超微半導體 (AMD) 2006 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Advanced Micro Devices, Inc. fourth quarter 2006 earnings conference call.

[OPERATOR INSTRUCTIONS]

It is now, with great pleasure, to turn the floor over the your host, Mr. Mike Haase.

Sir, you may begin your conference.

Thank you and welcome to AMD's fourth quarter 2006 earnings conference call.

Our participants today are Hector Ruiz, our Chairman and CEO, Dirk Meyer, our President and COO, 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 AMD.com.

The telephone replay number is 877-519-4471.

Outside of the United States the number is 973-341-3080.

The access code for both is 8264808.

Telephone replay will be available for the next ten days, starting later tonight.

In addition, I'd like to call to your attention that our Q1 2007 earnings quiet time will begin at the close of business, Friday, March 16th.

Before I 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'll find detailed discussions in our most recent SEC filings, including AMD's annual report on Form 10-K, for the year ended December 25, 2005, and AMD's quarterly report on Form 10-Q, for the quarter ended October 1, 2006.

With that, I would like to turn the call over to Bob Rivet.

Thanks, Mike.

Good afternoon.

First I would like to point out that as a result of AMD's acquisition of ATI, fourth quarter financials include results from the former ATI operation beginning October 25, 2006.

Because comparison of the fourth quarter consolidated financial results to previous periods do not correlate directly, AMD has provided non-GAAP financial information for historical AMD in our press release.

Management believes this non-GAAP presentation will aid investors by presenting current and historical results in a comparable format.

In addition, financial comparisons to 2005 do not include the results from our former memory product segment.

Let's start.

AMD's revenue in the fourth quarter of 2006 was $1.77 billion, including approximately $50 million in royalty and patent license revenue.

Loss per share for the fourth quarter was $1.08.

This includes $550 million or $1.04 per share from ATI acquisition-related and integration charges.

From here forward, I'll refer to them as ARC charges, and another $27 million or $0.05 per share from employee stock-based compensation expense.

Fourth quarter operating profits were $50 million, excluding ARC charges and stock-based compensation expense.

Fourth quarter 2006 gross margin was 40%, excluding ARC charges and stock-based compensation expense, compared to 52% in the third quarter of 2006.

The decrease in the prior quarter was largely due to significantly lower server processor ASPs, and the inclusion of ATI operations.

AMD historical business generated revenue of $1.37 billion, up 2% from the fourth quarter of 2005 and up 3% from the third quarter of 2006.

Operating income for the period was $63 million compared to $142 million in the third quarter.

Now I'll switch to the business segments.

Computation product revenue was $1.34 billion, up 3% from the prior quarter and units increased by 19% sequentially.

Our mobile and desktop processor sales were strong, and we believe we gained unit share.

Mobile unit shipments and revenue increased 41% sequentially.

Desktop props or unit shipments increased 14%, and revenue 8% sequentially.

The drop in desktop ASPs were driven primarily by a shift in customer mix.

Server processor unit shipments were essentially flat quarter-over-quarter and ASPs declined significantly.

Operating income for computation products was $73 million.

For the former ATI operation segments, revenue for the period October 25th through December 31, 2006, or 68 days of the fourth quarter, totalled $398 million, at the high end of our guidance.

Revenue in the graphics and chip set segment was $278 million with an operating loss of $33 million.

The Consumer Electronics segment achieved revenue of $120 million and an operating income of $20 million.

Now I'll turn to the balance sheet.

After completing the acquisition of ATI through a combination of cash, debt, and stock, we ended the quarter with a cash balance of $1.5 billion.

Total debt of $3.8 billion includes $2.2 billion associated with the ATI acquisition.

Total inventory of $814 million includes $314 million from former ATI operations.

Inventory for the historical AMD business increased $34 million as we continue to ramp Fab 36 65 nanometer products, and fourth quarter capital expenditures were $668 million.

As I laid out at our Analyst Day last month, in the fourth quarter, AMD's reported segments include computation products, embedded products, graphics and chip sets, and consumer electronics.

Beginning in our first quarter of 2007, we will report three business segments.

Computing Solutions, which will include microprocessors, chip sets, and embedded products, Graphic Solutions, and Consumer Electronic Solutions.

Now let's turn to the outlook.

AMD's outlook statement for the first quarter are based on current expectations.

The following statements are forward-looking and actual results could differ materially from our current expectations.

Because the first quarter will be our first full quarter, including the former ATI businesses, we are providing ranges for revenue and operating expenses for the period.

In the seasonally down first quarter, AMD expects revenue to be in the range of $1.6 to $1.7 billion.

Operating expenses, which include R&D and SG&A, will be in the range of $710 to $760 million.

Employee stock-based compensation expense in the first quarter is expected to be approximately $32 million at the current share price.

And first quarter ARC charges will be approximately $120 million, of which $30 million will hit cost of sales.

In summary, 2006 was a very good year.

We made significant strides in taking additional market share in our computation products business, and our customers are responding positively to the acquisition of ATI.

With that, I'll turn it over to Dirk.

Thank you, Bob.

We are not satisfied with our financial performance in Q4, and we need to improve our results in the future.

But it is important to acknowledge the strategic success that 2006 represented for AMD.

We gained processor share in every quarter, finishing the year with another record quarter for unit shipments.

Compared to 2005, we grew our annual processor unit shipments 135% in our server business, 78% in our mobile business, and 35% overall.

Clearly, the marketplace demands choice.

We made good progress in our customer acquisition strategy.

In greater China, Founder and Tungfung chose to become AMD customers and Lenovo expanded their business with us.

IBM expanded their AMD-based platform portfolio, HP broadened their business with us, and Dell begin shipping AMD-based server, desktop, and mobile products.

All of this great progress in the marketplace has allowed us to fund some new investments, one of which was our acquisition of ATI Technologies.

We closed the deal in Q4 and the integration is already largely behind us.

This new company has phenomenal assets.

We have assembled world-class talent in every discipline, and the acquisition adds 5,000 great people spanning every major area of the business.

We have a portfolio of customers and partners that place us at the confluence of the computing and Consumer Electronics industries, all looking to AMD to support them as a consumercentric processing powerhouse and strategic partner.

We have technology leadership in key product areas, X86 CPUs and associated chip sets, graphics, and video processing.

We have world-class manufacturing capability and a flex fab strategy designed to serve the desires of our customers as well as our shareholders.

Looking forward, our priorities are simple.

To acquire new customers, to serve our current customers increasingly well, and to provide long-term value to our shareholders.

Understanding what it takes to satisfy our customers is pretty simple.

They want good products, delivered in volume, at the time and the place they need them.

On the product side is evidenced by our continued share gains.

Our customers like the products we're shipping to them today, but they're even more excited about the opportunities presented in our road map.

Our improved X86 architecture and the family of products which it is based, such as Barcelona, our quad core offering in the server space will introduce new levels of performance and power efficiency.

Likewise, our GPU technology provides the ultimate VISTA experience today and the R600 family, our next generation graphics engine will delight customers and end users worldwide.

On the supply side, we will continue to ramp our capacity by building out assets like Fab 36 and by converting Fab 30 to a 300 millimeter tool set.

We will complete our conversion to 65 nanometer technology this year, and lay the ground work for a transition to 45 nanometers in the first half of next year.

At the same time, we will continue to optimize our supply chain to give customers what they want, when they want it.

We need to improve our financial performance relative to what we delivered in Q4.

We will do so by delivering improved products, lowering our manufacturing costs, increasing our operating efficiencies across all disciplines, and continuing to grow share.

As we look back at the last few years, we feel we have made great progress.

The assets we have assembled and our plans to use them with and for our customers together make for a very bright future.

With that, I would like to turn it over to Hector for some closing remarks.

Thank you, Dirk.

You know, I normally read from a prepared script in this conference, and this time I'm not going to do that.

I'm going to talk to you from the gut.

What I want to tell you is a little bit of history and put it in the context that I believe will show you why I am incredibly optimistic and excited about the future of this company, more than I have been in the seven years that I have been with this company.

First of all, we made a decision a few years back to really base everything we do on the mantra of our company that we call customercentric innovation.

We started that journey when we launched Opteron in early 2003 and the elegance of that product was in its simplicity.

A direct connect architecture that today continues to serve our customers extremely well, and an extension to 64 bit of the X86 instruction set, which was exactly what customers in the market really wanted.

That allows us to go at the most difficult part of the industry in trying to establish credibility and confidence in our team to be able to deliver to them the kind of products and technology they needed.

That was very successful.

As a matter of fact, we went from being almost nowhere in the server enterprise space to finishing 2006 with approximately a share number in the mid-20s.

We believe that is quite an accomplishment, and that credibility that we built and the confidence that customers began to have in us also led us to an expansion of our business with them in the client space.

And that opportunity opened up for us a huge window through which we could acquire customers and we embarked on a customer acquisition strategy that today continues.

As Dirk pointed out, we were able to convince customers such as IBM, Sun, HP, and others and eventually Dell to really adopt our technologies across the board.

And for three consecutive years, we have grown market share from going in the mid-teens back three years ago to ending 2006 also in the 20s.

The strategy turned out to be pretty simple.

All it meant is that we had to focus on innovation that was truly relevant to our customer, the marketplace, and the industry.

In doing so, we came up with customer-specific metrics, customer-specific products, and customer-specific technologies.

Some of the examples is a tremendous opportunity we saw in the large urban data centers when their consumption of power was increasing at a non-sustainable pace.

That opportunity allows us to redefine the data center's value proposition and turn it to being just from raw performance to performance for what and the Opteron and direct connect architecture established leadership position.

Just as an example of customer-specific products, we used this wonderful architecture to also address a very unique space of the enthusiast and gaming community, and our technology led us to the creation of a family of products that we referred to as FX.

And that technology and those products has been so successful for several years, that it allowed us in the fourth quarter of last year to ship a record number of FX products into that segment.

We also had customercentric technologies.

Because we recognized that the industry's addiction to single core clock frequency was something that was past due, and that we had to introduce the industry in our customers to a new way of looking at how to innovate, by looking at work flow and application-specific performance, and therefore we introduced the first ever dual core server product into the marketplace on X86 instructions.

I have to say that that was such a major change in the industry that the competition has followed suit and created also their own extension to X86 and their own multicore technology road maps.

But it's more than just about core, it really is about mapping technology to specific usages.

For example, GP, GPU, Torrenza and Fusion, those are the technologies that you heard us talk about in our Analyst Day.

And by now you can see how beautiful the ATI acquisition fits in our long-term strategy.

We see the opportunity to exploit [Moore's Law] in a very intelligent fashion, by focusing on what's relevant to our customers, and because of the acquisition of the ATI category of people, technology and products, we are the only company that is positioned to truly be able to deliver on this.

And as I said before, it's more than just about core.

It's true that Moore's law is allowing some people to claim that putting 64 cores or even 128 cores on one piece of silicon can be the future of this industry.

I beg to differ.

As a matter of fact, I think those products and technologies are going to find the rightful place in the Pentium where Pentium 4 10 gigahertz lies.

Our customercentric innovation strategy is working, and the ATI acquisition is a phenomenal and allows us to take it to another level.

And as we said in our analyst meeting, we're really intensely focusing on continuing to drive energy-efficient leadership in computing, to deliver in the ultimate visual experience, and to enable affordable internet usage across the world.

The demand for our technology is greater than our incurring share of the business, and largely the limiting factor has been the monopoly behavior that's been abusive by our competitor.

Our customers want us to win and increase their share of their business.

They like choice and demand more choice, and they want us to have the capacity to offer that choice and continue to offer the kind of innovation that we have provided, and of course to help drive growth.

They are demanding that we fight for share and we will.

So we will continue to expand our capacity to response to this customer need.

The interesting thing that in doing the things that I just talked about, we have actually forced the competition to become more efficient, but in doing so, it made us realize that we have to raise our own efficiency to a higher level.

So we're focusing a flawless execution on completing our 65 nanometer transition by this summer, and we're looking at accelerating 45 nanometer and closing the gap with our competitor.

We will carefully manage costs, but we also believe that we're going to have to tweak our business model, because we believe we have to achieve prosperity in an environment where price and competition is going to be tougher than perhaps we had originally planned.

We will do whatever it takes to continue on our path to deliver customercentric innovation this year and beyond.

After all, we have been, are, and will continue to be the Company that offers the best value proposition to our customers.

We will accomplish this by continuing to attract and retain the best and brightest people in the industry, and by having our now 15,000 or so AMDers intensely focused on customercentric innovation.

We thank our employees.

Now let me turn it back to Mike for a Q&A.

Thanks, Hector.

Operator, let's start the polling process for Q&A, please.

Thank you.

[OPERATOR INSTRUCTIONS]

Your first question is coming from Uche Orji of UBS New York.

Please go ahead.

Hello, can you hear me?

Sure.

Yes.

Just a couple of questions.

First of all, for Bob.

If I look at the gross margin you reported this quarter, can you just give us an idea how to think about gross margin for next year?

And if you can also tell us what that means for your cash flow, given that you give us a guidance of negative $500 million free cash flow for 2007 at the Analyst Day?

Sure.

First I would like to start to answer that question, everything we talked about at the Analyst Day, we still truly believe.

So there is no backing off of that from that perspective.

So a lot of the guidance I gave at the Analyst Day, we are still trying to execute as we begin this year.

So the 50% gross margin, plus or minus a few, is still our goal for 2007.

As we talked about, that will take a while to get there.

As we integrate the ATI operation and adjust accordingly, and as we transition in our microprocessor business to full 65 nanometer, fill up the factory, we will continue to show improvement in our cost structure to improve our gross margin.

We also see improvement in our mix of products.

So we're not backing off anything we talked to you about at the conference, with the maniacal focus, as Hector said, of even maybe turning up the notches a couple more notches in cost reduction efforts to make sure that we can achieve those targets.

And cash flow perspective, the same thing.

We're still going to spend $2.5 billion on capital expenditures this year to increase our capacity based on what our customers are telling us they want us to do.

That will generate a negative cash flow, but as you can see from the balance sheet, we're prepared for that.

Right.

Just one more question.

Given that you're getting a full quarter of ATI, is it possible for you to kind of give us more color on the revenue guidance for Q1?

Given--we had just basically two months of ATI in Q4, and now we have a full quarter, it's a bit hard for me to reconcile where--what ATI is going to do next quarter and how--what that means also for AMD core business?

This is Hector.

First of all, the ATI business, if--when you look at it from the perspective of the customers, they are customers that are heavily involved in the Consumer Electronics business, digital television, handsets, etc.

From that perspective, their strongest quarter that ATI normally has is the fourth quarter that we just finished.

So looking at that fourth quarter and trying to do some extrapolation and analysis for the first quarter, frankly, becomes very difficult, because historically the first quarter is the weakest quarter those particular segments also have.

We've done the best we can in trying to anticipate how we think the first quarter might look.

Frankly, we are getting mixed signals from our customers both in the Consumer Electronics space as well as the PC space.

The market seems to be a little uncertain, the uncertainty around VISTA is still there, even though we're very, very bullish on what VISTA is going to do for the whole year, but the first quarter impact is rather questionable.

And the other piece is that pricing is incredibly challenging.

We expect it to be for at least all of the year, but in particular for the first half of the year.

When you combine all that, we're taking a very cautious approach to the first quarter.

This is kind of slightly different from what you said at the Analyst Day about a benign pricing scenario.

Assumption, should we then assume that ASPs will be down for 2007?

No.

As Bob pointed out, there are a number of things occurring.

One of them is our product mix continues to move to spaces in which we did not participate before, and these are particularly the client commercial space.

The consumer electronic business has got a lot of potential, and we believe it has a phenomenal opportunity to grow at decent margins.

Also the--

Conversion to mobile.

The momentum to convert to mobile continues.

We believe that what occurred in the fourth quarter will continue throughout 2007, and when you combine all those things, we believe that we still have the opportunity to be slightly up in ASPs in 2007.

Okay.

Finally, can you just remind us of the timing of the delivery of the R600 products from ATI?

This is Henri, we're still planning to bring to market the R600 product in the first quarter.

All right.

Thank you very much.

Thank you.

Your next question is coming from Adam Parker of Sanford Bernstein, please go ahead.

Hi.

I just have two questions, or two general areas here.

One, Hector, your customers--or Bob, either one, your customers are telling you to spend CapEx.

How will you know when you're at the point that customers just want you to add capacity to create excess?

I mean, are they really ever going to tell you to stop adding capacity?

I certainly understand why you asked that question, Adam, but I think what our customers are asking us is that they want to increase their share of the business that they do with AMD.

They're not necessarily just saying capacity, period.

They want an AMD portfolio that is expanding, and as we mentioned earlier that we've been on a customer acquisition strategy for quite some time, but we're not through.

As a matter of fact, we still have major customers around the world that have yet to buy the phenomenal value that AMD offers.

So we still have even other customers yet to acquire, so we believe that this customer, what they're telling us is we want to increase the share of our business with you, we want to buy more product from you, it's good for us, it's good for the industry, it's good for our customers, and I think we're a long way off from ever being able to see a scenario where we think we should back off.

All right, maybe just the follow-up, or the question related to that would be on the server business.

It seems pretty clear at least for the last two quarters that Intel's gained a lot of revenue share in server, and their pricing is way up and yours is way down.

To what do you attribute that?

How can you remedy it?

What's your sales pitch here on the one and two-way server space, can you help at all with that because I think the surprise here is just relative to 6 months ago is how your server ASP's have trended versus Intels in the second half of '06?

Adam, this is Henri.

First, I would like to remind you that our ASPs in the server space wer higher than Intel, so there was a correction certainly as they came with more competitive product.

Secondly, it's clear that, particularly in the fourth quarter, the competition became very severe in the last month.

As you know, it's an enterprise-driven business.

A lot of the deals are back end loaded and there was a lot of headwinds in terms of closing some of the large businesses that were out there, coupled with a fact that we had some new product introduction that frankly were not executed by the customers as well as we had expected, and the fact that we will introduce a new architecture next year and some customers are waiting for that to--

Next year, you said?

This year, sorry.

Yes.

And some customers are waiting to see what sort of performance improvements they're going to see from that introduction.

So you would expect this trend to last at least one more quarter in server is that fair?

As we stated at the analyst meeting, we expect the first half of the year to be extremely competitive.

As you pointed out, there are segments where we have opportunities to grow.

Clearly we still have--in a lot of the markets outside Europe and the U.S., a growth opportunity in the traditional server space.

We have very little footprint in the 1P server space, so we have some opportunities to grow.

But we expect the environment to be extremely competitive and there's clearly a targeted action from the competition on that segment.

Henri, what's the sales patch in the first half of the year in the one way server space?

Best value in the industry.

All right.

I'll leave you guys alone.

Thanks.

Thank you.

Your next question comes from Mark Edelstone of Morgan Stanley.

Please go ahead.

Thanks, guys.

A couple questions.

First, Bob, there's obviously some of the charges that you're taking for ATI that were pulled out of non-GAAP gross margin.

I just wanted to get the review of that, if I could, in terms of what of the charges listed there actually being pulled out to come to that 40% number?

Sure, Mark.

It's the $62 million we highlighted, which is part of the acquisition-related charges associated with the gross up you need to do in inventory for GAAP.

That will burn off over the fourth quarter and first quarter as the $30 million I just talked about in my script a little while ago. - [Multiple speakers]

Got it okay, and the other 72 in the charges that you have for amortization and integration charges, where are those showing up in the P&L?

They're all on a separate line item, the rest are all on a separate line item as you see in the P&L just before operating income.

Okay, got it.

Perfect.

Then can you just walk us through, maybe Henri or Hector, what type of decline you saw in server ASPs in the quarter, and then also, what type of decline you might have seen in the PC client side of the business as well?

Henri will comment on the server piece.

We did not see any major shift in the desktop client pricing.

We actually saw a modest improvement in the mobile space.

So all of our issues with pricing were related to the server segment.

We, as Henri pointed out, it was a very competitive scenario.

We expect it to continue to be.

We're making plans to adjust to that for at least the first two quarters of the year.

And as Henri also pointed out, we think that will also begin to change as we introduce our new architecture in the summer.

Henri, what was the actual decline you saw in server ASPs?

I'm not going to go there, Mark, but I'll add something to what Hector described, which is, we did start a strategy--we have an architectural advantage in four socket servers, and it's also a direct plug-in of our new technology in those four socket environments.

So we have an aggressive commercial strategy to move a certain portion of the market that's been impaired, until now by both hardware costs and software licensing costs to move from 2P to 4P.

And some of the ASP decline is related to that strategy of moving the market to 4 socket systems.

Okay.

Maybe just one last final question on the environment, again, either for Hector or Henri.

Hector, you sort of talked about some of the near-term uncertainties in the PC market, but maybe just give us sort of your broad sense of how you think the health of the market looks right now, especially coming off of 19% sequential unit growth for you in Q4.

Maybe some thoughts on how inventories look out there in the broad marketplace of your products?

I'll make a general comment, Mark, that we are frankly--unit-wise, we're quite bullish about 2007.

I acknowledge that there are a number of reasons why the first quarter is low [inaudible-heavy accent], but 2007 to us looks very healthy.

We actually--we truly believe, and as we have had our own experiences ourself, that VISTA will provide importance to unit demand in 2007 and beyond.

We think it's going to be a great innovation that will bring a lot of value to the marketplace.

We see an expansion of PCs in spaces where we're beginning to see 2007 will be the beginning of that to start to occur.

An example of that is we believe that this year will be the first time that our 50 by 15 initiative will actually ship several million pieces in 2007.

So all in all from a unit perspective, we feel pretty bullish.

If I may add just on the question on inventory, Mark, as you know, we were lower that we would have liked in terms of channel inventory in the third and fourth quarter.

We were able to restore that at the very end of the fourth quarter and then to position ourselves in a much better velocity for the first quarter.

But at the same time we also took a prudent approach to the channel inventory and the graphics business, where we think that there's modeled improvement that we intend to execute in the first and second quarter of '07.

Thanks a lot, guys.

Thank you.

Your next question comes from Tim Luke of Lehman Brothers.

Please go ahead.

Thanks very much.

For Bob, with a sequentially lower revenue guidance that you've provided, we should be thinking about the gross margin moving sequentially lower before improving through the year, is that the right framework?

No, I think you have that backwards.

Even though revenue we're guiding to be lower than fourth quarter, with the improvement of 65 nanometer, more of that output continuing to come on board.

Servicing the channel, as Henri just talked about a minute ago, we believe gross margins will actually improve quarter on quarter.

In particular in the microprocessor business.

And we also believe so in the former ATI businesses too, as we continue to execute the game plans there.

Do you have a framework for sort of thinking about the basis point degree we should think about improvement?

Probably not ready to give that kind of guidance.

I just would say, it will improve from the current level.

And just a clarification on the tax rate, what should we be thinking about?

Still holding to the guidance I gave at the analyst conference, which we're working desperately to figure out how to lower that guidance, but at this point the guidance is unchanged.

It will be a little choppy, of course, but--so unchanged at this point.

On the market, maybe for Henri, just to follow-up on Mark's question, with respect to units in the first quarter, could you give us some sense of how you've historically seen the seasonality?

And obviously, Hector was talking about a little bit of uncertainty in the first quarter, as to how you think it would compare to normal seasonality in terms of the units, given what seems to be for you a pretty decent unit number in the fourth quarter, thank you.

I'll place your question in the context of microprocessor, right?

Yes, yes, okay.

Typically the seasonality in the first quarter is down about 4% at the mid-point.

And I think that one of the factors that I want to underline that Hector mentioned is that there's a certain amount of added uncertainty with regards to VISTA.

It's rapid deduction and any problem at launch, how will it affect inventories, and so that's another factor that makes the first quarter a little more complex than I would say the average first quarter, because Microsoft doesn't launch a new operating system every other year.

That's the guidance I can give you.

I think we're going to have a seasonal quarter from that perspective, but there's certain uncertainties in the marketplace in terms of the impact of VISTA and how will it drive consumer behaviors.

And the notebook ASP was up actually, did you say that and could you just clarify what the desktop ASP did?

The mobile ASP was slightly up, and the desktop ASP was slightly down.

Thank you.

But marginally.

Thank you.

Your next question comes from Michael Masdea of Credit Suisse.

Please go ahead.

Thanks a lot.

I just want to ask you, your competitor seems to be talking a lot about using a strategy of basically offering more silicon, more cores at the same price as their prior generation.

Is that fundamentally something that's got to change before you can sort of drive your profitability, or are there other ways to get around that?

It's Dirk here.

I don't know what you mean by got to change, but if you look at what's happening in the marketplace, it's similar to what's always happened in our business, that is to say new features, new capability to get introduced at the top of the price stack and slowly over time get rolled down the price stack and that's in fact what you see with dual core.

That's what we've been doing, that's what the competition is doing, so from that perspective, nothing new.

Maybe another way to ask, what steps are you taking to drive that mix?

What should we from a tangible perspective look for?

What do you do on the enterprise side and what else are you doing to really improve the mix over the course of the next year and a half?

Improve the mix is again a funny one.

Just for reference, the dual core mix in our product line in Q4 was roughly about a third and we've got an opportunity to accelerate that as a percentage of our overall product line going forward, probably more rapidly than the product gets pushed down the price deck as we go to an increasing fraction of 300 millimeter manufacturing and 65 nanometer technology.

So I actually think that increased dual core mix for us represents an ASP and margin upside in the near term.

Got it, and then any update on the legal front that we should be looking out for?

Any timing in terms of various legal actions that have been going against Intel from your perspective?

No, other than to repeat that we're in discovery.

We are continuing to--the process continues, it's slow.

But we continue to be very confident of where we want to go and the outcome will be very positive for us.

Got it.

Thank you.

Thank you.

Your next question comes from David Wong of A.G. Edwards.

Please go ahead.

Thank you very much.

In terms of your attitude to the pricing environment, do you anticipate that you'll have to take pricing actions to maintain market share or are you saying that you're going to be focused on profitability, and therefore you'll back away from taking a lot of pricing action?

There is not backing away from anything.

We're committed to serving our customers.

Our customers want our product and we'll fight hard to continue to provide them the opportunity to enjoy AMD technology.

And related to that, have there in the recent quarters been any special initial pricings you've given to big customers to capture initial business that might help you in pricing going forward once the initial pricing agreement sort of passed by?

We can't comment on specific agreements.

On the general comment, I would like Henri to comment on that, but on specific by customer, we can't.

I would just like to reiterate what Dirk said, which is we have an opportunity in terms of increasing our dual core mix as a percentage of total, we can accelerate that.

That will help ASPs.

And also, we've had a certain number of strategic customer acquisition through the year, which probably brought our channel business to a lower percentage than it's historically been, and we have an opportunity to grow our channel business.

So those are two positives in the overall environment.

Final question, will you bring out quad core servers first or quad core desktops?

Servers.

Thanks very much.

Your next question comes from JoAnne Feeney of FTN Midwest.

Please go ahead.

Good afternoon, folks.

A couple of questions, if I could, please.

Following up on the last one, really, about the servers and the quad core.

There's certainly a lot of questions about the potential for AMD to reacquire the performance lead.

I know there's some disputes about whether that lead exists currently, but let's suppose that in a number of applications your competitor does have a performance lead, and we're all looking to see whether Barcelona and the follow-ons will enable you to recapture that performance lead in enough of a degree really to offset the marketing push of your competitor.

I suppose since you're reluctant to give away a lot of details on the road map, understandably, perhaps you could shed some light on what you think your OEMs would say about your potential in that regard?

Well, I don't want to speak for our OEMs, and of course, you know who they are, so I encourage you to ask them.

However, based on what we know about our product and everything we understand about our competitor's road map from all sources, we're very bullish that when we introduce our native quad core in the middle of the year we'll capture definitively the performance, and performance [inaudible] and by the way do so in a away that doesn't require new platform investments on the part of our OEM customers.

The platforms are there today.

Then if I could follow-up separately on the cash and financing situation, perhaps for you, Bob.

Obviously, $2.5 billion of CapEx is a pretty big number and given this past quarter's higher than expected costs, lower than expected ASPs and next quarter's sort of muted outlook, I guess one might be a bit more concerned about the cash flow implications over the year and I think we're all wondering whether you will feel the need to go back and do some more financing really to help you get through this rather large capital expenditure over the next year?

Well, JoAnne, as I've said before, I've kind of outlined our process to fund the corporation in the appropriate investments, starting with cash flow from operations, monetizing the Spansion investment, and monetizing the tools in Dresden, Germany, at the 200 millimeter level.

We think that will be sufficient to keep the appropriate cash balance levels and fund the capital expenditures.

In addition, as I also pointed out, there's grant money associated with spending that $2.5 billion we'll collect also.

So we still feel pretty comfortable with our game plan.

Clearly my job is to make sure we've got the appropriate funds to execute the strategies of whether it's additional customer acquisition, design teams, or capital.

Is the grant money you just referred to from strictly Dresden, or does it also include some of the New York State incentives?

Just from Europe and Dresden.

And so I suppose we might--if we were to look at a contingency, if, say, operating cash flow didn't materialize in Q1 and Q2, then we might be anticipating a situation where you would need to go do some financing?

I'm not going to speculate with you on that.

Like I said, we have a good game plan.

Okay.

Thanks, Bob.

Thank you.

Your next question comes from Glen Yeung of Citigroup.

Please go ahead.

Thanks.

When we look out into the first quarter, you've talked about what you characterize as still a competitive environment.

In that statement, are you expecting incremental pressure on server pricing, or do you think it's going to stay down where it is?

It's very difficult for me to speculate on what the competition is going to do, but it's going to remain a very competitive environment, and I won't give you anymore guidance than that.

Okay.

How about on desktop and notebook, in as much as, clearly you're going to see some benefit here from a mix shift towards more dual core.

Within that outlook, how about part for part pricing in the first half or in the first quarter.

Can you comment on that?

I think there's--to elaborate a little bit on what Dirk was saying, there's a [difurcation] from my perspective in our market where the server market is going to continue to be driven by introducing new features, faster, better processors in a very traditional way.

I think in the client space, VISTA is introducing a lot more of a platform and balance performance opportunity, so think of what the best platform is, maybe in the past, was whatever the best processor was.

It's not going to be true anymore, and as such, I think AMD is uniquely positioned to provide customer with great value proposition around the portfolio of products that enable them to first differentiate in the marketplace and second bring the best user experience.

When we look at the bundled solutions that we can see from various vendors and we think about how that bundling--I mean, the pricing looks pretty attractive, how that impacts AMD, is that actually good margin for you to bundle that way if you were to collectivize all those parts?

We're not planning to do any bundling, but we're obviously offering some synergies simply because it's a lower cost of engagement for an OEM to look at a complete platform.

That makes sense.

Just one last question which is, I think I heard somebody mention, that second half '07--first half '07 obviously a competitive environment, but some view that second half '07 may be not quite as competitive, and I think you're alluding to the fact that you'll have different parts to be competitive with in the second half of the year.

Want to just confirm that that's an accurate read, and then secondly, is that to suggest that if you have a better part, you feel like that may ease some of the concerns that we're facing in the first half?

Yes, it's Dirk here.

I would certainly say that what you say is true in parts of the markets we participate in, and in particular in server, as Henri said, where it's still much more of a CPU-centric performance by and some of the server segments.

And clearly relative to product technology, we've got good products as evidenced by our share gains.

At the bleeding edge, there's an ebb and flow back and forth as to who has the best in any given quarter, so that's driving some of our statements about the back half of the year.

Makes sense, thanks, I appreciate it.

Your next question comes from Chris Danely of JPMorgan.

Pleas go ahead.

Thanks, guys, just a few quick housekeeping items.

What--have you given out a depreciation target for '07?

Yes, I did, at the conference.

I'll reiterate it. $1.3 billion for '07.

Okay, and then can you give us a sense of what percent of revenues were ascribed to server, desktop, and laptop in Q4?

No, we don't give that kind of granularity.

That's fine.

How about a break out of AMD versus ATI gross margins in Q4 and what you expect for Q1?

No, not breaking those out either, but I did in the press release at least try to get you to a true operating type level gross margin for the Company.

Yes, that's fine.

So if depreciation's going up and pricing's going to remain competitive, do you expect gross margins to go up by switching to 65 nanometer and also a mix, is that how we should look at it?

That's correct.

Okay, thanks.

Thank you.

Your next question comes from Jim Covello of Goldman Sachs.

Please go ahead.

Thanks very much.

First question, does the OpEx guidance that you gave include or exclude those restructuring charges you were talking about?

Exclude.

Okay, so the 710 to 760 excludes the $120 million or whatever--$90 million in restructuring charges?

Yes, it excludes, just to be perfectly clear, it excludes stock option expense, and it excludes the ARC charges I talked about.

Great, thanks.

Second question, and I hate to be so theoretical, but I think it's kind of important, it seems like your goals as a company are at a little bit odds here.

Getting new customers and creating value for shareholders hasn't been something that have worked well with one another for the last few quarters.

And it's not going to turn around as long as both you and Intel continue to add so much capacity and fight one another.

What is it going to take for you to change the strategy, I mean how bad does it have to get before the strategy to change?

I understand that you guys aren't changing the strategy today, but for shareholders that are looking for the answer of how it's going to turn around, other than you guys gaining a lot of share, which Intel is going to try to fight, how does it turn around?

And if it doesn't turn around soon, what would cause you to change the spending strategy?

Well, we've been pretty clear for--Dirk here, we've been pretty clear for quarters and years, and that is that we compete against monopolist who has a dominant share, and long term the best returns we can generate for our shareholders involve breaking that monopoly.

Can I ask a question about that?

You guys were doing incredibly well when you--before you really decided to ramp the spending and gain share.

Your motto was incredibly profitable, your balance sheet was great, you were picking up share in small segments and then you decided to really ramp it in a big, big way and now the spending is such that you're losing a bunch of money.

You've been very profitable competing against a monopoly before and now you're not.

Is there any thought of going back to the model that allowed you to be so profitable over the last 18 months, excluding the last couple of quarters?

We've thought long and hard about this and concluded that there's no model that's stable over the long-term that allows us to be profitable in a niche.

The level of investment required is too large, and the only way for us to maintain profits on a sustained basis is to be large and engage in a material way with strategic OEM customers.

That's what they want to see from us, that's what they demand from us, and that's what we're going to do.

Okay.

So then the second part of the question, though, is there a point at which you say, well, I can't afford to do this, even if it's what the customers want?

Well, I think--hopefully you picked up from both Dirk's comments and Hector's comment, too, is we are maniacally focused on cost.

You will see us continue to push what it costs to make a XYZ product within the portfolio at lower and lower levels.

We've always been lower on the ASP totem pole, we understand that environment.

We'll push that cost equation even harder.

So we'll have a business model that will enjoy and deliver the appropriate returns on a long-term basis, this is not a short-term gain, on a long-term basis, as we continue to provide choice into the marketplace and the marketplace gets to the appropriate balance.

Terrific.

Thanks so much.

Your next question so coming from Krishna Shankar of JMP Securities.

Please go ahead.

Yes, can you give us an indication of your profits and mix in terms of corporate versus consumer clients and what type of program do you have now that ATI is part of AMD to tackle the mobile and corporate desktop platform market with sort of bundled solutions that your competitor does?

Yes, I'm not going to give you a precise answer, but suffice it to say that obviously our commercial segment is growing faster than our consumer segment, and with regards to the second part of your question, we have a much deeper engagement model in the enterprise and the commercial space in the former AMD than ATI had, and obviously there's going to be a benefit in particularly in the workstation marketplace where the relationship that we've established with global 2000 companies that use workstation type technology are going to afford us some opportunities for presenting our new product portfolio.

And can you also elaborate on, you didn't call it bundling, but you said some synergistic areas where you can provide a complete solution for the customer?

Can you elaborate on that some more please?

If you look at the environment today, you've got companies that really believe that they're best served by transferring the most amount of [inaudible-heavy accent] cost to the CPU, other companies think that the best model is when the GPU takes most of the [inaudible-heavy accent] cost, and there's one company that's uniquely positioned to offer the customer a portfolio of balanced technology that enable them to a. differentiate and b. have the best end user experience, and that's us.

Thank you, and finally, Bob, can you give us an indication of interest payments over the next four quarters?

Let me give you just a framework.

The current quarter--fourth quarter that we just completed was not a full quarter in the interest payments, because obviously we didn't borrow the money until the 24th of October.

So that number will scale up a little bit from the current number that you see recorded, but not by a lot, there's not that many days left in the quarter.

It will be a little bit higher in the fourth quarter, is the answer.

Great, thank you.

Operator, we're going to take one more question, please.

Thank you.

Your final question is coming from Ross Seymore of Deutsche Bank.

Please go ahead.

Thanks for squeezing me in, guys.

A lot of the questions have been asked, but given the importance of the server market to your overall profitability, as we look forward to Barcelona and what your competitor looks like their doing in pricing quad core at the same level as dual core, how should we think about the profitability going to Barcelona can really deliver to your server product line heading into the second half of this year?

Dirk here.

Of course it's hard for me to speak to precisely what the pricing environment will be, but from a cost basis, you can think about Barcelona being not that much different than the introductory dual core Opterons--[multiple speakers] high level.

Okay, but directionally from that, then would it be safe to say given the price competition has been so severe as this last quarter illustrated that the price points you're going to be able to get through Barcelona, even though the cost is the same, the price point's going to be much lower than you got in the first round on the Opteron side.

Is that a fair assertion?

The pricing environment is so dynamic that it's hard for me to speculate what will happen as we introduce new products.

Okay.

The last question here, more for Bob, is getting from that 40% to the 50% gross margin, you talked a little bit about what's going to happen, you believe, in the first quarter.

Are there any other dynamics throughout the year that are going to kick in that are going to allow you to get up from that 40% to 50% level?

Well, I think we've kind of hit on them all, from mix of the business, more toward commercial, more dual core, less single core, servicing the channel, more consumer electronic business, better penetration in both graphics and AMD chip sets.

I think it's through the Analyst Day and what we've covered today, I think we've covered it all, but it's a waterfall of things, I'll call it on products and ASP, and then a maniacal focus on cost reductions, primarily through the 65 nanometer node, but there's plenty of other things in packages, test time reductions, etc. that you'll see take place, and last but not least is the synergy of the two companies.

So if I put it all together and nothing's really changed since the Analyst Day, given the fact that you talked about pricing being a little more aggressive than you had thought, is it really that you think you can take more costs out than we talked about at the Analyst Day, or what is the lever that allows that sort of flexibility given that pricing has been more competitive?

I would probably have to handicap it, that's where we're focused right now.

Just not knowing where pricing will land at different moments in time is we'll control what we know how to control, which is our cost structure.

Okay, thank you.

Right.

Thank you very much.

We'll conclude the call now.

Operator, are you okay?

Yes.

This concludes today's Advanced Micro Devices Inc. fourth quarter 2006 earnings conference call.

You may now disconnect your lines at this time, and have a wonderful evening.