超微半導體 (AMD) 2008 Q2 法說會逐字稿

Good afternoon.

My name is Matt, and I'll be your conference operator for today.

At this time I would like to welcome everyone to AMD's second quarter 2008 earnings conference call.

All lines have been placed on a listen only mode at this time.

After the speakers' remarks, you will be invited to participate in a question and answer session.

As a reminder, this conference is being recorded today.

I'd now like to turn the conference over to Ms.

Ruth Cotter, Director of Investor Relations for AMD.

Please go ahead.

Thank you, Matt.

Thank you, everybody, and welcome to AMD's second quarter earnings conference call.

Our participants today are Hector Ruiz, our Chairman of the Board and CEO, Dirk Meyer, our President and COO, and Bob Rivet, our CFO.

This is a live call and will be replayed via webcast on AMD.com and will also be a telephone replay.

The number is 888-266-2081.

Outside of the U.S.

The number is 703-925-2533.

The access code for both numbers is 1240774 and the telephone replay will be available for the next 10 days starting later this evening.

I'd like to call your attention to our Q3 2008 earnings quiet time which will begin at the close of business on Friday, September 12.

In addition, I'd like to take this opportunity to remind you that we will be hosting our annual Financial Analyst Day on November 13.

Before we begin today's call I'd like to caution everybody that we will be making forward-looking statements about Management's expectations.

Investors are cautioned that those statements are based on current beliefs, assumptions, and expectations and speak only as of current date and involve risks and uncertainties that could cause actual results to differ materially from our current expectations.

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

Therefore we encourage you to review our filings with the SEC where we discuss in detail our business and Risk Factors setting fourth information that could cause actual results to differ materially from our expectations.

You'll find detailed discussions in our most recent SEC filing, AMD's quarterly earnings report on Form 10-Q for the quarter ended March 29, 2008 and with that, I'd like to turn the call over to Bob.

Thank you, Ruth.

Good afternoon, everyone.

In the second quarter, revenues declined 7% from the prior quarter, affecting both of our businesses and reflecting the challenges of the current consumer, macroeconomic climate.

Looking ahead, the good news is we're getting traction with our new products as evidenced by a steep increase in unit growth and our triple core and quad-core offerings and strong market response to our new graphics products.

More specifically on the product side, we expanded our quad-core offerings with 18 new products this quarter, including four energy efficient and four high performance processors.

In servers, all four leading OEMs are shipping systems based on our quad-core AMD Opteron processors, and we are regaining server momentum and winning back business with key customers in the strength of our superior performance in floating point and memory-intensive work loads, as well as in the context of virtualization solutions.

It is noteworthy that three of the top five and seven of the top 20 super computers in the world are built on AMD Opteron solutions.

Finally our graphics leadership momentum continues to build with the successful introduction of our Next Generation ATI Radeon HD-4800 family of graphic processors, which have earned outstanding reviews and include the world's first graphic chip to break the teraflop performance barrier.

In addition, we continue to focus on delivering increasingly differentiated platforms, optimized for every usage scenario at work, at home, and at play, at leadership price performance points.

We launched the AMD business class commercial desktop and notebook solutions powering PC's from Acer, Dell, HP, Fujitsu-Siemens, and Lenovo.

Our AMD Live and AMD Gain platforms continue to gain customer momentum in the client space.

We also launched our next generation Puma notebook platform this quarter and have seen over 100 design wins to date on he basis of its superior 3D graphics and HD image quality.

Before I proceed with the financials, I'd like to remind everyone that last quarter we signaled a review of our non-core businesses.

This resulted in a decision to divest the Handheld and DTV divisions and classify them as discontinued operations for financial reporting.

Prior periods have been recast for comparability.

For the purpose of my remarks this afternoon, I will refer to continuing operations unless stated otherwise.

The reconciliation of GAAP to non-GAAP financial results is available in our press release so let's begin.

Revenue for the quarter was $1.35 billion down 7% sequentially and up 3% year-over-year.

We reported a net loss of $1.96 per share in the second quarter.

Losses from continuing operations were $269 million or $0.44 per share which included a net favorable impact of $97 million or $0.16 per share.

This favorable impact consists of a gain of $193 million from the sale of 200 millimeter tools, partially offset by $96 million in charges.

Our loss from Discontinued Operations was $920 million or $1.52 per share.

This was largely made up of non-cash goodwill and intangible asset impairment charges of $876 million.

Reported second quarter operating loss was $143 million, but on a non-GAAP basis was $276 million compared with $185 million last quarter.

For comparability, I've excluded the tool sales, arc and restructuring charges, as are outlined in our table on the Press Release.

Gross margin in the quarter was 52%, including a 14 percentage point positive impact associated with the sale of 200 millimeter equipment.

Therefore, gross margin was 37% compared with 41% in the prior quarter.

This decline was due to lower unit volumes in ASPs, and changes in product mix as we sold older generation products to make way for our new offerings.

Now switching to the business segments.

Computing solutions revenue was $1.1 billion in the second quarter, down 8% from the prior quarter and flat compared to the same period a year ago, primarily due to weaker client sales.

The server business saw 5% unit growth over the prior quarter and 19% increase over the same period a year ago, a positive sign in light of the recently launched OEM products.

Quad-core and triple core processor shipments were up significantly while microprocessor ASPs were down.

The result of sales of older generation products.

Operating loss for the computing solutions group was $9 million; however, this includes $193 million gain from 200 millimeter tool sales.

In the graphics segment, which now includes game console royalties, revenue for the quarter was $248 million, down 5% sequentially and up 18% year-over-year.

Operating loss for the graphics segment was $38 million and a very competitive pricing environment, particularly on our older generation products.

However, our new highly acclaimed HD 4800 series has been well received in the market since its launch in late June.

Now turning to the balance sheet.

Our cash and marketable security balance at the end of the quarter was $1.57 billion, down $186 million from the prior quarter.

Adjusted EBITDA was $119 million.

Capital expenditures were $104 million for the quarter, down from $322 million in the prior quarter.

We still have in excess of $200 million in future non- operational cash generating opportunities, based primarily on administrative assets.

This does not include any proceeds for the sale of our discontinued operations or the execution of our assets marked strategy.

Now let me turn to the outlook.

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

Last quarter, we set a goal to reduce our breakeven point at the operating level to approximately $1.5 billion.

We have made progress in that direction this quarter with a break even approaching $1.6 billion.

We expect to make ongoing progress on this front as we continue to focus on achieving this goal early next year.

In a seasonally up third quarter, AMD expects revenue from continuing operations to increase in line with seasonality.

Operating expenses are expected to be approximately 4% down from the second quarter.

Amortization of acquired intangibles is expected to be approximately $30 million.

Depreciation and amortization is expected to be approximately $300 million, and we remain on track with our planned capital expenditures for the year of approximately $900 million.

In summary, the second quarter was a tough one.

However, we remain focused on transforming the business for future success as we continue to roll out new and exciting platforms, positioning us for success in the second half of the year.

At this point, I'd like to turn it over to Hector.

Thank you, Bob.

And I'd like to welcome all of you to the call.

Three years ago under my leadership the AMD Board of Directors begun putting in place a succession plan to transfer the reins of this Company to my good friend and colleague, Dirk Meyer.

I am pleased and excited to announce on behalf of the AMD Board of Directors that we have elected Dirk as President and CEO of the company effective immediately.

The time is right.

Barcelona is shipping.

Product momentum is picking up in both our graphics and microprocessor business and our conversion to 45 nanometer technology is well on track.

We have made enormous progress on our assets smart strategy and this is why the time is right to turn the Company over to a new leader, one who has earned the trust and respect of AMD customers, partners, and employees worldwide.

And one who I know will do what it takes to earn your confidence as well.

What most of us know about Dirk is that he's a very prolific engineer.

He has over 40 patents and a dozen chip designs to his name, including the groundbreaking deck alpha processor.

He also landed the sign of our industry transforming AMD 64 architecture, and that took the reins of what was then the computation product business, where he was under his leadership, able to double the revenue and expanded his customer base partner and R & D footprint, and I think we all know that that changed the face of the microprocessor industry as we know it.

What a lot of you are going to get to know in the near future is that he is an incredibly talented business executive who makes decisions quickly, decisively, and just as quickly, turns those decisions into action.

In short, he is the right leader at the right time for this Company.

I will remain as AMD's Executive Chairman, focusing my full time energy on driving our asset smart strategy through its exciting conclusion, and I will also continue to lead our initiative to break our industry free from the grips of an illegal monopoly.

So Dirk, my friend, my congratulations on this well earned promotion.

AMD is in great hands.

Hector, thank you.

Thanks both to you and to the AMD Board for your support and your confidence in me.

AMD is a great company, comprised of great people dedicated to serving our customers and transforming this industry.

Hector, we've come a long way in the last six years since you took charge of this Company.

With you at the helm, we took AMD into the enterprise on the AMD 64 platform.

We built AMD's global presence with bold expansion efforts in China, Latin America, India, and the Middle East.

We established partnerships with many of the greatest OEMs and software firms in this industry, HP, IBM, Sun, Dell, Microsoft, Oracle, to name a few, and you, courageously, launched a global initiative for fair and open competition, a battle that we are winning for the benefit of the industry and consumers everywhere.

We have a Company rich with great people, great products, a great spirit, and a lot of great potential.

Looking to the recent past, we've not been living up to that potential.

Looking forward, we will.

We will demonstrate a pattern of sustainable profitability.

We will focus on our unmatched combination of X86 and leadership graphics technologies, and we will execute, execute, and execute.

We've been able to attract some outstanding new leaders to our team, examples, Nigel [Dessoff], our new CMO, [Akmed] Mahmoud, our new CIO, [Shakib Acru] who joins Jeff [Fraheul] in leading our newly formed Central Engineering team, and Emilio Ghilardi, who will join us next month to run sales and marketing in our EMEA region.

Great people, motivated to join a strong team, and one of the most compelling professional opportunities in the high-tech industry.

I want to thank Hector for the great progress we have made on our asset smart strategy, and for accepting the Board's request to stay on and drive it to completion.

And I know that I speak for all AMD employees when I say that I'm really looking forward to the challenges and opportunities that lie ahead.

And with that, Ruth, how about some Q & A?

Matt, we're now happy to take some questions so if you could please poll our participants and introduce each questioner accordingly we would appreciate it so we're ready to go, Matt, when you are.

Thank you, Ms.

Cotter.

(OPERATOR INSTRUCTIONS).

Our first question is from John Pitzer of Credit Suisse.

Your question, please?

Yes, guys thanks for taking my question this afternoon.

Dirk, you talked about demonstrating a pattern of sustainable profitability.

What kind of timeline would you be willing to share with us?

You guys talked in the past about goals as we came into the second half of calendar 2008.

I wonder if you could elaborate on those, thank you.

I'll provide comments and ask Bob to maybe provide some more.

We still believe on the strength of the momentum that we're seeing in the marketplace based on the new products that we introduced in Q2 that we can expect to be profitable at the operating level in the second half.

And Bob, do you want to provide further commentary.

Yes, so to me, we're not backing off on that.

We still believe that.

We have made progress in the breakeven point as I talked about.

The goal is to get to the $1.5 billion in the beginning of next year, making progress to that, so we would like to put the stake in the ground that we don't want to look back.

So start making money in the third quarter and moving forward from there.

And guys, relative to those targets, does that imply more work around the asset smart strategy or do you think the strength of the top line demand from the back half of the year kind of gets you there?

It's really a combination of both.

Clearly, we believe that new products will give us traction to increase the top line.

Our strategy have continued to execute on 45 nanometer improves our cost structure but also, it does incorporate asset smart execution by Hector to bring it to conclusion.

And then guys last question for me.

If you kind of project out for the balance of this year, your CapEx to rev ratio this year falls at about 15%, which is kind of almost half of what it's been running for the last three years.

I'm just kind of curious as to what kind of confidence level or milestones you can throw out around 45 nanometers to make us feel more comfortable that you're spending an appropriate level to stay competitive?

Yes, first talk a little bit about 45 nanometers in general.

We're well on track with the 45 nanometer plan as we've been telling this group about in the past.

We actually started production late last quarter and are on track to start volume shipments early in Q4.

Typically, it takes us three to four quarters to flip the factories once we start, so that would say that it would be largely converted roughly in the middle of next year.

Much of the capital expense that we're bearing now is in support of that plan.

Great.

Thanks, guys.

Our next question is from Ross Seymore of Deutsche Bank.

Your question, please.

Dirk, with your new role can you talk about any sort of of differences in the strategic direction that might ensue?

Two comments.

One is Hector and I have been a partnership leading the Company to this point.

Looking forward, there will certainly be some changes, as I said in my opening remarks, we're a Company with great potential and really distinctive capability relative to having both X86 and leadership graphics capability in hand.

I think looking forward, you're going to see us focus a little bit more narrowly on some of the big volume sweet spots in the marketplace, particularly in the PC space and the volume server space.

We're certainly going to increase our focus on execution, dependable delivery of products to our customers and focus on efficiency.

Some of my personal focus by the way, given my background as Hector described, is to work with the team and insure that we've got the right product and solution road map entering the front end of our R & D funnel and to focus on ensuring dependable R & D execution.

Likewise, I've been focused up to this point we'll continue to focus on building a great team of people around me to help lead the Company, particularly in the sales and marketing area.

Maybe a follow-up on the $200 million remaining in asset sales and then whatever potentially will happen with the Handheld side.

Bob, can you just give us a rough idea of timing on those, do you think just generally second half of this year some of those actions will be taking place just so we can factor it into some of our cash burn assumptions?

Sure.

The majority of the $200 million left is associated with administrative buildings.

To be honest, the market is a little bit choppy to go execute a transaction in that space but I anticipate that's a back half of the year, beginning of next year type execution of that $200 million bucket that's still left, which is the majority of the bucket.

Okay, and then what about the discontinued ops, what should we think about there and obviously I know you can't give any real specifics.

No.

You know, we're quite well down the path and we believe you will see something before the end of the year.

Okay and then the last question for me for you, Bob, is puts and takes on gross margin in the third quarter, it sounds like your mix would improve but given the pricing environment that we're hearing about in graphics, is that kind of a head wind and any other variables would be helpful.

No, if you kind of think of it, clearly the second quarter was characterized of a little bit of traction in the server space as I outlined, some unit growth, but the OEM line up took place more into the quarter so it takes it awhile for that to turn into volume.

We expect some of that volume opportunities will present itself in the third quarter, so the mix will enrich toward the server space and also we will have more of the new architecture affect the third quarter which cheerily gives us the ability to have some higher ASPs.

More unit volume and higher ASPs from that perspective and it's kind of the same story with just different words in the graphics space.

We launched the first, the new series of products really with only about two weeks to go in the second quarter so we'll have a full quarter worth of traction and as you know, seasonally this is a strong quarter for graphics from that perspective, so it's really top line and change of mix which is what drives us in the appropriate improvement direction.

Great.

Thank you.

Our next question is from Tim Luke of Lehman Brothers.

Your question, please?

Thanks so much.

Congratulations, Dirk, on your promotion.

Hector, I was wondering if you could provide us with some of the parameters around which you're considering the asset light strategy, you talked about some of the progress there, maybe you could share with us some of your thoughts around sort of how we should think about that progress, and how you perceive that developing is something that you think you would be likely to conclude in the calendar third quarter, and separately, Bob, perhaps you could give us some color on how you perceive your balance sheet in terms of are there any needs for incremental capital going forward, thanks so much.

Tim, I can tell you that we are very pleased with the progress, we've made enormous progress.

We're looking forward to being able to share that with you and we're certainly have an incredibly high level of expectation that we'll be able to do that before the end of the year.

And then in terms of progress, could you give any color on how you measure that or what you consider to be the elements of that progress?

I really can't.

Okay.

Hi, Tim, this is Bob.

Hi, Bob.

To the Balance Sheet question, as I said repeatedly in prior quarters, I get nervous, I'll call it out on the cash for the business when I start approaching the $800 million level.

2X that, so just a levels from that perspective, so therefore, I'm not nervous.

I believe in the business, the business plan for the second half of the year, so I don't see a need to go do anything to raise capital from that perspective, based upon the business plan we have in front of us, and execution of asset smart and execution on the discontinued operations.

Bob, maybe you could just remind us what you perceive normal seasonality to be roughly what sort of range for the calendar third quarter and did I get that right that you and Dirk were alluding to breakeven in the third calendar quarter?

First on the seasonality question, our data would suggest we've seen a range of 2 to 14% so it's a fairly big range.

The average continues to settle around that 8-10 as seasonality pick up in the third quarter from the second for the microprocessor business.

It's actually a little bit healthier than that in the GPU business, but it's in the same zip code because clearly it's going into the same spaces from that stand point, so that's the seasonality question.

And our comment is, I'm not going to try to forecast as I normally do, I don't forecast profitability for next quarter out, but we clearly will be profitable in the second half of the year.

So you're inferring from that that haven't the seen the gross margin move to the 37% level, you're comfortable that obviously to get back to those targets is going to be in the low 40s shortly then, as you move, ramp your new products?

Clearly your math is right.

We've got to get back to 40 plus, which is where we were last quarter.

Clearly, in the microprocessor business, it's still a very fixed cost oriented business, and how you run the factories, how many units you sell have a big impact on that gross margin.

The current quarters low level just drove gross margins to not be very good.

We expect those will pick up through the seasonality process and most important, through all of the new products.

Thank you, guys.

Thank you.

Our next question is from JoAnne Feeney of FTN Midwest.

Your question, please?

Hi, thanks and congratulations, Dirk, and Hector, I'm sure we're looking forward to seeing how this restructuring plays out and your leadership there.

I guess I have a question really on the top line and the combination to gross margin and how that played out this quarter.

You were saying you ended up with more legacy products selling and I guess I'm just wondering about the mismatch between what you were trying to sell and perhaps what the demand is moving from the market and how you see that changing in the third quarter.

Have you gotten rid of the products, are you seeing demand from the new ones, what should we expect gross margin really to look like?

Well, clearly, with the introduction I'll call it of the new quad-core architecture which really took place at the beginning of this year in servers at the end of the first quarter, that's what we're talking about, I'll call as the new microprocessor architecture, clearly the prior architecture was focused on single and dual core, so we moved out a lot of I'll call it single core type products in the second quarter, which definitely demanded a lower ASP from what the marketplace had.

We're also seeing a continued shift to people want to buy value based computers that are the right price points, so price points typically are moving down in the lower direction, but putting that aside, Third Quarter with server s contributing more to the top line, so I'll call it a mix shifting toward the server business, because we'll now have a full quarter of traction with all of the major OEMs and a better merchandising of our new architecture in the desktop line up and the Puma platform starting to get some traction based upon the hundred design wins we have, we believe that will drive the top line which will also drive gross margin.

And so on the graphics side, are you seeing some real wins here recently with the new products that have come out, do you see and you said Q2 was dominated by older graphics processors at lower prices, so how much might we expect that to contribute to gross margin and even looking forward beyond that, it seems like with the good execution in graphics and graphics sort of becoming perhaps more important to the Company, how big do you think graphics can be for AMD over the next few quarters?

Well, clearly, you're back to the thesis of why we purchased ATI, which was the graphics and chip set part of the business and that IP.

Clearly, we're starting to see some progress from the team's phenomenal efforts to bring a bunch of new products out.

The new 4800 series we believe will be the best products in the marketplace and you'll see that continuation happen through the second half of the year.

So it will definitely contribute to gross margin.

It's very similar to the microprocessor business.

You've got to be in right price points.

You got to be fully merchandised from the whole stack.

It's not just about having volume and the value in the equation.

You've got to have it all.

We believe with a new series of products we will, and driven in our first as we've talked about, we feel very comfortable with what's going on in OEM notebooks and desktop, the channel we continue to make progress.

That's where you're starting to hear a lot of chatter to the goodness, so gross margin expansion, driven by top line expansion on the backs of all new products.

And then sounds like sort of the mix shift across-the-board is something that would push your gross margins to a level by the end of the year where you reach that breakeven point.

Is that correct?

Correct.

Actually make money for the back half of the year.

Okay, great.

Thanks.

Our next question is from Krishna Shankar of JMP Securities.

Your question, please?

Yes, congratulations, Dirk and best wishes to you, Hector, going forward.

A couple of questions.

Previously you've talked, Bob, about a $2 billion breakeven level and now you're sort of talking about a 1.5, $ 1.6 billion level.

Can you talk about that and also you said profitability in the second half, is that profitability at the operating profit level or what do you mean by profitability here in the second half of the year?

Sure.

I'll kind of, in my, I'll do it in my order but answer all of your questions.

First is, you know, since we're so far away from profitability the first order of magnitude is operating profit at the operating income level, not at the net income level.

First get to that level and then we'll work to get the net, so that's what I talk about when I say 1.5 billion at the operating income level, and yes, indeed, we actually used to say $2 billion was kind of of more our breakeven point.

We realized in the current environment and in reviewing our whole portfolio of products that that didn't make any sense, revised it down to $1.5 billion.

We're still not at that goal.

We expect to be at that goal at the turn of next year, so it's kind of in the first quarter, so making progress and right now if you do the math, we're a little bit north of $1.6 billion.

Okay.

And also can you give us an update on Puma?

I know you have a hundred design wins.

We've seen some delays with the competitors platform.

How is Puma looking and will that have a material impact on Q3 revenues in terms of the book to school for notebooks?

Yes, Dirk here.

So certainly Puma is going to be a big contributor to revenues and margins in Q3.

As you know, the notebook platform refresh has happened in the so-called back-to-school cycle as it's called in U.S.

retail.

That's a cycle where machines start to show up on shelf in July.

We've had some of our OEMs already announce those machines and others will do so shortly, so we shipped some Puma platforms into OEMs in anticipation of that retail cycle but really the volume starts to take off in Q3.

And my final question, Dirk, is can you give us an update on Fusion and your thinking on the Fusion architecture for '09?

Yes, absolutely.

To reintroduce the term, Fusion represents the idea of bringing together in distinctive ways our X86 CPU graphics and video technology.

One of the ways in which we do that obviously is to bring together the platform level which is what Puma represents.

Looking forward, we'll integrate those technologies into a single piece of silicon and that development is under way and will be sampling customers next year.

So we're very excited about it and our customers are really enthused about it.

Thank you.

Our next question is from John Lau of Jefferies & Company.

Your question, please?

Great.

Thank you.

You mentioned seasonality.

I was wondering if you can give us a little bit more color as to what you're seeing in the marketplace.

There's been a lot of concerns out there.

Do you see anything that would change your thoughts about the normal seasonality pattern for Q3 and I have a follow-up.

Thank you.

Dirk here.

Obviously everyone we talk to is watching the macroeconomic environment and kind of wondering what it's going to mean for the PC market but interestingly, the signals we get from our customers still indicate that the market on a global basis is healthy.

Obviously some of the more developed areas, U.S, Western Europe, are weaker, but the emerging markets are still going strong.

So in aggregate, based on what we hear, we would expect normal seasonal patterns walking into Q3.

Great.

And then as a follow-up, you mentioned EBITDA.

I was wondering can you give us cash flow from operations for the last quarter?

Thank you.

Well, sure.

There was a negative 240 million.

Great.

Thank you.

Our next question is from Srini Pajjuri of Merrill Lynch.

Your question, please?

Thank you.

Bob, I have a few questions around gross margins.

First of all in the quarter, despite the fact that you saw better mix that dropped in almost 400 basis points or something, just wondering, did you see any unusual price pressures on the point side or was it anything else there?

Actually, where probably the most unusual price pressure was in graphics.

Clearly, our competitor took some pretty aggressive actions to try to maintain their position as we came out with our new products and slowed things down and I also think it also had a lot of inventory in a very seasonally weak quarter, so there was more pricing pressure I'll call it in the graphics space.

processors always has pricing pressure but I wouldn't say it was anything beyond normal.

Like I said before, there is a tendency shift that we see going on which is more geared toward the value space, that's kind of where the world wants to go, and you have to remember particularly for AMD, we're much more exposed to the consumer than the commercial space.

We're trying to change that mix but that is is the reality of the world we live in today is the consumer space.

Okay, but you seem comfortable that gross margins can get back into 40% levels in the next couple of quarters?

Yes.

And Bob, one more time, for the breakeven at $1.6 billion, what are the different elements, just looking for your OpEx, what kind of OpEx we expect for Q4 of this year.

Well, as I signaled Q3 will go down, so I'll get a full quarter impact of the restructuring process in the quarter.

And to be honest, we're going to try to stay at those kind of levels for quite a long period of time to get back to what Dirk talked about, is sustainable profitability.

So we've done a pretty thorough investigation of how do we spend the money, where do we spend our money, and so we'll stay at those levels plus or minus a little bit for a while.

Okay, got it and then my final question is on the gross margin again.

The once you are done with the asset strategy, once you execute that what kind of impact and how should we think about your gross margins and also do you have a longer term target in mind once you post the asset light execution?

Thank you.

I'll say at 50,000 feet, the specific details to me doesn't make sense to give until we actually have a deal to announce with all of the pluses and minuses of a deal I'll call it, but in reality today if you think about it from a microprocessor business, I spend two things in the R & D category or three things I'll call it in the R & D category which is process development, bringing up factories , and chip design, and clearly there's two of those that would go away in an asset smart strategy so one, there's cost reduction in that area, and clearly, there's going to be cost increases in the gross margin, as you pay for the cost of that technology on a per wafer basis and the cost of capital on a per wafer basis, so it's kind of a trying to figure out the math of working those two angles that we'll talk about once we have a

Thank you.

So gross margin down, R & D down.

That's about all I want to get into at this point.

Thanks, Bob.

Our next question is from Uche Orji of UBS.

Your question, please?

Thank you very much.

Just a couple of quick questions.

In terms of your design win in graphics for the new notebook platforms, you gave us a number awhile ago about the level of design wins that you've had.

Is there any updates to that, please?

Dirk here, first order, no, those were design wins all that were locked down last year actually.

So now is when they start to pay off.

And so what do you estimate what share you were getting in those platforms?

As we said at the Analyst conference, we're very happy with our design win momentum and we're getting 60%-plus design win share on that new platform.

Great.

Just a different question.

We've heard reports about pricing going up just for your graphics business, is there any way you are able to protect yourself from a cost push pressure coming from price increases, because I think the first question is are you seeing it yet and also to what extent are you able to try and manage this given all of the comments you made about ASP pressures as well within graphics.

Sure.

On the reality that's always a supply demand equation that the foundries got to work their way through, clearly, for people like us, who are a big user of the foundries and are a big strategic customer of the foundries, we work our way through those cost increases, most of those cost increases are I'll call it to the smaller players, not to us, not that they don't ask for price increases so we're working our way through that.

We don't see that instantaneously, we work our way through that because we have a long term strategic relationship with these guys, so I guess that was a long answer to your question.

We're not seeing, significant cost increases coming from our foundries.

Okay, thank you.

Our next question is from Doug Freedman from AmTech Research.

Your question, please?

Thanks for taking my questions.

Can you talk a little bit about new customer acquisitions, Company over the while Hector, you were sitting in the CEO role added quite a few number of major OEMs to the AMD stable.

Can you talk about if there's opportunities to continue to add to that and if so, is it something we can expect to see in the next 12 months?

Yes, good question.

With Hector at the helm, we did a great job of acquiring new customers and in fact if you look at the big players in the PC market, there's only a couple left with whom we don't do business on a CPU basis, although we do business on other product lines.

So looking forward clearly, there's a couple of hunts left relative to customer acquisition on the CPU side, but really the big opportunity that we have is to enjoy a broader base of business with the customers that we've already acquired and that's what we're focusing on, the big example there is really the commercial client business, Bob referred to it a little bit.

We've got a number of design wins, actually introduced in Q2 , I think the number is 15 overall in our business class platform so that's an area of incremental opportunity for

Can you talk a little bit about the next generation 45 nanometer server chip Shanghai and are we close enough yet to start to get some performance benchmarks whether to industry standard or to your own present line up?

Yes, but we're close enough to know exactly what we've got in hand and we're really excited about it and look forward to telling you about it when we launch the product.

Any projections on when it will launch?

Yes, as I said we're in production now and we'll ship for revenue early in Q4.

Great.

Thank you.

Our next question is from Chris Danely, of JPMorgan.

Your question, please?

Thanks, guys.

Can you give us a sense on what units versus ASPs did in Q2?

This is Bob, yes.

Directionally, units were down a little bit, ASPs were down more, so kind of the mix.

It was both of them contributed to the drop in revenues quarter on quarter, so it was like more ASP than units.

Okay, great.

And then a little bit of a different question but in terms of the Barcelona speeds, are you guys shipping 2.4-gigahertz now and when will you begin to shipping 2.5 and 2.6 gigahertz?

The answer to the first question is no, not yet in volume , and on the second question, I'd like to hold off until we talk about, future products and actually launch them rather than pre-launch them on this

Sure, Dick, can you give us a sense of when you will begin shipping in volume?

On Shanghai you mean?

The 2.4 Barcelona.

You know, I don't want to pre-announce product introductions on the call.

No problem.

And I might strike out on this next question, because it's in that same vein, but your competitor has talked about success with its stripped down notebook processor.

Are there any plans for AMD to launch a similar product, and why or why not

Are you referring to Adam?

Yes.

It's an interesting question.

First thing to point out is we're a much smaller company with not nearly the scale that our competitor has so clearly, we don't intend to try to do everything they do in the marketplace.

Adam, as I understand it, is intended for a range of products below what I'll call traditional notebooks in form factor size ranging from handheld to so-called mobile internet devices to smaller form factor, and more inexpensive notebooks.

Clearly, when you talk slightly smaller form factor notebooks and inexpensive notebooks, that is a market segment that we're interested in.

It's actually a segment that we're starting to offer products to our customers in support of now, we actually haven't talked in public about that but I expect we'll be talking about that road map when we get together in November at our Analyst conference.

Okay, thanks, that's helpful and then last question.

Hector, you've been talking about the fab light asset, light asset, smart for awhile now and last quarter, you promised us some details in the near term.

So I know you're not going to talk about details but like what's taking so long on this thing?

First of all, the near term is coming, so I can tell you that it's getting closer, and all I can tell you right now is that if it were something as simple as going to a foundry would be very easy to do and talk about it, but it's actually something that we believe is uniquely tailored to AMD, it's uniquely tailored to the needs of our customers & Company, and therefore, much more accomplished to do than just a general outsourcing scenario, and for that reason, it's taking longer than we thought.

And do you guys expect a major improvement to margins with this or something a little bit more minor?

Well, it will be a major reformation of the Company from that standpoint.

I don't want to get into those kind of specifics but it's definitely going to improve the balance sheet.

Okay, thanks a lot, guys.

Our next question is from Glen Yeung of Citi.

Your question, please?

Yes, thanks.

Dirk?

Earlier you said that one of the changes we might expect from you is that AMD would focus more on what you consider to be volume market.

I wonder if you could just define for us what you think those markets are.

Yes, what I mean by that is some of the traditional Markets that AMD and ATI frankly have been focused on for a long time, so the PC market and traditional desktop PC market , what we know today as the notebook PC market, and that market as it evolves particularly on the low end, and finally the volume server market, especially one and two socket servers.

That's not to say four socket is not interesting.

We actually have a great position there and we intend to defend that.

In addition, markets that are adjacent technologically, so an example would be enterprise of embedded market, networking storage, that would be an example.

We've got a participation in the living room game console space, we intend to continue that participation.

Does that give you a feel for

It does.

Another question is one of Intel's strategies is to try to proliferate X86 beyond just the traditional PC and sort of by definition that opens up an opportunity for AMD.

As you see that evolve and I think it's hard to see where it might evolve at this point but as it does start to evolve do you think it's something AMD is in position to take advantage of?

Yes, first of all it's kind of interesting.

We start talking about X86 everywhere three or four years ago maybe prematurely and since that time we've seen Intel cast off their arm based business and follow us with this idea.

Now being a bigger Company they've got more money to create markets for X86 technology as I said in response to an earlier question.

Given our scale, we can't afford to lead into every market, but to the extent Intel creates opportunity for X86 technology by growing new markets, that's good for us over time.

Okay.

And can I clarify one thing from some statements you made before about pricing and mix in the second quarter.

So you suggested, Bob, that ASPs were down more than units.

Just to be clear, is that, would that be a function of the pricing environment or is that a function of mix?

It's really a combination of a little bit of both.

So I'd say it's not solely on one side of the table or the other.

It's a little bit of both.

Pricing environment and just mix more in the lower end of the stack.

Okay.

Which it seems to be, as well.

The other question I had was on SLY.

If you guys think forward into your road map, particularly as the assets smart strategy starts to evolve, does SLY have to be part of that strategy?

Dirk here.

Going into every technology transition, 90 to 65, and 65 to 45 as examples, we reevaluate the technology choices we make including SOI.

Going into 45 nanometer, we're very confident that the SOI choice made is the right one, and we'll make that same judgment as we go into 32 and beyond, and that is not really influenced heavily by the asset light direction.

Actually one last question on really kind of stretching a little bit here, but you mentioned in some point you were making about ATI that you bought ATI for the graphics and the chip set business.

When I kind of think about things like the consumer business there, is that to suggest that something you don't really want?

Well, you know, first comment is we're declaring those businesses Discontinued Operations and offering them for sale, so I think that's probably the answer.

That's not to say they aren't good businesses.

It's great technology, good people, but to be honest, they aren't funding themselves today and we think they will be more successful in the hands of a Company that's more focused on those markets.

Okay, great.

Thanks.

We'll take two more questions, please.

Our next question is from David Wu of Global Crown Capital.

Your question, please?

Yes, I actually have two questions.

One on discontinued operations, one on the discrete graphics business and finally on clarifying with Bob.

To get to the breakeven at the operating level, I guess the precondition for that is asset light a pre condition for that, or is that design of the products that you have on a road map running on 45 nanometer is the key to hitting the break even point either in Q4 of this year or the first quarter of next year and on the ATI side of the house, I was thinking about the discontinued operation.

Do you intend to sell the whole thing to one buyer or separate pieces of that discontinued operation to potentially different buyers?

And the last question, is the 4800 family is a different track from ATI's past experience in the last two generations, and I was wondering whether in fact the gross margin than you can achieve with the 4800 should be higher than the sort of mid 30s that when ATI was a independent Company that those were the goals to the setting for the discrete graphics business.

Could you actually, if you have a architectural leadership this time around, can you achieve, put a number four in front of it?

Sure.

I think Dirk and I can work our way through this, kind of.

I'll call it the simple one, the ATI question.

Not going to, we're going to get out of both of those businesses which is Handheld and DTV.

Don't feel compelled to talk about how we're going to do that if it's one or two separate transactions, we will just figure out how to exit those appropriately so that they're seamless transition for the customers and there's a place for this great team of people and technologies to find an appropriate home.

Okay.

So we'll just leave that one where it is.

On the breakeven question, asset smart is not a precursor to the breakeven equation.

We're trying to set the cost structure in place today that will achieve that breakeven, and actually make money in the back half of this year, so in the next two quarters, and but to get to the $1.5 billion, will get us to some of the asset smart type transactions, so we believe we're on a path to continue to make progress and work our way down, but then make a significant transformation as we execute asset smart so hopefully that answered the question.

And then I'll take a shot at the 4800 piece.

I mean, clearly, you can see based on our competitor since there's only two of us in the graphic space, he who has the good goods gets the better margin, and nVidia has enjoyed nice margins in their graphic business.

We believe we can enjoy those same kind of margins and anticipate that will happen as this new family of products kind of takes over in the marketplace.

So gross margins north of 30 to the 35, 40 is definitely where we've said we desire this business to be operating at, and that's, the way to get there is to have the right products that are better than our competitor in a marketplace.

Well they have north of 40.

Well, you got to get to mid 30s before you can get to 40.

Right and the other thing I'll point out is another margin, dollar and margin percentage opportunity is the workstation graphics market and we've talked about that in the past as being an opportunity for AMD.

Okay.

Thank you.

Thank you.

Okay, Matt, we'll take one more, thank you.

Our final question is from David Wong of Wachovia.

Your question, please?

Thank you very much.

Your discontinued operations, do you have high confidence that you'll actually sell them and get cash for that or are you also considering a possibility of having a cash outlay because you'll need to shut them down?

We have no plan for a cash outlay.

Clearly, we have a plan, and believe it's highly, we're highly confident there will be cash inflow.

Right.

And further on the expense front, could you give us any idea what your legal expenses for the quarter are associated with the anti-trust actions?

We don't give that level of granularity, but they aren't insignificant.

Right.

Okay, and last thing, so as I understand what you said just now about breaking even without needing asset smart, so we can't assume we will learn about asset smart or that will be implemented in the next six months.

You'll actually expect to breakeven regardless of that?

Well, you're misinterpreting two things.

To me, we will make money in the back half of the year, period, decimal point so make sure you're clear on that.

Yes.

That's not a statement about asset smart and there's no indication, we're not trying to give any indication that asset smart is a 2009 event.

It's as soon as we can get it done which is what Hector is focused on.

Right.

Thanks very much.

Thank you.

Thank you.

Okay, Matt, that concludes the call and we would like to thank everybody for participating.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may now disconnect.

Good day.