from the second quarter, excuse me.

The Memory group made money in the quarter with operating income at $15 million, down from the $45 million in the prior quarter.

The Memory group's gross margin improved slightly in the quarter due to the successful transition to 110-nanometer technology, and increased shipments of MirrorBit technology.

Now, let's talk to balance sheet.

Cash balances ended the third quarter at $1.2 billion up slightly from the second quarter.

Third quarter capital expenditures were $407 million up from $361 million in the second quarter.

Inventories increased from the second quarter by $81 million, primarily in leading edge 110-nanometer Flash memory technology.

Now I'd like to discuss the outlook.

AMDs current outlook for the fourth quarter of 2004 is that we expect overall sales to increase, driven by microprocessor sales that exceed seasonal trends, and flat to up Flash memory sales.

In summary, we are pleased with our net income and gross margin progress in the third quarter, and are well-positioned for the fourth quarter.

With that, back to Hector.

Thanks, Bob.

In summary, I am pleased to report that once again, we're delivering on the promise that we have made to our customers, our partners, to our investors, and to ourselves.

We committed to lead the industry to pervasive 64-bit computing and we are delivering on that promise.

With our superior AMD 64 technology, and rapidly expanding product portfolio and solid growth trajectory and a growing collection of key strategic relationships with industry leaders such as Microsoft, HP, IBM, Sun, Linobel, and many others.

We committed to penetrating the enterprise, and we are delivering on that promise.

With notable enterprise caliber system deployment at Credit Suisse First Boston, Microsoft Treasury, Ajier, Merrill Lynch, Phillips Electronics, Qualcomm, AOL, (INAUDIBLE), Labor Holdings.

In fact, AMD 64 technology is now being employed in 25 of the fortune global 100 companies.

We committed to building a strong portfolio brand, and we are delivering on that promise.

With the introduction of AMD Opteron, AMD Athlon 64, AMD Athlon 64 FX, the Spansion, and in this past quarter the AMD Sempron processor family.

We are a strong Company and getting stronger.

In our manufacturing capability which is benchmarked as best in class, in our design capability where we have the taken a clear leadership position with our current generation of designs and our product portfolio which has never been stronger, more diverse and better positioned in the market, and our ecosystem which is the best in our history and getting better every day.

In our customer base which has expanded and improved globally and in terms of it's strategic competition, and in our financials where we're demonstrating a pattern of sustained profitability.

And finally, in our people where we continue to attract and retain the best people in our industry to what has become the new leader in the processor and memory solution business.

As with any company, AMD is only as good as the people who work here, and our people have demonstrated with with a strong sense of urgency their passion and desire to reformulate this Company into a new engine of innovation.

Customer-centric innovation with our own path to success.

Thank you and let me give it back to Mike Hasi for the question and answer period.

Thanks Hector.

Tammy if we could get started with the Q&A.

Thank you.

Ladies and gentlemen, if you wish to ask a question, please press star then one on your touch-tone phone.

You will hear a tone indicating you have been placed in queue.

You may remove yourself from queue at any time by pressing the pound key.

If you are using a speakerphone, please pick up the handset before pressing the numbers.

Once again, if you have a question, please press star, one at this time.

One moment for our first question.

Our first question comes from the line of Michael Masdea from CSFB.

Please go ahead.

Yeah, thanks a lot.

Yeah, we've been enjoying your chips here at CSFB.

Thanks for those.

The first question is on the inventory on the Flash side.

Just are we -- it sounds like you're going to be burning through more of that in the fourth quarter.

Does that continue into the first part of next year, and when do you think that will be cleared up.

Bob, do you want to take a crack at that?

Yeah, you know, actually if you stand back in our inventory position, we actually deplete a lot of inventory in the first half of the year, we're actually down about 14% from the same point in time from a year ago.

All of the inventory we built is 110-nanometer technology, so we feel very comfortable and very well positioned to take advantage of the wireless marketplace as it continues to evolve over the next couple periods of time.

So we're very confident we're in great shape to really take advantage of the marketplace.

I'll answer Bob's comment just a little bit.

Obviously with the technology we have in place, and the going with a healthy inventory position in the quarter, we intend to be aggressive.

Great.

And on the manufacturing side real quick, I think changes on the 300-millimeter plan with some of the kind of outlooks for next year being a little bit more -- more cautious, or are you still pushing forward on the same time frame?

We're not changing our plans at all.

We're doing it at as fast as we can and we're on plan at the moment.

Great.

Just a last question on the cost side.

Your costs declined more than your revenue.

You talked about MirrorBit and 110-millimeters -- nanometer.

Is there anything on the processor side that helped you do that in the quarter?

Our continued expansion of the 90-nanometer.

You know, we started the conversion in May, shipped our first product in the July/August kind of time frame, and that continues to evolve as time goes on, plus, we continue to enjoy world class yields in both 130-nanometer and in the 90-nanometer mode.

Great.

Thanks a lot.

Thank you our next question comes from the line of Tim Luke.

Please go ahead.

I was just wondering if you could give us a sense of the percentage of the business that has now moved to MirrorBit.

And give us a sense in terms of region.

I think you've spoken earlier about China being an area where there was some issues, give us some color there.

Thank you.

If you wouldn't mind repeating the second part of the question.

I lost it.

Can you hear me, Hector?

Yeah.

I'm sorry.

The question just related to MirrorBit as a percentage of the Flash business now, and also I think previously you had commented on synergies with China in the wireless area, could you give us any sort of regional color in terms of how you're viewing Flash demand.

Let me -- I'll make some comments and welcome Henri to add whatever he would like.

First of all we continued to ramp and move aggressively to a shift towards MirrorBit, because so far, as we said before, it's a great technology with great performance and great cost.

We expect to in terms of bits shipped that go out of this year with 50% of bits being shipped in the embedded space in MirrorBit, and by the end this year 50% of the bits for all slides will be in MirrorBit.

So we are in a fairly good ramp.

As a matter of fact, this quarter versus last quarter, we had a double-digit growth in units relative to MirrorBit.

We are pleased with that and that performance.

And relative to China, if you are referring to the fact that we made two comments relative to China.

One we did well in China in the processor side, and that was the (INAUDIBLE, MULTIPLE VOICES) there was a lot of acceptance of the introduction of Sempron in China.

It was received very well, it was product that they actually (INAUDIBLE) and exactly it seemed to fit right at the time of things they wanted to do and we did very well there.

Henri, would you like to add anything to that?

Just a clarification, Hector.

You said that in terms of MirrorBit shipments, we'll be at over 50% for the embedded space by the end of 2004, and we'll be at 50% overall at the end of 2005.

Could you also, Hector, just secondly, just with respect to the processor side you talked about the seasonal outlook for the fourth calendar quarter.

Could you just give us -- I think you sort of said microprocessors above seasonal trend.

Could you just clarify your commentary there.

Is that because your share gain, or any commentary on the turn of the overall market.

Thank you.

Let me ask Henri to make some comments about the market.

Which I think are appropriate.

Well, clearly in the microprocessor side, which is your question, we're seeing a continued acceptance of the ND 64 architecture, particularly in the enterprise.

This was outlined with significant wins in mainstream enterprise business during Q3.

We intend there continue to see this trend accelerate, and so we think we can gain share in the fourth quarter of this year.

Thank you.

Thank you.

Our next question comes from the line of Hans Mosesmann from Schwab SoundView.

Please go ahead.

Yes, if you can clarify the last statement regarding enterprise.

Are you implying that it's's Opteron that's driving the better than expected acceptance of the 64 architecture?

It's across all of the AMD 64 products, but clearly for the Opteron product which is an enterprise product it is that segment, but we're also enjoying a significant growth quarter to quarter on both the Mobile Athlon 64, the desktop Athlon 64, and the Athlon 64 FX.

And I have a follow-on on the wireless market if you can comment on seasonality or any inventory situation in the various markets that you participate in?

Thanks.

The wireless market is -- this is going to be a little bit of a lengthy answer.

It's important to put it in perspective.

We think that the hand -- the cell phone market is actually a healthy market this year.

We think it will have a reasonably good growth year-on-year.

However, I think that the cell phone manufacturers' expectations were probably a bit higher than just a good market, and as a result, in the first and second quarter of this year, there was a concern that there were not enough Flash capacity available to meet the needs of those customers.

As a result, what I did, I think it triggered some conservatism in purchasing on the part of the cell makers, but it was particularly compounded on the second and third tier players that of course they feel that -- they fear that they might get left behind, and they not only double order, but they triple order and so we believe in the second quarter, there was an accumulation of inventory that was unreasonable, particularly in the second and third tier players which seems to be very focused an indigenous cell maker in China.

The indigenous cell manufacturers in China ended up then compounding the situation, because of the Chinese government's desire to curtail economic activity.

And that had a profound effect on them too.

So when you combine those two effects, the Asian market was actually really affected, and I am to be fortunate that the last three three weeks of the quarter, I spent in Asia, mostly in China, and I personally talked to the CEOs, the various cell phone companies, and processor companies, and I got a very strong feeling of how severe it was, the combination of inventory accumulation, as well as the curtailing of economic activity really had an impact on these folks.

However, having said that, at the same time they also felt like towards the end of September they began to see a somewhat of a recovery of purchasing pattern, and although it wasn't strong enough to really affect or have any impact on the third quarter, it is encouraging for us that we're going into the fourth quarter with some activity pickup in those areas that were severely affected.

And for that reason we have cautious outlook in the fourth quarter, but optimistic that if the market is there, and they did indeed recover, and the supply chain logistics get fixed, we'll do well.

Okay.

Thank you very much.

Thank you.

The next question comes from the line of Mark Edelstone from Morgan Stanley.

Please go ahead.

Good afternoon, guys.

A couple of questions on processors, if I could.

First one is, what was the change in Athlon units in the quarter.

Did those increase or decrease sequentially?

Is that an Athlon 64 question, or an Athlon XP question?

That was basically the Athlon XP.

There was obviously a decrease -- significant decrease in Athlon XP as we're end of licensing that product line.

Okay.

Great.

And then I guess for Hector or Bob, obviously you were able to improve your profitability in processors, but the incremental margins there were perhaps less than what someone would have suspected given the strong growth that you had in revenues.

Is that largely because we've yet to really see the positive impact of the transition in 90-nanometer at this point in the AMD 64 and Opteron product lines?

A combination of two things, Mark, of one, yes, we're still in the early phases of transitioning to 90-nanometer, but two we also spent a fair amount of money, almost all of the increase -- the $20 million increase you're seeing quarter on quarter in sales and marketing went against the microprocessor business as we did some pretty aggressive campaign and work to -- for Opteron, Athlon 64, and the Sempron brands.

Okay.

And then just lastly, it looks like there's a restatement of some of the balance sheet items in Q2 relative to the cue that you put out.

Can you walk through that if that is the case?

Boy, I'm not aware of that.

Maybe we can just take it offline then.

Yeah, we'll need to take it offline.

Okay, guys.

Thanks a lot.

The next question comes from the line of John Lau from Bank of America.

Please go ahead.

Okay, thank you.

I wanted to take another try at the PC question.

I was wondering -- what do you believe is a typical PC seasonality for Q4 in your expectations, and while you may be growing faster than the seasonal, is the overall market fairly robust and seasonal at this point, and then I have a follow-up.

Thank you.

Well, we believe the traditional seasonality is between 10 and 12%.

I would like to add to that, is that, you know, going forward, it may not be as meaningful for us sometimes to talk about seasonality as it applies to us.

We've now departed significantly if terms of architecture products, features, et cetera.

For example, we had a very healthy back to school activity for us.

We felt good.

Very positive about it.

I'm not so sure that that was exactly in line with general trends.

And being this small in terms of dollar share, being at 10% or less of a dollar share, frankly, what we see may be more applicable to what we see for AMD rather than for the industry.

And so, therefore, given the momentum we're building on penetration in the enterprise, which we still believe will let us gain share and go out of the year at a healthy number that we communicated before, and the acceptance of the AMD 64 technology in the client space it's positioned to us have a very optimistic outlook this quarter.

Great.

And in terms of the follow-up, based on what you see in the channel there, do you believe the inventory for PCs in the channel are seasonally normal at this point, or do you see any issues?

We don't see any issues at all.

In fact, in certain aspects, there were some shortages that we heard happened in the market for chipsets in Taiwan, so it looks like the old build supply chain, starting from chipsets going to motherboards is very healthy.

Great.

Thank you very much.

Our next question comes from the line of Andrew Root from Goldman Sachs.

Please go ahead.

Thanks a lot.

I had a question on brand positioning.

I think you mentioned that the Athlon XP obviously being phased out with the Sempron launching.

Are there any campaigns or anything planned to transition that in the customers's mind, the retail side, the XP brand has been very successful, launched with great fanfare in '99-2000.

Just curious what's planned.

Well, yeah, there's a extensive campaign that's ongoing since the beginning of the summer.

Clearly we recognize the strength of the Athlon XP brand, but as you know we ended up in a situation where we were competing with a single brand against our competitor's two brands.

So what we started at the beginning of this year, the repositioning in order to be able to be aggressive in the value segment with a brand positioned appropriately, and that's Sempron and to compete head on with the Pentium brand with our Athlon 64 product.

And frankly, part of the successful result is this increase in ASP that we've seen because we're now competing appropriately against the two brands.

The Athlon XP was very solid, but ended up being a tweener in certain markets and that was affecting our ability to position properly.

And then I guess, sort of, 6-12 months from now as the desktop moves to Athlon 64, the XP gets phased out so, you know, a year from now we won't be talking about it?

No, the XP phase out is much faster than this.

We don't expect to have any significant Athlon XP shipments beyond Q1 '05.

Okay.

That makes sense.

And then one quick follow-up on inventory, just wondering if you could give us a sense if the dated inventory is higher on the Flash side, which I think it is, and then if you sort of step back and say, you know, you have 99 days inventory, Intel has 90, how does this -- how does this eventually resolve itself?

Because they're trimming production whether they're successful in bringing inventory I don't know.

But, is this just a level we can run at for a while until demand gets better, or just need to, you know, just have to resolve itself some other way?

We're not -- you know, we're not concerned about the inventory at this point in time.

As Bob pointed out in the comments, we actually were concerned in the second quarter we didn't have enough, when we thought there was a severe shortage, and we are right now, even today, we're still at 14% below where we were a year ago in Flash.

In processors, it's an entirely different story.

Frankly, we are, you know, able, we are fortunate that we're, you know, making every product we make it's a highly desirable SKU, an entirely desirable bin, and so we're not at all in any way concerned of inventory from the microprocessor side.

I think if the market does what we hope it does, and as I mentioned earlier the supply chain logistics issues on the cell phone business get sorted out in the fourth quarter, we're pretty solidly positioned to gain share.

Okay.

Thanks.

Thank you.

Our next question comes from the line of Krishna Shankar from JMP Securities.

Please go ahead.

Yes.

In the processor business in the AMD 64 did you have good growth both in desktops and notebooks Q2 to Q3, and also going into the fourth quarter, will -- did you say more than 50% of your processor production will be on 90-nanometer.

I'll answer the first part of the question.

We had a double-digit growth in both mobile and desktop Athlon 64 processor.

And in terms of the 90-nanometer, we expect going out of the year to have over half of our wafer starts to be 90-nanometer AMD 64.

Okay.

And for the Flash market it sounds like most of the shortfall was because of cell phones and finished goods.

Can you talk about the pricing environment in the in Flash market both for embedded, low density Flash and high density Flash applications?

Sure.

The market is competitive.

There were some irrational pricing that happened at the beginning of the quarter as people were facing the softness.

Frankly, if you look at our situation, we had a delight slight decline in ASP, but that's normal because we intended to be competitive and we are leveraging our 110-nanometer technology.

Overall, it wasn't a disaster and as Hector pointed out as the supply chain clears out and I think the market returns to a more positive tone, we are going to continue to see a competitive environment but no particular concern on the front of ASP.

And finally more sort of strategic question.

You had a phenomenal processor quarter, but obviously the response in the market has been dampened by what's happened in the Flash market.

What are your thoughts on, in terms of unlocking shareholder value for the spectacular performance you've had in processors versus a more volatile environment in the Flash market which seems be to commoditizing more rapidly?

Well, first of all we have a very long-term view of the investments we're making in the Flash memory business.

You know, we're not going to let a one quarter blip in performance to obscure the vision of our future.

And we have a tremendous confidence that this is a fast-growing market, pervasive in its applications.

We have a unique technology that is unique.

Nobody else has it.

We believe we can do a lot of exciting things, so we have a lot of faith in that, and on the long term, I believe this is going to be a way in which shareholder value will be created.

Thank you.

Our next question comes from Ben Lynch from Deutsche Bank.

Please go ahead.

Yeah.

Hi, guys.

I must congratulate you in a very difficult environment for really such a great quarter.

I also have two questions.

I'll just take one at a time, if that's okay.

Back to the seasonality thing that people have been on about, and how you sort of define it, when I look at the last 7 years, in 6 of them, it looks like you've had processor growth of 13% or above, and in fact in several of the years, significantly higher than that.

You know, is that a good sort of framework for us to be thinking about what you mean by seasonality this year?

I don't believe so.

I believe that this, frankly, we don't know.

I mean, that's the truth.

We believe the market in the fourth quarter will be better than the third quarter, and it is our belief that in an environment like that, we will do better than the market.

But frankly, you know, we do not think the world has changed a lot for seasonality discussions are not as appropriate.

Henri?

A couple of comments.

Historically, this data that you've indicated may be right, but you have to keep in mind that there is two factors that have changed at AMD.

First, we have a growing part of our revenue in microprocessors that have derived from enterprise and commercial business.

And second, a fast going part that's coming from strategic accounts.

And so some of the seasonality that we saw in the past was really related to more of a consumer based business than we're evolving towards, so I'm not sure that the past models are going to be as relevant going forward.

Okay.

Great.

And then the follow-up question I had was, you know, clearly you guys have been showing consistent share gains now against Intel and Intel is a tough competitor, they never like to lose share for long.

Realistically, what things are you guys worried about that they might do or can do in both the short term and the medium term to at least attempt to turn things around?

At the risk of sounding flippant which I don't mean to, we worry a hell of a lot more about what our customers really want from us and what they're expecting and making sure that we're turning this place upside down to do that for them.

And I think if we do that well, there's less of a risk of a competitor doing anything that could harm that situation.

So, yeah, you know, you've got a gorilla that's big and can do a lot of other things, but our focus and our energy, believe me, is totally focused on trying to understand how we can serve the customers, and a lot less worrying what the competitor might or might not do because we don't know.

Okay.

And you just said you're in that stronger position now than in the past, where it's, you know, you've got your own destiny more in your hands than you have in the past, and you're going to focus on customers to make sure that remains so.

And across the board, if you look at Flash and microprocessor both, you have products that are unique, technology that's different.

Differentiating products, and, you know, we believe we have created a situation where it's our execution and how how well we can meet our customer need and demands that will determine our success.

Thank you very much.

Our next question comes from the line of Kevin Rottinghaus from Midwest Research.

Please go ahead.

Yes, I didn't catch this.

Did you give any guidance on operating expenses in the the quarter?

No, we did not.

But I'll give them to you verbally.

Everything should be relatively flat, except continued investment in the SG&A category for the branding efforts and marketing investments on Opteron, Athlon 64, and Sempron brands

Okay.

Second question.

Can you give any kind of scope, or do you have any thoughts on where handset densities are, how much they're increasing quarter-over-quarter as people continue to move to high-end phones?

Well, clearly, I can give you our average.

We had a single digit, about 5% increase on average density.

The sweet spot right now for handset is moving from 32 to 64 meg.

And just after that, it appears that just a little over a year ago the average density in megapixels in a phone was less than one megapixel per phone.

We're now entering 2005, so with that beginning to approach to and we believe that shortly after that we should see in the year 2006 probably phones with 4 megapixels, which is all indicative of the acceleration of density in Flash.

Okay.

And I guess my last question on that note, can you talk out all about the threat from NAN over the longer term becoming the Fash of choice going into handsets?

You know, I think what customer is going to look for is what product solves their needs, what provides the features, the cost, the things they're looking for.

NAN happens to be a technology.

It's not a product, like NOR is for technology.

We've stated before, and we'll continue to do this, and we're going to do it in more detail at the analyst's meeting coming up next month is that the technology that we've created although it's been perceived to be only an NOR technology, MirrorBit actually is going to be providing land like features with improved performance and cost, and therefore we believe we'll be able to be a player in all of those areas where NAN today is beginning to play a big roll.

Okay.

Thank you.

The next question comes from the line of Michael McConnell from Pacific Crest Securities.

Please go ahead.

Thank you.

Hector, just wanted to kind of clarify a couple of comments.

You had said that obviously in China you are starting to see some stabilization, some reordering, yet you were planning on being more aggressive.

Was that just meaning being more aggressive with market share -- trying to take market share in Q4 because of the shrink to 110-nanometers, or is that something with pricing?

More along the lines of the fact that in the second quarter we were a little tight on supply, and as we migrated to 110-nanometers, we have a much more breadth of product and capabilities to serve other customers' needs, so we're going to go out to aggressively gain share.

Okay.

And then just one question on the gross margin side, maybe for Bob.

Looking at obviously the growth you're going to be expecting in CPG, now looking at Flash kind of stabilizing to growing, maybe low single digits, we should probably assume a pretty sizable bump in gross margin in Q4?

Any kind of color there would be helpful.

Thank you.

Well, we continue, obviously you saw the impact of the shift in mix of business towards more processors, less Flash.

We continue to be almost, you know, microprocessors is twice as large gross margin than the Flash business, so as you model forward and put more CPG in than flash, yes, indeed, the gross margin of the Company will go up.

But I want to make sure it's clearly noted.

We continue to make progress in gross margin in the Flash business as a stand alone business.

You know, we've been on that kick for white quite a while, and we will continue to make progress in that business to improve the gross margin and maybe actually even close the gap between the distance between microprocessor and Flash.

Thank you.

Thank you.

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

Please go ahead.

Thank you very much.

Bob, you made a comment when you were asked about operating expense if things will remain flat with the exception of SG&A, continue to expand for promotion et cetera.

Is that to imply that, just looking at it real quick, it looks like you ramped about $24 million, absolute dollars sequentially in Q3.

Did that type of ramp continue into Q4, and does it get rolled back post Christmas or post Chinese New Year?

How do we think about that trend line longer term?

Yeah.

I mean, you know, we are into a big season, a very big retail season from that standpoint, so there is a lot of increased costs, so modeling that same kind of growth quarter to quarter is fine.

As we've demonstrated in the past, though, that will retract a little bit in the first quarter as we move forward.

Okay.

Then also on the memory side of the house, it look likes the non operating expenses have declined for an actual number about 22.5 million in Q2 over a 28.5 in Q2, first if my math is right, if not right please correct me.

But trend line going forward, is there any way we can think about that?

Well, we'll continue to make -- I mean we continue to make cost reduction progress in the memory business, so while that was a fairly steep movement from quarter to quarter, because of converting 110-nanometer, as Hector said, we're almost complete with that movement, so obviously the line flattens out a little bit on progress, but we will continue to make progress.

Then last question if I could, convertible interest added back in the quarter is I believe about 4.2 million, and any comments on the trend line of that going forward, please?

No, that's right now obviously it's in the money.

If we could, it would be soft callable, but that position doesn't start until December of next year to be able to soft call it so I would continue to assume that interest will be there.

Thank you.

Thank you.

Our next question comes from the line of Chris Danley from J.P. Morgan.

Please go ahead.

Thanks, guys.

You said on the CPU business, both units and ASPs were up sequentially in Q3.

Can you give us a sense of did units increase more than ASPs or vice versa.

They both increased in double digits, and the only thing I will tell you is units increased slightly more than ASP.

Okay.

And can you give us is a sense of the relative increase in units and ASPs, or your expectations for Q4?

Well, I think that we'll obviously see an increase in the units, and as far as ASP, as the mix continues to move towards our new generation Opteron, Athlon 64 products, we should see another slight increase in ASP.

Sure.

And then moving over to the Flash side, did you say you expect Flash pricing to stabilize, Flash go up sequentially in Q4?

No, I said that we expect the environment continuing to be challenging, and also as Hector pointed out, we have our 110-nanometer technology which allows us to be aggressive in the market to gain share so I believe that we will continue to see a, you know, a fairly competitive environment on the pricing side.

Okay.

And then assuming Q4 goes as you guys expect it, what're you thinking on CapEx for next year?

Not ready to -- excuse me, but not ready to talk about that, but we will talk about that but we will talk about that at the analysts conference in mid-November.

Okay.

Great.

Thanks, guys.

Thank you.

Our next question comes from the line of Dave Iliskew from UBS.

Please go ahead.

Yes, this Steve Iliskew for Tom Thornhill.

You've answered most of the questions.

I just have one regarding this other category.

We haven't spoken about that.

But it seems to be an increasing drag on earnings.

What are your plans in terms of business to reverse those trends?

There is a piece of that -- there are two pieces to that.

One, there is a -- it's almost an incubating place for new businesses, and I'll talk about that a little bit, but then also we put other costs in there that have nothing to do with that, and I'll ask Bob to comment on that.

First of all, we've got some pretty exciting things in our X 86 cell record strategy, and we are going to be fairly public and disclose that this quarter, the fourth quarter.

We're very excited about some of the things we're doing with the X 86 technology in low cost, low power activities.

We think that has an awful lot of potential for us as the Company leverages the investments we've already made, and it really puts us in a position that we can have a phenomenal leverage on technology and the customer relationships that we have built, so I have a pretty -- you know, very high hopes that that will turn out to be another element of our strategy going forward that will grow well and fast.

But in addition in that category we also dumped a lot of costs in there that are different than just that business.

Bob?

Sure.

Actually, it's not that many costs.

It's really more corporate cost really driven on bonuses and profit sharing.

So it's those kind of costs associated.

The results of the corporation versus the results of an individual business.

Obviously, as we make more money, those numbers would go up, but obviously our game plan is to fix the business and actually generate a lot of sales and profits from the other business that Hector just talked about to cover those kind of costs.

And the expected time frame for that?

Well, this is a business that today it's an investment business, but we expect that business to not lose money next year.

Thank you.

Thank you.

Our next question comes from the line of Cody Acree from Legg Mason.

Please go ahead.

Thanks.

You mentioned earlier that Flash profitability on a gross margin standpoint would likely be make some trends towards processors.

With the pricing pressure with the continued expansion of capacity in that space, and obviously a lot of competition, but yet your improvements in manufacturing technologies, where do you see a longer term sustainable operating target, if not a gross margin target for Flash memory?

First, one correction.

We are continuing working on cost reduction in the memory business to improve its gross margin to try to close the differential between the microprocessor business and the Flash business, but we have no expectation that the Flash business will actually get to the margins of the microprocessor business.

So I wanted to make sure to level set there.

Our long term game plan of that business needs to be in the 30 to 35% range in gross margin, which would translate into a 15 to 20% operating income, so that's kind of the model we think a very healthy world class memory organization should be driving to on a continuum, and clearly it's a technology game, pennies count, and you have to drive -- be the technology leader to make sure you take every penny out of the system and share it with your customers to continue to have enormous market share and the appropriate return on investment.

Are you assuming in that 15 to 20%, I would assume a pretty aggressive pricing environment, or is that -- does that negate some of those profitability objectives.

No, we -- unfortunately, the -- because it's called memory, it's always aggressive pricing environment, so we have to always assume it will be an aggressive pricing environment, and that there will be, you know, occasionally that will change when there is supply, demand, and balance, but most of the time it is a -- cost per bit continues to go down, period, decimal point.

And then lastly with Sempron ramping in, obviously doing very well in the 64 bit side, do you get some bump out of the Sempron pricing or the Sempron gross margin initially or does that start to have some maybe negative impact to the 64-bit improvement in margins over time?

Clearly, you know, the Sempron product is aimed at the value space.

And as Hector pointed out, you know, we have a lot of market share gain potential in that space, as well.

But our focus is to build an enterprise business.

So we're going to continue to put all of our efforts in building a very strong Opteron brand.

Continue to gain share in the Athlon 64 and Athlon 64 FX space.

We have some opportunities in the mobile space as you know.

We're using Sempron strategically to make sure it responds to customer needs in important markets where the Sempron value proposition is the best suited to the customers.

Tammy, we're going to take two more questions, please.

Thank you.

Our next question comes from the line of David Wong from AG Edwards.

Please go ahead.

Thank you very much.

Spending on your 300 millimeter fab, I think originally you had a number like -- was it 2.4 billion?

Can you tell us how much of your cumulative spending has been invested already, how much is left to go, and roughly how that will be divided over the next several quarters?

Sure.

Yes.

You have the number right.

The initial investment, we're still working to, is about 2.5 billion. 600 million of that is for the building the rest is in equipment.

Our spend rate this year is around 600 million.

We've probably spent in the order of 250 million so far to date.

Obviously, the building is coming toward the end.

We will actually start receiving equipment in December.

Next year will be a fairly large ramp of equipment, which is effectively the first tool set that will go in, and so you can plan for around the same kind of number of about 600 million next year as a thought process.

Again, I'll give more clarity on this in November, and then the balance fills in to '06, '07 as you continue to fill out the equipment line.

Great.

Thank you very much.

Thank you.

Our last question comes from the line of Allan Mishan from CIBC.

Please go ahead.

Hey, guys.

I'm not going to ask you to give any March guidance, but I would just ask that based on the ASP trends that you expect to see, because 64 bit is really ramping up as a percentage of your mix, if March is seasonally down in unit terms, do you think that ASPs will rise enough to offset that?

Thank you.

You know, my crystal ball doesn't go that far.

I'm sorry.

You're right in stating that we expect to continue to see our AMD 64 based processor to represent a larger mix, but, you know we're enjoying also a very strong Sempron acceptance in the marketplace, so for me to give you two quarters out a balance between the two brands and how it's going to affect ASP is impossible.

Okay, then if I could try another question.

I just want to ask you the Intel question maybe in another way.

If you look at their inventories that they say they are going to try and get off their books in this coming quarter, it's $700 million over the last two quarters.

That's larger than you entire computation business.

With that coming into the market, can you talk about, you know, what you think insulates you from the types of levers that they have as a monopolist that they have shown they can be, to prevent adverse effect on your ASPs, or certainly on your unit shipments because you're a dual source for a lot of the stuff you do.

Thank you.

Well, first of all, you know, as I said before that's a good question that you should ask them what they plan to do.

I have no idea what they plan to do.

Let me tell you what we are going to do.

We continue to put efforts in really making sure that we execute to the plans that we have, and get the products out that we need that our customers really want.

I believe that we're now differentiated enough that we're not second source or compatible, and therefore we're now addressing different needs, differentiated products, and different markets.

What they do, frankly, I think it's appropriate for them to ask.

What we're going to do, we're going to stay focused and continue on the path to improve our Athlon 64, our Opteron brand, our Sempron activity and I think the momentum and progress that we have is one that gives us confidence that we'll continue to gain and do well, and particularly in this next upcoming quarter.

Okay.

Thank you very much.

Nice quarter.

Thank you everyone for participating the call.

Ladies and gentlemen, that does conclude our conference for today.

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