Advanced Micro Devices, Inc.
Q1 2010 Earnings Call Transcript

Published: 16 Apr 2010

[Operator:]

I would like to welcome everyone to AMD’s first quarter 2010 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Miss Ruth Cotter, Director of Investor Relations and Treasury for AMD.

[Ruth Cotter:]

Thank you and welcome to AMD’s first quarter earnings conference call. Our participants today are Derrick Meyer, our President and CEO, and Thomas Seifert, our Chief Financial Officer. This is a live call and will be replayed via webcast on AMD.com. There will also be a telephone replay. The number is 88-266-2081. Outside of the United States, the number is 703-925-2533. The access code for both is 1446133. The telephone replay will be available for the next ten days starting later this evening. Before we start, I’d like to highlight that AMD will attend UBS’s investment conference on June 9 in New York and that our second quarter quiet time will begin at the close of business on Friday, June 11. Last January, we announced that we deconsolidated Global Foundries as of the first quarter of 2010 and began accounting for our ownership interest under the equity method of accounting. AMD has an ownership stake in Global Foundries, which is reflected in the equity and net losses investee line of our statement of operations. For your information, our Class A preferred share ownership decreased from 3% to 82% as a result of the capital call that took place on the first of April. [Atip] participated in the cash call and AMD did not. As a result, AMD’s ownership on a fully diluted basis also decreased to approximately 30% as of the second quarter of 2010. Reconciliation of all non-GAAP financial measures are included in our financial tables that accompany our earnings release available on the investor relations section of AMD.com. 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 those statements are based on current believes, 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, especially in light of the current state of the economy. We encourage you to review our filings with the SEC where we discuss the risk factors that could cause actual results to differ materially from our expectations. You’ll find detailed discussions about such risk factors in our most recent SEC filings, AMD’s annual report on Form 10-K for the year ended December 26, 2009. With that, let me now hand it over to Derrick.

[Derrick Meyer:]

Thanks Ruth, and thanks to everybody on the call for joining us today. As I said at our analyst event back in November, our priorities this year are to deliver compelling platforms, increase access to customer demand and transform our business model. In the first quarter of this year, we made good progress on each of these priorities, and an improving global economic environment, we delivered record first quarter revenue coupled with good operating performance. Our platform execution continued to be solid across the board, with key new products transitions initiated in each of our main businesses. In graphics, we shipped a total over six million DX enables units to date, and expanded the family into the mainstream and value segments. In addition, we unveiled the industry’s first DX 11 products for notebooks where we continue to grow share. Demand for all of our DX 11 products is very healthy and continues to outpace supply. We are seeing strong support for our MD Vision program, an innovative campaign designed to simplify the consumer buying experience at retail, showcase the benefits of an all AMD solution and increase up sell. Today, over 50% of AMD’s notebook systems in the market are Vision branded, enabling us to participate more thoroughly in higher price bands. Meanwhile, in servers, demand for the new AMD Opteron 6000 series has been strong with HP, Dell and Acer all announcing new platforms at launch. These are the world’s first eight and twelve core processors, delivering on customer needs for more cores and more memory for less money. OEM interest in our AMD Opteron 4000 series has been strong as well. The 4000 series is on track for launch this quarter. AMD momentum in notebooks is growing as we expand our platform footprint and our list of top tier customers. We were very pleased to add [Linobo] to the list of customers attracted to our unique value proposition in notebooks, and we continue to see strong end customer demand for a vivid digital experience coupled with strong battery life and real world application scenarios. To that end, customer interest in our Danube and Nile platforms is very promising. On the business model, the deconsolidation of Global Foundries is complete. Our operating performance is improving. The cash generation potential of the business is beginning to be realized and we are improving our balance sheet. In summary, our first quarter was another in a series of solid quarters, a good balance of achieving strategic milestones and solid operating performance, in an improving market. With that, I’ll turn it over to Thomas.

[Thomas Seifert:]

Thank you Derrick. We are pleased to report another quarter of good product and financial execution as we further demonstrated the strength of our business model by growing ASP’s margins and improving cash flow. First quarter revenue was $1.57 billion, down 4% compared to the fourth quarter of ’09 and up 34% compared to the same period a year ago. AMD reported non-GAAP net income of $63 million in the first quarter of 2010. To calculate the non-GAAP net income, we excluded the $17 million amortization of intangible assets and three items related to the deconsolidation of Global Foundries. First, a non-cash onetime gain of $325 million based on the fair value assessment of our investment in Global Foundries. Second, a gross margin benefit of $59 million related to inventory and third, a non-cash loss of $183 million which includes our share of Global Foundries operating results and other equity accounting related adjustments. We continue to reference non-GAAP financial measures because we believe they are more indicative of our ongoing operating performance. Our non-GAAP diluted EPS of $0.09 in the first quarter was calculated using 730 million shares which excludes the impact of the 5 ¾ 2011 convertible debt dilution because the diluted EPS inflection point of $0.29 for the quarter was not triggered. For modeling purposes, if this inflection point is triggered, you’ll need to add back about $7 million in interest charges applicable to the debt and approximately $24 million common shares issuable upon conversion to calculate the diluted EPS. First quarter non-GAAP operating income was $130 million excluding the gross margin benefit related to inventory and amortization of required intangible assets. Non-GAAP gross margin for the quarter was 43%, up 2% from last quarter mainly due to improved product mix that drove higher ASP’s. Operating expenses in the quarter were $542 million, within the guided range. R&D was at $323 million and SG&A was at $219 million for the period. First quarter adjusted EBITDA was $302 million, up from $282 million in the fourth quarter, and adjusted free cash flow was $177 million. Now, switching to the business segments. First quarter revenue decreased sequentially in both our Computing Solutions and Traffic Segments. In the Computing Solutions segment, first quarter revenue was $1.16 billion, down 5% sequentially. For historical comparison, please note that starting in Q1 of this year, we are accounting for the embedded traffic business under the Computing Solutions segment. Previously, it was part of the Graphics product group. Prior periods also have been recast. The sequential revenue decrease in Computing Solutions was primarily driven by a decrease in microprocessor unit shipments, partially offset by increased microprocessor ASP’s, particularly in notebooks. Our server notebook and desktop businesses saw double digit revenue growth compared to this period last year. Server revenue and units demonstrated the strongest year over year growth reflecting the continuing strength in enterprise IT spending. We are encouraged by the ongoing success of our six-core Opteron platform as well as the broad acceptance of the recently launched eight and twelve-core offering. Combined, the two platforms drover higher server overall ASP’s in the quarter and made up more than two-thirds of server revenue. Computing solutions segment operating income was $146 million compared with $161 million in Q4 ’09. In the Graphics segment, revenue for the quarter was $409 million, down 3% sequentially in a constrained capacity environment. Record mobile CPU shipments were more than offset by a combination of seasonally lower gain royalties and desktop discrete traffic sales. Graphics processor ASP’s increased sequentially and continued demand for ADI’s 5000 series traffic parts. Graphic segment operating income was $47 million compared with $50 million in the fourth quarter. Now turning to the balance sheet; starting in the first quarter, there’s an additional line item on our balance sheet to reflect our investment in Global Foundries. The ending investment balance for the first quarter 2010 was $270 million. This balance will be adjusted on a quarterly basis primarily based on our equity gain or loss under the equity method of accounting. Our cash and marketable security balance at the end of the quarter was $1.9 billion. Long-term debt as of the end of the first quarter of 2010 was $2.6 billion. Now, let me turn to the outlook. The following statements concerning AMD are forward-looking and actual results could differ materially from current expectations. For the second quarter of 2010, AMD expects revenue to be seasonally down. As a result of deconsolidation, we expect an additional cross-margin benefit of approximately $15 million in Q2 related to inventory. Operating expenses are expected to be approximately $560 million because of quarter-to-quarter timing of expenses. We continue to expect capital expenditures to come in at approximately $160 million in 2010. In conclusion, AMD’s first quarter was a solid demonstration of the earnings potential of our business model. We are pleased with the market’s response to our new products and platforms and we remain optimistic about our capacity to scale our business as we offer increasingly compelling platforms with greater access to customer demand. At this point, I would like to turn it back to Ruth for the Q&A.

[Ruth Cotter:]

Thank you Thomas. Said, please poll our participants for their questions and we’ll start the question and answer session.

[Operator:]

(Operator Instructions) Your first question comes from Tim Luke – Barclays Capital.

[Tim Luke:]

Thomas, maybe you could frame some of the things that contributed to the improved gross margin in the quarter and how you perceive the puts and takes for the gross margin as you move into the second quarter with what you’ve described as seasonally lower revenue and how you perceive some of the backdrop for the second half of the year. And maybe also just on the operating expense you might be able to give some color about whether you’ll be able to hold the OpEx in this kind of range.

[Thomas Seifert:]

For the first quarter, the improvement was really driven by a better and improved product mix that drove higher ASP’s. Overall, for the remainder of the year, we have no reason to deviate from the guidance. We are inclined to stay in the range of 40% to 45% for the whole year. We see some opportunity in the second quarter because of better product mix because of the product launches that we will perform, especially in the notebook segment and we will see some headwind because of the lower volume expectations in the second quarter. With respect to the operating expenses, for the second quarter this is the guidance; $560 million, pretty much in the same range that we ended up in the first quarter but some timing pull into accelerate our R&D work.

[Tim Luke:]

Derrick, could you talk about how you perceive the node ramps and transitions and your confidence in the 30-nanometer ramp. I don’t see any early indications about time lines associated with Fusion going forward.

[Derrick Meyer:]

First answer is the plan that we’ve talked about previously for the first Fusion launch remains the plan. That is to say, we plan to commence volume production in the back half of this year. We do now have internal samples of both of our initial Fusion designs, are learning quite a lot, and are quite happy with what we see, and we started sampling to select customers, one of those two designs.

[Tim Luke:]

On inventory, it looked like it was fairly flat. How do you perceive your inventory in hand and in the channel and how would you expect it to trend in the second quarter as you prepare for the seasonally stronger second half.

[Thomas Seifert:]

We perceive inventory under our control as well as inventory in the channel as very healthy. We see ourselves building up inventory in the second quarter to prepare for a stronger second half.

[Operator:]

You're next question comes from Uchi Orji – UBS.

[Uchi Orji:]

Maybe I’ll start with a clarification Thomas. Did you say you are looking to pull in R&D in response to the earlier question and if that’s the case how should we think about the trend for R&D for the rest of the year and possibly for OpEx in general?

[Thomas Seifert:]

Pulling in some R&D work and we have some quarter end timing that gets us to $560 million from a Q1 guidance of $550 in the first quarter. So pull in is a very strong word. We are confident with the guidance we have given in terms of R&D spend in relation to R&D for the remainder of the year.

[Uchi Orji:]

Can I ask you about Magnacore. What’s the availability and what should be the impact on margins. So if we had to think about [inaudible] and comments you can make in terms of the feedback from customers. I know you said HP and Dell are going to get in, but how well will it be used from what you’ve seen so far. So any comments would be helpful.

[Derrick Meyer:]

First, we did start production shipments actually of Magnacore CPU’s in March in support of our customer’s platform plans. You’ll see platforms become available starting really early in Q2 and being staged out of the course of Q2 from the three OEM’s I outlined. The response to the product has been pretty enthusiastic. Our OEM’s have got some good design wins behind the product, and as well, we’re starting to get pretty encouraging feedback from some of the I’ll say big enterprises that have seen seed samples, and in fact, we’ve got some interesting wins so far. So I think that’s a good precursor to the competitive position of the product and how we’ll do in the market. You asked about the gross margin puts and takes and from my perspective to the extent we disproportionally grow our server business compared to our other businesses, that’s all upside for us.

[Uchi Orji:]

Apple announced some refresh of their Mac book product suites with put up from Invedia where one of the comments they made on their website is co-concepts of switchable graphics as part of the reason why they chose it and the impact on the battery life. How does this compare to what you have and how do you plan to respond to this type of competitive pressure coming from Invedia. If you can just talk about what Apple has done and the announcement they made and how that affect you that would be helpful.

[Derrick Meyer:]

I think that’s a reference to what Invedia calls their Optimus switchable graphics capability. At the high level, we’ve had switchable graphics capability in the ATI graphics platform for couple of years under the banner of Power Express. My understanding of Optimus is it provides a little bit more of a software controlled experience and one that we have in our development pipeline as well. The final thing I’ll say is kind of the ultimate high performance graphics expansion in notebook is actually going to be made available in the Fusion context, which is one of the reasons we’re so excited about having Fusion available on the market.

[Uchi Orji:]

IT spending, any comments you can make as to how you expect to see that progress for the rest of the year from an enterprise perspective?

[Derrick Meyer:]

I think the best thing we can say is that enterprise server business really started to pick up in Q3 last year and has remained pretty healthy and I think clearly we’ve seen a minor seasonal downturn Q4 to Q1, but we’re still optimistic that the server opportunity is going to remain there for us and pretty strong as CIO’s continue to look at the ROI available in these new platforms and bringing these new platforms and consolidate. It’s hard to talk with any confidence about the pace or rate of a client search in IT spend, so I’ll stay quiet on that.

[Operator:]

You're next question comes from Glen Yeung – Citi.

[Glen Yeung:]

My first question is about ASP’s just to clarify that the improvement that you saw in first quarter was a function of mix predominantly right, now absolute price increase. And then related to that, can you talk about the impact of your recent successes in notebook on ASP and also your strategy in the two way server market and how that might impact ASP’s looking forward.

[Derrick Meyer:]

First, correct. The ASP commentary on the MPU side was all about mix, not one of raising prices on pre-existing product. Could you repeat the question on notebooks?

[Glen Yeung:]

You had some success on notebooks in the first quarter and I assume that progresses in Q2. How does notebook help you or hurt you as you think about mix going forward and the same for the two-way server market.

[Derrick Meyer:]

Good question. Two things on notebook. One is, as we’ve said before we see the notebook market as a big opportunity for us because we’re relatively under represented there. As you know our unit churn desktop is in the high 20’s and our notebook unit share is much lower than that, and increasingly, we’ve closed whatever technological issues there might have been such as battery life perception gaps or other on the notebook platform. So we feel technologically our platforms are awesome. Of course the importance of graphics is becoming more clear to end users and finally, we feel really good about where we’ve got our triple and quad core positioned in the market in terms of the power of those products and the sort of thin and life form factors that OEM’s will be able to build around those products. All of that in combination with the Vision campaign we think it’s going to result in not only the opportunity for some share growth looking forward, but also a richer mix of AMD based platforms in the marketplace. Your question on servers was in effect how do we think about the opportunity in2P and how does that affect ASP’s overall. First, the Magnacore product really gets us back in a great competitive positive and by far the biggest volume part of the server market – 2P probably 80% of the unit opportunity, and we’re in the best competitive position that we’ve been since probably the middle of 2006. So clearly, an opportunity and as I said in responses to the earlier question, to the extent we disproportionately grow our server business, it’s good for our ASP’s and good for our margins.

[Glen Yeung:]

Next question is Thomas, the equity loss, I think if I’m doing the math right, the loss that go with that actually grew this quarter one I guess is that correct, and if it is, what happened there?

[Thomas Seifert:]

The math is not correct because this line item will go back to the webcast in January, contains more than just the operational loss at Global Foundry. It also includes the dividend that we accrue on the preferred shares. So there’s more in there than just the operating loss. On the operating losses at Global Foundry moving forward, we will not comment. We will not give guidance on performance of Global Foundry as a legal entity.

[Glen Yeung:]

Last question is on going back to the inventory question, recognizing that’s low. I did notice your deferred income to distribution was up marginally in the quarter but was actually high relative the history of the business. Is there anything to read into that or is that really just because revenues aren’t going up?

[Thomas Seifert:]

We moved more customers to a deferred revenue concept on our Add-in Board business. This had some impact you described.

[Operator:]

You're next question comes from John Pitzer – Credit Suisse.

[John Pitzer:]

On microprocessor, operating margins came in at about 7%. I’m kind of curious, saving share gain, what else can you do to help drive profitability in sort of the microprocessor business or is it really a top line story from here on out?

[Derrick Meyer:]

I would say largely a top line story in the form of a richer mix and unit share as well as market growth.

[Thomas Seifert:]

For this year there’s one minor component that we will see playing out mainly in the second quarter. You might remember that we still have an obligation to pick up the fixed cost of the idle capacity. We’re not at full utilization yet. So as we go into the second half, this will have a margin impact. And then moving forward of course, the transition to a 30-nanometer note.

[John Pitzer:]

The milestones or timeline for Fusion for volume, I know you’re sampling to a couple of customers now, but as we think about the big volume opportunity in Fusion, is that something that occurs late this year or is it a 2011 event? If you could help me understand that, I’d appreciate it.

[Derrick Meyer:]

We’ll ramp production in the second half and you’ll see platforms in the market early in the first half of next year.

[John Pitzer:]

You did not go after the netbook market and you saw that grow quickly and then kind of plateau. I’m kind of curious, any strategy around the tablet market or thoughts there.

[Derrick Meyer:]

We’ve talked in the past about our Bobcat core. That’s the brand new City 6 micro architecture which first appears in the Ontario product which we talked about in the analyst conference. The Ontario product is really focused on I’ll call it value PC’s and netbooks, but the Bobcat technology and other technologies that we have in house are appropriate to lower power envelopes such as are appropriate for Pads, and you’ll see Bobcat based products show up the following year appropriate to that market segment.

[Operator:]

You're next question comes from [Cody Acree – Williams Financial]

[[Cody Acree:]

Back to the server side, with the pricing differential between your chips and your competitor Intel server chips, do you believe that they have created somewhat of a price umbrella where AMD can operate and gain share with a richer mix and drive gross margins or is there a closing gap there that we shouldn’t be looking toward.

[Derrick Meyer:]

Repeat the second half of your question again?

[[Cody Acree:]

Is just the pricing differential between server chips. You now have higher end server chips. The prices obviously with the higher performance move northward and so does that start to close that price umbrella that maybe Intel has created and has allowed you to gain some share.

[Derrick Meyer:]

Let me turn around and hopefully answer your question with the following words. First, the Magnacore product delivers leadership performance across a lot of workloads, so we feel great about that. As I said, just on a raw performance basis, we’re in the best competitive position we’ve been in quite some time. And importantly, a lot of the buying criteria now include not just absolute maximum performance, but performance per watt per dollar. And there, Magnacore really shines both on a performance per watt basis and a performance per dollar basis. The final thing that we’ve done in the Opteron 6000 series, changed the pricing strategy and removed what have been a pretty big step up in price when you go from a two socket capable processor to a four socket capable processor, and we think what we’re going to do there is in some ways disrupt the market and encourage a lot of OEM’s and end users to look at four socket implementations where previously they didn’t. So you roll all that together, leadership performance and some applications, really leadership performance per watt per dollar and a disruptive strategy around four sockets, and we think we’ve got a good opportunity in the marketplace.

[[Cody Acree:]

With a range of gross margin 40% to 45%, but you have 32 nanometer coming on, that a corporate recovery price, ASP’s doing a little bit better, as we look into later quarters, what’s the puts and takes to drive a more stable and possibly higher gross margin?

[Thomas Seifert:]

We do not provide guidance beyond 2010 beyond what we indicated on our financial analyst day. You have to keep in mind that 32-nanometer impact on gross margin will be a January 2011 event from what Derrick just outlined. For the remainder of the year, we are still confident with the guidance we have given.

[[Cody Acree:]

Looking at the corporate spending environment, how much of an impact does that have to potential gross margin improvement?

[Derrick Meyer:]

I would say not much other than to the extent it affect one way or another our server business line.

[Operator:]

You're next question comes from [Shawn Lester – Macquarie]

[[Shawn Lester:]

I was wondering if you could share with us how much your pricing increased for both your processors and your graphics chips?

[Derrick Meyer:]

We don’t give out specific numbers, but to be clear, we didn’t actually increase prices. Rather, what we saw was a favorable change in mix q$ to Q1.

[[Shawn Lester:]

Was it a slight increase or something more?

[Derrick Meyer:]

One man’s slight is another man’s fix. Let’s not go there.

[[Shawn Lester:]

In terms of, are you experiencing any tightness? I know that in recent quarters you’ve experienced it on the 40 nanometer side and GPU’s. Has that gotten better? Is it about the same or can you give us some clarity on how lead times are going in general for processors and graphics chips?

[Derrick Meyer:]

First, we were supply constrained in the 40-nanometer GPU product line in Q1, and while we saw improvements in supply including improvements in forward looking committed supply, we’re also seeing increases in demand and forecasted demand, the result being, we still see a gap between demand and supply. Per internal plans and thinking, that gap is going to narrow over the next months and quarters, but we still think we’re going to be hand to mouth throughout much of this year.

[[Shawn Lester:]

What was your mix of processor business split between server, desktop, notebook in the last quarter?

[Derrick Meyer:]

We don’t give that level of specificity.

[Operator:]

You're next question comes from Ross Seymore – Deutsche Bank.

[Ross Seymore:]

Another question on the GPU side of things. I realize it was late in the quarter, but any changing competitive dynamics at all with your competitor putting out their new generation GPU?

[Derrick Meyer:]

None that affected Q1 of course because that product from the competitor wasn’t available in Q1, and in fact I don’t think is available until later this month.

[Ross Seymore:]

But going forward as far as any of your customers using that as a competitive threat and future ordering etc., any kind of changes in the dynamics in that manner?

[Derrick Meyer:]

Really no, and to amplify that, for quite some time we were looking at video’s next generation architecture as somewhat of a paper tiger. There was a lot of talk about it, but it wasn’t available, not a lot of details available. And now that we’ve seen the details, the product has in theory launched, we feel better now than we did based on having little information at that time. So we feel like from a performance per watt, performance per square millimeter of silicon perspective, we’ve got the best GPU products on the planet and as well, we’ve got the single highest GPU card on the planet in the form of our HD 5790. So we feel very good about our product looking throughout this year.

[Ross Seymore:]

In that area, when eventually we get yields up and supply kind of gets equilibrium versus demand, which do you think is more likely; the profitability will rise because the cost will drop on the yield side or a little more price and market share competition might into; so therefore the profitability might not rise as that battle starts in more active manner?

[Derrick Meyer:]

The history in this business is that the player with the best technology sees both share gain and margin expansion, and I would expect that to be the case in a normal environment, but unfortunately the supply constraints that we’re facing now make this not a normal environment and therefore, very hard to forecast in the dimension you asked.

[Ross Seymore:]

I know you’re only guiding for the first quarter out or one quarter out in the OpEx side of things, but historically A&D’s OpEx has moved around seasonally for all the right reasons and the third quarter rising, etc. Are there any reasons that kind of seasonal fluctuation would not be something we should assume for the second half of the year?

[Thomas Seifert:]

We gave and OpEx percentage of revenue guidance for all of 2010 and we have every intent to stay in this bracket and we’ll manage accordingly.

[Operator:]

You're next question comes from David Wong – Wells Fargo Security.

[David Wong:]

Going back to the earlier point about the pricing of your 6000 series, when you consider what you used to get for your 8000 series, do you now expect your revenues for four way server chips to drop going forward, because I mean market share gain is unlikely to make up for the lower price that you’re getting in this particular high end segment. Is my math correct here?

[Derrick Meyer:]

I understand the question, but in the 6000 series, we no longer have a four-socket specific product line. That 6000 series will support both two socket and four socket so in some ways we’re not going to be able to categorize the revenue in the form that you ask. The belief we have and the strategy is to be more effective, more competitive, deliver better performance, better performance per watt in the biggest segment of the market which is 2P, although I do expect the 6000 series to also hunt and hunt well in the four socket as well.

[David Wong:]

Could you give us then roughly what percentage did the 8000 series account for in terms of total server revenues in the past quarter and past quarters? Was it half or a quarter?

[Derrick Meyer:]

We can’t give you that detail, I’m sorry.

[Operator:]

You're next question comes from Stacy Rasgon – Sanford Bernstein.

[Stacy Rasgon:]

Around the pricing environment, you saw better pricing this quarter from mix. Your competitor saw better pricing I think from ASP’s coming up, and more importantly, they were pointing to what they saw as a more benign pricing environment for the rest of the year. I was just wondering if you could give us a little bit of color on where you see the overall pricing environment in your case for the rest of 2010.

[Derrick Meyer:]

As you know, there’s a couple of thing at play here. One is the pricing environment is a result of price competition between players in the market and the other is pricing influenced by what people choose to purchase in the way of system and system prices which drives the system mix and hence component mix. On the former point, we really haven’t seen much change for several quarters now; that is, the competitive element. It’s generally speaking a competitive market. And I think the wild card is the mix. Clearly, ’08 to ’09 you saw quite a mix shift down market and we’re seeing some evidence that historical trend will not be as dramatic ’09 to ’10 as it was in the past year, not surprising given the economic crisis last year. Within our product line, as I said on a prior answer to a question, I think we’ve got an opportunity for the reasons I stated earlier to see a better mix within our client line in particular, our notebook line.

[Stacy Rasgon:]

One question about GPU unit seasonality. I noticed most of the units were up this quarter. Can you tell us what typical Q1 unit’s seasonality for GPU’s would be?

[Derrick Meyer:]

We’re scrambling to find that number because it’s not on the top of my head. It looks like roughly, it depends on whether you’re talking notebook or desktop, but roughly flat across the whole product line.

[Stacy Rasgon:]

Can you give us a feeling for what you think your gross margins would have been had you been required to continue consolidating the Foundry this quarter?

[Thomas Seifert:]

No. I’m glad we did the deconsolidation. I’m very happy that we managed to report all the changes in this very short period of time. I’m not going to reverse the accounting percent and how we would have looked like if we had to consolidate. This is really a time period that we gladly leave behind us.

[Stacy Rasgon:]

Can you give us a feeling for what the Foundry CapEx was this quarter as well as the amount of the capital all for the contribution from Atech?

[Thomas Seifert:]

As we outlined in January and also in our webcast, we cannot and we will not give guidance for Global Foundries.

[Stacy Rasgon:]

I’m not asking for guidance. I’m asking what was it this quarter.

[Thomas Seifert:]

I’m not giving numbers on their performance. We will not engage in giving comments on their business.

[Operator:]

You're next question comes from Doug Freedman – Broadpoint AmTech.

[Doug Freedman:]

Can you offer any more color on how much the royalty income in the GPU space was down and whether you believe you won some share or not in the other GPU markets, the desktop and notebook segments.

[Thomas Seifert:]

We will not comment on the development of our royalty business in absolute.

[Derrick Meyer:]

On the share front, I think it’s too early to call. Of course in video’s it’s a quarter behind us relative to reporting. I think lots of evidence that we gained share in notebooks, but overall it’s tough to call.

[Doug Freedman:]

You plan for GPU migration onto Global Foundries, is that still a 28 nanometer and are they still on track to get you some 28 nanometer products by the end of the year?

[Derrick Meyer:]

Yes to the first one; that is the first intersection of our AMD GPU’s and Global Foundries 28 nanometers. We haven’t been public with respect to any timing there.

[Doug Freedman:]

Just in general the market condition, clearly you mentioned that you’ve got some forecast for demand I believe out of your GPU customers. On the CPU and chips set side, has visibility improved at all and if so, can you comment on what visibility is, as well as what your view is of the channel and market inventories?

[Derrick Meyer:]

We don’t see anything out of whack with respect to inventories either within our OEM customers or with within the channel either on the component side or the add in board side on GPU’s. In terms of being specific with respect to visibility going forward, we’re not going to provide anything other than Q2 guidance that Thomas outlined. The only thing about that I will say is reflect back on what we said about our expectations for the market at our last analyst call, which is to say we expected PC unit consumption to grow between 10% and 15% year over year and based on where we sit today, I’d say our expectations are above the center point of that range.

[Operator:]

You're next question comes from James Covello – Goldman Sachs.

[James Covello:]

The question I have is something that’s been asked different ways, but the way I would say it is, if a lot of share in the server market could go from four and eight way to one and two way, how do we think about that impacting profitability given that market could be more price competitive?

[Derrick Meyer:]

When you said a lot of the share, do you mean –

[James Covello:]

Well if your unit share could remain flat hypothetically, but we go from some of that being four and eight way to one and two way share, do you think there’s any way to offset the profitability impact of that?

[Derrick Meyer:]

That’s an interesting question, but it has a hypothetical in the premise, so I don’t want to answer a question that’s got a hypothetical in the premise. What I’ll say instead is to the extent we grow our server business faster than our other businesses, that’s good for us.

[James Covello:]

How much do you have to grow – if there is share shift within servers, how much faster do you have to grow servers than the other businesses assuming the mix within servers were to deteriorate? I certainly understand what you’re saying. It’s totally plausible, but what’s the balance?

[Derrick Meyer:]

It sounds like you’re asking me to give you the solution to a math equation on what our cost and ASP’s are which of course I can’t do.

[James Covello:]

Is there any framework that we could think about what the impact of the mix shift within servers, what you would need to do to impact the mix shift even qualitatively?

[Derrick Meyer:]

I think let’s just say we’ve got an opportunity to grow our participation in the biggest volume chunk of the market for all the reasons I said, and to the extent that we do that, it’s a good thing.

[Operator:]

You're next question comes from Craig Berger – FBR Capital Markets.

[Craig Berger:]

Is there any way to help us understand either qualitatively or quantatively what gross margins might look like once you pay the under utilization charges in Dresden or perhaps what the impact was in the quarter just ended?

[Thomas Seifert:]

In the quarter that just ended we had hardly any change in the utilization. Volume was down from previous quarter so there was certainly no improvement, and moving forward we have opportunity to improve. We said last quarter that our utilization was in the 75% range, so this is the indication of how much room we have improving our gross margin from a cost perspective moving forward.

[Craig Berger:]

What’s the annual cost associated with the other 25% of the fab that you’re not utilizing?

[Thomas Seifert:]

I’m not going to give guidance on the cost structure for Global Foundry, but I think this is something you could model.

[Craig Berger:]

You’re still running through depreciation excluding amortization of about $83 million a quarter. What’s in that number and how fast should we expect that to decline? And also as part of that, what’s your capital intensity on a go forward basis?

[Thomas Seifert:]

We just reiterated our guidance for this year on CapEx and we feel quite comfortable with that range. It’s a good indication where CapEx should move going forward. We’ll see probably some spikes when we have to adjust for testing infrastructure to new product, but this is a good range for us. The depreciation that is sitting on our books currently is coming from data laboratory structure and of course from our back end assembly manufacturing facilities in Singapore, Penang and Shanghai. Moving forward we think invest in CapEx, it will take some time before this catches up and balances out.

[Craig Berger:]

When should we expect to see 32 nanometer products from you in case I missed it and what market segments are going to be attacked first?

[Derrick Meyer:]

We’ll be commencing the volume ramp for 32 in the second half of the year with OEM system availability in the first half, and that’s both a notebook and desktop PC.

[Operator:]

You're next question comes from Hans Mosesman – Raymond James.

[Hans Mosesman:]

Can you give us the mix of40 nanometer shipments in the GPU space for the quarter?

[Derrick Meyer:]

I don’t want to be precise but it was over 30%.

[Hans Mosesman:]

What were they in Q4 just as a reference?

[Derrick Meyer:]

Much less. As I said, we shipped about six million units in total of DX 11 40-nanometer CPU’s through the end of Q1.

[Hans Mosesman:]

Can you give us a timeline in terms of your move to take Fusion and or GPU’s to Global Foundry. When can we expect to see products or GPU’s based on that foundry and what process node would that be?

[Derrick Meyer:]

The process node will be 28 nanometer and we haven’t been public with the date on that yet for GPU’s. And your question on Fusion I think, the first Fusion parts will be out of Global Foundries.

[Operator:]

You're next question comes from Patrick Wang – Wedbush Securities.

[Patrick Wang:]

You gave some color in terms of your expectations in the 2P service space and briefly touched on 4P. I guess your pricing is at the same level as the 2P parts. Do you have any evidence that the strategy is actually driving more customer interest? Any examples you can actually cite?

[Derrick Meyer:]

The only public example I can cite are the design wins that we talked about and the OEM’s we have lined up talking about the product alongside us at launch. We do have some positive feedback from some big enterprise customers but as you know, we can’t cite enterprise appointments by name.

[Patrick Wang:]

But the pricing strategy is actually taking hold and you’re starting to see some momentum on those parts.

[Derrick Meyer:]

I think there’s a lot of resonance in the industry for the strategy that we’ve deployed.

[Patrick Wang:]

Can you give us a framework for what you think seasonality in the second quarter is? The reason being that your guiding for a seasonal decline and just a couple of days ago, Intel was guiding for kind of flattish type numbers. Just help us reconcile that.

[Thomas Seifert:]

I think we are comfortable in a range of flat to minus 5%.

[Patrick Wang:]

Can you also talk about the, help us reconcile why it’s not a little bit better than seasonal?

[Thomas Seifert:]

I think it depends on what definition of seasonality you have. The range we have provided is a good explanation on where we think the business is going and how we perform in our expectation where the market is going to move.

[Operator:]

You're next question comes from [Jake Kanaty – Morgan Stanley]

[[Jake Kanaty:]

Can you walk through which debt remains outstanding and did you repurchase any debt during the quarter?

[Thomas Seifert:]

Only minor movement on the debt side. We repurchased about $10 million of debt in the first quarter. And your second question was?

[[Jake Kanaty:]

Can you walk through how much is outstanding under each of the major pieces of debt that you have.

[Thomas Seifert:]

On the 2012 convertible we are at $485 million and the 2015 convertible is at $1.67 billion and then $500 million under 2017.

[Operator:]

You're next question comes from Srini Pajjuri – CLSA.

[Srini Pajjuri:]

On the gross margin front you said you still have the volume obligations. Could you give us some idea as to when those obligations expire and what kind of impact that will have on your gross margins?

[Thomas Seifert:]

As we said in the last quarter, utilization was about 75% and the one module foundry where we have this obligation for the fixed cost of the capacity that we do not utilize. This is an indication of how much room we have to improve. It would go away with either filling this capacity over the course of the year. The obligation to pick it up contractually at the end of the first quarter 2011.

[Srini Pajjuri:]

When the obligation ends, do you expect any meaningful impact on the gross margin? I would expect you would become fully fabless and obviously the gross margin will probably be more flattish than being a bit better in the second half.

[Thomas Seifert:]

The best-case scenario is that we are able to fill the capacity until then and then the effect is meaningless.

[Srini Pajjuri:]

Given your view about the demand and your product leadership in graphics and also you obviously have a new product in servers, why not a bit more aggressive guidance for Q2? Is there anything you’re seeing out there that makes you more cautious there?

[Derrick Meyer:]

We’ve got the notebook products launching, our customers launching about half way through the quarter and the server products are becoming available in the quarter, so we won’t have a full quarter of benefit yet at that point, and as Thomas said, we’re looking at typically minus 2% kind of quarter and we’re comfortable with throwing that out there as a nominal plan to think about. Of course there’s a lot of variability to it.

[Ruth Cotter:]

With that we’d like to thank everybody for participating in our call today. We wish you all a good evening. Thank you.