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SEC filing shows depth of AMD CPU concerns

Future third party plans take shape

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US corporations have to file form 10Ks with the Security and Equity Commission (SEC) and in the last three days a bunch of them has done just that. But AMD's filing is of particular interest for several reasons. In the next few days, AMD will release its latest financial results and they will not be good, as it warned earlier. In the SEC filing, AMD sets out its different business lines. Its CPG division, which includes microprocessors and core logic products, accounted for 50 per cent of its net sales in 1998. We have italicised those parts which we think are of most interest and later on today will post our analysis of the seven year AMD-Motorola deal, much of which is also contained in the same filing. Says the filing: "In 1998, our most significant microprocessor product was the AMD-K6(R)-2 processor with 3DNow!(TM) technology, a sixth-generation microprocessor product and a member of the K86(TM) microprocessor family. The K86 microprocessors are based on Superscalar RISC architecture and are designed to be compatible with operating system software such as MS-DOS, Windows 3.X,Windows 95(R), Windows 98(R), Windows NT(R) and UNIX. We began volume shipments of the AMD-K6 microprocessor in the second quarter of 1997. "The AMD-K6 microprocessor was designed to be competitive in performance to Intel's sixth-generation microprocessor, the Pentium(R) II, which was designed by Intel specifically for desktop PCs. In the first quarter of 1999, we introduced and began volume shipments of the AMD-K6-III processor with 3DNow! technology, our highest performance, sixth-generation K86 microprocessor for desktop PCs. Our introduction of theAMD-K6-III processor with 3DNow! technology also marked the debut of our new TriLevel Cache, an advanced cache memory architecture which improves overall PC performance in Windows compatible desktop PCs. "The AMD-K6-III microprocessor was designed to be competitive in performance to the Pentium III, successor to the Intel Pentium II microprocessor. Our microprocessor business has in the past significantly impacted, and will continue in 1999 and 2000 to significantly impact, our revenues and profit margins and operating results. "We plan to continue to make significant capital expenditures to support our microprocessor products both in the near and long term. Our ability to increase microprocessor product revenues, and benefit fully from the substantial financial investments andcommitments that we have made and continue to make related to microprocessors,depends upon the success of the AMD-K6 and AMD-K6-III microprocessors with3DNow! technology, the AMD-K7(TM) microprocessor, which is our seventh-generation, Microsoft Windows compatible microprocessor planned for introduction by the end of the first half of 1999, and future generations of K86 microprocessors. "The microprocessor market is characterized by short product life cycles and migration to ever higher performance microprocessors.To compete successfully against Intel in this market, we must transition to new process technologies at a faster pace than before and offer higher performance microprocessors in significantly greater volumes. "Intel has dominated the market for microprocessors used in PCs for a long time. Because of its dominant market position, Intel can set and control x86 microprocessor standards and, thus, dictate the type of product the market requires of Intel's competitors. In addition, Intel may vary prices on its microprocessors and other products at will and thereby affect the margins and profitability of its competitors due to its financial strength and dominant position. Given Intel's industry dominance and brand strength, Intel's decisions on processor prices can impact and have impacted the average selling prices of the AMD-K6 microprocessors, and consequently can impact and has impacted our margins. "As an extension of its dominant microprocessor marketshare, Intel also now dominates the PC platform. As a result, it is difficult for PC manufacturers to innovate and differentiate their product offerings. We do not have the financial resources to compete with Intel on such a large scale. As Intel has expanded its dominance over the entirety of the PC system platform, many PC original equipment manufacturers (OEMs) have reduced their system development expenditures and have purchased microprocessors in conjunction with core logic chipsets or in assembled motherboards. "PC OEMs are becoming increasingly dependent on Intel, less innovative on their own and more of a distribution channel for Intel technology. In marketing our microprocessors to these OEMs and dealers, we depend upon companies other than Intel for the design and manufacture of chipsets, motherboards, basic input/output system (BIOS) software and other components. In recent years,these third-party designers and manufacturers have lost significant marketshare to Intel. "In addition, these companies produce chipsets, motherboards,BIOS software and other components to support each new generation of Intel's microprocessors only if Intel makes information about its products available to them in time to address market opportunities. Delay in the availability of such information makes, and will continue to make, it increasingly difficult for these third parties to retain or regain market share. "To compete with Intel in this market in the future, we intend to continue to form closer relationships with third-party designers and manufacturers of chipsets, motherboards, BIOS software and other components. Similarly, we intend to expand our chipset and system design capabilities, and to offer OEMs licensed system designs incorporating our processors and companion products. We cannot be certain, however, that our efforts will be successful. "We completed construction of the plant and administration building for Dresden Fab 30 at the end of 1997. In 1998, we installed equipment in the building and began testing. The planned Dresden Fab 30 costs are denominated in deutsche marks and are, therefore, subject to change based on applicable conversion rates. "We entered into foreign currency hedging transactions for Dresden Fab 30 in 1997 and 1998 and anticipate entering into additional such foreign currency hedging transactions in the first quarter of 1999 and in the future." ®

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