超微半導體 (AMD) 2008 Q3 法說會逐字稿

Good afternoon.

I'll be your conference operator for today.

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

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

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

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

Ruth Cotter, Director of Investor Relations for AMD.

Please go ahead.

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

This afternoon, our call will be hosted by Dirk Meyer, our President and CEO; and Bob Rivet, our Executive Vice President and CFO.

This is a live call and will be replayed via webcast on amd.com.

There will also be a telephone replay.

The number is 888-266-2081.

For those of you outside of the United States, the replay number is 703-925-2533.

The access code for both calls is 1284873.

In addition, this telephone replay will be available for the next 10 days starting later this afternoon.

I would like to draw your attention to our Q4 2008 quiet time which will begin at the close of business on Friday, December 12.

I would also like to remind you that we will be hosting our annual Financial Analyst Day on November 13, at our Sunnyvale offices and in addition refer you to our calendar of activities on the IR section of amd.com for details of additional events we will be participating in throughout the year.

Today's call will be webcast live and archived on amd.com.

Before we begin today's call, I'd like to caution everyone 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, speak only as of the 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, particularly in light of the turbulent economic conditions under which the entire world economy is presently suffering.

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 expectations.

You'll find detailed discussions in our most recent SEC filings, AMD's quarterly earnings report on Form 10-Q for the quarter ended June 28, 2008.

Now with that I'd like to turn the call over to Bob Rivet.

Thank you, Ruth.

Good afternoon, everyone.

I'm pleased to report that AMD had a well executed third quarter in the context of a challenging economic environment.

We reached our goal of achieving operating profitability in the quarter.

We launched and shipped a new family of industry leading Radeon HD 4000 graphics products and capitalized on the growing demand for our Quad-Core AMD Opteron processor family, as well as our new AMD Turion ultra notebook platform.

In short, we continue to progress toward delivering consistent profitability, based on a tightened focus and strong execution across our business.

We are particularly excited with last weeks' announcement of our asset smart strategy, a bold plan to unlock the value of our manufacturing assets, while assuring AMD access to leading edge manufacturing processes without the obligation to make the capital investments required to maintain a world class manufacturing operation.

Before I begin my financial overview I'd like to remind you that a reconciliation of GAAP to non-GAAP financial results is available in this afternoon's press release.

Included in the results of continuing operation is $191 million of process technology license revenue captured in our computing solutions segment, which had a positive effect on revenue, gross margin, and profits.

Revenue for the quarter was $1.776 billion, up 32% sequentially and up 14% year-over-year.

Income from continuing operations was $41 million or $0.07 per share.

We also reported a loss from discontinued operations of $108 million or $0.18 per share.

Third quarter operating income, excluding ARC and restructuring charges, was $170 million compared with a $276 million loss last quarter.

Last quarter, a gain on the sale of 200 millimeter equipment was also excluded from the operating loss.

Gross margin in the quarter was 51%, including a 6 percentage point positive impact associated with the process technology license revenue.

Therefore, non-GAAP gross margin was a solid 45% compared with a 37% non-GAAP gross margin in the prior quarter.

This increase was due to unit growth volumes and improvement in our product mix.

Now let me switch to the business segments.

Computing solution revenue was $1.39 billion in the third quarter, up 26% from the prior quarter and up 8% compared to the same period a year ago.

Highlights of the quarter included server revenue up 9% sequentially, bolstered by a solid 50% unit increase in Quad-Core shipments over the prior quarter.

Our Quad-Core AMD Opteron processors set several new benchmark records in the quarter, including the top X86 Web performance scores for both dual and Quad-Core processor systems, as well as an X86 record score for Java-based server applications.

Notebook processor units and revenues were up from the prior quarter driven by growing customer demand for our AMD Turion X2 ultra notebook platform.

Samsung and EC, Toshiba, MSI and ASUS all introduced new SKUs in the quarter, offering a unique graphics and power efficiency of the AMD on AMD platform.

Desktop unit and revenues were up sequentially on flat ASPs, driven by growing AMD Phenom processor sales and growing customer demand for AMD business class solutions.

As a result of these gains, as well as the process technology licensing revenue, operating income for the computing solution groups was $143 million in the quarter.

In the graphics segment, revenue for the quarter was $385 million, up 55% sequentially and up 40% year-over-year.

We refreshed our graphics product line in the quarter with the introduction of 10 new leadership Radeon 4000 series products that span from the enthusiast to the value segment, including the ATI Radeon HD4870 X2, the fastest graphics card in the world.

These timely introduced leadership products returned the graphics segment to profitability resulting in operating income from the graphics segment of $47 million.

Now let me turn to the balance sheet.

Our cash and marketable security balance at the end of the quarter was $1.34 billion, down from $1.57 billion in the prior quarter.

We are confident in our near and long term liquidity, based on our asset smart plans and the anticipated proceeds from the sale of our discontinued operations.

Turning to the outlook.

The following statements are forward-looking and actual results could differ materially from current expectations in a highly uncertain economic environment.

Third quarter 2008 revenue from continuing operations was $1.585 billion, not including process technology license revenue.

We expect fourth quarter revenue from continuing operations to be roughly flat to that number.

Amortization of acquired intangibles is expected to be approximately $30 million, depreciation and amortization expected to be approximately $280 million.

In summary, we made solid progress in the third quarter, gaining momentum on the strength of impressive new products in each of our core businesses while taking actions across the Company toward lowering our breakeven point.

We remain on track to achieve our target of $1.5 billion breakeven in the first quarter of next year, the result of continued restructuring activities, as well as our asset smart transaction.

We are executing our strategy of tightening our focus on our unique combination of world class processing graphic technologies.

And while we see opportunities for improvement across our businesses, we are pleased with our progress on the execution side, achieving clear leadership in our graphics business while delivering unique platform capabilities across our computing solutions businesses, with the favorable impact of 45 nanometer technology just beginning to take effect.

I'll stop here and at this point I'll turn it over to Dirk.

Thanks, Bob.

Thanks for joining us, everybody.

As Bob highlighted, this past quarter was a good one for us in a number of ways.

Certainly not satisfactory.

We won't be satisfied until we deliver consistent profitability, but one I would characterize as directionally correct.

We are on a path to becoming the Company we aspire to be and we will be.

But we are satisfied with our Asset Smart announcement.

In fact, we're thrilled.

As many of you indicated in our meetings last week, the Asset Smart transaction is nothing short of transformational for AMD and for the whole semiconductor industry.

It assures this Company of a long term source of world class manufacturing capacity, while unlocking the untapped potential and value of our phenomenal Dresden team to the rest of the industry.

It's good for us, good for our customers, good for the great people of Dresden, and in Upstate New York.

And it's good for competition, which means it will be good for consumers around the world.

I want to thank our employees for their tireless work in bringing this Company back to operating profitability at a time when we were working on the most strategic transaction in the history of our Company, and we all look forward to the transaction closing at the end of the year.

This is a Company that is putting itself in a position to win.

We have taken the leadership ground in the graphics business.

We deliver the platforms with the best balance of CPU, graphics and video technologies, and with Shanghai, which is shipping now and will launch in a few weeks, we have the best server platform in the business, period.

Over to you, Ruth for Q&A.

Thank you, Dirk.

Thank you, Bob.

Now with that we'll be happy to take your questions.

And in order to allow more of you to participate in our Q&A session today we ask that each person limit themselves to two questions only.

Our operator will introduce each of you and prompt your question and then ask if you have a follow-up.

We're now ready for our first question, please.

Thank you, Ms.

Cotter.

(Operator Instructions) Our first question comes from Uche Orji from UBS.

Your line is open.

Well, let me start by saying congratulations.

It's been a long time anyone has said that to you guys.

This is a good set of numbers.

But let me just start by asking about these license agreements.

What does it cover, what is the term, and what is the tenor of the agreement, just for us to get a proper handle what it means?

And also if you can explain how that reconciles with the agreements you also have with IBM.

Is this helping you to kind of offset that?

So any more light you can shed around this would be helpful.

That's my first question.

Sure.

Hi, this is Bob.

Thanks for the question and thanks for the compliment.

Yes, this technology revenue is actually associated with the sale last quarter of our 200 millimeter tools.

In addition to selling the tools we actually sold some process technology to the same vendor, so it's kind of a unique one off event.

There will be a little bit of dribbling of more in the future, but the bulk of it was recorded in the current quarter.

So it is not associated with the IBM -- an offset to the IBM Technology payment.

And it further relates to a technology node that we had developed before we entered into the licensing or into the process technology relationship with IBM.

Okay that's helpful.

Just on the -- let me ask another question on graphics.

Fantastic performance there, but the question here is what is your sense of how much share gain you had this quarter?

And what is the outlook for graphics given that in a tough macro environment, it looks like attach rate seems to go down?

So looking forward what is your sense as to how this business will perform going forward?

And how sustainable do you think all of the elements of share gain that you've had will be?

And similarly also if you can extend that to the rest of your processor business, the guidance for Q4 is for flat, how do you reconcile that with what is normal seasonality within the current macro?

So first on graphics and also the processing side.

Yes, Dirk here.

Why don't I answer them in the other order.

Q4 is typically a seasonally strong quarter.

In CPUs it's typically up about 8%, 10%, graphics a little bit less than that.

Clearly, we're not planning on losing share in either of our big businesses quarter to quarter.

Rather, we're just being cautious based on the macroeconomic environment.

So that's the second question.

The first question on graphics, clearly, we gained share quarter to quarter.

It's pretty difficult to put a number on it at this point.

We clearly gained share in notebook, consistent with the design wins that we've talked about in the past on the new notebook platforms that came out in Q3.

And we expect to be able to see continued share momentum in Q4, since those new notebook platforms really didn't ship until into Q3.

So that's point one.

Clearly on the desktop side we also gained GPU share on the strength of the products.

Some of these products were introduced deep into the quarter.

In fact some of the products, like the 730 and 710, were only introduced in September, so we feel like we ought to get continued momentum there.

But again we're being cautious based on the environment.

Thank you, sir.

Our next question comes from Tim Luke from Barclays Capital.

Your line is open.

Thank you so much.

Just to clarify first, your units were up in both notebooks and servers in the third quarter; is that right?

That's correct, Tim.

And the ASPs?

ASPs were roughly flat quarter to quarter for the total portfolio.

Some pluses and minuses between the pieces but effectively flat.

Is it fair to think, in looking for flat revenue for the calendar fourth quarter that the graphics business would be expected to show some sequential growth within that, or how should we think about the different segments for the fourth quarter?

We're just being cautious at this point.

I mean with what's going on in the banking, financial markets, what we're seeing in pull rates in the first part of October, we're just being cautious.

As Dirk said though, we expect to continue to gain share in the GPU space and continue to gain share in the CPU space, but it's a little bit hard to call exactly what the numbers are going to finally land at.

From a macro perspective Bob, can you give any kind of color than in terms of how you have seen corporate versus consumer and the different regions in terms of the general climate in October?

Thanks.

Yes.

Tim, it's Dirk here.

Why don't I take a swing at that.

Thank you.

First of all, on the consumer side, I would say we clearly saw September as softer than a typical September.

Certainly in the US, certainly in Western Europe, and even a little bit in China where the consumer market in China on the PC side seemed not to wake up as quickly as we expected after the Olympics.

Rest of the world kind of typical I would say.

On the enterprise side, frankly, the enterprise business from our perspective hasn't been particularly strong all year, so I wouldn't say that Q3 was really distinctive as compared to Q2.

Thank you, sir.

Our next question comes from Glen Yeung from Citi.

Your line is open.

Thank you.

If I look at your operating margins in computing, and I ex out the gains that you had from the licensing revenues, it looks like the profitability actually went down there.

I wonder if you could just talk a little bit about what drove that, because it sounds like servers did pretty well for you, I would imagine that's good margins.

So if I had to guess, I am going assume that mix had an issue or played a role in this impact.

I wonder if you can just clarify if that's true?

This is Bob.

If you take out the technology and try to do it from that perspective, mix is always a challenge.

We're introducing new products.

It's a combination of all of those things above that just kind of move things around.

But in total we're feeling pretty good about the progress we've made in server notebook desktop, et cetera.

Yes, absolutely, it is great

Actually the other thing to remember is that last quarter we also had a tool sale.

That's right.

So you got to actually back out both numbers to do an apples-to-apples comparison.

It ends up the numbers are roughly the same.

It was $193 million in the second quarter, it was $191 million in the third quarter.

Okay.

That's good to know, thank you.

And then the other question I had was on GPU.

A great quarter obviously in terms of sales.

And the fall through was spectacular.

I think you dropped 62% of your sales growth through the operating income line.

When you look at that, is that a sustainable metric in terms of your ability to drive through profitability going forward or is there anything unusually positive that helped that number?

This is Bob.

In the current quarter as we introduced each of the new products, they were significantly better than the competitors' offering, and so we could actually maintain our price points throughout the whole quarter, which is typically not normal in that business.

So that's part of the reason the magic of volume with the right products will yield the right kind of margin improvement.

On a go forward basis, we anticipate prices will continue to be competitive.

We'll still do pretty well, but probably tougher to maintain that kind of fall through on incremental sales.

Sure.

Well, good job.

I appreciate it.

Thanks.

Thank you.

Thank you, sir.

Our next question comes from Chris Danely from JPMorgan.

Your line is open.

Thanks, guys.

Can you just talk about how you expect gross margins and operating expenses to trend Q4, but especially into next year as we head into the teeth of the recession?

Sure.

Well, to be honest I don't want to get into a next year discussion since we're going to meet in 30 days with an analyst conference, so I'll hold the '09 discussion until then.

But to give you kind of a couple of things to think about for fourth quarter, and clearly, that's part of the thought process as you get into '09, but I won't give any more detail on it, is we're just starting 45 nanometer.

As Dirk commented, we're shipping Shanghai, which is 45 nanometer server product as we speak, so 45 nanometer is ramping.

Not only will we have better products at 45 nanometer, we'll also have the cost advantage at 45 nanometer.

So things are moving in the right direction of what we control from a cost perspective.

The market is the part where it's struggling with how to handicap.

So I kind of view it on the two positives as new products typically give you better ASPs, better unit expansion into the marketplace, cost control with 45 nanometer shrank, cost controls to continue to lower the breakeven point on operating expenses, market condition of what's the market going to -- what are we going to sell into, that's the part we really do struggle with exactly what that is for the fourth quarter, which is why we guided flat.

Okay, and so I guess to paraphrase especially on OpEx, flattish?

Flattish to slightly down.

Great.

And then for my second question, what exactly is the exit strategy for the foundry business?

In other words, how are we going to get this off of your consolidated P&L?

Well, as we said last week, but I'll kind of for everyone's sake kind of repeat it again.

The deal we have struck will let us, at our option, when a capital call is required for the foundry business allow us to either pay our fair share of that capital call or turn in more shares and ownership of the Company, from that perspective.

And as we've kind of alluded to, we'll make that determination at each point in time when the capital call arises.

But so you can think of it a way, there's a natural way to get out of it if we want to, which is not participating in the capital call with cash, turn over shares.

Is it safe to say this is not a near term thing that's going to happen, it's more a little bit farther out?

Correct.

Yes.

Thank you, sir.

Our next question comes from David Wong from Wachovia.

Your line is open.

Thanks very much.

Shanghai, when would we expect to see server systems containing Shanghai processors begin to ship, and what about desktop systems with 45 nanometer processes?

Yes, Dirk here.

We're shipping Shanghai server components to data OEMs, and you'll see OEM systems in the market this quarter.

We'll be shipping the desktop, marry into that product this quarter, and you'll see OEM systems in the market early next quarter.

Great, and if I understand correctly, Shanghai still has the StarCore architecture that Barcelona uses, doesn't it?

When do you expect to introduce products with your next generation core?

I think because we have an analyst meeting in a month, we would like to suspend longer term road map discussions until that meeting.

Thank you, sir.

Our next question comes from Srini Pajjuri from Merrill Lynch.

Your line is open.

Thank you.

Bob, just a clarification.

You said OpEx a little bit down next quarter.

And if I just did the rough math on your $1.5 billion breakeven target, I think the OpEx needs to come down by at least $50 million to $100 million, so just wondering where you see those opportunities?

And you obviously sounded pretty confident about getting there in Q1, I am just trying to understand where that will come from?

As we -- think about it this way, we continue to -- we will execute the transaction for Asset Smart.

Included in that transaction will be, I'll call it, a change in our G&A perspective.

We will also use that transaction to continue to sharpen our pencil and reduce our cost structure in the operating expense category, R&D, sales and marketing, G&A.

So that continuation of that process will continue in the fourth quarter so that we can start the year at the $1.5 billion breakeven point from a design co.

perspective.

Okay, but do you expect that the expenses to have any revenues associated with them?

No.

I mean, to me, we're not trying to cut revenue generating things.

We're trying to cut, I'll call it, just pure cost oriented things that we don't think we will need on a go forward state.

Okay, and then my final question is your comment about Quad-Core is growing 50% but yet your servers are only up 9%, I'm trying to understand what I'm missing here.

Has the pricing gotten that much worse or is there something I'm missing here?

Thank you.

Dirk here.

Good question.

What you're seeing there is the typical insertion of more capability and features into existing price points.

So in other words last quarter, two quarters ago we were shipping a dual core and now we're shipping Quad-Core consistent with semiconductor industry practice.

Thank you, sir.

Our next question comes from Jim Covello from Goldman Sachs.

A couple things.

Can you talk about the inventory management in relation to the flattish kind of outlook?

Inventory is up 7% or so, the outlook kind of flattish.

Are you comfortable with inventory at that level or do you feel like you have to bring it down next quarter?

Well, as you could imagine with the typical cycle times, in the third quarter we had to start making the signals for the fourth quarter with the anticipation that fourth quarter was going to be strong, I'll call it before the hurricanes started, per se.

As Dirk said, we started to see a little bit of wind in our sails in September, so we've backed off a little bit in the manufacturing environment to manage inventory in a marketplace that looks a little turbulent.

Interesting though, we're actually poised to actually respond if the market goes in the other direction and wants more units.

So we feel like we're moving in the appropriate direction.

Now that we know what we know, we probably built a little more inventory in the third quarter than a flattish environment would tell you to do, but had to make that call in the summertime.

Sure, all else being equal how much do you think that lower factory loading would hurt the margins in Q4 again kind of business mix being consistent?

Not too much because of the 45 nanometer impact that starts to play through.

Okay.

We got an offset, just the natural offset with the cost reduction of 45.

Okay and if I could just sneak in one more and then I'll go away.

Just relative to the foundry, and the Asset Smart strategy, Dirk, what do you think the biggest challenges are going to be in manufacturing at a foundry?

Obviously you feel comfortable that you can work through them, but what do you think the biggest things you'll have to stay on top of are?

Thanks so much.

Yes, good question.

Clearly there's some things we'll have to modify in terms of our behaviors and the way we go about running the business.

The good news is we've learned a lot about what we need to do as a result of seeing how the ATI team operates with their foundries.

So we've learned quite a lot over the last two years.

In the area of both supply chain and new product development, we're going to have to change a little bit our processes just to make them more formalized.

You can run things based on human relationships when everybody is part of the same Company, you need to be a little bit more formal when we're different companies.

I wouldn't say any of the challenges are fundamentally hard, but clearly we're going to have to make some changes.

And I actually think some of these changes are going to be good for us because they are going to enforce more discipline across these organizations.

Thank you, sir.

Our next question comes from Krishna Shankar from JMP Securities.

Your line is open.

Yes, congratulations on good results.

A couple of questions.

Can you talk about what kind of attach rate you're seeing in the notebook market for your Puma platform with your own graphics, and I think kind of a step up in your penetration of higher end notebook models with that or is it still more in the low to mid range consumer market?

Yes, Dirk here.

I would say that we still have an untapped opportunity with the Puma platform in that, if you look at the mix that we're selling, that is, the system level price points of Puma in the market versus the market overall, we're a little bit lower, and as a result, the discrete graphics attach rate is lower as well.

Okay.

And also can you talk about your penetration efforts in the enterprise market?

I realize it has sort of been weak the first three quarters of this year, but how is Shanghai helping there?

And also some of your business class desktops and notebooks, can you layout sort of your thoughts on the enterprise market and penetration there?

Sure.

First let me clarify the question.

So our big participation in the enterprise market, meaning big businesses, is really through our server business.

Our commercial client business is really more of a government education and small and medium business play.

On the client side, I would say that '08 has been the year of design wins and seeing those design wins get in the market, and now we're in a mode of working with our OEMs to get those systems sold through their channels.

I'd say quarter by quarter we're making progress, but we still got a lot of opportunity in front of us and a lot of growth we can still tap.

So a long way to go I guess I'll say in summary.

On the server side, with Barcelona having shipped for an entire quarter in Q3, I would say we're making progress.

We're doing better than holding our own overall in the server category.

We clearly saw strength return on our side in the four socket arena.

And we're really enthusiastic about Shanghai based principally on how enthusiastic our customers are about getting their systems in the market in Q4.

Okay, and my final question is what percent of AMD Foundry Company will be owned by you and then the Dubai investment?

Can you give us some sense for how the ownership of the Foundry Company will be starting in Q1 '09?

Yes, there's two dimensions of ownership.

There's voting ownership which will be a 50/50 proposition, and economic ownership will be roughly 55/45 on a fully converted basis.

So 55 AMD and 45 --?

No, the other way around, economically.

Okay.

Thank you.

And if I could sneak in one more, what's your response to Intel's Atom processor?

That clearly is a very viable high growth segment, what's AMD's product strategy there?

That's a good question and it's a complicated answer over the phone.

We'll show at the analyst conference pictorially how we think about the notebook market.

But clearly the so-called netbook is a new form factor, a new market opportunity, and one that we're not participating in right now, today.

We do have strategies, together with our OEMs, for pushing our solutions both down into smaller form factors and lowered notebook price points, and we'll detail that next month at the analyst conference.

Thank you.

Our next question comes from JoAnne Feeney from FTN.

Your line is open.

Thanks folks and congratulations on a nice quarter.

A couple questions.

One is do you guys anticipate a continued improvement in gross margin?

It seems like a lot of what we saw here in the third quarter came from improved mix in CPU and GPU, and it sounds like that is likely to continue into the fourth quarter.

Is that a safe assumption to make at this point?

This is Bob, JoAnne, hi.

I would love to say if business was usual strong fourth quarter, I'd say that it is pretty easy to call improvement in gross margin.

Based on the market condition, it's a little bit tougher to call.

In what we control, I feel like we've got the dials moving in the right direction, which is improved mix because of new products, Shanghai being I'll call it the big new one in the fourth quarter, and cost of moving to 45 nanometer.

So those two dials we control definitely moving in the right direction should yield better gross margin.

What I don't know is how much -- what's all the total -- what's the mix of what we're going to ship in the fourth quarter, first quarter, et cetera.

So kind of a political answer I'll call it, but that's I think reality.

Well, reasonable, yes, given the uncertainty we're facing I suppose.

And perhaps a follow-up.

If we could maybe talk a little bit about Asset Smart, and in particular the advantages that you're seeing.

I mean, as I see it, you've alleviated the debt, a major concern, and you've also shored up the technology front with -- it sounds like a stronger partnership with IBM.

I mean, as you go into the next year and you're trying to trim your operating expenses, it seems like a couple things might be happening for you.

One, with the market being so weak there might be some people around, design engineers perhaps, that you could pick up to also shore up the design side of the Company.

I'm wondering if you're planning to do that?

And then secondly, do you anticipate more people from IBM being involved on the foundry side?

I know the CEO is an ex-IBM guy, and I'm wondering if that relationship will become tighter through more participation from the IBM folks?

Yes, JoAnne, Dirk here.

Second one first.

IBM has publicly expressed their support behind the Foundry Company venture.

And the reason is clear, this brings a strong technically and financially strong foundry to the IBM ecosystem.

Clearly that's good for IBM.

They see that.

And as a result of that I do expect the partnership between the two companies to get stronger over time.

With respect to the prior question, as we always do -- and your question was mix of design engineering, what our thoughts there.

I would characterize '09 as high order being one of getting better results from the capability that we have in house as opposed to hiring people en mass.

That said, we always rebalance the workforce to get the right talent, working on the right stuff.

Okay, yes, it sounds like you might have a good opportunity in a downturn, might be a lot of people on the street.

And with your stock at its current price and potentially moving higher, it just seems like that would be an attraction to being able to hire some more better people?

You're singing our song.

Thank you.

Our next question comes from Ross Seymore from Deutsche Bank.

Your line is open.

Thanks guys, and congrats again on the business strength, especially in GPUs.

I am just wondering with your guidance, how would you describe recent demand patterns?

I know there's a ton of uncertainty out there, but was the end of the quarter something that has continued now into October gotten worse, better, stayed the same, et cetera?

Dirk here.

I wouldn't say a couple weeks into Q4 we're seeing substantially different market conditions than what we saw in Q3.

I would just say that the quarter doesn't have its usual strength.

It doesn't seem like a disaster.

As Bob said, we're not forecasting a shrink in business Q3 to Q4, but it is pretty murky.

The one good news I'll say is averaged across customers and channels, we're not seeing inventories being terribly out of line.

So to the extent end-user demand picks up or is a little stronger than we think, we got an opportunity to ship more.

I got a question on the balance sheet.

You might have gone through this, Bob, but I apologize if you did, but the cash fell quarter-over-quarter.

Given that you got the $191 million that came in, I was a little surprised to see that.

Could you describe what happened there?

Sure.

Yes, one of the phenomena on the $191 million is actually we collected the majority of the $191 million in prior quarters.

They were all, I'll call it prepaid.

It wasn't until we completed the revenue process in the quarter that we could actually record it.

So the $191 million didn't show up just in the third quarter, it actually showed up throughout this year, which is how we have managed our cash balance throughout the year.

So that's one of the phenomena of why cash went down even though I had this nice pop in revenue, particularly from process technology license.

Thank you, sir.

Our next question comes from Patrick Wang from Wedbush Morgan.

Your line is open.

Hi, guys and want to add my congrats on the quarter.

I just had a question on 45 nanometers here.

If we assume a relatively fast ramp, what are some of the milestones we should be looking for over the next I guess four to six quarters here, just in terms of how fast that ramps?

And if you guys have an estimate or target in terms of when you guys see crossover versus 65 nanometers?

Yes, Dirk here.

We'll be fully converted in the first half of next year.

It's a very fast ramp.

I mean, we'll be more than 50% end of first quarter, we'll have actually fully conversioned by some time in the summer, second quarter kind of time frame.

So it's not six quarters, it's less than four to do full conversion for us.

Okay.

Thanks, that was helpful.

And then just secondly, I'm just trying to figure out some of the moving parts in terms of the revenue side in computing here.

I know that in terms of desktop units, units were up and ASPs are flat, notebook units are up and server units are up, but just in terms of pricing on those, would it be fair to call that both of those were down just slightly on the quarter?

Dirk here.

So as Bob said, overall across the MPU portfolio ASPs were flat.

Desktop ASPs were flat.

Notebook revenue ASPs were essentially flat.

I mean, down just a wee bit.

And server ASPs were essentially flat.

I'll call it up just a wee bit.

But overall, noise.

I mean, think flat across-the-board.

In terms of pricing going forward into the fourth quarter, I know you guys kind of touched on this earlier, but any thoughts there?

Well, there's a couple of elements to pricing from our perspective.

One is what's the mix that we sell.

First, mix across server desktop and notebook.

And secondly within a product category, how rich a mix are we able to sell.

And then finally what's the competitive dynamic in the overall pricing environment?

The pricing environment really didn't change Q2 to Q3 and we're not expecting it to change much Q3 to Q4.

We've always striving to sell more server and sell a richer mix within notebook and desktop, so that's always the goal.

Thank you, sir.

Our next question comes from Sumit Dhanda from Banc of America Securities.

Yes, hi.

A couple of questions.

First, on the relative growth, I don't know if you touched on this Dirk, or Bob, between desktops and notebooks if you had to give us a sense of where the revenues grew faster one versus the other, could you give us some sense?

Yes, Dirk here.

I mean, clearly, quarter to quarter notebook revenues outpaced desktop in terms of growth.

Was it a 2X factor?

Just some rough idea?

I would say in terms of growth rate, better than 2X.

Okay.

The second question I had was as it relates to the earlier comment on shipping the Quad-Core processors at basically the same price as the dual core processors, is this really impacting your margins on Quad-Core?

I'm assuming that the dye size is much larger since you haven't done your 45 nanometer transition yet.

And do you expect to get a much more favorable margin basis on your Quad-Core product as Shanghai ramps?

In other words, give us a sense of how much smaller is that dye?

Is it just a 50% shrink as you would expect?

If you just isolate your question to talk servers, as an example, but I'll come back to the further clarification of your question.

Clearly, at 65 nanometer a Quad-Core is more expensive than a dual core and takes up more real estate.

And we're not seeing that much price premium, I'll call that, as we kind of continue to go through the process.

Though the one thing I'll remind you is the dual core Opteron's that we're shipping are 90 nanometer.

We don't have a dual core 65 nanometer Opteron, so it's really Quad-Core 65 versus a dual core 90.

It's not an apples-to-apples but that just shows, one, we had respectable gross margins in the current quarter of -- moving to 45 nanometer really is a nice pick up from that perspective, because you aren't going to see an ASP drop and you're going to see the cost reduction from that standpoint.

Plus the product actually is a hot product, as Dirk said, so we actually believe we'll sell a lot more units.

So that's the story on server.

But if you look at it in the total, either one of those stories, whether it's shipping 65 nanometer Barcelona or 45 nanometer Shanghai, that's still the area we want to move into because it has much higher gross margin than the client business.

So it's kind of in a priority sequence think of it as sell as many units as you can in the server space at whatever technology, because you actually get a lot of bang for the buck.

And then of course execute your plan within the server portfolio to get the smallest -- the richest technology as you can.

If I could sneak in just one short question here.

You noted that unit volumes and product mix contributed to the jump in non-GAAP gross margins.

Could you give us a sense of was it all microprocessor related given that you outsource your graphics chips?

No.

I'd refer -- you can see it fairly quickly if you look at the segment reporting page in the press release.

But we made huge progress in the graphics business quarter on quarter and progress in the CPU or the computing solutions segment, so it was actually both business units contributed to improving the gross margin and the profitability.

We'll take two more questions, please.

Yes, ma'am.

Our next question comes from Craig Berger from FBR Capital Markets.

Hi, guys thanks for taking my questions.

With such a steep ramp in 45 nanometer coming in the next couple quarters how do we think about that, the impact on gross margins there?

All goodness.

Goodness from the standpoint of clearly that delivers better product off the 45 nanometer technology node, which sell more units potentially at higher ASPs and cost reduction because it's a smaller dye.

So to me, going to 45 think about it -- compare this quarter to, let's pick, second quarter of next year is wildly different from a cost structure perspective and the refresh of the products.

Any quantification?

No.

Not at this point.

I'll talk about next year at the analyst conference in four weeks.

And can you just remind us again the impact on your OpEx from the satellite deal?

I assume you're talking Asset Smart?

Yes.

Yes, I mean the zip code I've kind of given people last week is still the same.

Again, more details to come.

We will lose around $100 million a quarter in process R&D in the AMD design co.

business, that will be replaced in gross margin by higher wafer costs.

Effect to operating income is effectively neutral, so we'll just have some parts moving around.

Again I'll talk about that in 30 days.

Okay, last question is the $191 million of licensing revenues, is that all in the processor bucket?

Yes, it is.

Computing solutions.

Thank you, sir.

And our last question comes from David Wu from Global Crown.

Your line is open.

Well, thank you very much.

I was late getting on.

I just want to get some clarification, Bob, on when you mention about $1.5 billion breakeven, is that on a consolidated basis or do you have to sort of do some magic and just look at design co.

in Q1?

That's staying focused as we have been being consistent with our message.

Clearly last week we could come out of stealth mode and really talk about it is $1.5 billion breakeven for AMD the design product company, not on a GAAP consolidated basis.

Which will be a little more confusing, but again, think of it this way for everybody on the call.

That foundry co.

piece of the bucket will have profits and losses.

We'll talk about that later, but they're all cashless.

The cash generating machine of AMD is the AMD design product P&L.

And we will be transparent and show that when we start reporting after the transaction closes.

But Bob, from a pure accounting basis, it's going to be multiple years when your ownership of the foundry will be off your consolidation basis, right?

Because it probably makes a couple rounds of fund raising before you actually deconsolidate the numbers.

It's actually even more confusing than that but the fundamental answer is yes, it will take awhile before we'll stop consolidating.

Okay.

Do you need a lot of -- with the Fab 38 coming on stream now that you've got a rich uncle, how does it change your mix of SOI and bulk CMOS in your manufacturing situation, and would you be using that to help your graphics company to reduce costs?

Dirk here.

So we'll, as you said, be ramping Fab 38, and we'll be in stalling into Fab 38 a 32 nanometer bulk process for the purpose of enabling the foundry business.

We'll also be moving some GPU product into the Foundry Company in order to help the Foundry Company get off the ground relative to that foundry type business.

And clearly, as a result of having two really good suppliers on the GPU side we got an opportunity to improve our costs there and capability.

Okay.

And one of the pick ups to think about on a go forward is the beauty -- another beauty of the deal is we finally get scale, because that factory can be ramped, not just on the backs of the microprocessor business, but on I'll call it the total industry, including the bulk part of the process, therefore, we'll both get the benefit of it.

Yes.

So basically, in Dresden, we got one SOI fab and one bulk CMOS fab?

That's maybe a little too simplistic but you're not too far off.

Okay, thank you.

Okay, we would like to thank everybody for participating in today's earnings call.

And we look forward to seeing many familiar faces at our forthcoming analyst day.

Thank you.

Ladies and gentlemen, this does conclude today's conference.

Thank you for your participation and have a wonderful day.

You may now all disconnect.