超微半導體 (AMD) 2007 Q1 法說會逐字稿

Good afternoon.

My name is Jeannie, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Advanced Micro Devices Inc.

first quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period.

[OPERATOR INSTRUCTIONS].

Thank you.

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

Mike Haase, Director of Investor Relations.

Sir you may begin your conference.

Thank you.

Welcome to AMD's first quarter earnings conference call.

Our participants today are Hector Ruiz, our Chairman of the Board and CEO, Dirk Meyer, our President and COO, Bob Rivet, our Chief Financial Officer, and Henri Richard, our Chief Sales & 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 8584000.

A telephone replay will be available for the next ten days starting later tonight.

In addition, I would like to call to your attention that our Q2 2007 earnings quiet time will begin at the close of business Friday, June 15th.

Also for your planning purposes, we have scheduled the AMD Technology Analysts Day for Thursday, July 26th.

More information will be sent out at a later date.

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 about our forward-looking statements and are based on current beliefs, assumptions and expectations, and speak only as of the current date, and 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, AMD's Annual Report on Form 10-K for the year-ended December 31st, 2006.

With that I will turn the call over to Dirk.

Thank you, Mike.

After 14 consecutive quarters of gaining share in the CPU business, the first quarter was a major setback in the strategic transformation of our Company.

But we know the only way to get healthy is to fully understand our problems and fix them.

First, it's important to note that with our remarkable success has come much more complexity in our business, more customers, more channels, more products.

The game is really quite different and frankly, that complexity has led to some challenges.

In the first quarter our challenges were caused by a few key things.

First, we suffered some major growing pains.

Starting roughly the middle of last year, we suffered occasional mix and delivery issues in the course of serving new and expanding relationships with global OEMs.

This led to challenges in our properly serving the component distribution channel.

Second, the pricing pressure that started in Q2 last year continued in the mainstream of our CPU business, as our competitor did everything in their power to protect their monopoly.

Third, we saw an increasingly competitive product environment in both CPUs and GPUs.

And finally, weakening demand in the Consumer Electronics businesses added to our pain.

While any one of these problems might have put a damper on our performance in the quarter, the sum total of all four was something of a 'perfect storm' for us.

Our plan to fix these problems is fairly straightforward.

We need to grow the top line, change our cost structure in-line with the competitive environment, and execute flawlessly on our product and technology road maps.

To regain momentum on the top line we have accelerated some key initiatives.

We have simplified our sales and marketing organization in order to improve our responsiveness to customer demand.

We restored our value proposition in the channel and refocused marketing spending on demand generation programs.

And we have increased our emphasis on acquiring new customers and broadening our portfolio with existing customers.

Now, while we know we cannot cut our way to prosperity, we realize we need to make some significant adjustments to our business model, in order to succeed in the current competitive environment.

Among the efforts already under way are reducing 2007 CapEx spending by approximately $500 million, largely by slowing the rate of the FAS 38 conversion.

We are reassessing our overall staffing plans, specifically, we are going to limit ourselves solely to critical hires.

And to the extent that we add resources we will focus primarily on doing so in lower cost geographies.

We plan to leave the year with a lower headcount than we have on-board today.

In addition to those staffing actions, we will be reducing discretionary expenses by over $100 million annually.

Finally, we need to deliver on our product and technology road maps, on time and on budget.

Specifically, we need to deliver on the promise of Barcelona later this year.

And by the way, our customers are increasingly excited about what they are seeing.

We need to successfully convert Fab 30 to a 300-millimeter tool set.

We need to start the ramp to 45-nanometer technology beginning in mid-2008.

And by the way, 100% of our Fab 36 wafer starts are on 65-nanometer technology today.

We need to and will successfully launch the 600 series graphics products next month, and over time, deliver and maintain GPU leadership in the dimension of performance, per watt, per square centimeters of silicon.

And we need to continue to deliver leading edge technology through our Best-in-Class customer engagement in the CE businesses.

In summary, we know what our challenges are, have a good grasp on what to do, and are well under way with programs to put us back on track.

Best of all, our customers want us to win.

And are expanding our relationship on the basis of our unmatched technology portfolio, and commitment to helping them succeed.

With that I would like to turn it over to Bob.

Thanks, Dirk.

As I said in the press release, the first quarter was totally unacceptable.

But as Dirk outlined, we have a good plan to address and fix our issues.

Before I start, I would like to remind everyone that as a result of the acquisition of ATI in the fourth quarter of last year, first quarter 2007 results do not correlate directly.

AMD's revenue in the first quarter of 2007 was $1.233 billion, down 30% sequentially, and down 7% compared to the first quarter of 2006.

We recorded a large net loss in the quarter at $1.11 per share.

Three noteworthy items to highlight in these results include, 1) ATI acquisition related and integration charges, which I call ARC, of $113 million, or $0.21 per share, 2) employee stock based compensation expense of $28 million or $0.05 per share, and 3) a tax expense of $23 million or $0.04 per share, primarily due to the need for a deferred tax liability, related to the large tax deductions AMD receives for the amortization of goodwill from the purchase of ATI.

First quarter operating loss was $363 million, excluding ARC charges, and stock-based compensation expense.

EBITDA was a negative $196 million.

First quarter 2007 gross margin was 31%, excluding ARC charges and stock-based compensation expense, compared to 40% in the fourth quarter of 2006.

The decrease from the prior quarter is attributable to significantly lower microprocessor unit sales, lower microprocessor ASPs, and the inclusion of the former ATI operations, which generally have lower margins for the entire quarter.

I will switch to the business segments.

First, Computing Solutions revenue, which includes the former computation products, embedded products, and the former ATI chipset business was $918 million, down 38% from the prior quarter, primarily due to significant lower desktop mobile and server unit sales and revenues.

Microprocessor unit shipments declined in all product categories, and ASPs declined in both desktop and mobile.

Chipset sales increased 15% sequentially, reflecting a full quarter of operations.

The computing solutions segment had an operating loss of $321 million in the first quarter.

Switching to the graphic segment.

Revenue was $197 million in the first quarter, a sequential increase of 19%, reflecting a full quarter of operations.

Operating loss in the graphic segment was $35 million.

And in the Consumer Electronics segment, revenue was $118 million, down slightly from the previous quarter, and also reflects a full quarter of operations.

Handheld and gaming revenue declines were offset by sequential growth in the DTV category.

The operating loss in the Consumer Electronics segment was $4 million.

Now turning to the balance sheet.

The cash balance at the end of the quarter was $1.2 billion, approximately 600 million above our minimal acceptable levels.

We continue to be focused on increasing liquidity for the business, and expanding our financial flexibility.

Our plan continues to include, 1) selling our 200-millimeter fab equipment, 2) monetizing our investment expansion, 3) collecting our grants and subsidies from our investments in Dresden, and 4) selling administrative land and offices.

In addition, we continue to evaluate a wide range of financing opportunities that are available to us.

Total inventory at the end of the first quarter was $937 million, up $123 million from the fourth quarter, driven by our sales mix in the microprocessor business.

About 40% of this inventory growth was 65-nanometer microprocessor products.

First quarter capital expenditures were on plan at $586 million, focused on the capacity ramp of Fab 36.

Now let's turn to the outlook.

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

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

In the seasonally down second quarter, AMD expects revenue to be flat to slightly up.

Operating expenses which include R&D and SG&A will be in the range of $750 million, reflecting only a small impact of the restructuring efforts we have undertaken.

You will see a much higher impact in the second half of the year.

Employee stock based compensation expense is expected to be approximately $30 million for the second quarter.

ARC charges will be approximately $80 million for the second quarter.

We believe we will have a tax expense of $25 million in the second quarter.

And as Dirk outlined, our capital plan for 2007 is now $2 billion, down 500 million, with the reductions coming out of the back half of the year.

In summary, the first quarter of 2007 was a terrible start to the year.

But, we are confident we have a plan to put ourselves back on the right track.

With that, I will turn it over to Hector for some final remarks.

Thanks.

Dirk and Bob have highlighted many of the programs and initiatives that we have put in place to address our near term business challenges.

And while the complete package is strong, including capital spending adjustments, sales and marketing restructuring, and headcount adjustments, I would like to take time to put all of it on a much larger context.

Because I want you to know that this quarter was more than a miss.

More than a series of concurrent issues or challenges.

This quarter was a major inflection point in our timing of action plans, to continue to innovate effectively on behalf of our customers.

And I want you to know that it has only served to accelerate our efforts to complete our work, that is to reinvent the dynamics of our industry.

The quarter proved that the job is only half done.

And that now is the time to accelerate our efforts to finish the other half.

Today, what you have heard Dirk and Bob describe is immediate and somewhat tactical in nature.

But make no mistake, it is also the beginning of a major restructuring of how we intend to run our Company going forward.

One that will reflect the natural growth and stratification of the world's processing solutions customer base, accommodate the business model distinctions between good enough entry level markets and performance-hungry, mature market solutions, and reduce our capital intensity by exploring deeply more asset-like business models, in order to fully execute our plan.

And most important, it will be based and driven on a single core competency, customer-centric innovation.

We plan to share more details at our upcoming Analyst Conference this summer.

In the meantime, in order to provide intense oversight to this transformational process, and also to ensure strong support across the Company for the various initiatives, Dirk and I are forming an Executive Task Force, to include Barbara Day, Henri Richard, and Dave Orton.

I will Chair this Task Force and provide a strong oversight of this company-wide effort.

While I expect this Task Force to be temporary in nature, lasting no more than a year, I expect this transformation to be bigger and more dramatic in impact, than the one we undertook in 2002.

But as I mentioned earlier, it will be the transformation needed to allow us to fully complete the transformation of our industry.

To put the customer back in charge, to put competition back in our industry, and to put sustainable value creation back in the hands of real innovators.

Now let me turn it back to Mike for our question and answer period.

Thanks, Hector.

Operator, let's start the Q&A.

Thank you.

[OPERATOR INSTRUCTIONS] We will pause for just a brief moment to compile the Q&A roster.

Thank you.

Your first question is coming from Tim Luke of Lehman Brothers.

Please go ahead.

Thanks so much.

Can you hear me, Mike?

Yes.

Could you just clarify how we should perceive your pace of investment in capacity than vis-a-vis prior plans, and also if you could give us any clarity on how you perceive with the elevated inventory level, how you would look at potentially clearing that, and then also, if there were any updates with respect to the timeline associated with Barcelona that Dirk was alluding to, in terms of the second half of the year.

Thank you.

Sure.

It's Dirk here.

I will respond to both of those.

First of all, going into Europe, our capacity plan was to fully facilitate the Fab 36 building, and start the conversion of Fab 30 to a 300-millimeter toolset roughly the middle of this year, with the so-called Fab 38 beginning to produce output early in 2008, and then of course we had chartered as a flex source of capacity.

As compared to that change, the only real change going forward is that we will reduce the rate at which we convert Fab 30 to a 200-millimeter toolset.

So specifically we will still completely ramp Fab 36.

Three questions.

With respect to Barcelona, we started shipping preproduction samples to customers in Q1.

We anticipate shipping production samples in the current quarter, and we will see customers shipping their products based on Barcelona in Q3.

And then finally, you had a question on inventory.

You know, to the first order of the products we have in inventory, are still products that are good in the marketplace.

The market wants them.

Our customers want them.

We will just modestly adjust our production plans over the balance of this year, and work off our inventory position over the next couple of quarters.

In conjunction with that, your guidance for the revenue is somewhat better than normal seasonality, and somewhat stronger than your larger competitor.

Could you just sort of reconcile how we should perceive those businesses that might sort of be flat to slightly up, given the general context?

Sure.

You know, clearly if you haven't picked up we're pretty disappointed in our performance.

The channel in particular, while we were optimistic we would see more improvement in the first quarter, we didn't.

We do see progress towards the end of the quarter and continuing to the second so that's part of the rebounding effort from that perspective.

To give us confidence that even in a seasonally down quarter, we can power away through that.

Plus, we launched new products in the graphics business.

So I mean we have definite things to recover from from the first quarter, and new product introductions on the ATI classics out of the house, that gives us a lot of confidence from that perspective, and also in the C2 we know the design-ins we have, and that product will start being shipped in the second quarter.

Thank you.

Thank you.

Your next question is coming from JoAnne Feeney from FTN Midwest.

Good afternoon folks.

I have a question.

I would love to hear a bit more about the restructuring.

You mentioned the asset light strategy.

With such challenges to profitability going forward it would seem like Texas Instruments has adopted, perhaps you could also use more of an asset light strategy to lower costs, and to give yourselves more flexibility during this cyclical times.

That is a very broad question and a challenging one, because as I mentioned in my talk, the level of restructuring that I am envisioning is very significant.

And so it would be difficult to outline it on a phone call.

But let me give it a try, as to what we intend to discuss later on in the year.

For example, four years ago we had one product in the company that through tweaking and maneuvering we could actually make it serve various segments of the market.

Today we proliferate our product line in towards goodness.

We have a broad array of products.

Now we are serving segments in the industry that each of these segments are large in size.

For example, an entry level segment in an emerging market is a very large segment, and all on its own it actually requires its own separate business model, and how to address that segment.

Compare that to a workstation or supercomputer segment, which all on its own requires a completely different business model.

Today up to now we have been running the company well.

As a matter of fact we ended last year at 26% share units.

As a result of a fairly successful four year run that we had, in doing it that way.

But now as Dirk outlined, when we increase the complexity of going from a largely channel company to now one with a very heavy weighting towards OEMs and a complexity of products, we have to restructure how we address that, and the way we manage the accounts is going to be different.

Over the next few weeks, we will be internally announcing those changes methodically.

All aimed at managing much more effectively this much more complex world that we live in.

As part of that, one of the things that's become pretty clear in our experience, we have had now for a number of years had some experience in partnering with people, such as for example IBM in joint development programs.

That has taught us a lot about how you can do some asset-light strategies, since we didn't have to build an R&D laboratory to do that.

We have had also an experience now for a number of years with some of our friends in the foundry business, and in particularly charter semiconductor.

We have learned a lot of that.

And through the acquisition of ATI we now have a perspective into a very asset-light model, that we're pretty excited about learning more and more about it.

When we look at all these things, we see a tremendous opportunity for us to really do something different going forward.

But it's unique for us.

I think for example what Texas Instruments has done as you said is very good for them and is uniquely tailored for what they do.

Whatever we do is going to have to be very uniquely tailored for us.

Because we have to be on one hand in the workstation supercomputer environment on the leading bleeding edge of technology.

But on the entry level part of products is not quite as necessary.

I think we are in a unique segment of the industry, the microprocessor industry, where an asset light model may require a considerably different look and feel that you might recognize when you look at somebody like Texas Instruments.

So we are pretty pumped up about the opportunity.

We think it's obviously not something you can do in a quarter or two.

But we certainly intend to give you a stronger perspective in our summer analyst meeting.

And is this then what you referred to, Hector, when you remarked that the second half of the transformation of the company really will begin now?

That is exactly right.

We are making the organizational changes needed to address our business models more effectively.

We are doing those now as we speak, and the broad action plans to do the much more complex issues, we actually started them some time back, and what we're doing today is accelerating them, and putting in place an executive task force to oversee the execution and implementation of this plan.

Okay.

Thanks very much.

Thank you.

Your next question is coming from Chris Danely of JPMorgan.

Please go ahead.

Thanks, guys.

Could you go through what your rough expectations are for pricing in the rest of the year?

Do you think it's going to ease up a little bit, and also maybe talk about gross margins and how to get those back up?

Yes, Chris, this is Henri.

I think we have seen some stabilization in the domain of pricing since the beginning of the year.

For us there is a lot of dynamics.

Our mobile business is growing.

Our commercial business is growing.

Our channel business as it recovers will represent a larger portion of our shipments.

Those are positive factors, but of course we also expect the market to continue to be extremely competitive.

As a result I think more stability, but still a very complex and competitive environment.

Sure.

How do you expect gross margins to trend given that type of environment?

This is Bob.

You know, from a gross margin perspective at a high level, you know, clearly we are very disappointed in where we ended the first quarter.

But the plans we have in place I will call it from the product and technology standpoint of introducing new products, whether it's next month in the GPU world, or in the Barcelona category, you know, that is first and foremost.

Second of course is just to remind you, you know, we're still in the early stages of 65-nanometer.

As Dirk outlined, we've actually got to all the wafer starts, but it takes you a good 10 weeks to pull all that product through and get it out the door.

Quite a bit of our shipments in the first quarter were 65, but every day more and more is 65.

Our inventory is well-positioned in 65, and that clearly will give us some margin opportunity because that die is 30 to 40% smaller on an equivalent basis, between 90-nanometer and 65-nanometer.

So you know, we feel like we will make progress every quarter to improve the gross margins as we continue through the year.

That makes sense.

Bob, you mentioned that it sounds like this is not going to be the last of the restructuring.

Should we expect OpEx to I guess remain flattish in terms of dollars in the second half of the year?

Will there be bigger changes?

You know, we are still working a lot of details on that, but it will probably be less in particularly the G&A category in the second half of the year.

You know, we are watching ourselves very closely in the R&D investments since that is the pipeline for the future.

But in general, we are hoping we can get that bucket to be a little more efficient than it has been therefore less in the second half.

That makes sense.

Thanks a lot, guys.

Your next question is coming from Uche Orji of UBS.

Please go ahead.

Thank you very much.

Just on the if I look on the pricing, a question for Henri, your ASP for service did not do so well in Q4, and if I look out with the launch of Barcelona, how should we think about what that could do for your ASP on the selling front?

And you are talking about volume in Q3.

Will that be significant volume in Q3, how should we think about what impact that would make?

The pricing environment has stabilized, a little more complex.

Our server ASP went up actually in the first quarter.

And clearly the arrival of Barcelona, which we know is an extremely competitive product will help us.

But we really are more focused on getting back to the volumes that we deserve than just being focused on ASPs.

Those two come together.

You know, of course you are looking at revenue for the first quarter and those are important.

But I am looking also a lot on design ins, and although Q1 has been a very disappointing quarter from a revenue perspective.

It is been a very fruitful quarter for design ins, both in the server market, and the desktop market, and the mobile market.

Now those will materialize in the marketplace in the second half of the year, along with our new products.

I feel that Barcelona can't come quick enough, because of the excitement that the customers are showing, based on what they've seen of the technology.

Right.

That is very helpful.

In the channel, you referred to having lost some share in the channel.

What efforts are you making to win that back and when should we start to see that bearing fruit?

One of the important things in the channel is predictability and stability.

Frankly in the second half of 2006, we have been challenged, particularly because of a very rapid shift from desktop to mobile.

On an overall basis, it's still an interesting shift for the industry.

But for the channel, it's seldomly good news.

We were challenged, being as reliable as we used to be.

We took the actions really at the end of Q4.

Those actions started to pay a little bit in Q1.

But it was a very difficult quarter for us.

Frankly, one of the advantages of having a little more inventory, is now I am in a position to serve my customers on a timely basis in the product mix that they desire.

We don't expect this to turn around immediately.

I think we will see, as Bob was pointing out, sequential improvement in the second quarter.

I see no reason why we shouldn't be again the franchise of choice that we used to be, in the second half of the year.

Right.

Just a couple more questions.

On the computing side, Bob, are you able to give us an idea of the split between MTU and chipset?

Is that something you can tell us?

No, that's not a detail we want to get into.

Okay.

Finally, on the, if I look at on the detail of the asset light model you plan, are there any restrictions as to how much you can [bring to the foundries]?

All of the blends that we are considering are all within the context of making sure that we meet the needs and requirements of all of our fee agreements that we have.

Thank you very much.

Thank you.

Your next question is coming from Michael Masdea of Credit Suisse.

I guess the question is on the pricing strategy, pretty aggressive pricing quarter generally.

It didn't seem to have a lot of fruit.

Sort of some channel issues this quarter.

Is that any sort of indication that you should back off the current pricing strategy, or is that even an option?

Our pricing strategy hasn't fundamentally changed.

We are pricing our products for what we believe is the value they provide in the marketplace.

One of the dynamics that is new is that we are now a platform company, and the fact that we have GPU technology, chipset technology, along with our CPU technology, is allowing us to do more interesting things than we did in the past.

Furthermore, this is placing an increased focus on graphics, and that becomes a very important aspect of the bottom of each platform, so as we look at design ins of sockets in the future, you know, we are in a position today to have a slightly different pricing strategy than we had in the past.

Because of instead of being a point product, we have a complete platform.

That begs another question.

You look in the past when you are successful and you had real incremental sort of drivers, whether it's power per watt, and then focused on the earlier dual core [inaudible] extensions, of what have you, it doesn't seem like obvious that that's out there in the future right now.

Is it just that we are not seeing it yet, or is there something you would point to that really can get you the differentiation to keep decent ASPs and market share?

First of all, we are very excited about the products that we have coming out near term.

In the dimension of performance per watt per square millimeter of silicon, both in the GPU category and in the CPU category.

So I do think we are going to be very compelling in that dimension.

Beyond the near term, the whole motivator for the ATI acquisition was one of having the opportunity to deliver a solution with an optimized balance of CPU, GPU, video and media technology tuned to the task at-hand.

We are not announcing any products based on that vision yet, but longer term that is absolutely the vision.

Maybe just a quick one for Bob.

It looks like there was a little bit of financing that sort of came from the balance sheet in terms of your receivables.

Is that, some of that can't repeat, should we start to think about cash coming down a little bit more rapidly here?

What is that threshold where you feel like you have to go out and raise some money, as opposed to doing some of the other things you talked about?

Sure.

First I will start backwards.

Just remind you what I said.

You know, I have always said a billion dollars is where I am very comfortable.

600 million though is where you really have got to go do something, just for making all the machinery work appropriately.

So we are still a little bit north of that at 1.2, 600 million high.

Clearly, thank you for noticing, we have been working on working capital, except for the inventory part of the equation.

So we will continue to figure out how to utilize and get working capital to be as robust as possible from that standpoint.

Then we will start monetizing the four things I listed.

Some of that you will see if the second quarter, whether it is the expansion issue or the 200-millimeter tools, selling land, et cetera.

Collecting grants and subsidies.

But like I said, we are very focused on making sure we have the appropriate liquidity, and I will be opportunistic in the market to go deal with that.

Thank you.

Your next question is coming from Joseph Osha of Merrill Lynch.

Please go ahead.

Hi, folks.

Back to Barcelona.

You talked about that being available here in sample form in the second quarter.

Are we going to see some of the Barcelona derivatives in the client products, in particular desktop in the third quarter.

I am also curious about the mix of Barcelona, and Barcelona derivative versus the existing Brisbane, 65-nanometer stuff.

How do you see that going as the year progresses?

First, you will see desktop variance of Barcelona in both two core and four core form in Q3 as well.

On the desktop side?

Yes, on the desktop side.

Relative to mix, we are not going to go to that level of detail.

That makes sense.

May I ask a follow-up?

Sure.

If I look at the mobile business there, you are going to be with Turion obviously 65, but clearly that area is up for refresh.

Can you talk a little bit about when we might see a new architecture show up in that segment of your business?

Yes.

We have got a product lined up for the refresh cycle in 2008, which is a 65-nanometer product.

It will introduce both a new CP and a new platform.

So that will show up later this year, but effectively it doesn't really become part of the plan until 2008?

Yes, it hits the OEM chassis refresh cycle in the first half of '08.

Your next question is coming from Mark Lipacis of Prudential.

Great.

Thanks for taking my questions.

A couple.

First, on the cash flow side, Bob, could you remind us how much, how many grants and subsidies you could expect to get for a dress-in, and anything on the timing there?

And how much you think you could get for the 200-millimeter tools?

Yes, both of those, just in broad terms, both of those are north of $200 million each.

So from that perspective.

On the grants and subsidies, each of them actually we have started, so we have collected a little bit in the first, and we'll collect additional money in the second, third and fourth.

So it gets spread out throughout the year.

Okay.

Great.

And then going to the kind of like the asset light and the stratification comments, Hector that you were making, are there limitations on how much you can outsource, and can you kind of help us with parameters for us to think about, when we think about the options that you guys have there, and when you talk about stratifying your product sets, does that suggest that you could be developing microprocessor technology on both SOI and bulk CMOS?

Does that even make sense?

Thank you.

You know, as I said a little bit earlier, we have a broad array of IP licensing agreements with many people in the industry, and every one of the options that we are considering for an asset light business model, takes all those into account and incorporates those into the agreements that we have.

We have a lot of flexibility in those agreements.

As a matter of fact, I would put it in the category of near infinite.

But and our plans are to start really narrowing down the choices, and exploring the opportunities with the various possible partners that we could have in exploring that.

And it covers the whole gamut of opportunities from everything like I mentioned earlier, we already have a joint development agreement with IBM, which we view that as an asset light strategy, from the point of view we don't have to build an R&D facility, and all the way into any aspect of the rest of the work that we do.

The rest of it that you referred to as a stratification of our products is really more along the lines of the business models that we intend to focus on, to be able to structure the organization such that it optimizes what is important for each of the business segments, and as I used as an example, which is a good one to use, is perhaps an emerging market entry level product.

It's a segment that needs to be managed with a very low level of overhead, and an N-1, or an N-2 technology.

Perhaps even consider a bulk solution, and on top of that perhaps the whole business can be run out of parts other than the United States.

We are really going all across the possibilities, and aggressively making those plans and we will share more of that with you as the year develops.

Very helpful.

Thank you very much.

Thank you.

Your next question is coming from David Wong of A.G.

Edwards.

Please go ahead.

Thank you very much.

Can you tell us what mobile ASPs look like?

You said that servers were up sequentially in the last quarter.

Were mobile ASPs also stable to up?

They were marginally down.

Right.

And can you give us any quantification of sequential microprocessor unit growth, or declines in any of the segments?

We typically don't give you those indications.

The only comment I would make to give you the best color would be, ASPs were the small piece of the equation in the sequential movement quarter to quarter.

It was mostly units.

ASPs were a piece of the equation, but the driver was the unit drop quarter on quarter, and that was in all segments, whether it's desktop, mobile, or server.

I'd like to add one point.

I think we need to wait a couple of weeks until all the analysts are publishing the sales out figure for the quarter.

Because we know that customers that really dispose of inventory that they had built in the fourth quarter.

So you might be actually surprised by our sales out market share numbers versus what you're looking at today which is sales in.

Okay.

Great.

And last thing, can you tell us what your current schedule expectations are for 45-nanometers?

Yes.

We'll be starting 45-nanometer production in Dresden in the first half of next year, and shipping product early in the second half.

And working every day to pull that in.

Great.

Thank you very much.

Thank you.

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

Please go ahead.

As you look at the quarter, did you see the pricing pressure both in the consumer and the corporate market, and can you give us some sense for the success you had in the corporate notebook and desktop market, now that you have ATI under your fold?

The first part of your question, there was no real significant difference in terms of the overall pricing environment but of course we have different participation.

So I would say that in the consumer market, there is a broad level of competition in both mobile and desktop across all geographies.

Where today in the Enterprise market, you know, the bulk of our fight is in the server segment.

Now, that leads to the second part of your question, which is what is going on with our commercial clients.

We are as planned continuing to increase quarter after quarter the number of platforms offered by our key OEMs, in an increasing number of channels, and increasing number of geographies, and sales are growing quarter after quarter.

Furthermore, there is another indicator, which is a leading indicator of success, which is the latter part of your questions, which is since now we have ATI and therefore are able to offer more complete platforms, is that giving us some traction.

As I indicated earlier in the call, I am very pleased with the level of design wins in the first quarter, even though I am not pleased with the level of sales in the quarter.

Thank you.

And Hector, a more I guess strategic question, there has been some speculation about private equity investors looking at AMD.

What are your thoughts of getting out of the public spotlight, and really working on the major restructuring phase that you talked about out of the public eye, and what does it take for AMD to do that, and would you seriously consider that?

As Bob has pointed out many times, we have absolutely no prejudice or bias towards the source of capital so long as it makes sense for us, and we're very open to any of those ideas, and Bob is continuously looking and alert as to any opportunity that might come up for us to take advantage of it.

As for the difference between I think that your question was being a public company versus a private company, it's like everything else, you know, if it's something that we think makes sense for our shareholders, we will certainly consider and look at it.

Thank you.

Your next question is coming from Glen Yeung of CitiGroup.

Please go ahead.

You know, as you come through this first quarter and obviously it's a difficult one, and you go through this restructuring, have you given any thought yet to what the target model for AMD is going to be?

Has anything changed if we look, one, two, three years out?

Actually, no.

I mean, when we have looked at that pretty hard.

Clearly, you know, depending on I will call it the extent of the asset light model, that could change the mix of how you deliver the end result, which I still believe needs to be in that 18% kind of range.

But clearly if you have no assets that number would change.

So that, so it will be worked and we will disclose that as soon as we have more specificity on the asset light strategy.

But right now I would say it's business as usual.

We are still driving to the model that I showed right after Thanksgiving.

That is helpful.

And then the other question I had is you are now slowing down the transition of Fab 30 to 38, which essentially means you're going to have a bit more 200-millimeter than you might have thought.

What is the change to your output that we should expect from this?

I think you have talked in the past about a unit potential in terms of your capacity.

What is the change we should expect now?

Dirk here.

First of all, we are not going to change our plan relative to 200-millimeter output.

So we will still start taking down 200-millimeter starts in Fab 30 in the current quarter.

We will simply lower the rate of 300-millimeter tool insertion into that shell.

So that plan relative to unit output capacity is not going to change at all in 2007.

It is going to change only modestly in 2008, and represents about a 10% potential change in 2009.

If we stick to the plan, which of course we have the opportunity to re-evaluate.

Okay.

And then the last question is just thinking a little bit near term on Barcelona, you know, between now, I guess we are now mid second quarter, and you are expecting first ships out in the third quarter, are there any milestones you have to hit?

Are there any critical points we are going to need to see between now and then?

Well, there won't be things that you will see necessarily.

I mean, of course we will be demonstrating Barcelona later on this summer, as I said, we will be shipping production samples to customers this quarter.

But what really matters is customers turning around, and shipping the systems based on that technology.

It sounds like you guys are ready.

It's getting designed and moving the thing off the shelf.

Simply one of qualifying our customer's systems and getting those systems out the door.

Okay.

Great, thanks.

Thank you.

Your next question is coming from Michael McConnell of Pacific Crest.

Please go ahead.

Regarding the asset light model, are there any restrictions to the amount you can outsource due to any covenants within the X86 license that you brokered with Dell back in the day?

We have a number of broad IP licensing agreements with many companies, including Intel, and every one of the models we are looking at to implement, takes all of that into account.

We have an awful lot of flexibility as to the earlier, so we feel pretty confident on what we want to do.

Are there any restrictions in terms of percentage of production that you could quantify?

We don't talk about the details of IP licensing so the asset light model we are talking about is well within all of the guidelines that we have.

Okay.

Fair enough.

Any chance we could get some comments on the breakout in Q1 between units and pricing?

I think as Bob pointed out, you know, we are disappointed that the pricing was not as stable as we would have hoped.

Although it has firmed up as Henri pointed out, the main issue we had frankly was volume.

The volume was significantly below where we wanted, and that is 80% or so of the driver of the challenge.

Okay.

And then looking at the graphics business, any way we could get an apples-to-apples comparison between Q4 and Q1, I know there was a limited amount of revenue in Q4, but is there any what he we could kind of get an idea of what the growth was quarter to quarter there?

Full quarter to full quarter?

Basically the revenue was slightly down.

The units was up and ASP was slightly down, and frankly it's logical, since we are waiting for the launch of our brand new line R600 line of products, which will enable us to restore the price positioning in the marketplace.

Okay.

Just on that note, last question, the R600 stack, coming out in late May is that enough time for the window before back to school, or should we be thinking about this more for the holiday season?

When you think about back to school, a large majority of those machines use integrated graphics.

So there is very little impact of discrete graphics.

As you know, the launch of the R600 is essentially a discrete graphics launch.

Those cores will find their way into integrated chipsets later in the cycle.

So I feel that when you have the right technology, particularly in the enthusiast space, it gets gobbled up pretty quickly, and those people don't actually march their purchases based on cycles.

Okay.

Thank you.

Thank you.

Your next question is coming from Sumit Dhanda, Banc of America Securities.

Please go ahead.

Hi, Bob, Hector.

Had a couple of questions.

Your outlook for the second quarter up slightly in the face of weak seasonality, but your channel inventory at least for what your deferred revenue line would suggest doesn't seem to have improved.

So can you help us reconcile that discrepancy?

And then I had a couple of follow-ups.

Henri, you have been on top of the channel inventory issues.

Perhaps you could comment on that?

If you recall, as we indicated, starting at the end of the second quarter of '06, and really into the third and fourth quarter, we ran our business, it was a really depressed channel inventory situations.

We were able in the first quarter to restore that.

So what you see as an increase is really in absolute just getting back to what we need to have out there to have, as I pointed out, consistency and predictability of supply.

I am not concerned whatsoever with our inventory position, either with our channel partners or key OEMs, to be frank.

I know you talked a little bit, Bob, about restructuring efforts, et cetera, but can you help us understand why the R&D line was up so significantly on a sequential basis from the first quarter?

Yes.

The part you have to remember is we only had nine weeks of the ATI Corporation that we purchased on October 24th in the fourth quarter.

So there was an unnatural 9 week to 13 week comparison, and ATI is a very engineering-centric corporation that we purchased.

That is what we really wanted in that acquisition.

So that is why you saw that line move so much.

Okay.

And the last thing, you know, in terms of the restructuring, you are in a difficult position as you pointed out on the call.

Your competitor, when it was in the same position last year, took very aggressive action.

But your rhetoric doesn't seem to suggest anything as aggressive from a headcount reduction perspective.

Help us understand why this is not the case, or is this something you're going to flush out in more detail at the analyst meeting?

First of all, let me make sure we put this in perspective.

Our hats off to our competitor.

They have done a good job in closing the gap in the product line.

It took them four years to do it.

I think they have done a good job.

I think they ran into some difficult challenges, and I am certainly am sympathetic and understanding.

In our case, frankly, we had four years of continuously every quarter outperforming our competition, and then it's, to use the analogy of football, we had an undefeated season and lost the first game of the playoffs.

Well, we are not going to change dramatically what we were thinking of doing, as a result of one lousy quarter.

We do have to make adjustments, as Bob pointed out.

I think we are going to take advantage of this opportunity to accelerate our performance management culture, that is going to drive some people out.

As a result of the further understanding of the integration with ATI, we now have ideas on how to better manage the company, and therefore there is also more efficiencies, and when you combine all that between now and the end of the second quarter, we know we are going to have 500 plus people out that will leave the company.

So now going beyond that, you know, we have not changed our goals, our objectives, our strategy, our technology plans, our customers like our road maps and to execute those, we need the top talent in our engineering organization, which is really our company.

We are an engineering company, and we need best and brightest, which we have, and we intend to execute to that.

And that is the difference.

One final question for you, Dirk.

You said 100% of the wafer starts are at 65-nanometers.

Can you give us a sense of what the proportion is within microprocessors from a shipped product perspective?

Yes, I don't think we want to be specific other than to say in Q1 it wasn't quite half.

I will remind you that comment was a Fab 36 specific comment, relative to the wafer starts at 65-nanometers.

And what percent of your 65 than millimeter starts are Fab 36 at this point?

100%.

Okay.

Thank you.

Thank you.

Your next question is coming from Jim Covello of Goldman Sachs.

Please go ahead.

Good afternoon guys.

Thanks so much.

Quick question.

The guidance for Q2, does that assume share gain, share loss or no change in the microprocessor segment?

From which quarter?

From Q1 or a year ago?

The sequential guidance of flat to up slightly.

By definition, giving the guidance of our competition, it means share gain.

I wasn't sure what the mix was relative to some of the other segments as opposed to pure microprocessor.

So you think you will gain share in the second quarter.

Yes.

And what gives you confidence in that after the last couple quarters?

Well, again, you know, if you look at the third and the fourth quarter, despite some of our challenges, we were gaining share.

As Hector pointed out, we had a very difficult quarter, but as I also told you, our design in pipeline has never been stronger.

And what is selling in the market is one thing.

How many systems are your OEMs proposing.

How many countries are they offering your products in.

How many customers are having access to your programs?

All these things are not changing, and we are seeing particularly in the mobile space, we had a 30% year-on-year growth, when the competition actually went down.

We are continuing to see good momentum on design wins, and that's why we are expecting that we could have a decent second quarter.

From a philosophical perspective, maybe you could help us, obviously as you said tough quarter, you didn't see it coming.

Any thought about taking a little bit more conservative approach to the guidance, given that it's been a few quarters in a row that you have had some struggles meeting the top line guidance?

Believe me, we are not happy with having to meet the numbers.

Let me make it clear that we are doing all we can to make sure on one hand we are not ridiculously conservative.

On the other hand, although we are pleased to have confidence that we're going to do better in the second quarter, you know, frankly, it's increase in share of a really lousy quarter.

So I wouldn't put a big flag on top of that and wave it.

So what I would like to point out, because again, we have to be careful to put one quarter in perspective, is that we had to gain unit share for 14 consecutive quarters.

Last quarter there was a meltdown.

We collapsed.

We were very upset about it.

We understand it, as Dirk pointed out, we are not exactly the things that led to the perfect storm.

We are going to fix them, and we are making progress as we speak.

Therefore from such a lousy beginning, we expect to improve.

And throughout the year, we expect to improve quarter by quarter.

Okay.

And then Bob, depreciation for calendar Q2, can you help us with that?

Sure.

Depreciation will take another increase upwards.

In the tune of 25 to $40 million, quarter on quarter.

Great.

Thank you very much.

We are going to take two more questions, please.

Thank you.

Your next question is coming from Kevin Rottinghaus of Cleveland Research.

Please go ahead.

Could you help us out with your thoughts on just general PC demand and maybe channel inventories of PCs?

I think that in general the first quarter was not a great quarter, particularly we saw a lot of softness in the Enterprise market in North America.

By contrast I think greater China continued to show some robust demand.

Overall I would say not a stellar quarter, and certainly some pockets of heavy pressure, particularly North America, and to a lesser degree Europe.

Did you say your Enterprise segment grew again in 1Q sequentially?

I'm sorry I didn't get that question.

Did you say your Enterprise segment grew in 1Q sequentially?

No, the answer would be no.

Enterprise did not grow.

How about on the platform wins, you know, you are talking about a very strong pipeline.

Is that, when does that start to convert into revenues?

Is that a 3Q event, or how far along are you with that?

In terms of some of the, we have just announced a new series of chipsets.

You will start to see platforms based on those chipsets some time in the third quarter.

It's driven mainly by the rapid adoption of HD standards in a lot of the consumer devices.

And it's widely known that with ATI we have a very strong position in the video space, and so we are seeing a lot of success with that particular aspect of what this platform offers.

On the core PC side, is that, should we expect an acceleration in that business in 3Q based upon platform stations starting to take off, or when should that really start to hit?

You have to remember that in that particular segment of our business, we have two contradicting trends.

We obviously are increasing our business on AMD platforms.

We also have some Intel business that will continue to ramp down.

So it's difficult for me to predict exactly how those two are going to gel into a total.

Okay.

And then just lastly, I know there are still some OEMs you are not working with currently, particularly on the notebook side.

Anything you could tell us there, as far as traction you have gained, or any expectations you might have for this year, as far as new OEMs or new platform additions?

No, other than repeating what Dirk said in his statement, which is we have an increased focus of continuing to not only deepen our relationship with existing customers, but also create new relationships.

Thank you.

Thank you.

Your final question is coming from Gurinder Kalra of Bear, Stearns.

Please go ahead.

Hi.

Just a question on your R600 launch.

Can you just provide us more detail in terms of timing, whether it will be a hard launch or a soft launch, how much product do you expect to have, and in what categories?

I mean, will there be a performance product, or a performance mainstream product?

Well, we are going to announce those products in the second part of May.

The location has been picked.

It is a series of 10 products, covering the entire stack with the DXN capabilities, leading edge performance, and more importantly, a solution that works with all qualified drivers.

And would do you expect to have sufficient quantities of product available at the launch?

Absolutely.

We don't do soft launches.

All right.

Thank you.

Thank you.

I would like to turn the floor back over to Mr.

Mike Haase for any closing comments.

Please go ahead sir.

Thank you, very much, for participating on the call today.

Thank you.

This concludes Advanced Micro Devices Inc.

first quarter earnings conference call.

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