Oct 16, 2008
Executives
Ruth Cotter - Director of IR Dirk Meyer - President and CEO Bob Rivet - EVP and CFO
Analysts
Uche Orji - UBS Tim Luke - Barclays Capital Glen Yeung - Citi Chris Danely - JP Morgan David Wong - Wachovia Srini Pajjuri - Merrill Lynch Jim Covello - Goldman Sachs Krishna Shankar - JMP Securities JoAnne Feeney - FTN Ross Seymore - Deutsche Bank Patrick Wang -- Wedbush Morgan Sumit Dhanda - Banc of America Securities Craig Berger - FBR Capital Markets David Wu - Global Crown
Operator
Good afternoon. At this time I would like to welcome everyone to AMD’s third quarter 2008 Earnings Call.
(Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms.
Ruth Cotter, Director of Investor Relations for AMD. Please go ahead.
Ruth Cotter
Thank you and welcome to AMD's third quarter earnings conference call. This afternoon our call will be hosted by Dirk Meyer, our President and CEO, and Bob Rivet, our Executive Vice President and CFO.
This is a live call and will be replayed via web cast on amd.com. There will also be a telephone replay.
The number is 888-266-2081. For those of you outside of the United States, the replay number is 703-925-2533.
The access code for both calls is 1284873. In addition, this telephone replay will be available for the next ten days starting later this afternoon.
I would like to draw your attention to our Q4 2008 quiet time which will begin at the close of business on Friday, December 12. I would also like to remind you that we will be hosting our annual Financial Analyst Day on November 13th at our Sunnyvale Offices and in addition refer you to our calendar of activities on the IR section of amd.com for details of additional events; we will be participating in throughout the year.
Today’s call will be web cast live and archived on amd.com. Before we begin today’s call, I would like to caution everyone that we will be making forward-looking statements about managements expectations.
Investors are cautioned that those statements are based on current beliefs, assumptions and expectations, speak only as of the current date and involve risks and uncertainties that could cause actual results to differ materially from our current expectations. The semiconductor industry is generally volatile and market conditions are particularly difficult to forecast, particularly in light of the turbulent economic conditions under which the entire world economy is presently suffering.
Therefore, we encourage you to review our filings with the SEC, where we discuss in detail our business and Risk Factors setting forth information that could cause actual results to differ materially from expectations. You will find detailed discussions in our most recent SEC filings, AMD's quarterly earnings report on Form 10-Q for the quarter ended June 28, 2008.
Now with that I would like to turn the call over to Bob Rivet.
Bob Rivet
Thank you, Ruth. Good afternoon everyone.
I am pleased to report that AMD had a well executed third quarter in the context of a challenging economic environment. We reached our goal of achieving operating profitability in the quarter.
We launched and shipped a new family of industry leading Radeon HD 4000 graphics products and capitalized on the growing demand for our Quad-Core AMD Opteron processor family as well as our new AMD Turion ultra notebook platform. In short, we continue to progress toward delivering consistent profitability based on our tightened focus and strong execution across our business.
We are particularly excited with last week’s announcement of our "asset smart" strategy, a bold plan to unlock the value of our manufacturing assets. While assuring AMD access to leading edge manufacturing processors without the obligation to make the capital investments required to maintain a world-class manufacturing operation.
Before I begin my financial overview, I would like to remind you that a reconciling of GAAP to non-GAAP financial results is available in this afternoon’s press release. Included in the results of continuing operation is $191 million of process technology license revenue captured in our Computing Solutions segment, which had a positive effect on revenue, gross margin, and profits.
Revenue for the quarter was $1.776 billion up 32% sequentially and up 14% year-over-year. Income from continuing operations was $41 million or $0.07 per share.
We also report a loss from discontinued operations of $108 million or $0.18 per share. Third quarter operating income excluding [ARC] and restructuring charges was $170 million compared with a $276 million loss last quarter.
Last quarter, a gain on the sale of 200 millimeter equipment was also excluded from the operating loss. Gross margin in the quarter was 51% including a six percentage point positive impact associated with the process technology license revenue.
Therefore, non-GAAP gross margin was a solid 45% compared with a 37% non-GAAP gross margin in the prior quarter. This increase was due to unit growth volumes and improvement in our product mix.
Now, let me switch to the business segments. Computing Solutions revenue was $1.39 billion in the third quarter up 26% from the prior quarter and up 8% compared to the same period a year ago.
Highlights of the quarter included server revenue up 9% sequentially bolstered by a solid 50% unit increase in Quad-Core shipments over the prior quarter. Our Quad-Core AMD Opteron processors set several new benchmark records in the quarter including the top x86 web performance scores for both dual and Quad-Core processor systems as well as an x86 record score for Java based server applications.
Notebook processor units and revenues were up from the prior quarter driven by growing customer demand for our AMD Turion X2 ultra notebook platform. Samsung, NEC, Toshiba, MSI and Asus all introduced new skews in the quarter offering the unique graphics and power efficiency of the AMD on AMD platform.
Desktop unit and revenues were up sequentially on flat ASPs driven by growing AMD Phenom processor sales and growing customer demand for AMD business class solutions. As a result of these gains, as well as the process technology licensing revenue, operating income for the Computing Solutions Groups was $143 million in the quarter.
In the Graphics segment, revenue for the quarter was $385 million up 55% sequentially and up 40% year-over-year. We refreshed our graphics product line in the quarter with the introduction of 10 new leadership Radeon 4000 series products that span from the enthusiast to the value segment including the ATI Radeon HD 4870 X2, the fastest graphics card in the world.
These timely introduced leadership products return the Graphics segment to profitability resulting in operating income from the Graphics segment of $47 million. Now, let me turn to the balance sheet.
Our cash and marketable security balance at the end of the quarter was $1.34 billion down from $1.57 billion in the prior quarter. We are confident in our near and long term liquidity based on our “asset smart” plans and the anticipated proceeds from the sale of our discontinued operations.
Turning to the outlook. The following statements are forward-looking and actual results could differ materially from current expectations in a highly uncertain economic environment.
Third quarter 2008 revenue from continuing operations was $1.585 billion not including process technology license revenue. We expect fourth quarter revenue from continuing operations to be roughly flat to that number.
Amortization of acquired intangibles is expected to be approximately $30 million. Depreciation and amortization expected to be approximately $280 million.
In summary, we made solid progress in the third quarter gaining momentum on the strength of impressive new products in each of our core businesses, while taking actions across the company toward lowering our breakeven point. We remain on track to achieve our target of $1.5 billion breakeven in the first quarter of next year, the result of continued restructuring activities as well as our “asset smart” transaction.
We are executing our strategy of tightening our focus on our unique combination of world-class processing graphic technologies. While we see opportunities for improvement across our businesses we are pleased with our progress on the execution side achieving clear leadership in our Graphics business, while delivering unique platform capabilities across our Computing Solutions businesses with a favorable impact of 45 nanometer technology just beginning to take effect.
I will stop here and at this point I will turn it over to Dirk.
Dirk Meyer
Thanks Bob. Thanks for joining us everybody.
As Bob highlighted this past quarter was a good one for us in a number of ways, certainly not satisfactory. We will not be satisfied until we deliver consistent profitability, but one I would characterize as directionally correct.
We are on a path to becoming the company we aspire to be and we will be. We are satisfied with our “asset smart” announcement, in fact, we are thrilled.
As many of you indicated in our meetings last week the “asset smart” transaction is nothing short of transformational for AMD and for the whole semiconductor industry. It assures this company of a long-term source of world-class manufacturing capacity while unlocking the untapped potential and value of our phenomenal Dresden team to the rest of the industry.
It is good for us, good for our customers; good for the great people of Dresden and in upstate New York and it's good for competition, which means it will be good for consumers around the world. I want to thank our employees for their tireless work in bringing this company back to operating profitability at a time when we were working on the most strategic transaction in the history of our company and we all look forward to the transaction closing at the end of the year.
This is a company that is putting itself in a position to win. We have taken the leadership crown in the graphics business.
We deliver the platforms with the best balance of CPU, graphics and video technologies and with Shanghai, which is shipping now and will launch in a few weeks, we have the best server platform in the business period. Over to you, Ruth for Q&A.
Ruth Cotter
Thank you, Dirk. Thank you, Bob.
Now with that we will be happy to take your questions and in order to allow more of you to participate in our Q&A session today, we ask that each person limit themselves to two questions only. Our operator, [Hove] will introduce each of you and prompt your question and then ask if you have a follow-up.
[Hove] we are now ready for our first question, please.
Operator
Thank you, Ms. Cotter.
(Operator Instructions) Our first question comes from Uche Orji from UBS. Your line is open.
Pardon me Mr. Uche, your line is open.
Uche Orji - UBS
Can you hear me?
Dirk Meyer
Yes. Hi Uche.
Uche Orji - UBS
Yes. Well let me start by saying congratulations, it is been a long time since anyone has said that to you.
This is good set of numbers. Let me just start by asking about this license agreements.
What does it cover? What is the term?
What is the tenure of the agreement just for us to get a proper handle what it means? Also, if you can explain how that reconciles with the agreements you also have with IBM, is this helping you to offset that.
So, anymore light you can shed around this would be helpful. That is my first question.
Bob Rivet
Sure. This is Bob.
Thanks for the question and thanks for the compliment. Yes this technology revenue is actually associated with the sale last quarter of our 200 millimeter tools in addition to selling the tools we actually sold some process technology to the same vendor.
So, it is a unique one-off event or it will be a little bit of dribbling of more in the future but the bulk of it was recorded in the current quarter. So, it is not associated with the IBM and also to the IBM Technology payment.
Dirk Meyer
Yes. It further relates to a technology node that we had developed before we entered into the licensing or into the process technology relationship with IBM.
Uche Orji - UBS
Okay, that is helpful. Let me ask another question on graphics.
Fantastic performance there but the question here is what is your sense of how much share gain you had this quarter, and what is the outlook for graphics given that in a tough macro environment, it looks like the tax rate seems to go down. So, looking forward, what is your sense as to how this business will perform going forward and how sustainable do you think all of the elements of share gain that you have had will be?
Similarly, if you can extend that to the rest of your processor business the guidance for Q4 is for flat. How do you reconcile that with what is normal seasonality within the current macro, so first on graphics and also the processor side?
Dirk Meyer
This is Dirk here. Why don't I answer them in the other order, Q4 is typically a seasonally strong quarter and CPUs it is typically up about 8, 10%, graphics a little bit less than that.
Clearly, we are not planning on losing share in either of our big businesses quarter-to-quarter, rather we are just being cautious based on the macroeconomic environment. So, that is the second question.
The first question on graphics, clearly, we gained share quarter-to-quarter. It is pretty difficult to put a number on it at this point.
We clearly gained share in notebook consistent with the design wins that we have talked about in the past on the new notebook platforms that came out in Q3 and we expect to be able to see continued share momentum in Q4, since those new notebook platforms really did not ship until into Q3. So, that is point one.
Clearly on the desktop side, we also gained GPU share on the strength of the products. Some of these products were introduced deep into the quarter.
In fact some of the products like the 730 and 710 were only introduced in September. We feel like we had a get continued momentum there but again we are being cautious based on the environment.
Uche Orji – UBS
Thank you very much.
Operator
Thank you, sir. Our next question comes from Tim Luke from Barclays Capital.
Your line is open.
Tim Luke - Barclays Capital
Thank you so much. Just to clarify, first your units were up in both notebooks and servers in the third quarter; is that right?
Dirk Meyer
That is right, Tim.
Tim Luke - Barclays Capital
And the ASPs?
Dirk Meyer
ASPs were roughly flat quarter-to-quarter for the total portfolio. Some plusses and minuses between the pieces, but effectively flat.
Tim Luke - Barclays Capital
Is it fair to think then in looking for flat revenue for the calendar fourth quarter that the graphics business would be expected to show some sequential growth within that? Or how should we think about the different segments for the fourth quarter?
Bob Rivet
We are just being cautious at this point. I mean with what is going on in the banking, financial markets, what we are seeing in rates in the first part of October we are just being cautious.
As Dirk said though, we expect to continue to gain share in the GPU space and continue to gain share in the CPU space. So, but it is a little bit hard to call exactly what the numbers are going to finally land at.
Tim Luke - Barclays Capital
From a macro perspective Bob, can you give any color then in terms of how you seen corporate versus consumer and the different regions in terms of the general climate in October? Thanks.
Dirk Meyer
Yes. Tim, its Dirk here.
Why do not I take a swing at that?
Tim Luke - Barclays Capital
Thank you.
Dirk Meyer
First of all, on the consumer side, I would say, we clearly saw September is softer than a typical September certainly in the US, certainly in Western Europe and even a little bit in China, where the consumer market in China on the PC side seem not to wakeup as quickly as we expected after the Olympics. Rest of the world is typical I would say.
On the enterprise side, frankly, the enterprise business from our perspective has not been particularly strong all years. So, I would not say that Q3 was really distinctive as compared to Q2.
Tim Luke - Barclays Capital
Okay. Thanks very much.
Bob Rivet
Thanks, Tim.
Operator
Thank you, sir. Our next question comes from Glen Yeung from Citi.
Your line is open.
Glen Yeung - Citi
Thank you. If I look at your operating margins in computing and I ex-out the gains that you had from the licensing revenues, it looks like the profitability actually went down there.
I wonder if you would talk a little bit about what drove that because it sounds like servers did pretty well for you, I would imagine that is good margins. So, if I had to guess I am going to assume that mix had an issue or played a role in this impact.
I wonder if you can just clarify if that is true.
Bob Rivet
This is Bob. If you takeout the technology and try to do it from that perspective the mix is always a challenge.
We are introducing new products. It is a combination of all those things above that just move things around.
In total, we are feeling pretty good about the progress we have made in server, notebook, desktop, etc.
Glen Yeung - Citi
Yes, absolutely, great.
Dirk Meyer
Dirk here. The other thing to remember is that last quarter; we also had a tool sale.
Bob Rivet
That is right.
Dirk Meyer
So, you got to actually backup
Glen Yeung - Citi
Okay.
Dirk Meyer
Both numbers to do an apples-to-apples comparison.
Bob Rivet
The numbers are roughly the same. It was 193 million in the second quarter.
It was 191 million in the third quarter.
Glen Yeung - Citi
Okay. That is good to know, thank you.
Then the other question, I had was on GPU; a great quarter obviously in terms of sales and the fall through was spectacular. I think, you drive 62% of your sales growth through the operating income line.
When you look at that, is that a sustainable metric in terms of your ability to drive through profitability going forward, or is there anything unusually positive that helped that number?
Bob Rivet
Well, this is Bob. In the current quarter, as we introduced each of the new products they were significantly better than the competitors offering.
So, we could actually maintain our price points throughout the whole quarter, which is typically not normal in that business. So, that is part of the reason the magic of volume with the right products will yield the right margin improvement.
On a go forward basis, we anticipate prices will continue to be competitive. We will still do pretty well but probably tougher to maintain that fall through on incremental sales.
Glen Yeung - Citi
Sure. Well good job.
I appreciate it. Thanks.
Bob Rivet
Thank you.
Operator
Thank you, sir. Our next question comes from Chris Danely from JP Morgan.
Your line is open.
Chris Danely - JP Morgan
Thanks. Can you just talk about how you expect gross margins and operating expenses to trend Q4, but especially into next year as we head into the teeth of the recession?
Bob Rivet
Sure. Well, to be honest I do not want to get into a next year discussion since we are going to meet in 30 days with an analyst conference, so I will hold the '09 discussion until then.
That gives you a couple of things to think about for fourth quarter and clearly that is part of the thought processes as you get into '09. I will not give anymore detail in it is we are just starting 45 nanometer as Dirk commented.
We are shipping Shanghai, which is 45 nanometer a server product as we speak, so 45 nanometer is ramping. Not only we will have better products at 45 nanometer, we will also have the cost advantage at 45 nanometer.
So, things are moving in the right direction of what we control from a cost perspective. The market is the part, where it is struggling with how to handicap.
So I view it and the two positives as new products typically give you better ASPs, better unit expansion into the marketplace, cost control with 45 nanometer shrank, cost controls to continue to lower the breakeven point on operating expenses, market condition of what is the market going do, what are we going to sell into that is the part we really do struggle with exactly what that is for the fourth quart, which is why we guided flat.
Chris Danely - JP Morgan
Okay. So to paraphrase it is especially on OpEx flattish?
Bob Rivet
Flattish to slightly down.
Chris Danely - JP Morgan
Great. Then for my second question, what exactly is the exit strategy for the foundry business.
In other words, how we are going to get this off of your consolidated P&L?
Bob Rivet
Well, as we said last week and I repeat it again - the deal we have struck will let us made at our option when a capital call is required for the foundry business allow us to either pay our fair share of that capital call or turn in more shares and ownership of the company from that perspective. As we have alluded to, we will make that determination at each point and time, when the capital call arises.
So, you can think of it a way, there is a natural way to get out of it if we want to which is not to participate in the capital call with cash turnover shares.
Chris Danely - JP Morgan
Is it safe to say this is not a near term thing that is going to happen, it is more a little bit further out?
Bob Rivet
Correct. Yes.
Chris Danely - JP Morgan
Great. Thanks.
Bob Rivet
Thank you.
Operator
Thank you, sir. Our next question comes from David Wong from Wachovia.
Your line is open.
David Wong - Wachovia
Thanks very much. Shanghai, when would we expect to see server systems containing Shanghai processors began to ship and what about desktop systems with 45 nanometer processors?
Dirk Meyer
Yes, Dirk here. We are shipping Shanghai server components to data OEM and you will see OEM systems in the market this quarter.
We will be shipping the desktop (variant) 2:02 18 of that product this quarter and you will see OEM systems in the market early next quarter.
David Wong - Wachovia
Great. If I understand correctly, Shanghai still has the StarCore architecture, the Barcelona does not it?
When do you expect to introduce products with your next generation core?
Dirk Meyer
I think because we have an analyst meeting in a month, we would like to suspend longer-term roadmap discussions until that meeting.
David Wong - Wachovia
Great. Thanks.
Bob Rivet
Thank you.
Operator
Thank you, sir. Our next question comes from Srini Pajjuri from Merrill Lynch.
Your line is open.
Srini Pajjuri - Merrill Lynch
Thank you. Bob, just a clarification.
You said OpEx will be down next quarter and if I just do the rough math on your 1.5 billion breakeven target, I think the OpEx needs to come down by at least 50 to $100 million. Just wondering where you see those opportunities and you obviously sounded pretty confident about getting there in Q1 just trying to understand where that will come from.
Bob Rivet
As we think about it this way; we will execute the transaction for “asset smart” included in that transaction will be, I will call it a change in our G&A perspective. We will also use that transaction to continue to sharpen our pencil and reduce our cost structure in the operating expense category, R&D, sales and marketing, G&A.
So that continuation of that process will continue in the fourth quarter so that we can start the year at the $1.5 billion breakeven point from a design growth perspective.
Srini Pajjuri - Merrill Lynch
Okay. Do you expect that the expenses to have any revenues associated with them?
Bob Rivet
No. I mean, to me we are not trying to cut revenue generating things.
We are trying to cut, I will call it just pure cost-oriented things that we do not think we will need on a go forward state.
Srini Pajjuri - Merrill Lynch
Okay. Then my final question is, your comment about Quad-Core is growing 50% but yet your servers are only up 9%.
I am trying to understand what I am missing here, is the pricing gotten that much worse or is there something I am missing here? Thank you.
Dirk Meyer
Dirk here. Good question.
What you are seeing there is the typical insertion of more capability and features into existing price points. So, in other words, last quarter, two quarters ago we were shipping a dual core and now we are shipping Quad-Core consistent with semiconductor industry practice.
Srini Pajjuri - Merrill Lynch
Thank you.
Operator
Thank you, sir. Our next question comes from Jim Covello from Goldman Sachs.
Your line is open.
Jim Covello - Goldman Sachs
Good evening. Thanks so much for taking the question.
A couple of things. Can you talk about the inventory management in relation to the flattish outlook your inventory is up 7% or so the outlook kind of flattish.
Are you comfortable with inventories at that level? Do you feel like you have to bring it down next quarter?
Bob Rivet
Well, as you could imagine with the typical cycle times, we in the third quarter we had to start making the signals for the fourth quarter with the anticipation that fourth quarter was going to be strong. I will call it before the hurricanes started, per se.
As Dirk said we started to see a little bit of wind in our sales in September. So, we have backed off a little bit in the manufacturing environment to manage inventory in a marketplace that looks a little turbulent.
Interesting though, we are actually poised to actually respond if the market goes in the other direction and wants more units. So, we feel like we are moving in the appropriate direction.
Now that we know, what we know, we probably built a little more inventory in the third quarter than a flattish environment would tell you to do, but had to make that call in the summertime.
Jim Covello - Goldman Sachs
Sure. All else being equal, how much do you think that lower factory loading would hurt the margins in Q4 again and the business mix being consistent?
Bob Rivet
Not too much because of the 45 nanometer impact that starts to play through.
Jim Covello - Goldman Sachs
Okay.
Bob Rivet
That is just a natural offset with the cost reduction of 45.
Jim Covello - Goldman Sachs
Okay. If I would sneak in one more then I will go away.
Just relative to the foundry, the “asset smart” strategy, Dirk, what do you think the biggest challenges are going to be in manufacturing at a foundry? Obviously, you feel comfortable that you can work through them.
What do you think the biggest things you are going to have to stand on top of are? Thanks so much.
Dirk Meyer
Yes, good question. Clearly there is some things that we are going to have to modify in terms of our behaviors and the way we go out about running the business.
The good news is we have learned a lot about what we need to do as a result of seeing how the ATI team operates with their foundries. So, we have learned quite a lot over the last two years.
In the area of both supply chain and new product development, we are going to have to change a little bit our processes just to make it more formalized. You can run things based on human relationships when everybody is part of the same company.
You need to be a little bit more formal when we are different companies. I would not say any of the challenges are fundamentally hard.
Clearly we are going to have to make some changes and I actually think some of these changes are going to be good for us because they are going to enforce more discipline across these organizations.
Jim Covello - Goldman Sachs
Thank you.
Dirk Meyer
Thank you.
Operator
Thank you, sir. Our next question comes from Krishna Shankar from JMP Securities.
Your line is open.
Krishna Shankar - JMP Securities
Yes, congratulations on good results. A couple of questions.
Can you talk about what tax rate you are seeing in the notebook market for your Puma platform with your own graphics, and I think a step up in your penetration of higher end notebook models with that, or is it still more the low to mid range consumer market?
Dirk Meyer
Yes, Dirk here. I would say we still have an untapped opportunity with the Puma platform in that if you look at the mix that we are selling that is the system level price points of Puma in the market versus the market overall.
We are a little bit lower and as a result, the discrete graphics attach rate is lower as well.
Krishna Shankar - JMP Securities
Okay. Also can you talk about your penetration efforts in the enterprise market?
I realized it has been weak the first three quarters of this year but how is Shanghai helping that and also some of your business class desktops and notebooks. Can you layout your thoughts on the enterprise market and penetration there?
Dirk Meyer
Sure. First let me clarify the question.
So, our big participation in the enterprise market meaning big businesses is really through our server business. Our commercial client business is really more of a government education and small and medium business play.
On the client side, I would say that '08 has been the year of design wins and seeing those design wins get in the market and now we are in a mode of working with our OEMs to get those systems sold through their channels. I would say quarter-by-quarter we are making progress.
We still got a lot of opportunity in front of us and ahead, a lot of growth we can still tap. So, a long way to go, I will say in summary.
On the server side, with Barcelona having shipped for an entire quarter in Q3, I would say we are making progress. We are doing better than holding our own overall in the server category.
We clearly saw strength returned on our side in the four socket arena and we are really enthusiastic about Shanghai based principally on how enthusiastic our customers are about getting their systems in the market in Q4.
Krishna Shankar - JMP Securities
Okay. My final question is what percent of AMD Foundry Company will be owned by you and then the Dubai investment can you give us some sense for how the ownership of the Foundry Company will be start in Q1 ‘09?
Bob Rivet
Yes. There is two dimensions of ownership.
There is voting ownership, which will be a 50/50 proposition and economic ownership will be roughly 55/45 on a fully converted basis.
Krishna Shankar - JMP Securities
So, 55 AMD and 45…
Dirk Meyer
No, the other way around economically.
Krishna Shankar - JMP Securities
Okay. Thank you.
If I can sneak in one more, what is your response to Intel's Atom processor that clearly is a very viable high growth segment? What is AMD's product strategy there?
Dirk Meyer
Yes that is a good question and it is a complicated answer over the phone. We will show at the Analyst Conference pictorially how we think about the notebook market.
Clearly the so-called netbook is a new form factor, a new market opportunity and one that we are not participating in right now today. We do have strategies together with our OEMs for pushing our solutions both down into smaller form factors and lower notebook price points and we will detail that next month at the Analyst Conference.
Krishna Shankar - JMP Securities
Thank you.
Operator
Thank you. Our next question comes from JoAnne Feeney from FTN.
Your line is open.
JoAnne Feeney - FTN
Thanks folks and congratulations on a nice quarter. A couple of questions.
One is, do you anticipate a continued improvement in gross margin? It seems like a lot of what we saw here in the third quarter came from improved mix in CPU and GPU and it sounds like that is likely to continue into the fourth quarter.
Is that a safe assumption to make at this point?
Bob Rivet
This is Bob, JoAnne, hi. I would love to say that if business was usual strong fourth quarter, I would say there is pretty easy to call improvement in gross margin.
Based on the market condition, it is a little bit tougher to call. In what we control, I feel like the dials moving in the right direction, which is improved mix because of new products.
Shanghai being I will call it the big new one in the fourth quarter and cost of moving to 45 nanometer. So, those two dials we control definitely moving in the right direction should yield better gross margin.
What I do not know is how much, what is all, the total, what is the mix of what we are going to ship in the fourth quarter, first quarter, etcetera. So, it is a political answer I will call it but that is I think reality.
JoAnne Feeney - FTN
Reasonably given the uncertainty we are facing I suppose and perhaps a follow-up if we could maybe talk a little bit about “asset smart” and in particular the advantages that you are seeing. I mean, as I see it, you have alleviated the debt, a major concern and you have also shored up the technology front with something like a stronger partnership with IBM.
As you go into the next year and you are trying to trim your operating expenses, it seems like a couple of things might be happening for you. One with the market being so weak there might be some people around, design engineers perhaps that you could pick up to also shore up the design side of the company, I am wondering if you are planning to do that?
Then secondly, do you anticipate more people from IBM being involved on the foundry side? I know that the CEO is an ex-IBM guy and I am wondering if that relationship will become tighter through more participation from the IBM folks.
Dirk Meyer
Yes, JoAnne, Dirk here. Second one first.
IBM has publicly expressed their support behind the Foundry Company venture and the reason is clear. This brings technically and financially strong foundry to the IBM ecosystem.
Clearly that is good for IBM. They see that and as a result of that I do expect the partnership between the two companies to get stronger overtime.
With respect to the prior question, as we always do and your question was mix of design engineering and what I thought there. I would characterize '09 as high order being one of getting better results from the capability that we have in-house as opposed to hiring people in mass.
That said we always rebalance the workforce to get the right talent working on the right stuff.
JoAnne Feeney - FTN
Okay. It sounds like you might have a good opportunity in a downturn, what might be a lot of people on the street and with your stock at its current price and potentially moving higher it just seems like that would be an attraction to be being able to hire some more better people?
Dirk Meyer
You are singing our song.
JoAnne Feeney - FTN
Well, thanks a lot. That is helpful.
Bob Rivet
Thank you.
Dirk Meyer
Thank you
Bob Rivet
Thank you
Operator
Thank you. Our next question comes from Ross Seymore from Deutsche Bank.
Your line is open.
Ross Seymore - Deutsche Bank
Thanks and congrats again on the business strength especially in GPUs. Just wondering with your guidance, how would you describe recent demand patterns?
I know there is a ton of uncertainty out there but with the end of the quarter something that has continued to now and October gotten worse, better, stayed the same, etc?
Dirk Meyer
Dirk here. I would not say couple of weeks into Q4 we are seeing substantially different market conditions than what we saw in Q3.
I would just say that the quarter does not have its usual strength. It does not seem like a disaster.
As Bob said, we are not forecasting a shrink in business Q3 to Q4 but it is pretty murky. The one good news I will say is average across customers and channels, we are not seeing inventories being terribly out of line.
So, to the extent the end user demand picks up, there is a little stronger than we think. We got an opportunity to ship more.
Ross Seymore - Deutsche Bank
I got a question on the balance sheet. You might have gone through this, Bob, I apologize if you did.
The cash fell quarter-over-quarter given that you got the 191 million that came in I was a little surprised to see that. Could you describe what happened there?
Bob Rivet
Sure. One of the phenomena’s on the 191 is actually we collected the majority of the 191 in prior quarters.
They were all, I will call it prepaid. It was until we completed the revenue process in the quarter that we could actually record it.
So, the 191 did not show up just in the third quarter. It actually showed up throughout this year, which is how we manage our cash balance throughout the year.
So, that is one of the phenomenas of why cash went down even though I had this nice pop in revenue particularly from a process technology license.
Ross Seymore - Deutsche Bank
Great. Thank you.
Operator
Thank you, sir. Our next question comes from Patrick Wang from Wedbush Morgan.
Your line is open.
Patrick Wang - Wedbush Morgan
Hi and I want to add my, congrats on the quarter. I just had a question on 45 nanometers here.
If we assume a relatively fast ramp, what are some of the milestones we should be looking for over the next four to six quarters here just in terms of how fast the ramps, and if you have an estimate or target in terms when you see crossover versus 65 nanometers?
Dirk Meyer
Yes, Dirk here. We will be fully converted in the first half of next year.
Bob Rivet
It is a very fast ramp. I mean, we will be more than 50% end of first quarter.
We will have actually fully conversion by sometime in December second quarter timeframe. So, it is not six quarters.
It is less than four to do full conversion for us.
Patrick Wang - Wedbush Morgan
Okay. Thanks, that was helpful.
Then just secondly, I am just trying to figure out some of the moving parts in terms of the revenue side in computing here. I know that in terms of desktop units, units were up and ASPs were flat, notebook units were up and server units were up.
Just in terms of pricing on those, would it be fair to call that both of those were down just slightly on the quarter?
Dirk Meyer
Dirk here. So, as Bob said overall across the MPU portfolio ASPs were flat.
Desktop ASPs were flat. Notebook ASPs were essentially flat.
I mean, down just a wee bit and server ASPs were essentially flat, I will call it up just a wee bit. Overall, noise, I mean, things flat across the board.
Patrick Wang - Wedbush Morgan
Thanks. In terms of pricing going forward into the fourth quarter, I know you touched on this earlier, but any thoughts there?
Dirk Meyer
Well there are a couple of elements to pricing from our perspective. One is what is the mix that we sell first mix across server, desktop and notebook and secondly within a product category how rich of mix, are we able to sell?
Then finally, what is the competitive dynamic in the overall pricing environment. The pricing environment really did not change Q2 to Q3, and we are not expecting it to change much Q3 to Q4.
We are always striving to sell more servers and sell our richer mix within notebook and desktop. That is always the goal.
Patrick Wang - Wedbush Morgan
Okay. All right.
Thanks very much.
Dirk Meyer
Thank you.
Operator
Thank you, sir. Our next question comes from Sumit Dhanda from Banc of America Securities.
Your line is open.
Sumit Dhanda - Banc of America Securities
Yes, hi. A couple of questions.
First, on the relative growth, I do not know if you touched on this Dirk or Bob between desktops and notebooks, if you had to give us a sense of where the revenues grew faster one versus the other, could you give us some sense?
Dirk Meyer
Yes, Dirk here. I mean, clearly, quarter-to-quarter, notebook revenues outpaced desktop in terms of growth.
Sumit Dhanda - Banc of America Securities
Was it a 2x factor, just some rough idea?
Dirk Meyer
I would say, in terms of growth rate better than 2x.
Sumit Dhanda - Banc of America Securities
Okay. The second question I had was, as it relates to the earlier comment on shipping the Quad-Core processors at basically the same price as the dual core processors, is this really impacting your margins on Quad-Core?
I am assuming that the dye size is much larger since you have not done your 45-nanometer transition yet. Do you expect to get a much more favorable margin basis on your Quad-Core products as Shanghai ramps?
In other words, give us a sense of how much smaller is that dye? Is it just a 50% shrink as you would expect?
Bob Rivet
If you do isolate your question to talk servers as an example, but I will come back to the further clarification of your question. Clearly, at 65 nanometer a Quad-Core is more expensive than a dual core and takes up more real estate, and we are not seeing that much price premium I will call that as we continue to go through that process.
Dirk Meyer
Though the one thing I will remind you is that dual core Opterons that we are shipping are 90 nanometer. We do not have a dual core 65 nanometer Opteron.
So, it is really a Quad-Core 65 versus the dual core 90.
Bob Rivet
Yes. It is not an apples-to-apples but that just shows one we had respectable gross margins in the current quarter of moving to 45 nanometer really is a nice pickup from that perspective, because you are not going to see an ASP drop, and you are going to see the cost reduction from that standpoint.
Plus, the product actually is a hot product as Dirk said, so we actually believe we will sell a lot more units. So that is the story on server.
If you look at it in total, either one of those stories, whether it is shipping 65 nanometer Barcelona or 45 nanometer Shanghai that is still the area we want to move into because that is much higher gross margin than the client business. So, it is in a priority sequence think of it sell as many units you can in the server space and whatever technology because you actually get a lot of bang for the buck, and then of course execute your plan within the server portfolio to get the smallest, the richest technology as you can.
Sumit Dhanda - Banc of America Securities
If I could sneak in just one short question here. You noted that unit volumes and product mix contributed to the jump in non-GAAP gross margins.
Could you give us a sense of was it all microprocessor related given that you outsource your graphics chips?
Bob Rivet
No. I would refer you can see it fairly quickly if you look at the segment reporting page in the press release.
We made huge progress in the graphics business quarter-on-quarter and progress in the CPU or the Computing Solutions segment. So, it is actually both business units contributed to improving the gross margin and the profitability.
Sumit Dhanda - Banc of America Securities
Okay. Thank you very much.
Ruth Cotter
We will take two more questions, please?
Operator
Yes, ma'am. Our next question comes from Craig Berger from FBR Capital Markets.
Your line is open.
Craig Berger - FBR Capital Markets
Hi, thanks for taking my questions. With such a steep ramp in 45 nanometer coming in the next couple of quarters, how do we think about the impact on gross margins there?
Bob Rivet
All goodness. Goodness from the standpoint of clearly that delivers better product of the 45 nanometer technology node, which sell more units potentially at higher ASPs and cost reduction because it is a smaller dye.
So, to me, going to 45 think about it compare this quarter to let's pick second quarter of next year is wildly different from a cost structure perspective and the refresh of the products.
Craig Berger - FBR Capital Markets
Any quantification?
Bob Rivet
No. Not at this point.
I will talk about next year at the Analyst Conference in four weeks.
Craig Berger - FBR Capital Markets
Can you just remind us again the impact on your OpEx from the satellite deal?
Bob Rivet
I assume, you are talking “asset smart”?
Dirk Meyer
Yes
Craig Berger - FBR Capital Markets
Yes.
Bob Rivet
Yes, I mean the zip code I have given people last week is still the same again - more details to come. We will lose around 100 million a quarter in process R&D in the AMD Design Co business that will be replaced in gross margin by higher wafer costs.
Operating income is effectively neutral. So, we will just have some parts moving around.
Again I will talk about that in 30 days.
Craig Berger - FBR Capital Markets
Okay. Last question is the 191 million of licensing revenues, is that all in the processor bucket?
Bob Rivet
Yes, it is. Computing Solutions.
Craig Berger - FBR Capital Markets
Okay. Thank you.
Bob Rivet
Thank you.
Operator
Thank you, sir. Our last question comes from David Wu from Global Crown.
Your line is open.
David Wu - Global Crown
Well, thank you very much. I was late getting on.
I just want to get some clarification Bob on when you mentioned about $1.5 billion breakeven is that on a consolidated basis, or do you have to do some magic and just look at Design Co in Q1?
Bob Rivet
That is stay in focus as we have been being consistent with our message. Clearly last week we could come out of stealth mode and really talk about it that is 1.5 billion breakeven for AMD the Design product company not a GAAP consolidated basis, which will be a little more confusing.
Again, think of it this way for everybody on the call that Foundry Co piece of the bucket will have profits and losses. We will talk about that later but they are all cashless.
The cash generating machine of AMD is the AMD Design product P&L. We will be transparent and show that when we start reporting after the transaction closes.
David Wu - Global Crown
Bob, from a pure accounting basis, it is going to be multiple years, when your ownership of the foundry will be off your consolidation basis right because it probably make couple of rounds of fund raising before you actually deconsolidate the numbers.
Bob Rivet
It is actually even more confusing than that but the fundamental answer is yes it will take a while before we will stop consolidating.
David Wu - Global Crown
Okay. Do you need a lot of help with the Fab 38 coming on stream now that you have got a rich uncle?
How does it change your mix of SOI and bulk sea moss in your manufacturing situation, and would you be using that to help your graphics company to reduce costs?
Dirk Meyer
Dirk here. So we will, as you said, be ramping Fab 38 and we will be installing into Fab 38 a 32 nanometer bulk process for the purpose of enabling the foundry business.
We will also be moving some GPU product into the Foundry Company in order to help the Foundry Company get off the ground relative to that foundry type business. Clearly, as a result of having two really good suppliers on the GPU side we got an opportunity to improve our costs there and capability.
David Wu - Global Crown
Okay, great.
Bob Rivet
One of the pickups to think about on a go forward is the beauty, another beauty of the deal is we finally get scale because that factory can be ramped not just on the backs of the microprocessor business but on I will call it the total industry including the bulk part of the process. Therefore we will both get the benefit of it.
David Wu - Global Crown
So basically, in Dresden, we got one SOI fab and one bulk sea Moss fab?
Bob Rivet
That is maybe a little too simplistic but you are not too far off.
David Wu - Global Crown
Okay, thank you.
Ruth Cotter
Okay. We would like to thank everybody for participating in today’s earnings call and we look forward to seeing many familiar faces at our forthcoming Analyst Day.
Thank you.
Operator
Ladies and gentlemen, this does conclude today’s conference. Thank you for your participation and have a wonderful day.
You may now all disconnect.