Live from the AMD Q4 earnings call
In the first test of its strategy of divesting its foundries and concentrating on developing IP assets, AMD reveals the extent to which an historically negative chain of events is impacting the already ailing CPU manufacturer.
3:00pm PT: Call wraps up.
3:00pm PT: MTR Securities: Convertible bond repurchase, what was the principal, how much cash?
Rivet: Retired $60 million of debt, used $20 million in cash.
MTR: Guidance on cash restructuring?
Rivet: Still trying to tally all that up.
MTR: Depreciation and amortization of $100 million for Product Co., does that include goodwill?
Rivet: No, does not include.
2:58pm PT: Q: Intel licensing agreement, is that up for renewal?
Meyer: [thinking] Our license of Intel patents are perpetual. The patents to which we're licensed, and they're licensed, are forever. The agreements will expire...but the licenses persist. Will enter into those negotiations over the next couple of quarters.
2:57pm PT: Credit Suisse: New Obama administration, new things to take into consideration?
Meyer: No new boxes to check.
CS: What will cap-ex for Foundry Co. be in 2009?
Rivet: Analyst Day number still applies, $1 billion cap-ex for Foundry Co.
CS: Comfort level has to do with wafer agreement with Foundry Co. At what point does pricing start to impact that 40% gross margin level?
Meyer: It's a dynamic equation: where you sit in the stack, where your demand is, where you are in technology node migration, where you are in negotiation with vendors for raw silicon. Don't know how to answer question, "That's the world we live in: ASPs are always declining." Will have to continue to manage that. "Maybe we haven't always been in the best position from a product offering, but we're in a 40% kind of zone."
CS: Will AMD pursue multiple foundry options?
Meyer: 100% of 2009 volume will come from third-party foundries, not counting Foundry Co. Looking for balance in ecosystem.
2:53pm PT: Q: Could you clarify operational impact of splitting off Foundry? Will its operations be funded out of Foundry balance sheet?
Meyer: Yea. Operating costs of factory, op-ex, will be borne by Foundry Co. We'll buy material so there will be cash from us, but if there is a shortage of cash, that'll be borne by the Foundry Co. balance sheet and funded accordingly.
$1.4 billion Foundry Co. starting cash balance.
Q: What level are you comfortable with cash balances for Foundry Co.?
Meyer: Won't revise forecasts for AMD product co. just yet.
Q: Wafer agreement with Foundry Co. Comfortable with 40%-ish gross margin? Need to see ASPs?
Meyer: Based upon foundry agreement, cost-plus arrangement that we're happy with, that drives a 40% or more gross margin for AMD Product Co.
Q: Less exposed than pre-Asset-Smart?
Meyer: On Day 1, it's better than it is today by a significant margin, but not as good as being a completely fab-less company. As time moves on, it'll move to a completely fab-less company.
2:50pm PT: Wedbush Morgan: Ramp up on 45 nm, talked about greater than 50% shipments exiting Q1, how does that track?
Rivet: Half of material is 45 nm, that material comes out in Q1. By Q2, majority of shipments will be 45 nm, break-even in shipments in Q1. No pullback on ramp. "We just need a demand pick-up, that's all."
WM: Moving pieces behind gross margins going into Q1?
Meyer: Positive and negative: 45 nm yields a better cost structure, thus better gross margin. With introduction of 45 nm in desktop and server, a full-quarter offering in Q1, plays higher up in the stack. Negatives are, utilization of factories is lower, demand is down.
After Foundry Co. transaction, "we'll pay a markup for that material."
Rivet: 40% or more is a reasonable target for Product Co.
WM: Yukon, any milestones?
Meyer: HP starts shipping this quarter, other companies will announce at the appropriate time.
WM: Enterprise and consumer, who's weaker?
Meyer: We started receiving softening of enterprise purchases earlier in 2008, before the Q4 meltdown. Before then, consumer PC consumption was still healthy and growing. Didn't really decrease much from Q3 to Q4, though any decrease is noteworthy. Going into 2009, tough to forecast where consumption will go, so no forecasts. To what degree will the current economic climate have an impact on consumer spending patterns? Too early to tell.
2:44pm PT: Jeffries: Break-even at $1.3 billion, would equate to -10% for next quarter, would require a 30% sequential improvement in following quarter to get there. Is that the ballpark? What are the mechanics?
Rivet: "I think you're confusing a couple of things." No guidance for Q1, Q2. Guidance you're getting is the cost structure, from a modeling perspective -- how much money are we going to spend? From there, you can interpret what money we need to break even.
Doable by Q2, "working like hell" to get the revenue to match that.
Jeffries: But you're saying you're working hard, you may not get there, but help us understand the dynamics of how you would get there, in terms of the moving parts?
Meyer: When we talk about $1.3 billion break-even, that's in terms of the cost structure of the company. Given the limited visibility of the business, priorities land us in an op-ex level that Rivet stated. Is not a forecast.
2:41pm PT: Meyer: Channels will drain in Q1, we're manufacturing below shipment level.
Citi: Have order trends in desktops stabilized?
Meyer: We can see the inventory levels of our master distributors. Sales out through distribution levels, give a pretty good idea of downstream.
Rivet: OEM pulls on desktop started low, ended up consistent. Pretty good flavor from both angles, not much in the system.
2:40pm PT: Citi: ASPs, is there no point in trying to actively lower pricing?
Meyer: We manage pricing to optimize our gross margin dollars, no matter what is the environment.
Citi: Servers, ASP increase in Q4. Can it increase in Q1, will servers buck the trend?
Meyer: What trend?
Citi: Up.
Meyer: "The dynamics of that business are different." Driven by new technology, production. Given that Shanghai has such a good position, superior performance across workloads, Q1 server business will be strongest relative to the other two. But in terms of absolute numbers, can't go further.
Citi: Inventories in Q1 to fall again?
Rivet: Yes, lowered manufacturing rates quite a bit.
Citi: Utilization rates to a point where AMD is undershipping the market by a wide market?
Rivet: Q4 data, massive inventory correction. Is it done, is it halfway done, three-quarters? "We clearly don't feel like it's done in the notebook space." Hoping over time those two numbers will come into balance, end market and sell-through. Right now, they're out of balance.
2:36pm PT: Wachovia: What percentage of server CPU sales from Shanghai in this quarter? Quad-core versus dual-core for servers?
Meyer: Expect Shanghai sales less than 50% of overall Opteron mix. Three-fourths of server sales are quad-core.
2:36pm PT: Deutsche Bank: Foundry Company seems like it will stay consolidated for some time, so how do you adjust break-even target, op-ex from a consolidated perspective?
Rivet: Would prefer you think about it differently, since Foundry will not contribute cash flow to AMD. Guidance has been in that vein. That's a discussion that will have to take place with Foundry Company. Get people focused on AMD, the product company.
DB: $200 M charge in Q4, any charge in next quarter?
Rivet: Normal-type things based on inventory. Appropriate to be cautious because the outlook is so murky.
DB: Asset sales to Broadcom, Qualcomm -- when will they hit the balance sheet?
Rivet: DTV sale was felt in Q4, handheld transaction with Qualcomm in Q1.
2:33pm PT: Broadpoint Amtech: ASPs for the CPU segment, nice performance for GPUs where ASPs increased, but new products, quad-core should have improved the mix.
Meyer: Server side, good increase in ASPs (average selling prices), small decrease elsewhere due to mix. A matter of AMD choosing to pursue opportunities for single-core design wins with some OEMs, solely responsible for that decrease. Otherwise, consistent Q3-Q4.
BA: Noticeable demand shift for less powerful processors? Impact from new operating systems [Windows 7]?
Meyer: Consistent with processor business unfolding, "we sell more capability into ever-lower price points." Higher mix of quad-core, dual-core processors. Consistent with what's happening in the PC industry, system-level ASPs coming down year to year. Expect that to continue.
2:31pm PT: J.P. Morgan: Yukon for thin-and-light notebooks, what's the plan for netbook market?
Meyer: Distinction between "netbook" and "notebook" will go away over time, replaced by a continuum of price points, form factors. "This distinction between, what is a netbook, is going to go away."
Opportunity to be exploited, given the way netbooks are configured today, consumers have to compromise and won't enjoy a full PC experience. People who wanted a thin-and-light machine had to pay four-digit figure. Yukon offers a full PC experience at light price points, market reacting to that value proposition.
J.P. Morgan: Growth rates relative to CPU/GPU?
Meyer: No forecast with that level of granularity.
J.P. Morgan: Exit strategy for Foundry Company? How do you get it out of P&L?
Rivet: We're the anchor tenet and the only customer. Foundry will bring on third-party revenue, so AMD will have the option to not consolidate. Over time, AMD will most likely not participate in those capital calls, "and our ownership will decline as time goes on." Eventually, it winds its way out as time goes on.
2:27pm PT: Global Crown Capital: Puma platform doing well in terms of design wins. Notebooks may be weaker than desktop in Q1, though. Will the rate of decline slow down in Q1, in view of desktop inventory is clean? Also, cross-licensing meeting with Intel? Also, GPU inventory correction, are graphics further along in inventory correction with OEMs, channel partners, than MPU?
Meyer: Notebook will enjoy a higher growth rate in terms of end-user consumption throughout 2009. Won't know what those growth rates will be. Supply chain is much longer than desktop, so the inventory correction takes longer. So notebook sales will take longer to come into balance with end-user consumption. Hard to put numbers on it.
Intel sent a letter about cross-licensing. Complete agreement with all terms and conditions for cross-licensing with Intel. Will look to 2/10.
Comparing GPU/MPU, can't characterize.
2:23pm PT: Charter Equity: Operating cash flow for quarter? Update on analyst's day forecasts? What's the timeline for $700 million from ATIC, $100 from investors?
Rivet: Cash balance is down, paid off a lot of debt, invested $112 million in new capital. Did burn cash, part of why we're taking aggressive actions in Q1. With break-even model of $1.3 million, depreciation of $100 million, makes more free cash flow. Q1 will be a little negative because AMD won't get to break-even.
Shareholder meeting 2/10. Will close transaction within 48 hours of shareholder vote of Yes. $700 million into Product Company, $1.4 billion into Foundry, $100 million + on sale of AMD shares to foreign investors.
2:21pm PT: UBS: Sense of where we are in terms of inventory, where will production come in line with consumption?
Meyer: Question varies depending on the product line. Desktop products through component distribution channel, the channel reacted early in Q4, leaving inventories "pretty appropriate to sell through" in that channel. Other extreme is notebook, where machines are built in Asia and shipped on boats, channel is long, takes longer to respond and bring down inventory. Continuing process into this quarter. Hard to predict where inventory levels will be appropriate, but not expected to be completed process any time soon?
UBS: Share gain against Nvidia?
Meyer: Hard to know based on third-party reports, but where there's differentiated offerings, "we did gain share in Q4." Add-in board channel can react faster than the GPU business segment associated with notebooks.
2:18pm PT: Barclays follow-up: Variables, expectations for Q1?
Rivet: Minus is volume. What is the volume forecast change, quarter-to-quarter? That'll be down. Lineup will be significantly better in Q4. Factory utilization will be "crummy, based on the environment we're staring at."
2:17pm PT: Barclays: Seasonal loss last year was 15%, why would you expect revenue even lower? More or less than seasonality of last year? If you close the transaction in February, how will you report Q1 2009? Fully consolidated or separated elements? R&D looks to be up slightly?
Rivet: No further guidance. "The current environment is pretty murky, visibility's pretty low." Seasonality all over the map.
Reporting - AMD the Product Company, Foundry Company, and AMD consolidated results simultaneously in Q1.
Op-Ex guidance - Product Company is $1.3 billion break-even target, will get there by Q2, will make progress in Q1. Won't get there fully because of headcount reductions, salary cuts, but will make significant progress.
2:14pm PT: Q&A is beginning now.
2:14pm PT: Preserving and generating cash while protecting core investments and P&L, and serving customers' needs.
2:13pm PT: Reducing break-even target to $1.3 billion. Maintaining gross margin goal of 40% or more. R&D $300 million, down $325 million outlined in November. Does not compromise roadmap.
2:12pm PT: Q4 $1.274 billion operating loss. Includes negative impact of writedown of $227 million.
Computer Solution revenue $870 million, -27%, excluding technology license revenue. Microprocessor sales down across the board, average selling prices (ASPs) slightly down. Operating loss for that group $431 million, significantly affected
$270 million revenue in graphics segment. Operating loss $10 million.
Balance sheet: Cash $1.1 billion, down $240 million from the prior quarter.
2:10pm PT: Bob Rivet, CFO: $1.162 billion, down 28% sequentially. $2.34/share net loss. $1.14 billion net loss from continuing operations, including $996 million in net charges.
$714 million of charges related to impairment of goodwill [not mentioned, probably ATI], incremental writedown of inventory, restructuring charges, and impairment of AMD's investment in Spansion.
2:08pm PT: The realities of the global economy mandates that AMD redouble its efforts on cash management.
2:08pm PT: HP, Dell, and others plan to launch processors based on Dragon platform this quarter.
2:07pm PT: Will reduce headcount by another 9%.
Will develop 32 nm technology consistent with plans, apparently no change in product roadmap.
Expanded ATI Mobility Radeon 4000 for notebooks, 4830 for mainstream market. Shipped "Shanghai" Opteron quad-core processors ahead of schedule.
2:06pm PT: CEO Dirk Meyer: "The first quarter of 2008 is going to be remembered for the severe stresses placed on the economy."
Severe inventory reduction across the entire supply chain, particularly in notebooks. "This combination makes the future particularly murky."
Focusing on completing "Asset Smart" transactions in February as scheduled. Received clearance from regulators to transfer assets. Documenting the agreement with holders of debt to transfer obligations from AMD to The Foundry Company.
Completed sale of DTV business to Broadcom to $142 million, sold more assets to Qualcomm for $65 million.
2:03pm PT: Boilerplate warnings have begun.