AMD 2004 Annual Report Download - page 67

Table of Contents
We outsource to third parties certain supply-chain logistics functions, including physical distribution of our products, and co-source some information
technology services.
We rely on a third-party provider to deliver our products to our customers and to distribute materials for our manufacturing facilities. In addition, we rely
on a third-party provider in India to provide certain information technology services to us, including helpdesk support, desktop application services, business and
software support applications, server and storage administration, data center operations, database administration, and voice, video and remote access. Our
relationships with these providers are governed by fixed term contracts. We cannot guarantee that these providers will fulfill their respective responsibilities in a
timely manner in accordance with the contract terms, in which case our internal operations, the distribution of our products to our customers and the distribution
of materials for our facilities could be materially adversely affected. Also, we cannot guarantee that our contracts with these third-party providers will be
renewed, in which case we would have to transition these functions in-house or secure new providers, which could have a material adverse effect on us.
In addition, we decided to outsource or co-source these functions to third parties primarily to lower our operating expenses and to create a more variable
cost structure. However, if the costs related to administration, communication and coordination of these third-party providers are greater than we expect, then we
will not realize our anticipated cost savings.
Uncertainties involving the ordering and shipment of, and payment for, our products could materially adversely affect us.
Sales of our products are typically made pursuant to individual purchase orders. We generally do not have long-term supply arrangements with our
microprocessor customers. From time to time, we enter into long-term supply arrangements with our Flash memory customers. Generally, our customers may
cancel orders 30 days prior to shipment without incurring a significant penalty. We base our inventory levels on customers’ estimates of demand for their
products, which are difficult to predict. This difficulty may be compounded when we sell to OEMs indirectly through distributors, as our forecasts for demand
are then based on estimates provided by multiple parties. In addition, our customers may change their inventory practices on short notice for any reason. The
cancellation or deferral of product orders, the return of previously sold products or overproduction due to failure of anticipated orders to materialize could result
in excess or obsolete inventory, which could result in write-downs of inventory. Because market conditions are uncertain, these and other factors could materially
adversely affect us.
Our reliance on third-party distributors subjects us to certain risks.
We market and sell our products directly and through third-party distributors pursuant to agreements that can generally be terminated for convenience by
either party upon prior notice to the other party. In addition, these agreements are non-exclusive and permit our distributors to offer our competitors’ products. In
2004, one of our distributors, Avnet, accounted for approximately 13 percent of our consolidated gross sales. In addition, Fujitsu accounted for approximately 22
percent of our consolidated gross sales in 2004. Fujitsu primarily distributes Spansion Flash memory products. Accordingly, we are dependent on our distributors
to supplement our direct marketing and sales efforts. If any significant distributor or a substantial number of our distributors terminated their relationship with us
or decided to market our competitors’ products over our products, our ability to bring our products to market would be impacted and we could be materially
adversely affected. Additionally, distributors typically maintain an inventory of our products. In most instances, our agreements with distributors protect their
inventory of our products against price reductions, as well as provide return rights for any product that we have removed from our price book or that is not more
than twelve months older than the manufacturing code date. In addition, some agreements with our distributors contain standard stock rotation provisions
permitting limited levels of product returns. We defer the gross margins on our sales to distributors, resulting from both our deferral of revenue and related
product costs, until the applicable products are re-sold by the distributors. However, in the event of an unexpected significant decline in the price of our products,
the price
62
Source: ADVANCED MICRO DEVIC, 10-K, March 01, 2005