AMD 2007 Annual Report Download - page 39

Table of Contents
than they ultimately need. Subsequently, these customers could cancel all or a portion of these orders when they realize they have sufficient supply. This
behavior would increase our uncertainty regarding demand for our products and could materially adversely affect us. With respect to our graphics products, we
do not have any commitment or requirements for minimum product purchases in our sales agreement with AIB customers, upon whom we rely to manufacture,
market and sell our desktop GPUs. These sales are subject to uncertainty because demand by our AIBs can be unpredictable and susceptible to price competition.
Our ability to forecast demand is even further complicated when we sell to OEMs indirectly through distributors, as our forecasts for demand are then based on
estimates provided by multiple parties. Moreover, PC and consumer markets are characterized by short product lifecycles, which can lead to rapid obsolescence
and price erosion. In addition, our customers may change their inventory practices on short notice for any reason. We may build inventories during periods of
anticipated growth, and 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 and an adverse effect on profit margins. Factors that
may result in excess or obsolete inventory, which could result in write-downs of the value of our inventory, a reduction in average selling prices, and/or a
reduction in our gross margin include:
• a sudden and significant decrease in demand for our products;
• a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements;
• a failure to estimate customer demand for our older products as our new products are introduced; or
• our competitors taking aggressive pricing actions.
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. These agreements are non-exclusive and permit our distributors to offer our competitors’ products. Our third
party distributors have been a significant factor in our ability to increase sales of our products in certain high growth international markets. 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 would 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 and that is not more than twelve
months older than the manufacturing code date. Some agreements with our distributors also 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 protection
rights we offer to our distributors would materially adversely affect us because our revenue would decline.
Our operations in foreign countries are subject to political and economic risks, which could have a material adverse effect on us.
We maintain operations around the world, including in the United States, Canada, Europe and Asia. For example, all of our wafer fabrication capacity for
microprocessors is located in Germany. Nearly all product assembly and final testing of our microprocessor products is performed at manufacturing facilities in
China,
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Source: ADVANCED MICRO DEVIC, 10-K, February 26, 2008