AMD 1998 Annual Report Download - page 211

COMPARISON OF EXPENSES, GROSS MARGIN PERCENTAGE AND INTEREST
The following is a summary of expenses, gross margin percentage and interest
income and other, net for 1998, 1997 and 1996:
(Millions except for gross margin percentage) 1998 1997 1996
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Cost of sales $1,719 $1,578 $1,441
Gross margin percentage 32% 33% 26%
Research and development $ 567 $ 468 $ 401
Marketing, general and administrative 420 401 365
Litigation settlement 12 - -
Interest income and other, net 34 35 59
Interest expense 66 45 15
We operate in an industry characterized by high fixed costs due to the capital-
intensive manufacturing process, particularly due to the state-of-the-art
production facilities required for microprocessors. As a result, gross margin is
significantly affected by short-term fluctuations in product sales. Gross margin
percentage growth is dependent on increased sales from microprocessor and other
products as fixed costs continue to rise due to continuing capital investments
required to expand production capacity.
Gross margin percentage decreased to 32 percent in 1998 compared to 33 percent
in 1997. The decline in gross margin percentage was primarily caused by a
decline in net sales of non-microprocessor products. During 1998, we continued
to invest in the facilitization of Fab 25, our submicron integrated circuit
manufacturing facility in Austin, Texas, and in the transition from 0.35-micron
to 0.25-micron process technology in Fab 25. These investments have led to
significant increases in our fixed costs associated with our microprocessor
products. Fixed costs will continue to increase as we add equipment to Fab 25
and as we introduce equipment for 0.18-micron process technology capacity in our
production facilities. Accordingly, absent significant increases in sales,
particularly with respect to microprocessors, we will continue to experience
pressure on our gross margin percentage.
Gross margin percentage increased in 1997 compared to 1996 primarily due to
increased sales of microprocessors manufactured in Fab 25.
In 1998, we entered into an alliance with Motorola for the development of Flash
memory and logic technology. The alliance includes a seven-year technology
development and license agreement and a patent cross-license agreement. The
agreements provide that we will co-develop with Motorola future-generation logic
process and embedded Flash technologies. The licenses to each generation of
technology vary in scope relative to the contributions to technology development
made by both companies. Subject to certain conditions, the companies will share:
. ownership of jointly developed technology and any intellectual property
rights relating to such technology;
. development costs for mutually agreed upon facilities, tasks and
technologies; and
. foundry support.
In addition, we will gain access to Motorola's semiconductor logic process
technology, including copper interconnect technology. In exchange, we will
develop and license to Motorola a Flash module design to be used in Motorola's
future embedded Flash products. The licenses to logic process technologies
granted to AMD may be subject to variable royalty rates, which are dependent on
the technology transferred and subject to certain other conditions. Motorola
will have additional rights, subject to certain conditions, to make stand-alone
Flash devices, and to make and sell certain data networking devices. The rights
to data networking devices may be subject to variable royalty payment
provisions.
Research and development expenses increased in 1998 compared to 1997 due to an
increase in spending in Dresden Fab 30 for construction, facilitization and pre-
production process development and in Fab 25 for new product and process
development. In addition, we incurred research and development expenses of $11
million in the fourth quarter of 1998 related to the alliance with Motorola. We
expect research and development spending related to this alliance
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Source: ADVANCED MICRO DEVIC, 10-K, March 29, 1999