AMD 2006 Annual Report Download - page 59

Table of Contents
of the top 500 of the Forbes Global 2000 were using AMD64 technology, and existing customers continued to expand the number of AMD-based solutions
targeting the commercial market. Also, compared to 2005, sales of our mobile and server processor products grew faster than sales of our desktop products.
We believe our progress in the marketplace in 2006 will allow us to continue to develop products based on platform solutions. Platforms consist of a
collection of technologies that are designed to work together to provide a better product than if the technologies were used separately. With our acquisition of
ATI in October 2006, which is described in more detail below, we intend to develop and offer integrated CPU and GPU platforms to our customers. However,
we also intend to continue to develop and provide discrete microprocessor and graphics processor products and to maintain open interface and software standards
in order to allow our customers to choose the combination of technologies that best serve their needs.
We also continued to execute our microprocessor manufacturing plans during 2006. During the first quarter, we began commercial shipments of
processors manufactured on 300-millimeter wafers at Fab 36. During June 2006, we began shipments of processors manufactured at Chartered Semiconductor,
and during the fourth quarter we began commercial shipments of processors manufactured using 65-nanometer technology.
We also announced developments in our future manufacturing capacity strategy. In May 2006, we announced plans to significantly expand our
300-millimeter manufacturing capacity in Dresden, Germany by converting Fab 30 from manufacturing 200-millimeter wafers to 300-millimeter wafers,
expanding the capacity of Fab 36 and adding a new facility to support bump and test activities. We also announced an agreement with the New York State Urban
Development Corporation d/b/a Empire State Development Corporation pursuant to which we would receive financial incentives from the State of New York to
build a new 300-millimeter wafer fabrication facility on the Luther Forest Technology Campus in Saratoga County, New York if we decide to build the facility.
We believe that our investment in expanding the manufacturing capacity of our Dresden operations and the option to build a new manufacturing facility in New
York will provide us with maximum flexibility to intelligently scale production to meet market demand.
We also faced challenges in 2006, particularly in the second half of the year, due to competitive market conditions. Despite a richer product mix in 2006
compared to 2005, average selling prices remained relatively flat. Higher average selling prices in the first half of 2006 were offset by lower average selling
prices in the second half of 2006. Average selling prices decreased significantly in the fourth quarter of 2006 as compared to the third quarter of 2006 particularly
for our server processor products, which had a negative impact on fourth quarter gross margin. Similarly, gross margins in 2006 decreased compared to gross
margins, excluding the Memory Products segment, in 2005. Higher gross margins in the first half of 2006 were more than offset by lower gross margins in the
second half of 2006 due to declining average selling prices, higher manufacturing costs and the consolidation of the operations of ATI, which historically has had
lower gross margins than AMD’s business. We believe that 2007 will continue to be extremely competitive, particularly with respect to product pricing.
Another challenge in the second half of 2006 related to the ability of our supply chain to keep up with the significant ramp in microprocessor units sold
across a diverse set of customers and geographies and to deliver products on a timely basis. One of our key goals in 2007 is to improve the efficiency and
scalability of our supply chain.
We intend the discussion of our financial condition and results of operations that follows to provide information that will assist you in understanding our
financial statements, the changes in certain key items in those financial statements from year to year, the primary factors that resulted in those changes, and how
certain accounting principles, policies and estimates affect our financial statements.
ATI Acquisition
On October 25, 2006, we completed the acquisition of all of the outstanding shares of ATI, a publicly held company headquartered in Markham, Ontario,
Canada for a combination of cash and our common stock.
54
Source: ADVANCED MICRO DEVIC, 10-K, March 01, 2007