AMD 1999 Annual Report Download - page 123

We operate in an industry characterized by high fixed costs due to capital-
intensive manufacturing processes, particularly the state-of-the-art production
facilities required for microprocessors. As a result, our gross margin
percentage is significantly affected by fluctuations in product sales. Gross
margin percentage growth depends on continually increasing sales from
microprocessors and other products because fixed costs continue to rise due to
the ongoing capital investments required to expand production capacity and
capability.
Gross margin percentage decreased to 31 percent in 1999 compared to 32
percent in 1998. The decrease in gross margin percentage was primarily caused by
lower average selling prices of AMD K-6 microprocessors combined with higher
fixed costs. Fixed costs will continue to increase as we introduce equipment for
0.18-micron process technology capacity and facilitize Fab 25, our IC
manufacturing facility in Austin, Texas. As described below, Dresden Fab 30 will
also contribute to a significant increase in cost of sales when it begins
producing units for sale, which we anticipate to be no earlier than the second
quarter of 2000. 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 decreased to 32 percent in 1998 compared to 33
percent in 1997. The lower gross margin percentage was primarily caused by a
decline in net sales of non-microprocessor products. In addition, our fixed
costs associated with our microprocessor products increased. During 1998, we
continued to invest in the transition from 0.35-micron to 0.25-micron process
technology and in the facilitization of Fab 25.
Research and development expenses of $636 million in 1999 increased 12
percent compared to 1998 due to a full year of expenses associated with the
Motorola alliance, which is described below, increases in spending for
facilitization and pre-production process development in Dresden Fab 30 and
research and development activities for the AMD Athlon microprocessor. These
additional costs were partially offset in 1999 by savings in our Submicron
Development Center (SDC) as a result of restructuring activities, savings
related to the absence of Vantis expenses in the second half of 1999 and the
recognition of deferred credits on foreign capital grants and interest subsidies
that were received for Dresden Fab 30. These credits of approximately $12
million per quarter (denominated in deutsche marks) will continue to be offset
against Dresden Fab 30 expenses in future quarters until June 2007. Beginning no
earlier than the second quarter of 2000, we expect Dresden Fab 30 to begin
producing units for sale. At that time, a significant portion of Dresden Fab 30
expenses, including the deferred credits referred to above, will shift from
research and development expense to cost of sales.
Research and development expenses of $567 million in 1998 increased 21
percent compared to 1997 due to an increase in spending in Dresden Fab 30 for
facilitization and pre-production process development, and in Fab 25 for new
product and process development.
In 1998, we entered into an alliance with Motorola for the development of
Flash memory and logic technology. Costs related to the alliance are included in
research and development expenses. The alliance includes a seven-year technology
development and license agreement, which was amended on January 21, 2000 to
include certain additional technology, and a patent cross-license agreement. The
agreements provide that we will co-develop with Motorola future generation logic
process and embedded Flash technologies. In addition, we will receive certain
licenses to Motorola's semiconductor logic process technologies, including
copper interconnect technology, which may be subject to variable royalty rates.
In exchange, we will develop and license to Motorola a Flash module design to be
used in Motorola's future embedded Flash products. 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.
Marketing, general and administrative expenses of $540 million in 1999
increased 29 percent compared to 1998 primarily as a result of marketing and
promotional activities for our launch of the AMD Athlon microprocessor,
increased costs and related depreciation expense associated with new information
systems and software put into production in 1999 and higher labor costs. These
increases were partially offset by savings related to the absence of Vantis
expenses in the third and fourth quarters of 1999.
Marketing, general and administrative expenses of $420 million in 1998
increased five percent compared to 1997 primarily due to depreciation expense
and labor costs associated with the installation of new order management and
accounts receivable systems and related software upgrades.
In the first quarter of 1999, we initiated a review of our cost structure.
Based upon this review, we recorded restructuring and other special charges of
$38 million in 1999 as a result of certain of our actions to better align our
cost structure with expected revenue growth rates.
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Source: ADVANCED MICRO DEVIC, 10-K405, March 21, 2000