超微半導體 (AMD) 2009 Q1 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 first quarter 2009 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 will now like to turn the conference over to Ms.

Ruth Cotter, Director of Investor Relations for AMD.

Ma'am, please go ahead.

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

Our participants today are Dirk Meyer, our President and CEO, and Bob Rivet, our Chief Operations and Administrative Officer and Chief Financial Officer.

This is a live call and will be replayed by a webcast on AMD.com.

There will also be a telephone replay.

The replay number is (888)266-2081.

Outside of the United States, the number is (703)925-2533.

The access code for both is 1343745.

The telephone replay will be available for the next ten days starting later this evening.

As you know, on March 2 we closed our asset smart transaction resulting in the formation of Global Foundries, a joint venture between AMD and the Advanced Technology Investment Company Abu Dhabi.

As a result of this transaction, AMD now consolidates Global Foundry for financial reporting services.

Therefore, references to AMD on this earnings conference call include consolidated operating results, which are reported for GAAP purposes.

AMD Product Company refers to AMD, excluding the operating results of our new Foundry segment and intersegment elimination.

The Foundry segment includes the operating results attributable to front end wafer manufacturing operations and related activity, as of the beginning of the first quarter of 2009, which include the operating results of Global Foundry for March 2, 2009 through March 28, 2009.

Intersegment eliminations consist of revenues, cost of sales and profit on inventory between AMD Product Company and the Foundry segment.

While the operating results of Global Foundries are consolidated in our financials, we also provide results for non-GAAP financial measures for AMD Products Company such as the statement of operations and select balance sheet items.

In addition for AMD Product Company, we are providing non-GAAP financial measures such as net income or loss, operating income or loss and gross margin, which include certain adjustments set forth in the tables in in today's press release.

AMD is providing these financial measures because it believes it's important for investors to have visibility into AMD's financial results, excluding the Foundry segment, intersegment elimination, and these adjustments.

So, before we begin today's call I would like to caution everyone that we will be making forward-looking statements about management's expectations.

Investors are cautioned that these statements are based on current belief, assumptions and expectations.

They 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, especially in light of the current state of the economy.

We encourage you to review our filings with the SEC, where we discuss in detail the current risk factors set forth, information that could cause actual results to differ materially from our expectations.

You'll find detailed discussions in our 10-K filing for the year ended December 27, 2008.

Now with that, I'd like to turn the call over to Dirk Meyer.

Dirk?

Thank you Ruth and thanks for joining us, everyone.

The global economic contraction continued in the first quarter, and while end-user IT demand continued to be sluggish, it appears that the severe inventory corrections of the prior quarter have stabilized and should play out completely in the coming quarter.

Against the back drop of soft demand, our execution across our major goals for the quarter.

First, we completed the launch of Global Foundries, altering the financial structure of AMD while introducing one of the most exciting new companies in the recent history of the semiconductor industry.

As a result of the transaction, we were able to immediately improve our balance sheet, while ensuring ongoing access to world-class manufacturing capacity.

Meanwhile, early customer interest in the new Foundry Company continues to be quite strong.

Second, as I outlined here last time, we completed a number of difficult yet important actions to bring our cost structure in line with our top line targets, while preserving our core investment.

I am particularly pleased with our capacity to reduce discretionary spending, while maintaining our product development and go-to-market effectiveness.

Third, we continue to meet or exceed all of our major engineering and roadmap milestones in the quarter.

In our graphics business, we will lead the industry to 40-nanometer technology.

In microprocessors, we are pleased with the execution of our 45-nanometer microprocessor roadmap and we are executing next generation programs according to plan.

On the product side, we believe the economy has triggered a rather important change in the buying psychology of today's end user, whether at work, home or play, people have become much more discerning about paying only for what they really need, and getting the best experience for their dollar.

In this environment, the AMD value proposition is well tuned to today's value-conscious consumer and business decision maker.

In short, AMD-based systems are designed to deliver maximum value across all price points.

For example, we enabled the industry to create a truly affordable ultrathin notebook.

Our new Yukon platform allows an uncompromised combination of high end graphics and small form factor at mainstream price points.

As evidence, the HP Pavilion DV2 is resetting expectations of what is possible inside an $800 system.

Looking ahead, our upcoming Congo platform will extend the performance range of affordable ultrathin computing, with the incorporation of dual core CPUs and our 7 series chipsets.

Our popular Dragon platform, featuring the AMD Phenom 2 quad-core processor is now available on systems from over 40 AMD partners worldwide, including Dell, Alienware, and HP.

Continuing our market leadership in graphics, AMD announced the expansion of our award winning Radeon HD4000 series into notebooks, with a 4860 an d 4830, the world first 40-nanometer graphics processors, and as promised we expanding our participation in the lucrative work station graphic segment, with the launch of the FirePro 2450 and V7750, and in the context of the soft enterprise demand environment, we are seeing solid OEM support for our new Quad-Core Opteron processors.

The new designs are well positioned to deliver maximum value in both high density and highly scalable systems.

Our seamlessly upgradeable six-core Istanbul processors are earning strong early reviews from our customers, and I am pleased to announce that because of our strong engineering execution, we are pulling in revenue shipments at Istanbul into May, with system availability in June.

For more details on this announcement and updates on our server platform plans, please join our webcast tomorrow.

One quarter ago, I outlined a plan to reduce our break even while protecting our core assets of people and intellectual property, and I am pleased to report that we are executing well on these commitments.

Most important, we are showing that we can be an even more agile and responsive company, one with the ability to succeed today, and when the market makes a turn for the better.

With that, I will turn it over to Bob.

Thank you Dirk.

First quarter revenues were $1.177 billion, flat sequentially.

The first quarter of 2009 was as expected a challenging market environment.

However, our enhanced product portfolio and strong market position allowed us to capitalize on a widespread flight to value across price point segments.

At the same time, industry wide supply chains stabilized, desktop first, followed by notebook.

First quarter non-GAAP net loss for AMD Product Company was $97 million.

After backing out unusual benefits and changes, the adjusted non-GAAP net loss was $189 million.

First quarter operating loss was $159 million.

Excluding the unusual items outlined in our press release, the adjusted operating loss is $124 million.

Overall, both results represent a significant bottom line improvement from the fourth quarter.

Gross margin for AMD Product Company was 40%.

This includes a 5 percentage point benefit from the sale of inventory written down in the fourth quarter of last year.

Therefore, the adjusted gross margin was 35%.

Gross margin was impacted by lower microprocessor ASPs and underutilization of our manufacturing assets.

Let's switch to the business segments.

Computing solutions revenue was $938 million in the first quarter, up 7% compared to the fourth quarter.

Microprocessor units were up sequentially, driven by higher volume in the client segment.

Overall ASPs were down quarter-over-quarter.

Operating loss for the computing solutions group was $36 million, a significant improvement over the fourth quarter.

In the graphics segment, revenue for the quarter was $222 million, down 18% sequentially and down 15% from the first quarter of 2008.

Units and ASP were down quarter-over-quarter.

ASPs were up year-over-year as a result of richer mix of the ASD 4000 family of products, and the graphics segment broke even at the operating level.

Now turning to the AMD Product balance sheet.

Cash and marketable securities balance at the end of the first quarter was $1.6 billion.

Depreciation and amortization was $105 million.

Capital expenditures were only $17 million for the quarter, as we continue to manage and scale our business according to current market conditions.

And adjusted EBITDA was $99 million.

Long-term debt outstanding in the first quarter was $3.7 billion, as we transferred approximately $1 billion of debt to Global Foundries.

In addition, we continue to repurchase convertible bonds in the period.

Let's turn to the outlook.

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

Considering current macroeconomic conditions, limited visibility, and historical seasonal patterns, AMD, the Product Company expects revenue to be down for the second quarter of 2009.

We continue to drive toward our Product Company break even model of $1.3 billion, and we are on plan to approach this cost structure during the second quarter.

As a reminder, the breakeven model is built on the gross margin goal of 40% or more, R&D spending of about $300 million per quarter, SG&A spending of $200 million, and depreciation and amortization of approximately $100 million per quarter.

As reported in our 10-K, capital expenditures for 2009 will be about $150 million for AMD Product Company and about $760 million for Global Foundries.

Please keep in mind that both targets continue to be evaluated and will be adjusted as necessary to level appropriate for market conditions.

Due to the Global Foundries transaction, we now have approximately 665 million shares outstanding today.

You can use this number for your second quarter EPS calculation.

In closing, we are executing well in every major element of our strategy from launching Global Foundries to reducing our cost structure to delivering a growing portfolio of platformed tuned to today's increasing value conscious end-user mind-set.

As Dirk mentioned in his opening comments, we enter 2009 a very different company than the one you were following as recently as a year ago.

AMD, the Product Company is a much nimbler operation, right sized to respond to today's economic uncertainty, as well as the dynamic demands of our world-class global customer base.

With that I will turn it back to Ruth.

Huey, we'd like to welcome calls from our audience.

Thank you, Ms.

Potter.

(Operator Instructions).

Our first question comes from JoAnne Feeney from FTN Equity.

Please go ahead.

Hi folks and congrats on a good quarter in a tough environment.

I would like to get some clarity on the gross margin situation both for last quarter and going forward.

So you were targeting 40%.

It came a little bit short of that, and I'm just wondering whether the underutilization in the first quarter was passed to you guys and whether you see a recovery here in the second quarter, or whether you might return to that 40% target going forward.

This is Bob.

Good question.

Thank you.

Clearly, in the first quarter we built a lot of inventory.

We built a fair amount of inventory in the second half of the year in anticipation of a much stronger year than the fourth quarter kind of signaled to us.

We began dropping our factory run rates pretty significantly in the Christmas time period to late in the fourth quarter.

That continued in the first quarter.

We are trying to deplete inventory.

As you can see on the balance sheet we did a good job in the three month period of time.

So I expect utilization rates kind of like the supply chain will improve a little bit in the second and third quarter.

Mostly third and fourth, kind of depends on the visibility of what we see in the second quarter of, is it a strong second half, or a casual second half, or whatever.

So utilization is a big piece of it.

We did sell a lot of 65-nanometer material also in the quarter.

The majority of our starts today are 45-nanometer, so we will get some pick up benefit from 45-nanometer shipments, I'll call it starting in the second quarter.

So a combination of both of those areas will help the cost part of the equation and continue to play in more price bands as we continue to roll out all the different versions of the product, whether it's in server, mobile desktop or graphics.

So are you suggesting, Bob, that because of the shift over from 65 to 45 in your mix that your ASPs might actually improve next quarter despite the pressures we are starting to see in GPU pricing and CPU pricing?

Pretty hard to call whether it will improve.

We would like them to improve.

Hard to say if they will or not.

So we are definitely working on what we control, which is all the cost structure part of the equation, continue to work with the OEMs, they are merchandised across all the SKUs, and we believe we delivered a real powerful combination of CPU and graphics for the marketplace.

If I could one follow up.

I'm wondering if you can comment on your cash flow projections.

A lot of data to digest here in the release.

Can you comment on whether you still think you'll be able to achieve positive cash flow for the year?

We made that bold statement in the fourth quarter, in the beginning of the first.

I guess the best proxy is EBITDA for the quarter for AMD, the Product Company would be at about $100 million.

I'm confident we'll be cash positive in the second half of the year.

Whether that recovers the cash flow negatives of the first half of the year is to be determined.

So we are going to be close.

Okay.

Thanks.

Thank you ma'am.

Next we have Uche Orji from UBS.

Please go ahead.

Two questions.

Let me start by asking you about the revenue.

If I look into Q2, is it fair to assume that you are going to be ceding market share to Intel, and would ASPs still declining on Intel coming out with the CULV.

I want to know what will drive your revenue growth, how that fits in the gross margin space.

Dirk here.

First of all I don't think you should consider our Q2 forecast as being any stated intention to lose share.

Rather, we are simply communicating that, one, the economy is still weak, making it very difficult to forecast end user demand levels, and we are heading into what is typically a seasonally weak quarter.

So you put all that together and the outlook is murky at best and that results in our forecast.

It is not a statement about the intention to lose share.

Sure.

You mentioned CULV.

Really we view that as a response to our Yukon offering, which as you know is exploiting an opportunity in the marketplace to bring PC performance and affordable price to ultrathin notebooks and we are happy with the momentum that we have with HP and we are happy with the design win momentum that we have around Congo.

Just on gross margin, would the benefits we have had from the inventory write-down from the inventory that was written down and sold, I'm just wondering what will help, and the surprise is that 37% first of all, and then I'm just wondering what would happen to get it to 40% especially now that you have to pay for wafers from Global Foundry.

Sure.

I can tell you the factors without being specific and giving you time frame.

One, as Bob described, we still have a situation where our manufacturing assets all in are under loaded and we're therefore bearing expense, they are unabsorbed.

I'll say.

Number two, as the mix of what we sell in the marketplace shifts more to 45-nanometer, that helps our unit cost tremendously.

And the final point is mix and there we have two opportunities.

One, we are aren't launching new platforms in the quarter.

For example, our new mobile platform will come out, which will provide better capability both in the dimensions of performance and battery life, and finally, as I often say in this call, we always have an opportunity to sell up the stack, and versus the competition.

That's an untapped potential for us.

Thank you very much.

Thank you, sir.

Our next question comes from Kevin Cassidy from Thomas Weisel Partners.

Please go ahead.

Thank you.

I wonder if you can give a little more detail about what was happening in the server market through the first quarter.

Can you say what your split was in multi-socket servers versus dual socket servers, et cetera?

Good question.

We don't provide granularity.

What I would say overall is to say that the enterprise server market wasn't tremendously exciting in the quarter.

We'll see how Q2 unfolds and we are not anticipating a dramatic turnaround in that space and unfortunately I can't give you a mix breakout.

As a follow-up maybe if you can speak to Cisco's introduction of a server.

Do you expect that they will be a customer eventually?

Look forward to that opportunity.

Absolutely.

Thank you.

Thank you, sir.

Our next question comes from Doug Freedman from Broadpoint AmTech.

Please go ahead.

Thanks guys.

Can you offer any sort of color on what you are seeing sort of in the computing market space where you mentioned that your ASPs were down.

Can you give us some sort of magnitude of what is going on there, whether there is a shift notebook, desktop, any clarity would be helpful.

Dirk here.

A bunch of moving parts.

So first of all on the desktop side, ASPs were flat to actually up a little bit.

On the notebook side, ASPs were down, mostly driven I'd say by shift in the marketplace for lower end machine.

In addition, as Bob said, we walk into the quarter with a pretty big inventory position so we clearly found opportunities, I'll say, to move inventory which was also part of what drove the quarter to quarter ASP decrease.

And finally, stand back and look at it, our server business was down a little bit quarter on quarter while both the desktop and notebook businesses were up quarter on quarter, which affects the overall ASP and moves it down.

Okay.

Great.

Does that make sense?

It does.

That was the clarity I was looking for.

If you can comment a little bit, you mentioned a 45-nanometer products and the fact that you've still been selling 65.

Can you give us a cross-over period when you expect 45 to be the majority of the shipments?

Is it possible we see that by the end of the June quarter?

I expect we will hit that point in the current quarter.

Okay.

And then if I could, a lot of legal issues in the quarter.

Are there any specific dates that you guys have on your calendar that we should be making sure that we are paying attention to?

I know that you really can't comment on ongoing legal issues but maybe you can give us some ideas what is on the calendar?

I understand.

I can't comment on the specifics and nor can I give you a specific mile post in the form of a date.

All right.

And I guess let me -- Bob, you mentioned a share count of 655 is the new sharecount for Q2.

Is that a basic share?

665 is the basic share count.

Right.

Could you give us an idea what the fully diluted would look like?

I don't have that number at my fingertips.

We would have to get back to you.

Thanks.

It's north of 700, though.

I just don't know the specific number.

But I'll have Ruth get back to you on that.

Thank you sir.

Our next question comes from David Long with Wachovia.

Please go ahead.

Thank you very much.

The sequential growth that you saw in the last quarter was very impressive.

Was there any special sale that helped boost this number?

Did you say were there any special --

Were there any sort of once-only deals or any particularly big transactions that helped push up that number or was it just general across the board strength that you saw?

General strength across the client businesses.

But the momentum, it's significantly better than seasonal for March.

We are not seeing an ongoing momentum.

We are seeing something normal seasonally into June then?

I would say that -- I characterize it like this.

We've seen the inventory drain that was occurring across the IT supply chain slow down in Q1, and we are starting to see I'll say normal inventory replenishment.

I don't expect that to be a major effect in Q2 and therefore calling Q2 relates really to calling end user demand for IT products, which in the current environment is difficult to do and it's that thought process that guides our guidance on Q2.

Thanks very much.

Thank you, sir.

Our next question comes from David Wu with Global Crown Research.

Please go ahead.

Good afternoon.

I apologize.

I just got on.

But I was curious about two things.

The first one is there seems to be a dichotomy between Q1 and Q2 relative to competition and if I were to look at what is in the press release, I assume this is entirely due to the fact that you had some very good cost inventory to sell in Q1 which sort of boosted Q1 and Q2 back to seasonality.

Did I get that roughly right?

I would say no in the sense that we didn't do anything truly extraordinary in terms of pricing that resulted in us draining inventory.

We were responding to opportunities in the market as we always do.

As I told you, we saw inventory level kind of start to come back in the balance in the past quarter which kind of explains the Q4 to Q1 comparison.

And frankly Q2 outlook is just awfully hard to call.

I've heard some day that we've hit the bottom.

I don't know how anybody can say that we hit bottom given the continued uncertainty that we have in the macroeconomic climate and as a result of that I would say that we are being cautious on our outlook.

Dirk, I would add also if you break it into supply and demand, supply, we have plenty of supply, plenty of capability to run more material.

So we are running fairly underutilized today which is reflected in our gross margin today.

Supply is not our issue.

Demand is our issue.

Where is the demand and when will it materialize and then we can execute the manufacturing plans given the right supply.

Okay.

Maybe you can help us with one more thing.

In terms of the three segments, desktop, notebooks, and server, what are the relative level of demand for these classes of products?

When you say relative level of demand, relative to what?

The mean, an average, for example Q1 you achieved sequentially flat revenue, and I was wondering relative to that flat comparison with Q4, did any of the these three categories were up or down relative to that average number.

That is what I was trying to drive at.

I kind of answered this way, as Dirk outlined, server was the weak spot.

The enterprise spending has been clamped down pretty hard.

Server was a decline quarter on quarter.

Stronger growth was in notebooks, and desktops were reasonable but still grew quarter on quarter.

And those added up to the positive for quarter on quarter for microprocessors.

I see.

Can you tell at this point how the second quarter demand looks for those three categories again?

That's where again, second quarter to say it again, second quarter is typically a down quarter from first, and we still believe there's still some supply chain issues to work through, and the visibility of end users' purchases is still unclear.

So we are just being cautious at this point that we think potentially it will be down.

Okay.

Thank you.

Thank you.

Thank you sir.

Our next question comes from [Nate Pasimony] from JPMorgan.

Your question please.

Thanks for taking my questions.

Can you comment in general about the graphics and the CPU business?

For the current quarter graphics was much worse that CPU, but do you see that trend continuing through the rest of the year or for graphics to get better over time?

No.

I would say I don't see that trend happening for the rest of the year.

One of the factors I think that caused the GPU and CPU results to differ a little bit quarter on quarter were that our exposure to graphics on notebooks is really our exposure on Intel platform and one thing we talked about last time on the call is that the notebook supply chain was taking quite a bit longer to recover versus the desktop supply chain and we certainly saw that in our notebook GPU business.

We think that process has largely corrected itself.

And looking forward, I expect the overall market for CPUs and GPUs to track in the same fashion.

But again our graphics business is exposed to both AMD and CPU platforms.

Okay.

That's helpful.

And you already talked about achieving break even cost $1.3 billion in revenue and that you would like to get there in the June quarter.

Do you see a need for continuing going forward or do you think that would be the level that you would be comfortable and see how the revenue plays out in the next few quarters?

Right now we think the 13 model is the right model to chase.

We worked on this pretty hard through the balance end of the year and the beginning of the first quarter.

So right now we are holding to that.

Okay.

Great.

Thank you .

Our next question comes from Mark Lipacis with Morgan Stanley.

Two questions, first on Global Foundries.

When should we expect Global Foundries to actually have a fully qualified bulk seamless process?

Is it still planned for 2010 or is it later?

No change to the plan that we talked about in the analyst conference which was as you said the qualified bulk process available for third party customers in 2010.

Okay.

Thanks.

Second question.

Can you tell us how we should think about the AMD fusion render cloud noted in your press release.

Would it disrupt your client side GPU business long term?

Hard to predict because you used the word disruptive.

The whole phenomenon of cloud computing, that is applications being hosted in a data center, is both interesting and potentially disruptive for the market, and what we talked about with the fusion rending cloud is the idea that media intensive applications and graphic intensive application can be hosted on the cloud.

Exactly how that technology results in changes in our business is awfully hard to predict, because as you said, it it's potentially disruptive.

Thank you.

Thank you sir.

Our next question comes from Ross Seymore with Deutsche Bank.

Please go ahead.

Thanks, and congrats on the strong revenue numbers.

I think this was asked before a little bit but I want to make sure I have the answer right.

For your second quarter guidance for revenues to be down, do you expect there to be a delta between what your CPU business does sequentially versus your GPU?

It's interesting.

If you look at historical seasonality patterns, the CPU pattern is potentially less growth, more negative than the GPU pattern.

So they are slightly different just based on the timing of when people buy the different components but our forecast comprehends that from that perspective.

it's still the visibility issue and what is going on in the end market demand to buy IT technology.

Okay.

And then as far as the first quarter, business upside especially on the CPU side of things.

Geographically, can you give us where the stronger and weaker geographies might have been, if there was a big delta?

If I were to consider North America and Western Europe to be in the center of the distribution, I would say that China is a little bit stronger.

We saw life return to the PC market in China after the Chinese New Year.

The Middle East I would say is also stronger than the average and meanwhile Eastern Europe and Russia a little bit weaker.

The final question.

As you mentioned that you guys expect to have a lead going into the 40-nanometer on the GPU side of things from a qualitative perspective, do you expect to use that shrink more so to lower your costs or to add functionality?

As you know, the technology has been used for both those purposes.

So we'll deliver I'll say equal performance and capability at lower cost, and that will be the story and part of the product line as well as in the back half of the year introduce products that have more performance and more features.

How do you think the die side comparison at 40-nanometer might be versus your primary competitor versus what that is at your prior node?

The way we approach the business is to look at price points in the marketplace to engineer our cost consistent with those price points and to drive more performance and features over time in the price points, so the game is at the high end, more performance, better features, and at the bottom end is -- as an example, better performance.

Thank you.

Rather than opening up lower price points because it's typically below the bottom end of the straight GPU stack that you start talking about integrated graphics.

Thank you.

Thank you sir.

Our next question comes from Patrick Wang from Wedbush Morgan.

Please go ahead.

Thanks so much.

Just a quick question.

I hope that you can discuss your visibility now and how you feel about channel inventory at this point.

Sorry Patrick.

It was hard to hear your question.

Can you come off speaker please?

Can you repeat your questions please Patrick?

He may have disconnected.

We'll take another question and maybe he'll queue again.

Our next question comes from Tim Luke from Barclays Capital.

Please go ahead.

I almost disconnected myself.

I was wondering, seeing the GPU down 18%, do you feel that you would have ceded some share in the first quarter, and I was wondering how you see it going forward in terms of the share dynamic and maybe just more broadly, when you think about seasonal guide, other areas that you would expect to be somewhat stronger than others, should we for example, expect server to be a bit softer than seasonally than notebook and desktop, or where do you see it leading?

Yes.

First on graphics, no, we don't at this point see a sequential decline driven by share loss, rather it was predominantly driven by OEM notebook builds coming down so as to drain inventory from the system.

Over half of our sequential decline was driven by not book graphics.

And graphics would be seasonal in the second quarter, seasonally lower?

Interesting.

It depends to what degree we start seeing inventory replenishment.

I'm not smart enough to know whether the system has too little inventory walking into Q2, but that is a factor as OEMs start building notebooks for the back to school season .

And as Bob said, the seasonality with GPU is different than CPU.

Q2 is stronger.

You asked for me to comment a little bit on the share expectation overall with GPU, and there we feel very good.

We feel great about the product roadmap throughout the marketplace today.

We just introduced a new product on the high end.

We talked about our new 40-nanometer product.

We still have feature advantages in the form of DX 10.1 and GDBR 5 technology which makes the products distinctive and we plan to lead the market with t DX 11 solutions connected with Microsoft Windows 7 release in the back half of the year.

So we feel very good about the GPU

The segment is seasonality?

It's hard to talk about seasonality.

What I will say is the enterprise side of the commercial market is clearly still weak.

Wallets are closed.

Our big exposure there is really the server business as you probably know, our commercial client business is largely in SNB play and then we are exposed to the consumer market.

Could you just give some framework for where you think the sensitivities are on the gross margin as you move out through the year and what you're monitoring there, and also when you expect Yukon to start shipping?

We will start shipping Yukon at the end of this quarter.

Okay.

Sorry, Yukon is shipping now to HP, I thought you were asking about Congo.

So Yukon is shipping now to HP and others.

You can buy that platform from HP today.

And we'll have Congo design to which we will be shipping in the back half of this quarter.

Your question Tim on gross margin, I think of it this way.

On the top line it's clearly the ASP, what is the end mix in server mobile desktop graphics and even in graphics if it's split between how much is the AIB channel versus directly to an OEM.

It feels that based on our current line up and all the continued refreshes and new introductions that we continue to have more, a deeper spread across all the SKUs that we can play in, so we can play more in the higher ASP points.

So that's on the ASP side of the equation.

On the cost side of the equation, it's two big levers.

Factory utilization, which today is very low.

So clearly, as I've said we have plenty supply.

We need to run the factories a little bit harder, if we see the demand, and then shipping 45-nanometer and 40-nanometer stuff, whether that's a CPU statement or a GPU statement.

Those are the two big levers on the cost side of the equation.

Thank you very much guys.

Thank you.

And Patrick has queued back up.

Sir, your line is open.

Sorry about that.

My apologies.

First, can you guys discuss your visibility out there and perhaps how you feel about channel inventory?

We actually feel good about channel inventories.

Clearly we have the best insight in our own component distribution channels and graphics adding partner channels where we feel like where we need to be.

It's a little harder for us to know definitively what is the inventory situation beyond our OEM customers, but first order from what we hear there's nothing terribly alarming there either.

Got you.

And then in terms of visibility here, is your visibility any better today than it was maybe a month or two ago?

Can you repeat?

We lost you right at the end.

Sorry.

Just curious about visibility here, if your visibility is any better today than it was perhaps a month or two ago.

Well, I would say visibility, not substantially better but the climate is certainly a little bit easier to deal with in the sense that in Q4 we were dealing with simultaneously, an economic contraction driving a reduction in end-user demand and a very strong, very quick reduction in inventory levels that our customers were driving across their ecosystem.

At this point, the latter situation has stabilized, and we are left with simply the macroeconomic climate, and our relative inability to predict that and thus the effect on end user demand for IT.

Got you.

You guys have done a great job in graphics.

Can you talk about the industry trends you are seeing out there and how you see mix and margins trending over the course of the year?

Good question.

And one of the things that we get asked a lot about is are we seeing any change in discrete graphics attach rate either on desktop or notebook, and I'll say the first order answer is no, not much change which is interesting given the back drop of decreasing just price points and so on.

So notebook as an example we are still seeing the consistent attach on GPUs and likewise desktop, nothing notable in terms of changes in the market climate.

So you are not seeing a shift toward the lower end, lower cost adding boards and away from the mid range?

Not really, no.

And it's been true for quite sometime that the growth in the PC market, discreet graphic has been a concept in terms of size and much of the unit growth has been at price points with integrated graphic plays but we are not seeing any big shift in the size of the discrete GPU market and who knows.

With Windows 7 being released in the back half of this year and all the benefits that come along with that, DX 11, improved graphics quality, we might see a spike in interest for a richer graphic experience and that is one of the things we are trying to drive this Company.

Great.

Last question here.

And I might have missed this earlier.

Can you talk about your server ASP last quarter and also how you feel the competitive landscape looks in the back half of the year?

Particularly with the sample out there in terms of pricing and positioning.

I lost you in the back half of your question.

I'm sorry.

First part of the question was if you can just talk about how server ASP trended last quarter and if you can talk about the competitive landscape in server in the back half of the year especially when you have Istanbul out there and other guys out there with a couple of new chips.

First, server ASPs were actually up quarter-over-quarter.

That is sequentially.

What I would characterize the rest of the year as one of technology leap frog.

Intel came out there and announced the availability of Nehalem.

Of course, that will take quarters to ramp across the marketplace.

As I said in my introductory remarks, Shanghai, the quad-core opteron part plays extremely well and offers great value particularly in highly scalable systems and high density, i.e.

cloud computing installation.

So that would be our two market focus areas.

Also as I've said in the opening remarks we pulled in substantially our shipments of Istanbul and we'll provide more detail tomorrow on other accelerated plans for server platforms.

So I expect the market will be competitive.

The overarching question is what would be the end-user demand situation in enterprise.

Thanks so much.

Thank you, sir.

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

Thanks for taking my question.

How do we think about the gain loss on Foundry operations in the second quarter?

It will be a loss.

I would frame it this way.

It will be in a loss position as Doug outlined on the analyst day, as it continues to try to build out, the requirements become a separate company to hire a sales force, buy or build the right technologies to sell to somebody else besides AMD, so it will incur losses.

Not of the magnitude of the current quarter because there was a one time issue of taxes in the current quarter.

That is not a repeatable type event but we anticipate for 2009 Global Foundries will lose money.

Okay.

But improving losses you think?

Not going to go in that level of detail.

Okay.

And the 500 quarterly OpEx, did we hit that in the second quarter?

We will be very close to that number, yes.

Did you guys talk at all about your graphics transition to 40-nanometer?

What we did.

What we said is we launched notebook GPUs in Q1.

We'll launch another product here soon, and follow that up with I'll say a wave of the DX11 compatible products in the back half of the year.

Perfect.

Thanks guys.

Operator, we'll take two more calls.

Our next question comes from Cody Acree with Stifel Nicolaus.

A couple of quick ones.

Looking at next quarter, if you had to rank the three primary issues, the inventory burn, the seasonality, and the lack of visibility, how would those stretch out as far as impact on your guidance?

Could you repeat the question?

We had a hard time hearing.

Sorry about that.

If you had to rank the three areas that are impacting your second quarter guidance, the inventory burn, the seasonality, and of course, the questionable visibility, how would you rank order those and give a magnitude of impact?

I would say that the inventory correction is largely behind us, and what we are left with is just uncertainty about end-user demand with the seasonal patterns and the overarching economic question playing against each other.

Can you give any details to -- I know this is a number that we haven't really talked yet, of just typical GPU seasonality, typical CPU seasonality for Q2?

I'll start with GPUs and give you a flavor and I'll give it to you in this framework.

Kind of the maximum we have seen over the last five years.

The minimum or the best case and worst case and what's the average.

Just to give you a flavor, it does bounce around.

On the maximum, the best case scenario, we are talking double digits, plus ten, pushing 15%, between both mobile and desktop, and both of them have slightly different, and then you go to the worst case scenario, that number is approaching 9%.

So you have a pretty big spread there and, no surprise, the average approaches close to zero.

That's kind of in that ballpark.

If you go to CPUs, you get a different answer.

It's been changing over time from that perspective.

Give me one second.

The range is, again a plus 12ish to a minus 10ish to a couple down on the average.

So -- which kind of gets back to our guidance.

You can drive trucks through some of those numbers, whether it's a positive 10 or a minus 10.

So it's hard to figure out what the average happens in the second quarter and then you add into it the current economic environment and it really becomes foggy.

Thanks guys.

Thank you sir.

Our final question from today comes from Srini Pajjuri with BAS.

Please go ahead.

Bob, just a question on gross margin.

You said the factory utilization is impacting the gross margin both on a consolidated basis as well as for the Product Company.

I'm just wondering I was under the impression the Product Company is more like a fabless company, and I'm just wondering how the fixed cost is allocated between these two entities.

We are in that early stage where the manufacturing assets that are in place are to build microprocessors because we are the only customer, and what we cut, I'll call it in the initial stages of the deal, are responsibility to manage costs and to manage the loading and therefore also pay for that cost.

So that's why I say utilization does affect us.

It's not the extreme we have with on OSAD or a typical Foundry that a GPU has.

So it's more tightly coupled relationship since we put in all that capacity and we are the only customer and we work our way through that and manage the cost collectively with Global Foundries and also pay for the cost.

Thank you.

The utilization definitely impact us and we are running pretty low rates and we would like to improve it.

Thanks.

This concludes our call.

We would like to thank everybody for participating today and I encourage you to tune into our webcast tomorrow for our server event.

It will be available on AMD.com in the Investor Relations homepage, and we look forward to speaking to you next quarter.

Thank you.

Thank you ladies and gentlemen.

This does conclude today's program.

Thank you for your participation, and have a wonderful day.

You may now all disconnect.