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April 13, 2005

AMD to float margin-squeezing flash unit

Advanced Micro Devices will spin off its majority-owned Flash memory unit in a $600m initial public offering, to prevent plummeting unit prices and "approaching zero" gross margins affecting its overall business.

By CBR Staff Writer

Spansion, in which Fujitsu has a 40% stake, filed its IPO registration statement with the US Securities and Exchange Commission yesterday, minutes before AMD reported the memory unit caused it to lose money in the first quarter.

For the three months ended March 27, AMD reported a net loss of $17.4m, or $0.04 a share, compared to income of $45.1m, $0.12 a share, a year ago, on revenue that was down almost 1% to $1.23bn compared to the year-ago quarter.

It was quarter of contrasts, said CFO Robert Rivet in a conference call with analysts and investors. Unfortunately the negatives more than offset the positives, and the results were disappointing.

The contrasts were evident no more than in sales to mobile device makers, where processor sales boosted the Computation Products Group, but where fierce competition and oversupply flattened the Memory Group.

CPG sales were up 31% on last year at $750m, driven by record server and mobile processor sales, and strong overall penetration in high-growth regions, and recorded operating income of $92m, up from $89m in the fourth quarter of 2004.

Memory sales were down 29% on last year at $447m, down 11% sequentially, pushing the loss deeper, to $110m from $39m in the fourth quarter. This was due to competition and big buyers negotiating lower prices, executives said.

Henri Richard, AMD’s chief sales and marketing officer, said some of the lower Flash memory revenue came as a result of a reset of some of our large contracts with the market makers in the wireless space.

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Despite industry-wide oversupply we shipped approximately 10% more units compared to fourth quarter, Rivet said. He added that a result of the oversupply was that gross margin declined significantly during the quarter, approaching zero.

After the second consecutive poor quarter for the memory unit, the company did not wait for investor pressure to force it to do something about the problem, announcing the planned IPO of Spansion in tandem with its quarterly results.

Flash memory is a capital-intensive business, and our strategy is designed to give Spansion direct access to the capital markets, Rivet said. Spansion plans to list on the Nasdaq stock market, with a maximum offer price of $600m.

Both joint venture partners will keep a stake in the separate company, but the spin-off will allow AMD to report its profit or loss from Spansion as a minority investment line item on its quarterly income statements.

AMD chief executive Hector Ruiz said the planned spin-off represents the continuation of strategy we began over two years ago when the 12-year-old AMD-Fujitsu joint venture first acquired the name Spansion.

From the S-1, it appears that the company will retain close ties with both AMD and Fujitsu. AMD’s memory sales force and distribution relationships will be transferred to Spansion, and Fujitsu will be the firm’s exclusive distributor in its native Japan.

We also reached an understanding with Fujitsu to reduce the distribution margin currently earned by Fujitsu on the sale of our products, the Spansion filing says. In addition, we have agreed with each of AMD and Fujitsu to pay a reduced royalty rate for the use of their intellectual property by the consummation of this offering.

A side effect, probably deliberate, of the SEC registration statement being filed immediately before AMD reported its quarter was that the company’s executives refused to divulge any forward-looking details of Spansion’s business.

But Rivet did give some guidance on the processor business, saying he expects it to be flat to down slightly sequentially. The second quarter is usually seasonally down, he said.

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