BrushDUD - Re: "Link, please, hot air bag. "
"As indicated in the press release, our-ah-if current business-- if current business
conditions prevail, our revenues could decline by more than 100 million dollars in the
current quarter and we would report an operating loss. "
jc-news.com
2001 Second Quarter
This transcript is generally completed, save for the fact that some points were difficult to understand.
For making fixes to my errors, I would like to thank Jim Zaremski, Jon King, and Brushwud (and any people whom I forgot about).
Good afternoon and welcome to AMD's second quarter earnings teleconference call.
With me here today in Sunnyvale and hosting this call is Jerry Sanders, our
chairman and Chief Executive Officer.
Also with me are Hector Ruiz, our President and Chief Operating Officer,
Rob Herb, Executive Vice President and Chief Marketing Executive,
Walid Maghribi, Senior Vice President and President of our Memory Group,
and Ben Annixter, Vice President of External Affairs.
I will begin by summarizing our second quarter highlights and then turn over
to Hector and finally to Jerry.
Today we have representatives from the media listening in. But since this call
is for financial analysts, we will only take questions from members of the
financial community. Please hold all questions until we conclude our prepared
remarks.
This conference call is a live broadcast and will replay via the internet at
www.streetfusion.com and www.amd.com.
The taped phone replay number for North America is 800-633-8284. Outside the
US, dial 858-587-5842. The code to access the ?????? is the same for both,
and that number is 191-51-508.
Before we begin the conference call, I would like to caution everyone that we
will be making forward looking statements about management's goals, plans,
and expectations. As you know, the semiconductor industry is generally volatile.
Our products, and process technology development projects, and our manufacturing
process are complex. Current economic conditions make it
especially difficult to forecast product demand. Because our actual-- because our
actual results may differ materially from our plans and expectations ????, I
encourage you to review(?) our filings with the Security and Exchange Commission,
where we discuss in detail the risk factors in our business. You will find recent
???? in our most recent 10K filing with the SEC.
Let's begin....
Revenue. Revenue for the second quarter was 985 million, down 11% from the second
quarter of 2000 for continuing operation['s'?], and down 17% from the first quarter
of 2001. For clarity, when I mention continuing operation['s'?], we are excluding
the voice communication business, now called Legerity, from our historical results.
We sold this business in the third quarter of 2000.
In our microprocessor product line, we shipped in the second quarter an excess of
7.7 million units, a new company record, enabling business to grow in revenue by
one percent from the second quarter of last year. However, our microprocessor
revenues did decline 11% from the record levels of the first quarter.
Revenue in our memory business declined by 13% over the second quarter of 2000,
and was down 23% from the first quarter.
With our top line declining both year on year and sequentially, our ability to stay
in the black was challenged, but I'm pleased to report we made money in the quarter.
Propau .. mm ... excuse me. Proforma operating income was 34 million or 3.5% of
revenue for the ["second"?] quarter as shown on our press release as our non ???
consolidated statement of operations, which includes the impact of FASL, our manufacturing
joint venture with Fujitsu. This represents a decline of a hundred and fi -- fif -- 155
million from the first quarter, driven ???? ["princely"?!?] by lower revenues in our
memory product line and greater than a 15% ASP decline in our microprocessor product
line.
Net income for the quarter was 17 million or 1.8% of revenue.
Fully diluted earnings per share was five cents for the quarter.
Gross Margin on a pro forma basis was 36.7% for the quarter, down 11 percentage points
from the second quarter of 2000 ["for"|"in"] continuing operations. As stated previously,
margins were significantly impacted by the revenue cline -- declines in our memory product
line and the ASP pressure in our microprocessor product business.
Factory execution in both output and yield productivity was better than the first
quarter.
Research and Development spending was on plan at 174 million for the quarter, up 10%
from the second quarter of last year.
Marketing General and Administrative Spending was also on plan at 156 million, up 3%
from the second quarter of last year.
Our cash balance ended the quarter at 1.1 billion, down 200 million from year end. Over
half of this decrease from from nonrecurring investment in our FASL joint venture.
We completed the quarter with 401 million dollars ["of"|"in"] inventory, up 46 million
from the first quarter. Inventories for both our microprocessor and flash product
lines are well positioned for our plans for the balance of the year.
Capital spending ["for"|"in"] the second quarter was 215 million, about half of which was
for Dresden, and depreciation expense was 159 million for the quarter.
EBITDA was 181 million for the quarter.
And, finally, we are pleased to report we returned 517 million ["in"|"of"] convertible
["bonds"|"stock"|????] in the quarter, which brings our debt to excess(?) equity ratio
to 20%.
For your modeling for 2001, please consider the following.
Assume our tax rate will be 27% for the year.
We have reduced our capital spending to 900 million for the year, down 100 million from
our previous guidance as we moderate our back end capacity needs.
We will complete FAB30 and install 130nm capacity on schedule this year.
Depreciation expense for the year has been reduced to about 630 million for the year,
down from our previous guidance by 40 million.
We project our cash balance['s'?] to remain at 1 billion dollars for the balance of the
year.
For your eps calculations, use 350 million shares for the third quarter.
Finally, R&D investment will continue at the second quarter spend rate for the
balance of the year, investing in both of our fu-- investing in both our future technology
and products.
I would now like to turn this over to Hector to start the business segment discussion.
Hector?
<Hector>
Thank you, Bob.
I would like to make a few comments about our operation.
Our execution across our factories continues to be ????. We continued our ramp of FAB30
in Dresden, Germany, and expect to achieve in full capacity in terms of wafer starts by
the end of the year.
The demand for our Athlon products is ??? strong, and we sold out the output of FAB30 in
the second quarter.
We have successfully made several product transitions as evidences by the nearly a quarter
of a million 1.4GHz parts that were shipped in the second quarter.
Our plans continue on target for the beginning of the .13 micron conversion in the fourth
quarter for both bulk and SOI based technologies. We are very encouraged by the progress
of this transition as evidenced by the continued great results in the fabrication of SRAMs
as precursors to the conversion.
Before the end of the year we will begin the conversion of FAB25 to a Flash factory. The
speed of the conversion will be dictated by the return of demand for our Flash products.
This, along with ??? our manufactuing partnering strategy and our current planned back end
and test capabilities, will result in having ample capacity for both Flash and
microprocessors for us to continue to gain share.
Now let me talk about our product lines. Memory group sales declined 13% from the second
quarter of 2000 and 23% from the previous quarter. Networking and Communications segments
??? market remained very weak with some apparent stability in the set top box and automotive
markets. This condition ??? ["persists"?] across all regions of the world.
Flash memory density increased from the first to the second quarter by 17.4% or 12.2(?) megabits.
As our customers move towards feature rich products in a lower unit environment, our capability
to continue to offer our customers increased density in flash will be further enhanced by the
recently announced technology innovation called mirror-bit architecture.
The continued weakness in most market segments of this product line makes it very
difficult to accurately forecast the demand going forward. We currently expect that
sales in the third quarter will be down as much as 30%.
In the microprocessor business, virtually all of our sales this quarter were our seventh
generation products. Both Athlon and Duron product lines ["have"?] established record
unit sales in the quarter with the aggregate shipment being in excess of 7.7 million
units.
We expanded our portfolio during the quarter for the introduction of the AMD
Athlon 4 processor for mobile PCs, which is the segment with great opportunity for
us, because our products offer unequalled performance. We also introduced the AMD
Athlon MP with its companion AMD760MP chipset for workstation and server applications.
Additionally higher performance Athlon and Duron processors were also introduced
during the quarter. The 950MHz Duron is the industry's highest performing processor
for the value segment, and the 1.4GHz AMD Athlon offers more delivered performance
than any other processor as evidenced by industry benchmarks.
Pricing pressures in the quarter resulted in ASPs declining significantly from the
first quarter to the second quarter. While we do not expect the rate of decline to
continue, we do(?) see an environment where pricing pressures will continue,
and ASPs could be lowered sequentially in the second quarter- or second half of the
year, sorry.
We are prepared to adjust our cost structure and continue offering the best value
for delivered performance, so that we continue to gain share.
I would like now to turn the discussion over the Jerry Sanders.
<Jerry>
Thanks, Hector.
Well, today AMD is all about PC processors, which are 60% of our business, and Flash
memory which ["was"|"is"] 32% of our business in the quarter. Accordingly, I won't spend
any time discussing our other IC businesses or the foundry services we provide to some
businesses which we sold and which are now operating as separate, unaffiliated companies.
Those businesses in the aggregate are less than a hundred million dollars a quarter, and
declined with the industry. That will continue.
In the just completed quarter our biggest disappointment was the absence of any recovery
in the Flash memory market. Our revenue decline was twice what we had expected. We were
premature in believing that the second quarter was the trough quarter for Flash memory.
Q3 Flash sales decline in dollars is expected to approximate the decline we just
experienced in Q2.
On the strength of seasonal effects and new product cycles, we are confident that our
Flash memory sales will resume growth in Q4. We continue to outperform the market and
are gaining market share. The second part of our strategy of "defend and extend" in
Flash memory will be evident in 2002 with the advent of mirror-bit technology and greater
participation in the NAND sector.
Our customer relationships are excellent, and we continue to win awards, the most recent
coming the Robert Bosch company. We are very well positioned both customer-wise and
product-wise to benefit disproportionately in an upturn.
In PC processors, as reported, we shipped a record 7.7 million Athlon and Duron processors
with each setting individual records. Latest industry market research indicates we
continue to gain market share reaching a level in excess of 22%. An unprecedented number
of price moves in the quarter by Intel in attempt to stall our market share progress were
successfully countered but impacted ASPs severely. ASPs for microprocessors, PC Processors,
were down to about 75 dollars and change. I'd remind you that on 7.7 million units, a 15
dollar drop in ASP compared to the prior quarter cost us 115 million dollars in revenues,
most of which would have dropped to our bottom line.
In today's PC environment, price is a particular important determinant in product choice.
We plan to continue to offer superior delivered performance at a competitive price to that
of Intel. In the value desktop space, our Duron products are clearly super to the
alternative by any measure. In the performance space, our superior delivered performance
and substantially lower manufacturing costs have us well positioned to compete against
Intel.
Demand for our new mobile Athlon 4 processors is strong, and we are maintaining our maximum
ramp in the Dresden fab. In a weak PC market, in Q3, we expect AMD processor unit sales to
remain at record levels in the face of continuing aggressive price competition. Our working
hypothesis is that ASPs will be no better than that in Q2, even on the richer mix. In Q4,
we expect seasonal effects, the advent of Microsoft Windows XP, and a greater supply of
power managed Athlon and Durons for mobile applications will enable us to increase PC
processor revenues significantly. We remain on track to commence production of 130nm
Athlon Thoroughbred devices in Q4 with samples available at year end.
In summary, AMD overall is executing exceptionally well in an exceptionally weak market.
As indicated in the press release, our-ah-if current business-- if current business
conditions prevail, our revenues could decline by more than 100 million dollars in the
current quarter and we would report an operating loss. In this environment, we are
intensifying our cost containment efforts where appropriate and reducing or eliminating
those costs which will impact our near term outlook without affecting our strategy.
We continue to make the necessary product and process technology investments that will
position us well for the upturn. Our internal goal, through a combination of cost
control and aggressive selling is to break even in Q3 and return to solid profitability
in Q4.
Thank you, and now I'll turn it over to - um - Bob for questions.
<Bob>
Thank you, Jerry. Robert, will you organize the Q&A, please?
<Robert>
Thank you, sir. Ladies and gentlemen, if you wish to register for a question, you will
need to press the 1 followed by the 4 on your telephone. You will hear a three tone
prompt to acknowledge your request. If your question has been answered, and you wish to
withdraw your phone request, you may do so by pressing the 1 followed by the 3. If you
are on a speakerphone, please pick up the handset before entering your request. One
moment please for the first question.
The first question comes from Scott Randall with Wit Soundview. Please
go ahead
<Scott> Yeah, um, great, thank you. Two questions. First, on the transition
of Alpha towards Intel, ah, does that change any ["of the"?] requirements on
bus licensing, either currently or for the future roadmaps?
<Jerry> No, not so-- not whatsoever.
<Scott> Okay, in future roadmaps, how would that work? Is that-
<Jerry> Well, our strategy for processors is to differentiate and ?????
...uh, as you probably know, we do not have a compatible bus with Intel's
Pentium 4. We have our own bus, and we intend to continue to improve the
performance for that bus and offer an alternative platform to the Intel
platform. When we go to our, um, next generation - eighth generation -
uh, Hammer family, again, we have a new proprietary AMD technology, uhh,
Hyper Transport, which - again - is a differentiated solution. It is our
intention to compete with Intel not on a - uh - pin for pin - ah - basis,
but as a superior alternative platform.
<Scott> I understand. And secondly, relative to - uh - the pricing, um,
it looks like you folks have done a good job of defending market share,
but - but at a - uh - pretty big cost - impact there. Is the policy
still to defend market share sort of independent of pricing?
<Jerry> Uh, pretty much. We're not going to be - uh - pushed out of the ring
by a sumo wrestler. Ah - basically, we've got a lower cost structure on our
products than they have on theirs. When it comes to Duron, we've got a
clearly superior solution - the only differentiator is if we're prepared to
meet the pricing, we get the business, so it's in our intention that whatever
it takes in Duron. As Hector mentioned, we're selling out the production of
the Dresden fab, we're ramping at the maximum rate, umm, and so what we're
doing there is to - uh - negotiate on a customer by customer basis to optimize
our - um - our - our product line. We - uh - frankly, we're a little surprised
by the aggressiveness and the number of price changes that Intel implemented
last quarter, um, because they're really not doing nearly as well with Pentium
4 as they had hoped. So they're trying to push the Pentium 4 down into, um,
uh, the mainstream space, where AMD is, uh, prepared to offer a competitive
alternative, we've been ["giving"|"getting"] the business, but there's no
question about this, uh, it puts some pricing pressures on. Pricing, though,
on Athlon is still in excess of a hundred bucks. The Duron pricing is, uh,
substantially lower.
<Scott> Alright, thank you.
<Robert> Tim Mahon(?) with CS ??? Boston, please go ahead with
your question.
---19:55---
<Tim> Uh, yeah, thanks. Ah, congratulations on the market share gains, Jerry.
Uh, hey, curious if you'd give us a rough break["down"|"out"] of Athlon
versus Durons on a unit basis during the quarter? Was there a significant
difference in the two?
<Jerry> Um, we're reluctant to do that for competitive reasons, and so I -
as much as I would like to give you everything you want, I can't really
give you that. I can say that they're, uh, pretty evenly split at this
point in time. Um, going forth, we expect obviously to sell more Durons
and especially when we now have the power managed, uh, the mobile Durons,
which we expect is gonna be driving up - our target there is that fifty
percent share of the US retail mobile market by year end.
<Tim> Great, and then, um, maybe, uh, if you could help us out here, maybe
some thoughts on, you know, what percentage of the processor shipments in
Q3 you would expect roughly, once again, to be mobile processors?
<Jerry> Well, uh, that's not something that I'm prepared to guess, maybe,
um, Rob Herb can help me out there. It's still - still - it's basically,
I believe that virtually all of our Palominos are still being directed
toward mobile, but we will be introducing a 1.5 GHz desktop Palomino,
that's a power - that's the new version. Um, so, um, but the - the bulk
of our unit shipments from Palomino will - will be for mobile, and as far
as Morgans go, which is the mobile Duron, I don't have a good answer.
Rob, can you help me here?
<Rob> Yeah, overall, the question was what percentage will be mobile. Less
than 10% of our total shipments from Q3 will be for mobile market.
<Tim> Great, thank's Rob, and then finally, um, I don't know if you guys
can give this out, just kind of a linearity of the quarter for processors,
the unit shipments? Thank you very much.
<Jerry> It was awful. It was the most nonlinear quarter in my memory. The
customers were, uh, in a constant state of negotiation, renegotiation,
reallocation, redistribution, when, where, what, and if to ship. It was,
um, uh, much more than 50% of the units were shipped in the final quar -
uh - month.
<Tim> Okay, thanks, Jerry.
<Robert>??? ?????, with Robertson Stephens, please go ahead with your
question.
-----22:04-----
<> Thanks, uh, can you give an idea on your speed roadmap on Athlons through to
the end of the year? When will you be shipping the 1.7GHz Athlon and
faster versions?
<Jerry> Well, ??? we're ["going to do"?] the 1.5 GHz in the current
quarter. Uh, the 1.733 is the next, uh, major speed grade, and we're targeting
the fourth quarter, end of the fourth quarter, for that product.
<> Thank you
<Robert> The next question comes from Mark Edelstone, Morgan Stanley, please
go ahead.
<Mark> Uh, yeah Jerry, couple questions if I could. First of all, on just your
overall senses to the health of the PC market, uh, both as you went through Q2,
and then kinda your observations here going into Q3, and then, uh, based on your
commens about the nonlinearity of Q2; how do you think Q3 looks from a linearity
point of view versus what you just have in Q2?
<Jerry> Uh, I'm gonna let Rob answer that, since I'm holding him responsible for
these aggressive sales ["deals"?].
<Rob> Uh, yeah Mark. As part of the overall PC market, um, you know we're of
the belief now that the, um, PC market for 2001 is going to be roughly flat
with what it was in 2000. I think most of the ???? vendors are still looking
for a 2 or 3% growth, but, um, that continue['s'|'d'] to deteriorate, you know,
month after month after month there, so I think, um, uh, what - what we're
looking at right now is a roughly flat PC market for the year. Relative to, uh
linearity for the quarter, uh, Q3 is typically a fairly back end loaded quarter,
because, uh, you're obviously getting ready for a very strong Q4 PC selling
season, and a lot of processors ship in September into that. In addition, with
the Windows XP timing, I expect that to be even moreso this year. So I think
we have another, uh, quarter where we're, uh, we're fighting - we're fighting a
linearity battle, and we're going to be, uh, relatively back end loaded.
<Mark> And, Rob, is your - is your ???? that based on the - uh, the way that
shipments went in Q2, that channel inventories are in relatively good shape
going into the third quarter?
<Rob> Yeah, I think the, uh, channels ["have"?] gotten very sensitive on
managing inventories. I also think the channel is watching Q3 very closely,
because of course they also, uh, wanna make sure that they're prepared with,
uh, ???? material based on XP, uh, as early as possible, so that means, uh,
monitoring closely what happened this quarter. I - I believe if you look
at the US ???? the largest single segment to look at, um, from a consumer
standpoint, you know I think that, um, they're planning Q3, uh, year on year
to be down, probably in the 30 to 35% range, which I think is a little bit
pessimistic, but I will say that, uh, I think they have a lot to do trying
to manage the inventory prior to the XP launch.
<Mark> Thanks a lot.
<Robert> The next question comes from ???? Kim with Welsh Capital. Please
go ahead.
<Robert> Once again, ???? Kim from Welsh Capital, please go ahead with
your question.
-----24:50-----
<Kim> Huh?
<Robert> Well ... Mr. Kim, you're line(?) is available for questions.
<Kim> 'Kay. Um, my question is, um, on the ge- geographic break["down"|"out"]
what you're seeing relative to the US in terms of end user demand.
<Jerry> Yeah, basically, uh, Europe was, um, and you got to put it into both
businesses, I guess. I'll talk first primarily about the PC business. Uh,
Europe was actually a stronghold as we went through Q1. In Q2, uh,
you know, clearly I think, uh, European economy slowed a little bit. I know
that the, uh, the professional part of the European market was down. I think
it also caught up in consumer market a little bit. So clearly we ???? in
Europe although I still don't think it's nearly as bad as we've seen in the
US. Uh, relative to the Flash business, I think it's, uh, safe to say we saw
slowing in all segments of the world, and in all market segments.
<Kim> Okay, great, thanks.
<Robert> Hans Mosesman with Prudential Securities. Please go ahead with
your question.
<Hans> Yeah, thanks. Uh, can you, uh, Jerry, give us an update on your 300mm
strategy? Thanks.
<Jerry> Well, as I said to you many times, what counts is the die cost, or the
ultimate cost. Our view is that with our very small die sizes and, uh, moving
to a 130nm technology, uh, we have adequate volume for the next several
years to achieve our 30%, uh, world market share of units. Uh, so, um, our
300mm strategy really ties into the comments that Hector made earlier today
when he said our manufacturing partnering strategy, we have a number
of, uh, dis - discussions that are ongoing, but we're not at liberty to, uh,
talk about at this time, which will ultimately result, I'm sure, in our 300mm
announcement. But for the near term, being the next year or two, we think that
we're going to have a lower cost on our current 200mm wafers with our die size,
with our technology, than our competitor, and that's what really counts.
<Hans> Okay, and, uh, adding a followup. You mentioned NAND Flash, uh, in
2002. Does that mean that you're go - coming out with a NAND architecture, or
is it your mirror-bit is going to allow you to go after those guys?
<Jerry> Uh, I'm going to let Wally ["McGreeby"?] answer that, but those are two
very market opportunities and Wally will discuss.
<Wally> Actually, we have had, uh, NAND art - uh, products for a long time, and
the reason we did not push them in the market is because we were totally sold
out in the year in 2000, and, uh, even in, uh, the first quarter of 2001. Now,
uh, what we are coming out with is more advanced technology and, uh, higher
density, and the first product would be introduced, uh, very very soon, we
thought shipping probably in Q4. The, uh, the, uh, the NAND, uh, product is
geared towards, uh, data, uh, storage, where the mirror-bit architecture, which
also gives us very high density is geared towards cost reduction of NOR, where,
uh, code shadowing is, uh, utilized such as networking. Then we would have
three products which would(?) address three different market segments, the ????
["execute in place"?], the code shadowing, and the data storage.
<Hans> Okay, great. Thanks a lot.
<Jerry> Just a thing I'd like to add to that is up until now we really
haven't had 'til now the most effective counter to Strataflash. Mirror-bit
directly attacks Strataflash in that it's got competitive costs and there's no
compromise in reliability or endurance. Uh, the customer asks to make a big
compromise to use Strataflash. He doesn't get the one million cycle endurance
that AMD guarantees. Mirror-bit will give them that, so we think that, and
you might know the 28% of Intel's flash business is Strataflash, so there's,
uh, 28% of a market that we haven't been able to go for, so, uh, mirror-bit
gives us a, uh, part of our extension strategy.
<Hans> Thanks.
<Robert> Dan Niles, Lehmann Brothers, please go ahead with
your question.
-----28:55-----
<Dan> Great, thank you, uh, couple of questions, if I could. Um, the first
one, Jerry, is trying to understand, uh, a little maybe for you, Rob, what
your views are on inventory, I know you said that you thought they were in
good shape, I'm just a little bit confused. It sounds like you shipped about
fifty percent of your microprocessors in the last month, and, sounds like
Intel's quarter was a little back end loaded, as well, from what I can tell.
Yet on the PC shipment side, it seems as though shipments fell off pretty
deep, or that they were fairly nonlinear in terms of the third month didn't
ramp that well for names like Compaq and, uh, other companies, uh, yet to
report. So it would seem as though inventories have actually essentially
increased. I'm trying to figure out maybe where the disconnect is there.
<Jerry> Yeah, couple comments. First of all, on the AMD front, which I
can speak with a little more confidence ??? don't quite know what Intel's
??? in the quarter, but they probably did. From an AMD front, if you'll
remember, um, we're still fairly heavily weighted in the consumer space,
and if you take a look at what was traditionally the, uh, refre> |
