超微半導體 (AMD) 2005 Q2 法說會逐字稿

Ladies and gentlemen, welcome to AMD's Q2 '05 earnings conference.

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

Later there will be an opportunity for questions, instructions will be given at that time.

If you should require assistance During the call, please press star then zero and as a reminder this conference is being recorded.

I would now like to turn the conference over to Director of Investor Relations, Mike Haase.

Please go ahead, sir.

Thank you.

And welcome to AMD's second 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 Chief Sales and Marketing Officer.

This call is a live broadcast and will be replayed at www.amd.com and www.streetevents.com.

Telephone replay number is 800-475-6701.

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

The access code for both is 787311.

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

PST tonight.

For your planning purposes I want to call to your attention an upcoming Amd event.

We will be hosting our Analyst Day in Sunnyvale, California the morning of November 15th.

We will be sending out invitations in a few months for that.

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 uncertainties that could cause actual results to differ materially from our current expectations as set forth in the forward-looking statements.

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 discuss in detail our business and risk factors setting forth information that could cause actual results to differ materially from those in our forward-looking statements.

You will find detailed discussions in our most recent SEC filings, including AMD's Annual Report on Form 10-K for the year ended December 26, 2004, and AMD's Quarterly Report on Form 10-Q for the quarter ended March 27, 2005.

With that I'll turn it over to Hector Ruiz.

Thank you, Mike.

In the second quarter of 2005 AMD continued to show solid momentum gains in our microprocessor business.

And in our Spansion Flash Memory operation we saw a moderate quarterly increase in revenues driven by increased demand for our Second-Generation MirrorBit Flash Memory products.

MirrorBit revenues were up nearly 50% over the prior quarter and over half of our MirrorBit revenue in the quarter was from Second-Generation MirrorBit products.

We are now in full production on our 110nm MirrorBit, 256Mb part and are seeing a broad adoption of this new technology among key OEMs across the wireless segment.

We are pleased that SAGEM is using our 512Mb single-chip NOR Flash memory in their feature-reach mobile phones.

We're likewise pleased with our Ornand code execution having seen the first 90nm silicon in the second quarter.

In the meantime we remain on track with our plan for a more independent expansion, re-engineering the business model, reducing expenses, and stream lining operations.

As I mentioned on this call the last quarter, our processor business continued not simply to grow, but to accelerate thanks to the strong adoption of the AMD64 Processor Platform.

This second quarter of '05 was another high watermark for us on several key measures, an all time quarterly record for microprocessor of revenue, an all time quarterly record for mobile processor of revenues, and an all time quarterly record for server processor revenues.

As a result we delivered an all time record for quarterly operating profits in the processor business.

Second quarter processor revenues were up from the prior quarter bucking typical seasonal trends and up almost 40% over the prior year.

For the record, this is the eighth consecutive quarter of 20-plus percent year-on-year growth.

And the largest quarter-on-quarter expansion since the launch of the AMD64 Platforms.

We're particularly pleased with the growth projectory of our AMD Opteron family.

AMD Opteron revenues nearly doubled over the prior quarter reflecting surge in demand for our customer's growing product offering.

Sun, HP, IBM, and many other OEMs announced new systems based on our Dual-Core AMD Opteron family.

And we continue to work with our partners to fully develop the explosive Blade Server opportunity with the launch of IBM's LS20 and the HP ProLiant BL45p.

Our partnership with Sun has generated tremendous momentum in the enterprise where the combination of AMD Opteron and Solaris 10 have become the reference platform for many x64 deployments.

Sun's V40z server broke the world record for 8-way x86 performance achieving over 2.5 times the performance of the latest 4-way MP Xeon processor based servers.

With the launch of our AMD Athlon 64 X2 Processors we are now the only company with a complete dual-core offering from servers to business and consumer desktops.

In the thin-and-light segment we are seeing a strong demand for our new AMD Turion 64 Processor Platform which has captured more than 60 design wins since its launch.

Meanwhile on the marketing front we are proud to be working hand-in-hand with HP on the HP Special Edition LiveStrong Notebook reflecting our proud support of Lance Armstrong and the Discovery Channel Team, as well as the Lance Armstrong Foundation. $50 from the purchase of every one of these notebooks will go directly to support the cancer survivorship cause of the Lance Armstrong Foundation.

Our success in the enterprise continues.

We now can claim more than 75 of the companies on the Forbes Global 100 AMD64 customers, up from 55 last quarter.

Our transition to 90nm is complete with world-class yields resulting in continued capacity expansion to meet the growing demand for AMD products and solutions.

Our Fab 36 remains on schedule and on budget with production starts planned in the first quarter of 2006.

We continue with the great support of our partners on a steady path toward reinventing the competitor dynamics of the microprocessor industry.

With the successful launch of our Dual-Core AMD Opteron and Athlon 64 X2 processors, AMD64 has truly become the gold standard in 64-bit computing.

At this point I would like to ask Bob to review the results of the quarter, as well as the outlook.

Thanks, Hector.

AMD had a good second quarter.

We had solid execution across the board with exceptional CPG performance and good directional progress in our Spansion operation.

Our Microprocessor business established all-time quarterly records in total sales, server processor sales, mobile processor sales, gross income, and operating income.

Our microprocessor business continues -- clearly continues to gain momentum.

For AMD overall sales were $1.26 billion, flat from the second quarter of last year and in a seasonally slow second quarter up three percentage points compared to the first quarter of 2005.

We recorded net income for the quarter of $11 million amounting to an earnings per share of $0.03.

Second quarter gross margin was 39% compared to 34% in the first quarter of 2005.

This improvement was largely due to record CPG gross margins.

Second quarter marketing, general, and administrative costs grew 8% as compared to the first quarter of 2005 largely due to record microprocessor sales, particularly with large global OEMs driving increased marketing investments.

Cash flow from operations was $265 million for the quarter and EBITDA was $345 million.

Switching to the business segment highlights, CPG had a record breaking quarter.

CPC sales were $767 million, another new record which represents a 38% increase over the same period a year ago.

We also grew two percentage points from the first quarter of this year in a typically seasonal down quarter.

Units in the quarter increased by 22% over the same period a year ago, but were down 4% from the first quarter.

In the quarter we saw an especially strong sales in China, North America, and all of our high-growth markets.

We continue to gain momentum in the commercial market driven by AMD Opteron Processor penetration in the enterprise space.

Microprocessor ASPs increased 6% compared to the first quarter and new sales records were established in both server and mobile.

CPG's operating income of $110 million established a new high watermark in the quarter, up again from the record levels of the first quarter of this year.

Year-over-year CPG's operating income has increased a strong 92% from the 58 million in the second quarter of 2004.

CPG's gross margin increased from the first quarter and was a record high 59%.

Now switching to the Memory Group business.

We continue to execute on a strategy which we embarked on over two years ago to make Spansion a financially independent organization.

Flash Memory, as you know, is a capital intensive business and our strategy designed to give Spansion direct access with the capital markets going forward.

In a very competitive market Flash Memory sales were $462 million down 31% compared from the second quarter of 2004, but up 3% from the first quarter of this year.

We shipped 12% more units compared to the first quarter and ASPs were down again.

We recorded a $90 million operating loss in our Memory Group in the quarter, a $20 million improvement from the first quarter in what continues to be a very challenging supply/demand environment.

Most of our improvement is associated with strong demand for our Second-Generation 256Mb MirrorBit parts.

The Memory Group's gross margin increased in the quarter to mid single-digits.

Turning to the balance sheet, cash balance is into the second quarter at $1.22 billion, a $135 million increase from the prior quarter.

In the second quarter we received funds from the German Government and Fab 36 partners for meeting certain milestones and running our first engineering test wafers.

Second quarter capital expenditures were $303 million down from $518 million in the first quarter with the majority of the investment going into our microprocessor business.

Inventories were up as planned from the first quarter by $65 million, mostly in CPG as we prepare for anticipated strong second half of the year.

Now let's talk outlook.

AMD's outlook statements are based on current expectations.

The following statements are forward-looking and actual results could differ materially depending on market conditions.

AMD expects microprocessor sales to grow to exceed normal seasonal patterns.

Due to the Spansion filing of the SEC Form S-1, AMD is not providing guidance for the Flash Memory business.

Based on the continued ramp of Fab 36, an increased spending in marketing and legal, we anticipate total AMD third quarter operating expenses to increase by approximately 8%.

Our capital expenditure forecast remains unchanged from our prior guidance, approximately $1.5 billion for the year.

In summary, we are very pleased with our progress and we believe we will continue to see further improvements in the coming quarters.

With that I will turn it back over to Hector.

Thank you, Bob.

I would like to close by underscoring this strong progress that we have made in transforming AMD in our industry.

Because I believe that we have done some rather remarkable things in a fairly tight time frame, we have seen the technology leadership mantling processors, first, by deploying AMD64, a superior industry standard 64-bit architecture.

And more recently, by introducing our dual-core technology, the only real dual-core technology for industry standard computing platforms.

We have gained remarkable ground with many of the world's most demanding OEMs, established a strong and growing footprint in the enterprise, and we have grown our presence in key high-gross geographies, such as, China, India, Eastern Europe, and Latin America.

We have built one of the most impressive manufacturing operations in the semiconductor industry and with our APM technology created the capacity to make rapid technology transitions in response to market needs.

Finally, we continue to attract the best and the brightest minds in the industry.

All here for one reason, to reinvent the competitive balance of the microprocessor industry.

It is an important story, an exciting story, and it is only just beginning to really unfold.

And to complete it we need to preserve a world where the market place decides what innovations to reward and consumers are free to choose without the constraints of an abusive monopolist.

In short, we need a fair and open competitive playing field. [indiscernible] we are working to change the industry, the world, and we are highly motivated about the prospects of helping to create a market place that is better for our customers and consumers and businesses around the world.

Once again, I want to thank each and every AMD employee for remaining laser focus on the task of creating the world's most innovative semiconductor products and technologies.

And I want to encourage them to view our continued progress as the source of great motivation to finish the job of reinventing in our industry.

Thank you.

Back to Mike Haase for Q&A.

Thanks Hector.

Operator, if we could start the polling session for Q&A please.

Certainly.

Ladies and gentlemen, [OPERATOR INSTRUCTIONS].

And our first question comes from Mark Edelstone with Morgan Stanley.

Go ahead, please.

Hi, good afternoon, guys and great gross margins there in processors.

I guess a couple of questions if I could, one, could you guys just give us kind of a view of what you see as the tone of overall business in the PC market?

I certainly know that you guys are gaining share, but how does the overall tone of the market look to you?

And then I've got a follow-up.

Hello, Mark, this is Henri.

We are actually seeing a favorable environment in the PC business, both in the consumer and in the commercial segments.

And I'm fairly optimistic for the second half of this year.

As you know the new technologies that we are offering to the market are being adopted.

But of course starting from our low market share the only way we can look is up.

Okay, fair enough.

Then Bob for you, on the margins, your gross margins I think in CPG are up about 500 basis points sequentially, yet operating margins are only up about 200.

Can you just talk about what's going on there?

And when should we start to see better fall through on the gross margins down to the operating level in CPG?

Yes, sure, Mark.

First, just to remind you and everyone, that we continue -- we will continue to see increased investments particularly in Fab 36 in ramping of the R&D costs.

As we talked about at the Analyst Day in last November, that number is around 200 million year-on-year, and so we will see that continued progress as time goes on from a quarter-to-quarter standpoint.

In the current quarter about $20 million of the increase in operating costs was in the R&D line almost exclusively for Fab 36.

Second, SG&A is up quarter-on-quarter and that's really driven by the microprocessor business.

As we continue to launch a series of new products in the current quarter and as we go forward you will still see those relatively high levels of investments as we continue to activate those launches and actually get traction in the market place.

So --.

Just one last follow-up then, if I could, could you just give us the latest thinking on when and how much of an impact we'll see on Fab 36 depreciation and at the same time if you have a view on the roll-off of Fab 30 that would be helpful?

Not ready to go into that kind of detail at this moment, Mark.

But for the question, most of the depreciation of Fab 36 will not take place in the beginning of next year because that's actually when we will actually turn the facility on to run production material.

So right now the depreciation bill is mostly associated with the building and the building infrastructure.

So we should sort of see it kicking in some time in Q1?

That's right.

Thanks, a lot guys.

And I will, as we get closer to the Analyst Day in November, I will give you much more granularity of the depreciation mix between the roll-off of Fab 30 and the increments of Fab 36.

Great.

I appreciate it.

Thanks a lot.

Sure.

Your next question is from Krishna Shankar with JMP Securities.

Please go ahead.

Yes, you had a nice increase in ASPs here going into Q2.

Can you comment on the potential for further ASP increases as you go through the second half of '05 especially given the makeshift towards mobile and servers?

Yes, Krishna, this is Henri again.

While clearly we have momentum in both our mobile and our server business.

They both command better ASP than the desktop business and so just mechanically because of that we expect to continue to see some ASP improvement in the second half of '05.

Will that be offered as you get more competitive in mobile and servers, are you seeing increase in terms of competitors -- the pricing environment and mobile and servers, can you comment on that?

Well, of course the competition is tough, but we have superior products, particularly, in the server space.

And so we're in a situation where particularly because the customers are buying solutions and then just technology, we believe that we have a good opportunity to maintain or even grow our ASP in the server area with the adoption of dual-core technology.

In the mobile space, which is a little closer to the desktop space, it is very competitive.

But we've demonstrated with Turion 64 that we can get access to ASPs that are very close to our competitor.

Great.

And then on the flash business, I realize you can't say much given that you're on registration.

But despite -- I mean regardless of the IP environment or the prospects for profitability in the flash business, AMD is committed to -- I mean, would you consider just spending this off as a tax base enough to shareholders even if you can't raise new capital for Spansion?

This is Hector.

We have a plan that we sent out with, Bob, outlining his topic when he talked that started three years to make Spansion an independent entity and eventually financially spinning it off or becoming a public company.

We are very happy with the progress.

We are pleased with where we are.

It is a great organization with great people.

Awesome technology, great products, and we are pleased with the progress we are making and will continue to make.

Thank you.

Thank you.

We will now go to the line of Michael Masdea with CSFB.

Please go ahead.

Yes, thanks a lot.

Maybe Henri there is a fair amount of tightness being talked about from your competitor.

Is that having any impact on your business?

And I guess the concern here is that we have two better than seasonal quarters, is there any chance we're building inventory here?

So first of all, on the first part of your question, clearly we are hearing rumors about tightness from our competitor.

But the reality is that if you look at the success we have had with Turion 64, those designs were where we basically started months ago.

The products are brought to market and, frankly, the ability of our competition to execute their own plan has less and less of an affect on us.

Our products are differentiated enough today so that they stand on their own.

What was the second part of your question?

Just in that tightness that's out there, are you seeing -- do you think there is any double ordering -- any concern about inventory being built out there?

No, and certainly for our part, I can not talk for the rest of the industry, but for our part we are managing inventories very, very tightly.

Great.

And just a follow-up on the processor side, dual-core you seem to be doing quite well.

How do you think your market share is versus your competition?

They seem to be talking a little bit more muted on that front.

And then, why do you think that is?

What are the customers looking for out there in dual-core that you guys seem to be providing?

Well, clearly, first I want to make sure everybody understands we are the only company shipping real dual-core technology and not two processor on a chip.

And it so happens that the customers that are looking for that type technology and performance in the market place understand the difference between the two.

As a result of that, and again, I encourage you to ask our customers, what they are telling us is that when they look at their backlog and pipeline of dual-core orders, we seem to be out gunning the competition by quite a margin.

And based on the current technology we believe this is going to continue.

In the server space, clearly the combination of the efficiency of our dual-core architecture and our superior thermal envelope makes the dual-core Opteron the absolute winner, particularly, in enterprise customers that are very concerned today about their power bill and their ability to leverage their existing data centers.

So I believe that in both implementation, clients and server we have the upper hand in the quarters to come.

Thanks.

And good execution, guys.

Your next question is from Joseph Osha with Merrill Lynch.

Please go ahead.

Hi, guys.

I know that you don't disclose an actual processor and end market breakdown, but could you give me maybe a sense as to among server desktop and mobile which grew more quickly and more slowly in relative terms?

And then I have a follow-up.

Yes, Joe, we don't give too much granularity, but clearly with an 89% growth quarter-on-quarter from server I have to confess that it is the fastest growing part of our portfolio.

Okay.

Any comments on whether desktop or mobile grew more quickly this quarter?

Well, clearly, I mean again, you have server, then mobile, then desktop.

Okay, fair enough.

Second question for Bob, obviously, the R&D is going to wang around here as you pull some of those test wafers into production costs.

But setting that aside and looking also at the SG&A business, is there any target operating model you would care to articulate for the processor business in terms of what these operating costs will look like once we are where we want to be?

Well, I'll talk more, Joe, of -- just to remind you what I said at the -- our Analyst Conference in November, the microprocessor business, there is no reason to expect the microprocessor business, when we get to the right altitude to be in the 20 to 25% operating income level.

Obviously, it will take awhile to get there.

Clearly we need to digest the building of the new 300mm facility, get it into production mode, et cetera.

But that's our expectation of where that business needs to be as a 25% -- 20 to 25% operating income level.

Okay.

With a 55 to 60% gross margin.

Okay.

You had indicated third quarter seasonal microprocessor.

Would you care to share with me maybe a range as to what you regard as seasonal?

Sure, Joe, this is Henri again.

As we look back the last four years of post-bubble, on average the it's about 8%.

Okay.

Last question then, not to sort of be a kill-joy here, but I look at the margins you are generating on your personal conductivity business and that's 14 million operating loss there.

Why not just shut this puppy down?

That would certainly help a lot in terms of the margins that you are reporting.

Joe this is Hector.

First of all, as you probably would expect, and I hope you would expect that every good company will have some sort of an investment business of looking out in the horizon.

We call this Horizon III opportunities.

Horizon I meaning in the near-term, Horizon II is usually 18 months out, Horizon III is beyond that.

We are really incrementing here a lot of ideas about the future of the home, the entertainment, the possibility that x86 will eventually be a very strong enabler for the handheld communications digital conversion products.

We have, frankly, very high expectations that this is going to yield results.

So to think of it as a business like all the others that should turn around in a quarter or two is unrealistic.

But also understand the need for that to continue to improve.

And frankly, we expect this business not to lose money next year.

Okay.

Thank you very much.

We now have a question from Ben Lynch with Deutsche Bank.

Please go ahead.

Yes, hi you guys.

Bob, I know in Q1 you had an unspecified amount of Flash inventory write-down.

Would you be willing to specify what that was now and whether it had any sort of contribution to the 2Q gross margin jump?

Particularly, when I look at the COGS line it sort of jumped 60 million in Q1 and then fell again 50 million or so in Q2.

Ben, thanks for the question.

I'm actually not going to go to that level of specificity in the answer, but can definitely give you the sense, we ran under utilized factories in our Spansion operation in the first quarter.

As we actually qualified the 256 mega -- Mb part -- MirrorBit part we actually ran the production operations much harder in the second quarter.

Obviously, that contributed to the movement quarter-on-quarter in cost absorption.

Okay.

And how much -- you don't want to give a sort of a rough feel for -- I mean, it just seems there's a -- a 60 million in Q1 which sort of more or less nearly all came back again in Q2 into the -- [multiple speakers].

Well, as I said in my opening comments, we strategically built inventory in our microprocessor business in the quarter, as we anticipate a very strong second half.

So most of our inventory build movement was in the microprocessor business.

Great.

And the second question I have, maybe this is for Henri, you said that you dual-core Opteron in the Press Release contributed to the 90% Q-and-Q server growth.

Any feeling for the actual contribution?

Clearly if you have some volume versus none it's going to contribute by default.

And also do you have any comments you would like to make on your volume or penetration or whatever, expectations for dual-core Opteron?

Well, Ben, again, I don't want to give too much granularity.

As far as dual-core server products we have 100% market share.

That's pretty simple.

Yes, and it doesn't have a price.

So [multiple speakers] the failure of our competition to execute.

Yes.

As far as the contribution of dual-core to our Opteron surge, the only thing I would tell you is that it is at the high-end of our expectations.

Okay.

Thanks very much.

Thank you.

Our next question is from Tad LaFountain with Wells Fargo.

Please go ahead.

Yes, a couple of questions in regard to the balance sheet.

The comprehensive loss through the -- appears to be running about $200 million.

Can you shed any light on that?

Well, obviously that's where the change in currency takes place, on the balance sheet.

You know, the currency has been moving around quite a bit over an extended period of time with a movement in a different direction in the second quarter from the 130 levels to the 120 levels.

That's where the offset goes when you do the re-evaluation of the assets and with the bulk of our microprocessor assets sitting in Dresden, Germany, euro-base, that's where you get the change.

And there also I would mention too and the yen has been moving around also.

We have a fairly large exposure to yen with our JV1, 2, and 3 factories in Aizu-Wakamatsu.

Okay.

So does that explain what is happening with the differences between CapEx depreciation and the net plant and equipment account?

That's right.

Okay.

Great.

And did you utilize any foundry for the Flash operation in the second quarter or is that all down the road?

We did not utilize any foundry on the Fab side, but we are outsourcing a fair amount of product on the back-end.

And for the future I would refer just to what we said in the S-1 Form relative to that which we continue to amend at the end of each quarter as the results of each quarter continue to accumulate.

Okay.

And as the OpEx bills forecast for the third quarter has there been a significant ramp in the legal expense to date or is that something that's just going to be lost in the ships of the overall corporate development?

In the magnitude of how much money we spend for everything we do, it gets lost in the rounding from that perspective.

Thanks a lot.

Thank you.

Thank you.

Our next question is from Michael McConnell with Pacific Crest Securities.

Please go ahead.

Thank you.

With respect, and understanding you can't comment much on Flash, just with particular what you have seen in Q2, would you -- are you experiencing the price pressure more from the lack of really adoption of feature phones at the high-end?

Or is this something more competitive driven or is it just purely supply/demand?

If you could give us a little color on what the dynamics are going on in the Flash market, that would be very helpful?

Well, Michael, I'll give you a little granularity there because actually it is been a mix bag of good and bad news.

I mean the pressure on pricing in the embedded space and on the NOR Flash proper has actually dampened a little bit.

We had that stable ASPs on those two categories, lower end embedded densities and NOR Flash, higher density and NOR Flash in the wireless segment.

All of the price pressure was really concentrated in the MCPs where we continue to see a very tough environment.

And so that is for the feature reach phones and some of the higher end products, complex products where there is still a fight out there.

But so it is not as tough as it was in Q1 where really the price pressure was across the board, all regions, all segments.

And can -- any comments whether or not towards the end of the quarter you saw any stabilization in the MCP price?

No.

Okay.

And then just with respect to Q3 with Flash, I know you obviously can't say any comments there, but normal seasonality looking historically backwards, what was normal seasonal growth typically in Q3 for you with respect to Flash?

We really can't go there with -- I'd love to answer the question, but I really can't.

Sure.

Okay.

That's fine.

Thanks a lot.

We will now go to Jim Covello with Goldman Sachs.

Please go ahead.

Good afternoon.

Thanks so much.

Quick question relative to the comment about bedded and seasonal growth in the third quarter.

How much of that do you expect from bedded and seasonal market growth versus AMD share gains?

Thanks very much.

When we say -- let me think -- make sure I understand what you ask.

Because I thought we said it very clearly, what we think the market is going to be seasonal and we expect to do better, that means we have to gain share.

Understood.

Okay.

That's helpful.

And then question on the outsourcing of the Flash, and I wasn't quite sure if you were saying this is what you couldn't comment on or there was something else you couldn't comment on.

But could you comment at all on the potential going forward to outsource your production on the Flash side to TSMC or one of the other foundries?

The only thing I can say to that is that we have outlined our plans in the S-1 filing which we continue to modify at the end of each quarter.

We just did that last quarter and we will do that again some time in the near future here.

And I will have to refer you to that because that is a look-ahead kind of comment.

Thank you.

Your next question is from Glen Yeung with Smith Barney.

Go ahead, please.

I have a few questions about legal fees.

Is there a way we should think about legal fees looking out over the next several quarters?

Again, as I said, in totality it is relatively immaterial to the total of what we spend.

But I think at this point I will continue to give guidance on total operating expenses each quarter and each quarter phone call which is why I did for the first time actually give you some guidance to where we are going in total AMD quarter-on-quarter.

Okay.

And Bob, I'm not sure if I heard this correctly, but I think you said that processor gross margins were 59% in the reported quarter; did I hear that right?

You got that right.

Okay, so if --.

All-time record.

If we look forward given that's kind of within or close to the high-end of the range you expect it to be in, should we think about the improvement and profitability really from this point forward being -- really being driven on the OpEx side?

Well, first comment on gross margin, gross margins will toggle between the 55 and 60 in any given quarter depending on the mix of what we ship.

The real leverage will be in growing the topline and getting some continuing operating at 55 to 60% kind of range and then in getting dilution in the other cost structure below that.

Right.

Okay.

And then I guess one other question associated with that, we hear all the time that your major competitor is tight.

How are you guys in terms of Fab utilization?

You obviously have been gaining share, growing a lot of units.

Where do you guys sit on utilization rates?

Our factors are fully utilized.

And when we look at the second quarter on a global basis, we were able to meet customer demand.

However, I have to say that there were segments in some regions and segments in some markets where we were tight.

But as the total we were able to meet the demand.

And when you look at the -- our expectation that the second quarter will be healthy and the fact that we build some plant inventory at the end of the second quarter where 80-plus percent of it was due to server products, it kind of gives you an idea that our expectation is continuing to gain share in those segments.

That's very helpful.

Thank you very much.

We will now go to David Wong with A.G. Edwards.

Please go ahead.

Thank you very much.

When we look at the 4% sequential drop in units shipped and how you described servers versus network versus desktops, it looks like your desktop units dropped by at least that amount.

Are you seeing that the desktop market is actually below seasonal, although, in an aggregate you're above seasonal or are you sort of pacing rapidly equal to the market or do you think you are losing some share here?

I'll take that one.

Actually as you know we have a very healthy business in the European market.

The European markets are traditionally the ones that are the most seasonal when it comes to our business.

And so actually when we look at Q2 we had very healthy desktop business in all of the high-growth markets.

And we had the expected seasonal decline in the two large mature markets;

North America and Europe.

Overall, I don't think we've lost share.

All right.

Thank you very much.

We will now go to the line of Tim Luke with Lehman Brothers.

Please go ahead.

Thank you.

I was wondering if you might be able to share the percentage that was Mirror Bit in the Flash area in this past quarter?

It's basically double-digit, obviously improving given the growth.

It is now north of 20%, but I don't want to give you more detail than that.

I was also wondering, in the first quarter you had shared with us, I think that -- I think you said that 90% of the incremental growth had come from emerging markets, and I was wondering how you had seen the incremental growth or just generally in terms of regional color.

Thank you.

Yes, so the second quarter was slightly different in the sense that there was a lot of growth coming from the emerging market, continuing momentum in those markets.

But more in the client space.

And, of course, we had very solid growth coming from the mature market and the server space.

So you could think of it as now we have two engines of growth.

And do you have a market share number for servers I think in the 4-way area you had said you got to 27% in 4-way.

I was wondering if you had an update on that?

Well, Tim, it is a little early to tell you because, of course, our -- the competition is going to announce there own numbers later and we rely on external sources to look at that.

But we've always said that we wanted to exit 2005 crossing the threshold of a 10% market share and I think we continue to execute like we did in the second quarter this is going to become a reality.

Thank you very much.

We will now go to Tom Thornhill with UBS.

Go ahead, please.

Congratulations on the execution and servers.

You can had UBS to your list of financial-related customers.

Thank you.

The question I have is related to cash flow.

Rob, if you could walk us through the funds flow outlook here based on the -- you said your CapEx number has not changed, it is still 1.5 billion.

And the cash flow from operations year-to-date is running a little over 500.

How do we match those up as we go through the second half of the year?

Obviously, we're at the midway point, so cap expenditures are roughly the same in the second half as they are in the first half.

We anticipate, as we said, seasonally the second half is better than the first half, so cash flows from operations will improve, but your math is not too far off from that standpoint.

The part not to forget is the grants and subsidies we continue to receive as we did in the second quarter throughout the year on the Fab 36 project.

That's supposed to be a couple hundred million for the year, isn't it?

That's right.

Actually it is north of a couple hundred.

Okay.

So the delta will be met through increased cash flow from operations in the second half of the year?

That's right.

Okay.

Thank you very much.

Thank you.

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

Thank you.

Then next we'll have John Lau with Jefferies Company.

Please go ahead.

Great.

Thank you very much.

Wanted to circle back on to your comments.

You mentioned China and emerging markets were strong and there has been some concerns about North America and Europe.

Are you seeing overall normal strength and that the overall markets are doing well?

And I have a follow-up.

Thank you.

Hi, John, yes I'd like to say that earlier, I don't have any concerns with our mature markets.

Again, partly because of the starting point for us.

We have tremendous opportunity for growth in the commercial space.

Those are materializing today with the success of Opteron, but there's still a lot of client business we can go after.

And clearly in the high-growth markets we have lots of opportunities because of the strength of our offering, the portfolio that's increasing, and also some of the local relationships that are becoming extremely successful like, for example, Lenovo in China.

Great and a follow-up to that, you had mentioned MirrorBit and Ornand as great products and targeting them for handsets.

Is there any major migration yet to a unified memory architecture or is it just on a selective model and the mainstream stays with your NOR Flash and MirrorBit?

Thank you.

The only comment that we can make there at this time is to repeat what we said before is that MirrorBit is a technology that frankly, fragments itself into four or five different ways of doing it.

One of them is very NAND like and that's Ornand.

And we're as we just said we have silicon out of 90nm in Ornand and it looks very encouraging as we expect it.

Great.

Thank you.

Our final question will come from Christopher Danely with JPMorgan Chase.

Go ahead, please.

Hey, thanks guys for squeezing me in.

I just had a few quick follow-ups.

You talked about '05 CapEx, any direction on '06 CapEx?

Not at this point.

Up or down, you can't comment on that?

No, we're not ready to comment on that.

That's fine.

How about the percentage of Athlon 64 processors in the quarter?

Well, obviously, it continues to go up.

One of the important data points is that we basically finished the end of life of our older architecture, our case seven architectures.

So going forward, all of the processors that will go in the market are really based on the AMD64 architecture, whether they are both Athlon 64 or Sempron or Opteron or Turion products.

Sure.

And you guys talked about the relative growth of server, desktop, and laptop.

Can you give us a rough break out by of the percentage of revs by server, desktop, and laptop in the quarter?

I wish I could, but I am really not prepared to give you that level of granularity.

Okay.

I'll try one more then.

Real quick on the inventory, it came up a little bit as expected.

Can we assume that inventory is going to go down in days in Q3, Q4, and do you guys have a target inventory in terms of either days or dollars?

You've kind of got it right.

I mean, we're at the situation where we're running as much silicon as possible with high expectations in the second half of the year.

As we hit our expectations inventories will drift downward as time goes on from that standpoint.

Our channel inventory is very light at this point in time, as someone asked the question before.

We feel like we are managing inventory as tightly as possible.

I see.

So I guess, you guys have over 100 days of inventory.

Can you just give us a little confidence in why that should be okay when your leading competitor has like 65, I believe?

Well, we are confident with the model right now because let me start with the channel which is a significant part of our go-to-market strategy.

We had actually depleted channel inventory this last quarter.

That means we are really managing tight and well and in terms of the total days of inventory as our expectations for growth continue, we expect that to improve.

We don't expect that to worsen.

Got it.

Okay, thanks a lot, guys.

Great quarter.

Thank you.

All right.

Thank you very much.

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