Equity Research September 08, 2009 United States of America Technology Semiconductors
Advanced Micro Devices (AMD - US$ 4.53) 1-Overweight
Recommendation Change
Upgrade to 1-OW, Raise PT to $7
Investment Conclusion
While comp pressures remain fierce & execution risks continue, blv several factors may be conspiring to allow weak investor sentiment towards MPU & GPU challenger AMD to improve over the nxt several months. We see an improved overall PC market, a series of new product launches, troughing margins, legal progress w/Intel and potential progress at subsidiary Global Foundries and potential for the first estimate revisions in many qtrs positioning AMD to outperform in coming months after a period of significant underperformance. Ests move upwards & we upgrade rating to 1-OW. Our PT moves to $7 or 1.4x CY10 sales. Sector view selective.
EPS (US$) (FY Dec)
2008
Actual 1Q -0.51A 2Q -0.60A 3Q 0.13A 4Q -0.69A Year -1.67A P/E Old -0.63A -0.50E -0.39E -0.30E -1.79E
2009
New St. Est. -0.63A -0.66A -0.62A -0.48E -0.47E -0.38E -0.34E -0.30E -2.04E -1.96E N/M Old -0.32E -0.29E -0.23E -0.14E -0.98E
2010
% Change
2010 43% 47% 47% 53% 46%
New St. Est. 2009 -0.36E -0.32E -24% -0.33E -0.31E -3% -0.25E -0.24E -462% -0.16E -0.18E 51% -1.10E -1.08E -22% N/M
Market Data
Market Cap (Mil.) Dividend Yield 52 Week Range 2504 0.00 6.47 - 1.62
Financial Summary
Revenue TTM (Mil.) 5464.0
Summary
Blv trends in NB & server mkts may be seeing upside vs street ests (see Asia Meetings note 9/8). AMD strengthening product offerings across NB (Tigris/ Congo), Servers (Istanbul), & Graphics (DirectX11) should help support ASPs & margins. Global Foundries making customer progress, ATIC / Chartered a strong positive. F3Q revs/EPS of $1.3B (+10% QoQ)/-$0.47 vs. $1.2B/-$0.51 prior. CY09 rev/EPS of $5.1B/-$2.04. Risks remain; Intel comp pressure, execution, & legal challenges.
Stock Overview
ADVANCED MICRO DEVICES - 9 / 8 / 2 0 09
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Reuters ADR
AMD AMD
Bloomberg
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Stock Rating
New: 1-Overweight Old: 2-Equal Weight
Target Price
New: Old: US$ 7.00 US$ 4.00
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2 Volum e 50M
Sector View: 2-Neutral
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Source: Lehm anLive
Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
PLEASE SEE ANALYST(S) CERTIFICATION(S) ON PAGE 7 AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 8
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Equity Research Summary While competive pressures remain fierce and execution risks continue, we believe several factors may be conspiring to allow weak investor sentiment towards MPU and graphics challenger AMD to improve over the next several months. We see an improved overall PC market, a series of new product launches, troughing margins, legal progress with Intel and potential progress at subsidiary Global Foundries and the potential for the first estimate revisions in many quarters positioning AMD to outperform in coming months after a period of significant underperformance. Following our West Coast and Asia Meetings, we had highlighted a more constructive bias on this potential value idea. This morning, our estimates move upwards and we upgrade our rating to 1-OW. Our target price moves to $7 or 1.4x CY10 sales of $5.6B. Our old target of $4 was based on 1.1x EV/Sales estimate of $5.2B. Our sector view remains selective. In the context of solid broader PC/MPU market trends, we have also retained a constructive bias on Intel (2-EW) at current levels. Improved PC/MPU End Market; Following our recent round of meetings in Asia and broader channel checks, we believe trends in the key notebook and server markets may be seeing some upside versus earlier street expectations. We observe that key partners for AMD such as Compal and Quanta are guiding for around 20% shipment growth in 3Q and around 15% to 20% growth in 4Q09. We are not expecting AMD to gain share but we believe 3Q guidance of up slightly (street up 4.8% in 3Q09) may be conservative based on these trends. Looking into CY10, we observe that notebooks could grow more than 10-15%. We acknowledge that AMD is more highly consumer focused and Intel has a formidable corporate, data center and server portfolio with Nehalem and Nehalem EX focused but any firming in corporate spending on IT could help AMD's server market end demand. A Roster of New Products; Notebook, Server, Graphics; With rival Intel executing crisply in recent quarters on new product releases, AMD has seen significant pressure. We believe several new product launches may help bolster AMD's positioning over the next few quarters. Notebooks; Tigris and Congo; In notebooks, AMD is releasing its new Tigris and Congo Ultra Thin offerings this quarter. We believe these products are being well received by the market with 8 OEMs supporting Tigris and 10 PEMs to date supporting Congo. We believe this may help improve both margins and revenues in this key arena where Intel has had over 90% market share and where AMD has seen significant ASP pressure. Server Supported by Istanbul; In the server arena, AMD's new Istanbul offering has been shipping through 3Q09 and has we believe helped stem recent market share pressures. While we aim to monitor pressures in 2010 from broader rollout of Intel's 16 thread Nehalem EX we believe Istanbul may help support AMD's margins and revenues vs our and street expectations in 2H09. Graphics; DX11 Potential Launch This Week; In the slower and smaller desktop arena, we see less new product traction but have been encouraged by a steadier end market outlook after a weak 1H09 and believe AMD may be positioned to broadly hold share. Meanwhile in the key graphics area, we believe AMD is poised to unveil its new DX11 40nm offering by as early as this week potentially ahead of rival Nvidia. In general, we believe that with a strengthened product line up in graphics, AMD is being less aggressive on pricing potentially lifting margins and sales. CEO To Update Roadmap at Analyst Day Nov 11 We believe an analyst day on November 11 may be supportive of sentiment towards AMD enabling recently promoted CEO Dirk Myers to outline his product roadmap and expanded management team. Margins May Have Troughed: After a very weak 2Q09 that saw significant ASP, mix and under utilization pressure with gross margins declining to just 29% from 37% in 1Q09 and 44% in 4Q07, we look for AMD's gross and operating margins to show some progress in coming quarters. We consider that the new offerings in server, notebook and graphics should help support ASPs and margins as well as market share. In addition, an improved overall market may help AMD achieve its targeted $1.3 billion for breakeven on an operating level and 40% gross margins over time. Balance Sheet and Global Foundry Progress: Following AMD's conclusion of its Global Foundries partnership with ATIC, we believe its balance sheet has seen significant improvement moving to hold cash at $1.6 billion currently. Going forward, we believe investors would like to see AMD advancing towards a more deconsolidated model and we consider recent progress by Global Foundries may support this outlook. We observe that GF has established a relationship with STM and our checks suggest that further partners may be unveiled before the end of this year. ATIC/Chartered a Strategic Positive; Separately, we view the announcement this weekend of ATIC's intention to purchase the world's number three foundry player Chartered as a strategic positive for AMD and Global Foundries. We consider this move underlines ATIC's commitment to the foundry area and may help establish new customer relationships for GF through Chartered while also highlighting a path towards GF potentially being deconsolidated from AMD. We consider AMD is now increasingly unlikely to need to commit new funds to GF. We do recognize, however, that the voting rights and cross licensing aspects for the AMD/GF relationship and the ATIC/GF/Chartered relationship could be the source of further legal discussion and possible dispute with Intel.
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Equity Research Possible Progress in Process of Legal Dispute with Intel: Following a lengthy, multiyear period of disputes, we observe that Intel and AMD are now scheduled to take their issues to a trial process in Delaware beginning in March 2010. The process is likely to result in a two to three month jury trial. We believe the cross licensing and other legal issues here are complex but observe that anti competitive ruling in Japan and Europe have tended to place pressure on Intel. We recognize that the cross licensing issues associated with the formation of Global Foundries may be a key area of contention to be addressed potentially as part of a broader settlement. Near Term Trends Solid, Our Estimates Move Upwards; Following our recent checks, we believe that AMD has seen improved trends in its shipments in both July and August of 3Q09. September remains a back end loaded quarter (40% of shipments) with sell thru still key but in general we consider near term guidance for sales "up slightly" as well as gross margins could prove conservative. For F3Q, we estimate revenues and EPS of $1.3B (+10% QoQ)/-$0.47 on a consolidated basis versus $1.2B/-$0.51 pro forma prior. We now model gross margin of 33% in F3Q versus 32.5% prior with opex estimates of $417M in R&D and $239M in SG&A. For FY09 we model revenues/EPS of $5.07B (-12.8% YoY)/-$2.04 versus $5.81B /-$1.68 prior. For FY10, we estimate $5.6B (+10.5% YoY) in revenues and -$1.10 EPS versus $5.17B and -$1.37 prior. Valuation May Offer Upside Potential: While we recognize substantial risks remain and competitive pressures remain fierce, we consider that even with recent move, the shares could see upside from current valuation levels. With the shares at 1.2x EV/Sales vs 1.7x historically we see potential upside to around $7 or 1.4x FY10 EV/Sales. ATIC to Acquire Chartered Semiconductor; May Help Broaden Customer Base for Global Foundries ATIC announced on September 7, 2009 a definitive agreement to acquire Chartered Semiconductor Manufacturing of Singapore for USD $3.9 billion. The transaction is expected to close during 4Q09 subject to regulatory and shareholder approvals. Singapore’s Temasek Holdings, which holds 62% of Chartered Semiconductor’s shares, has voted in support of the transaction. Global Foundries CEO Doug Grose will run the combined operations and Chartered Semiconductor CEO Chia Song Hwee will become COO and in charge of combining the two operations. While terms of the agreement were largely undisclosed, we view the transaction as a strategic positive for Global Foundries which will acquire customer relationships and manufacturing capabilities in both 8-inch and 12-inch fabrication. We note that while the combined capacity between Global Foundries and Chartered Semiconductor were not disclosed, ATIC Chief Executive, Ibrahim Ajami, highlighted that the combination of Chartered and Global Foundries would create the world's second largest player by production capacity. AMD Implications Post ATIC/Chartered Semiconductor Transaction We believe the ATIC/Chartered Semiconductor transaction is a net positive for AMD as it could likely help moderate loss levels at AMD consolidated as Global Foundries broadens its customer base over time. Near-term however, Global Foundries and Chartered Semiconductor Manufacturing will be treated as two separate entities. We believe the transaction between ATIC and Chartered Semiconductor further solidifies ATIC’s financial support for Global Foundries and reduces AMD’s risk profile.
st Global Foundries Secured STM as 1 Customer In July 2009, AMD’s Foundry JV Global Foundries announced that it had secured its first new 3rd party customer in an engagement with European leader STM (covered by Andrew Gardiner). We saw this announcement as a strategic positive for AMD and an important milestone in developing a roadmap to both reducing loss levels from the Foundry business and eventually separating the AMD Product and Design Company from Global Foundries. While few details on the deal have been released, we highlight that the engagement should focus on leading edge 40nm Low Power (LP) bulk silicon technology which we believe have been a key differentiator for Global Foundries using bulk technology as opposed to AMD’s SOI technology in the former FAB 38 300mm facility in Dresden, now named FAB 1.
Global Foundries would use STM’s low-power technology on 40nm with tape out and production beginning we believe as early as the end of 1H2010. We believe Global Foundries may target products on 40nm offerings for wireless applications, handheld devices, and consumer electronics. Our checks suggest STM would be using Global Foundries as an additional source in a dual source structure. Global Foundries Likely to Remain Consolidated in 2009, 2010 Post the completion of the “Asset Smart” deal, AMD is now required to consolidate Global Foundries financials under US GAAP. Global Foundries is a variable interest entity where AMD is deemed to be the primary beneficiary. AMD and ATIC currently each own 50% of the common stock as well as 50% voting rights in Global Foundries. On a fully diluted basis this translates into a 34.2% ownership for AMD Product Co. and 65.8% ownership for ATIC. However, despite the 32% stake (on a fully diluted basis), AMD Product Co. owns 83% of the Global Foundries Class A Preferred Shares and therefore 83% of Global Foundries gains/losses will flow through to AMD. While cost cutting efforts and lower capex now $100M for CY09 vs. prior $150M at AMD Product Co may help to achieve free cash flow positive in 2H09, the 83% loss impact of Global Foundries is likely to make profitability for AMD consolidated unlikely before 2H10. Our analysis is based on AMD consolidated financial as we expect AMD to consolidate Global Foundries in 2009 and 2010 as it needs to secure
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Equity Research significant third party customers for Global Foundries before it can be deconsolidated. The renegotiation of the x86 licensing deal with Intel (January 1, 2011) may also be an important element. Global Foundries Share Holding Structure
Class A Ordinary Share Voting Rights (Based on All Shares) Class A Preferred Share Profit/Loss Share (based on Class A Pfd) Class B Preferred Share Shares+ Preffered Share of Shares and Preferred Convertible Notes Shares+ Prefered+ Converts Ownership After Full Conversion of Converts+ AMD 1 50.0% 1,090,950 83.3% 0 1,090,951 50.0% 0 1,090,951 34.2% ATIC 1 50.0% 218,190 16.7% 872,760 1,090,951 50.0% 1,009,050 2,100,001 65.8% Total 2 100.0% 1,309,140 100.0% 872,760 2,181,902 100.0% 1,009,050 3,190,952 100.0%
Source: Company Reports and Barclays Capital Sept Q Back End Weighted / New Products May Help Margins Following our recent checks, we believe AMD may have seen solid trends to date through July in what remains a back-end weighted September quarter (we estimate 40% of shipments are usually made in the month of September). In light of continuing uncertainty, AMD has guided for a relatively cautious and below seasonal sales guidance of “up slightly” vs. Intel’s pre-announced sales guidance of +12% QoQ for 3Q. After seeing a sharp decline in margins in 2Q09 to just 29%, we look for some improvement in 3Q09 and 4Q09 led by new nd product launches (Tigris notebook platform, Congo 2 generation ultra-thin notebook platform, and Direct X11 in graphics) helping mix, higher utilization (at least 10% point improvement expected in 3Q), and increased shipment of 45nm products with cross over expected in F3Q driving down unit costs and improving profitability going forward. Looking forward, we look for CEO Dirk Meyers to update investors on strategy at an investor conference on September 9 and then lay out the new product roadmap at a major analyst day on November 11. Segment Overview (revenues in million $)
Revenues Computing Solutions Graphics All Others AMD Total QoQ Revenue Growth Computing Solutions Graphics All Others AMD Total 1Q08 $1,194 $262 $0 $1,456 1Q08 -15% -11% NM -14% 2Q08 $1,101 $248 $0 $1,349 2Q08 -8% -5% NM -7% 3Q08 $1,391 $385 $1,776 3Q08 26% 55% NM 32% 4Q08 $873 $270 $1,143 4Q08 -37% -30% NM -36% 1Q09 $938 $222 $17 $1,177 1Q09 7% -18% NM 3% 2Q09 $910 $251 $23 $1,184 2Q09 -3% 13% NM 1% GAAP Operating Income (Loss) Computing Solutions Graphics All Others AMD Total Operating margin Computing Solutions Graphics All Others AMD Total 1Q08 ($164) $13 ($63) ($214) 1Q08 -14% 5% NM -15% 2Q08 ($9) ($38) ($96) ($143) 2Q08 -1% -15% NM -11% 3Q08 $143 $47 ($59) $131 3Q08 10% 12% NM 7% 4Q08 ($431) ($10) ($833) ($1,274) 4Q08 -49% -4% NM -111% 1Q09 ($36) $1 ($273) ($308) 1Q09 -4% 0% NM -26% 2Q09 ($72) ($12) ($165) ($249) 2Q09 -8% -5% NM -21%
Source: Company reports and Barclays Capital estimates Servers; Likely to Benefit from Istanbul in FQ3 First, focusing on servers, we note Istanbul, AMD’s six core server offering in the two-way space was launched in April 2009 coinciding with Intel’s March 30th launch of Nehalem 2P server offering. Management highlighted that top tier customers including DELL, HP, and IBM have all announced server products based on AMD’s processor. Our recent checks suggest AMD’s new 6 core server offering Istanbul, which began shipping in June 09, has seen some more encouraging initial orders supporting server ASPs and believe AMD is likely to benefit from a full quarter of Istanbul shipments in F3Q. Looking into 1H10, AMD expects to launch new 8 and 12 core offerings to address the four-way server market with Magny-Cours (2010). Tigris in NB and Congo in Ultra-Thin segment may Help in F3Q We expect AMD to gain some traction with its next generation mainstream notebook platform codenamed Tigris (successor to Puma platform) in 3Q09. While appetite for fully featured notebooks appears to be high with design wins at eight different major OEMs for Tigris, nd ramp still remains somewhat uncertain. With respect to the ultra-thin mobile segment, AMD is slated to launch its 2 generation ultra-thin notebook platform Congo in 3Q09. We note AMD announced Intel’s Atom rival Yukon and Congo at its analyst day in November 2008. AMD’s Yukon platform includes a single core CPU codenamed “Huron” and targets the netbook (7” -10 screen size”) and ultra portable (10” -12” screen size) markets. Yukon is produced on 65nm and may have gross margins at around 30% (lower than AMD corporate margins and Intel’s Atom). We expect AMD to benefit from lower unit cost as it ramps its Congo platform in F3Q. Congo features “Conesus” a 2 CPU core at 45nm and is expected to target the ultraportable segment. While Yukon had limited design wins largely with HP, we highlight Congo currently has design wins with 10 major OEMS. Going forward we estimate ASPs to be up in F3Q on richer product mix with Congo and Tigris. Solid 2Q Performance in Desktops; Units Slightly Up and ASP Flat QoQ In desktops, we believe AMD likely saw 2Q units and revenues slightly up QoQ partially helped by its exposure to consumer and small and medium businesses (SMB) versus Enterprise. We believe desktop units may have improved low single digits in 2Q with ASPs roughly flat
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Equity Research QoQ. We note that AMD has increased its focus on platform strategy in desktops starting 2008 with the introduction of its Perseus platform. AMD also highlighted the refresh of its Dragon platform (high end enthusiast desktop) available on systems with top vendors. Llano and Ontario APU (accelerated processing units – combined MPU and GPU) in 2011 may also support AMD longer term; however, visibility in the positioning of these offering appears limited. We expect AMD to continue to perform well in desktops where its exposure to consumer and small and medium business is expected to help drive revenues higher in Q3. However, we do not expect to see any imminent catalyst driving up ASPs in desktops. Similar to trends at Intel, we believe chipsets revenues at AMD which account for less than 10% of overall revenues improved. AMD Microprocessor Roadmap
2007 Desktops Athlon X2 (Brisbane, 2Q07); Phenom (4Q07) Athlon 64 X2 Mobile (2Q07); Turion 64 (Tyler, 2Q07) Mobile Sempron (Sherman, 2Q07) Barcelona (3Q07) Budapest (4Q07); Deerhound (4Q07) 2008 Perseus Platform (1H08) Leo and Cartwheel Platform Puma Platform/ Griffin CPU (2Q08) Barcelona -B3 Shanghai 45nm stepping (1Q07) (4Q08) 2009 Deneb CPU (2009); Propos CPU (2009) Dragon platform (1Q09); Kodiak platform (2H09); Pisces platform (2H09) Tigris platform/ Caspian CPU (2H09) Yukon/ Huron CPU (1Q09); Congo/ Conesus CPU (2Q09) Istanbul (2Q09); Fiorano Next Gen DDR2 Platform (2009) 2010 & Beyond Orchi CPU (2011); Llano APU (2011) Danube platform/ Champlain CPU (2010) Nile platform/ Geneva CPU (2010); Ontario APU (2011) Sao Paulo (2010); Magny-Cours (2010) Maranello New DDR3 Platform (2010)
Notebooks
Servers
Source: Company reports and Barclays Capital estimates Direct X11 Graphics Launch Expected in 3Q & Higher 40nm Shipment Meanwhile in September for the graphics area, AMD aims to rollout its Evergreen DX11 40nm offering in conjunction with Windows 7. While AMD saw operating margins decline to -5% in graphics in 2Q, we expect to see improvements in 3Q with increased shipment of 40nm parts. AMD’s lead in 40nm and DirectX 10.1 and DirectX 11 should help AMD vs. NVDA in 2H09. AMD formally launched its 40nm discrete GPU products on March 3, 2009, approximately a quarter ahead of rival Nvidia. Asus, MSI and Toshiba announced designs with AMD’s 40nm parts - Mobility Radeon HD 4860 and 4830 at CeBIT - in Hanover Germany (March 3-8, 2009). AMD is initially targeting cost reduction with 40nm products and hopes to add features and functionality to further improve performance with the new architecture at 40nm in 2H09. We note that NVDA currently does not support DirectX 10.1 but plans to support DirectX 11. AMD expects a rapid ramp of DirectX 11. GPU Process Technology Roadmap
GPU 65nm 55nm 40nm AMD 1Q07 4Q07 1Q09 NVIDIA 4Q07 3Q08 2Q09
Source: Company reports and Barclays Capital Research Revenue by Region; Asia Stronger, North America Flat & Europe May Begin to Improve Over the second quarter, AMD Product Company saw strong sequential growth in their Computing Solution segment in Asia, while sales in the Americas were flat and declined across Europe. Going forward, we believe there may be some improvement in 2H09. In the Graphics segment, revenue in 2Q ($251 million, +13% QoQ) was driven by strength from the Asia Pacific and greater China regions. Solid Balance Sheet; Inventory Moves Lower On a consolidated basis, AMD ended the June quarter with $2.7B in cash and cash equivalents significantly higher year over year, but down from $2.7B in the March quarter. As of end 2Q, AMD Product Company holds $1.63B in Cash, up from $1.59B in the March quarter due to reduced cash expense and a full quarter impact of AMD’s “Asset Smart” strategy. Global Foundries holds $877M, down slightly from $1.1B in the March quarter. Accounts receivable for AMD consolidated in 2Q decreased by $48M to $366M from $414M prior. AMD’s balance sheet however continues to be pressured by high levels of debt. AMD consolidated ended 2Q with long-term debt of $5.5B. While $3.7B of this debt is held by AMD Product Company, Global Foundries holds $1.8B in debt. At the end of 2Q, AMD consolidated had net debt of $3.0B versus $2.8M at the end of the prior quarter. Net debt/ share declined from $4.54 in 1Q to $4.52 at the end of 2Q. Total inventory dollars in 1Q declined 8.5% QoQ to $493M from $539M prior. DOI improved to 53 days in Q2 from 66 days in 1Q as the company saw demand stabilize over the quarter. DSOs in the June ended quarter came in lower at 28 days versus 32 days in the prior quarter.
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Equity Research AMD Consolidated Balance Sheet Summary (in million $)
FQ1:09 Cash ($M) Short Term Debt Long Term Debt Inventory Accounts Receivable A/R DSOs Days Inventory $2,719 $281 $5,282 $539 $414 32 66
FQ2:09 $2,514 $289 $5,243 $493 $366 28 53
Delta ($205) $8 ($39) ($46) ($48) (3.9) (13.1)
% Delta -8% 3% -1% -9% -12% -12% -20%
Sources: Company Reports and Barclays Capital Estimates AMD Product Co Has No Debt Repayment Due Before 2012 Post the Asset Smart deal, the transfer of $1.1B in debt from AMD Product Co. to Global Foundries has significantly reduced AMD Product’s near term debt level. Debts due in the next 3 years (2009-11) are Fab 36 Term Loans and Energy lease payments which are due from Global Foundries. AMD Product’s first major repayment is due in 2012 when the 7.75% and 5.75% notes are due. 3Q Guided Up Slightly QoQ; $1.3B Breakeven Target for AMD Product Company AMD guided 3Q revenue up slightly, in the low to mid single digits for growth versus normal seasonality in the range of +12% to +15% (vs. our 10%) with solid orders into July according to management. While end demand remains uncertain, AMD noted that the Enterprise segment continues to be weak, a comment echoed by Intel. AMD maintains its break even guidance for AMD the Product Company for revenues of $1.3B with gross margins of +40%. AMD lowered its capex to $100M for CY09 (versus $150M prior) for AMD Product Co. and to $690M (versus $760M prior) for Global Foundries. AMD Product is targeting to be free cash flow positive by 2H09 given its low capex ($25M/quarter) versus relatively higher depreciation charge ($103M/ in Q2). Fully diluted shares outstanding were guided to 705M for 3Q. Estimates Move Higher We expect 3Q revenues to be solid, but below seasonal trends and model +10% vs. up 12% to 15% normal range with solid orders into July. AMD’s flattish revenues in 2Q of +1% QoQ compares to Intel’s revenues of +12% QoQ. However we would note that in Q1, Intel revenues were down 13% sequentially vs. AMD down only 1.3%. We expect gross margin to head higher in F3Q and model 33% on richer mix, higher capacity utilization, and increased ramp of 45nm where cross over is expected in 3Q. New products may now suggest a 2Q trough with legal actions and progress a key investor focus for 2H09/1H10. Our CY10 EPS moves to a loss of $1.10 from a loss of $1.37 on sales of $5.6B +10.5% year over year. For F3Q, we estimate revenues and EPS of $1.3B (+10% QoQ)/-$0.47 on a consolidated basis versus $1.2B/-$0.51 pro forma prior. We now model gross margin of 33% in F3Q versus 32.5% prior with opex estimates of $417M in R&D and $239M in SG&A. For FY09 we model revenues/EPS of $5.07B (-12.8% YoY)/-$2.04 versus $5.81B /-$1.68 prior. For FY10, we estimate $5.6B (+10.5% YoY) in revenues and $1.10 EPS versus $5.17B and -$1.37 prior. Valuation AMD is currently trading at 1.2x EV/CY09 sales versus 5 year average of 1.7x and trough of 0.8x. On a Price/ Sales basis, AMD trades 0.6x CY09 Sales of $5.1B versus 5 years average of 1.22x and trough of 0.17x. Our new price target for AMD is $7 or 1.4x EV/CY10 sales or 0.5x Price/ CY10 sales.
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Equity Research AMD Price/ Sales
AMD P/S ; (2004 - Current) 4
Max: 3.00
AMD EV/ Sales
AMD EV/S ; (2004 - Current) 4
Max: 3.62
3
Mean: 1.21
3
Mean: 1.69
2
2
1
Min: 0.17
1
Min: 0.79
19-Nov-2004
28-May-2004
13-May-2005
04-Nov-2005
20-Oct-2006
05-Oct-2007
28-Mar-2008
19-Sep-2008
13-Mar-2009
28-Apr-2006
13-Apr-2007
28-May-2004
13-May-2005
19-Nov-2004
04-Nov-2005
19-Sep-2008
Source: FactSet
AMD Financial Model (Consolidated AMD in million $)
AMD CONSOLIDATED
Fiscal Year-End: December Revenues Q/Q Y/Y Cost of Goods Gross Margin R&D Mktg, Gen & Admin Operating Expenses Cont. Operating Income Extraordinary Item Other Income (Expense) Income Before Taxes Taxes Net Income to Common Minority Interest
Q1 $1,233 -30.5% -7.4% $857 $376 $432 $335 $767 ($391) ($60) ($451) $23.0 ($474) ($24)
Fiscal 2007 Q2 Q3 $1,378 $1,632 11.8% 18.4% 13.3% 22.9% $917 $963 $461 $475 $344 $819 ($358) ($89) ($447) $32.0 ($479) ($22) $669 $467 $350 $817 ($148) ($77) ($225) $27.0 ($252) ($66)
Q4 $1,770 8.5% -0.2% $985 $785 $473 $321 $794 ($9) ($75) ($84) $4.0 ($88) ($78)
Q1 $1,505 -15.0% 22.1% $877 $628 $501 $341 $842 ($214) ($81) ($295) $0.0 ($295) ($13)
Fiscal 2008 Q2 Q3 $1,349 $1,797 -10.4% 33.2% -2.1% 10.1% $846 $881 $503 $442 $337 $779 ($276) ($59) ($335) $0.0 ($335) ($31) $916 $438 $315 $753 $163 ($84) $79 ($1.0) $80 ($7)
04-Sep-2009
Q4 $1,162 -35.3% -34.4% $663 $499 $442 $317 $759 ($260) ($83) ($343) $69.0 ($412) ($6)
Q1 $1,177 1.3% -21.8% $738 $439 $446 $266 $712 ($273) ($3) ($276) $116.0 ($392) $0 ($36) ($6) ($8)
Fiscal 2009E Q2 Q3E $1,184 $1,302 0.6% 10.0% -12.2% -27.5% $841 $873 $343 $425 $247 $672 ($329) ($102) ($431) ($10.0) ($421) $0 ($150) ($25) ($20) ($416) 667 ($0.62) 29.0% -1371.4% 35.9% 20.9% -27.8% -35.1% 2.3% $430 $417 $239 $656 ($226) ($102) ($328) $0.0 ($328) $0 ($125) ($21) ($22) ($329) 705.0 ($0.47) 33.0% 73.3% 32.0% 18.4% -17.4% -25.3% NM
Q4E $1,407 8.0% 21.0% $900 $506 $412 $234 $646 ($140) ($102) ($242) $0.0 ($242) $0 ($100) ($17) ($22) ($247) 722.5 ($0.34) 36.0% 73.5% 29.3% 16.6% -9.9% -17.5% NM
Q1E $1,332 -5.3% 13.2% $859 $473 $408 $229 $637 ($164) ($102) ($266) $0.0 ($266) $0 ($185) ($31) ($22) ($257) 725 ($0.36) 35.5% 44.9% 30.6% 17.2% -12.3% -19.3% NM
Fiscal 2010E Q2E Q3E $1,316 $1,421 -1.2% 8.0% 11.2% 9.1% $820 $850 $496 $404 $227 $631 ($135) ($102) ($237) $0.0 ($237) $0 ($125) ($21) ($22) ($238) 727 ($0.33) 37.7% -145.6% 30.7% 17.3% -10.2% -18.1% NM $571 $410 $233 $643 ($71) ($102) ($173) $0.0 ($173) $0 ($60) ($10) ($22) ($185) 729 ($0.25) 40.2% 71.4% 28.8% 16.4% -5.0% -13.0% NM
Q4E $1,535 8.0% 9.1% $880 $655 $416 $239 $655 $1 ($102) ($101) $0.0 ($101) $0 ($25) ($4) ($22) ($119) 731 ($0.16) 42.7% 74.0% 27.1% 15.6% 0.0% -7.8% NM
Fiscal 2007 $6,013 6.4% $3,722.0 $2,291 $1,847 $1,350 $3,197 ($906) ($301) ($1,207) $86 ($1,293) ($190)
Fiscal 2008 $5,813 -3.3% $3,267.0 $2,546 $1,823 $1,310 $3,133 ($587) ($307) ($894) $68 ($962) ($57)
Fiscal 2009E $5,070 -12.8% $3,351.8 $1,718 $1,700 $986 $2,686 ($968) ($309) ($1,277) $106 ($1,383) $0 ($411) ($69) ($72)
Fiscal 2010E $5,604 10.5% $3,408.6 $2,196 $1,637 $928 $2,566 ($370) ($408) ($778) $0 ($778) $0 ($395) ($66) ($87) ($799) 728 ($1.10) 39.2% 89.4% 29.2% 16.6% -6.6% -14.3% NM
Profit/ Loss Attributable To Global Foundries 17% of Global Foundries Net Profit/Loss 83% of Class B Preferred Dividend Net Income Shares Outstanding Cont. Diluted EPS Percent of Sales Gross Profit Incremental GM R&D SG&A Operating Income Net Income Tax Rate ($498) 549 ($0.91) 30.5% 60.6% 35.0% 27.2% -31.7% -40.4% NM ($501) 552 ($0.91) 33.5% 58.6% 34.5% 25.0% -26.0% -36.4% NM ($318) 554 ($0.57) 41.0% 81.9% 28.6% 21.4% -9.1% -19.5% NM ($166) 579 ($0.29) 44.4% 84.1% 26.7% 18.1% -0.5% -9.4% NM ($308) 606 ($0.51) 41.7% 59.2% 33.3% 22.7% -14.2% -20.5% NM ($366) 607 ($0.60) 37.3% 80.1% 32.8% 25.0% -20.5% -27.1% NM $73 608 $0.12 51.0% 92.2% 24.4% 17.5% 9.1% 4.1% NM ($418) 609 ($0.69) 42.9% 65.7% 38.0% 27.3% -22.4% -36.0% NM
($394) 626.0 ($0.63) 37.3% -400.0% 37.9% 22.6% -23.2% -33.5% NM
($1,483) 559 ($2.66) 38.1% -154.9% 30.7% 22.5% -15.1% -24.7% NM
($1,019) 608 ($1.68) 43.8% -127.5% 31.4% 22.5% -10.1% -17.5% NM
($1,386) 680 ($2.04) 33.9% 111.4% 33.5% 19.4% -19.1% -27.3% NM
Source: Company reports and Barclays Capital estimates Analyst Certification: I, Tim Luke, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
Company Description: Advanced Micro Devices, Inc. (AMD) provides processing solutions for the computing, graphics and consumer electronics markets. AMD primarily offers x86 microprocessors and embedded microprocessors for commercial and consumer markets. On October 25, 2006, AMD acquired ATI Technologies Inc. and also began to supply 3D graphics, video and multimedia products, chipsets for PCs and servers, and products for consumer electronic devices.
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04-Sep-2009
20-Oct-2006
05-Oct-2007
28-Mar-2008
13-Mar-2009
28-Apr-2006
13-Apr-2007
0
0
Equity Research
On September 20, 2008, Barclays Capital acquired Lehman Brothers' North American investment banking, capital markets, and private investment management businesses. All ratings and price targets prior to the acquisition date relate to coverage under Lehman Brothers Inc.
Important Disclosures: Advanced Micro Devices (AMD)
Rating and Price Target Chart: ADVANCED MICRO DEVICES INC.
As of 06-Jul-2009 32.00 30.00 28.00 26.00 24.00 22.00 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Currency = USD
US$ 4.53 (04-Sep-2009)
1-Overweight / 2-Neutral
7-06
10-06
1-07
4-07
7-07
10-07
1-08
4-08
7-08
10-08
1-09
4-09
7-09
Closing Price Recommendation Change
Currency=US$ Date Closing Price 22-Apr-09 3.33 06-Mar-09 2.14 06-Mar-09 2.14 07-Oct-08 4.59 29-Sep-08 4.29 18-Jul-08 4.65 17-Jun-08 7.72 07-Apr-08 6.34 18-Jan-08 7.07 14-Dec-07 8.43 20-Jul-07 15.50 08-Jun-07 14.07
Price Target Drop Coverage
Source: FactSet
Rating 2 -Equal weight RS -Rating Suspended
Price Target 4.00 3.00 6.00 8.00 9.00 8.00 9.00 12.00 18.00 15.00
Date 05-Apr-07 06-Mar-07 21-Feb-07 24-Jan-07 12-Jan-07 12-Jan-07 08-Jan-07 31-Oct-06 19-Oct-06 12-Sep-06 12-Sep-06
Closing Price 12.86 14.09 14.56 16.03 18.26 18.26 19.47 21.27 21.01 26.48 26.48
Rating
Price Target 13.00 16.00 18.00 19.00 21.00 24.00 26.00 26.00 29.00
2 -Equal weight
1 -Overweight
FOR EXPLANATIONS OF RATINGS REFER TO THE STOCK RATING KEYS LOCATED ON THE PAGE FOLLOWING THE LAST PRICE CHART.
Barclays Capital and/or Lehman Brothers Inc. and/or one of their affiliates has received compensation for investment banking services from Advanced Micro Devices in the past 12 months. Barclays Capital and/or an affiliate trade regularly in the shares of Advanced Micro Devices. Barclays Capital and/or Lehman Brothers Inc. and/or one of their affiliates has received non-investment banking related compensation from Advanced Micro Devices within the last 12 months. Advanced Micro Devices is or during the past 12 months has been an investment banking client of Barclays Capital and/or Lehman Brothers Inc. and/or one of their affiliates. Advanced Micro Devices is or during the last 12 months has been a non-investment banking client (securities related services) of Barclays Capital and/or Lehman Brothers Inc. and/or one of their affiliates. Advanced Micro Devices is or during the last 12 months has been a non-investment banking client (non-securities related services) of Barclays Capital and/or Lehman Brothers Inc. and/or one of their affiliates.
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Equity Research Barclays Capital is associated with specialist firm Barclays Capital Market Makers who makes a market in Advanced Micro Devices stock. At any given time, the associated specialist may have "long" or "short" inventory position in the stock; and the associated specialist may be on the opposite side of orders executed on the Floor of the Exchange in the stock. Barclays Capital and/or an affiliate makes a market in the securities of this company. Valuation Methodology: $7 PT represents 1.4x EV/CY10 sales of $5.6B Risks Which May Impede the Achievement of the Price Target: AMD is heavily dependent to PC and server sales. If the number of PC and servers sold declines, AMD's processor opportunity will be directly affected. Historically, as Intel reduces processor prices, AMD mirrors the price reductions with similar price cuts. Intel's price reduction could help drive demand and reduce AMD's market share.
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Equity Research
Important Disclosures Continued: Intel Corp. (INTC)
Rating and Price Target Chart: INTEL CORP.
As of 06-Jul-2009 32.00 30.00 28.00 26.00 24.00 22.00 20.00 18.00 16.00 14.00 12.00 10.00 Currency = USD
US$ 19.64 (04-Sep-2009)
2-Equal Weight / 2-Neutral
7-06
10-06
1-07
4-07
7-07
10-07
1-08
4-08
7-08
10-08
1-09
4-09
7-09
Closing Price Recommendation Change
Currency=US$ Date Closing Price 13-May-09 15.13 06-Apr-09 15.86 25-Feb-09 13.03 16-Jan-09 13.74 05-Dec-08 13.29 11-Nov-08 13.93 13-Oct-08 16.99 29-Sep-08 17.27
Price Target Drop Coverage
Source: FactSet
Rating
Price Target 18.00 17.00 16.00 15.00 14.00 16.00 20.00 21.00
Date 29-Sep-08 08-Sep-08 15-May-08 07-Apr-08 16-Jan-08 17-Oct-07 18-Jul-07 21-Feb-07
Closing Price 17.27 20.97 24.97 21.75 19.88 26.72 25.06 20.88
Rating 2 -Equal weight
Price Target 24.00 26.00 24.00 23.00 30.00 28.00 24.00
FOR EXPLANATIONS OF RATINGS REFER TO THE STOCK RATING KEYS LOCATED ON THE PAGE FOLLOWING THE LAST PRICE CHART.
Barclays Capital and/or an affiliate makes a market or provides liquidity in the securities of Intel Corp.. Barclays Capital and/or Lehman Brothers Inc. and/or one of their affiliates has received compensation for investment banking services from Intel Corp. in the past 12 months. Barclays Capital and/or an affiliate expects to receive or intends to seek compensation for investment banking services from Intel Corp. within the next 3 months. Barclays Capital and/or an affiliate trade regularly in the shares of Intel Corp.. Barclays Capital and/or Lehman Brothers Inc. and/or one of their affiliates has received non-investment banking related compensation from Intel Corp. within the last 12 months. Intel Corp. is or during the past 12 months has been an investment banking client of Barclays Capital and/or Lehman Brothers Inc. and/or one of their affiliates. Intel Corp. is or during the last 12 months has been a non-investment banking client (securities related services) of Barclays Capital and/or Lehman Brothers Inc. and/or one of their affiliates. Risks Which May Impede the Achievement of the Price Target: Intel is heavily dependent to PC sales. If the number of PCs sold declines, Intel's processor opportunity will directly be affected by the units. Intel's average selling prices are also impacted by supply and demand conditions of PCs. Although the company typically reduces processor prices once a quarter, the company may increase the severity of the price cut to drive sell through demand. Also the competitive position of AMD products and any market share gains could adversely affect Intel. Intel's Architecture group, which includes the processor revenue, generates about 85% of total revenue and over 100% of operating profit.
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Equity Research
Important Disclosures Continued: NVIDIA Corp. (NVDA)
Rating and Price Target Chart: NVIDIA CORP.
As of 07-Jul-2009 42.00 40.00 38.00 36.00 34.00 32.00 30.00 28.00 26.00 24.00 22.00 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 Currency = USD
US$ 15.11 (04-Sep-2009)
2-Equal Weight / 2-Neutral
7-06
10-06
1-07
4-07
7-07
10-07
1-08
4-08
7-08
10-08
1-09
4-09
7-09
Closing Price Recommendation Change
Currency=US$ Date Closing Price 17-Jun-09 11.28 08-May-09 9.25 03-Apr-09 11.32 20-Mar-09 9.53 13-Jan-09 7.65 12-Jan-09 7.61 07-Nov-08 8.72 11-Sep-08 10.30 11-Sep-08 10.30 04-Aug-08 10.58 03-Jul-08 12.49 02-May-08 22.52 02-May-08 22.52
Price Target Drop Coverage
Source: FactSet
Rating
Price Target 13.00 12.00 11.00 10.00 9.00 10.00 11.00 12.00 15.00 17.00 25.00
2 -Equal weight
Date 07-Apr-08 30-Jan-08 29-Oct-07 11-Sep-07 10-Aug-07 16-Jul-07 21-Jun-07 21-Jun-07 11-May-07 01-Feb-07 01-Feb-07 10-Nov-06
Closing Price 19.23 25.19 33.59 34.58 29.33 31.13 28.65 28.65 23.43 20.69 20.69 22.96
Rating 2 -Equal weight
Price Target 24.00 34.00 37.00 34.67 32.67 31.33
1 -Overweight 24.00 18.67 2 -Equal weight 30.00
1 -Overweight
FOR EXPLANATIONS OF RATINGS REFER TO THE STOCK RATING KEYS LOCATED ON THE PAGE FOLLOWING THE LAST PRICE CHART.
Barclays Capital and/or an affiliate makes a market or provides liquidity in the securities of NVIDIA Corp.. Barclays Capital and/or an affiliate trade regularly in the shares of NVIDIA Corp.. Risks Which May Impede the Achievement of the Price Target: (a) dependence on short product cycles; (b) dependence on PC industry; (c) dependence on external foundries; and (d) dependence on the cyclical semiconductor industry.
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Equity Research Important Disclosures Continued: The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by investment banking activities.
Company Name Advanced Micro Devices Mentioned Company Intel Corp. NVIDIA Corp.
Ticker AMD Ticker INTC NVDA
Price US$ 4.53 Price US$ 19.64 US$ 15.11
Price Date 04-Sep-2009 Price Date 04 Sep 2009 04 Sep 2009
Stock / Sector Rating 1-Overweight / 2-Neutral Stock / Sector Rating 2-Equal Weight / 2-Neutral 2-Equal Weight / 2-Neutral
NVIDIA Corp.: Our target price for NVDA is $13 or 2.0x EV/CY09 Sales of $3.0B.
Guide to the Barclays Capital Fundamental Equity Research Rating System: Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the “sector coverage universe”). Below is the list of companies that constitute the sector coverage universe: Advanced Micro Devices (AMD) Analog Devices (ADI) AuthenTec Inc. (AUTH) Cavium Networks Inc. (CAVM) Entropic Communications Inc. (ENTR) Hittite Microwave Corp. (HITT) Intel Corp. (INTC) Linear Technology (LLTC) Marvell Technology Group, Ltd. (MRVL) Microchip Technology (MCHP) Microsemi Corporation (MSCC) Netlogic Microsystems (NETL) ON Semiconductor (ONNN) QUALCOMM, Inc. (QCOM) Silicon Laboratories (SLAB) Smart Modular Technologies (SMOD) Triquint Semiconductor (TQNT) Altera Corp. (ALTR) Atheros Communications, Inc. (ATHR) Broadcom Corp. (BRCM) Cypress Semiconductor Corp. (CY) Fairchild Semiconductor (FCS) Integrated Device Technology, Inc. (IDTI) Intersil Corporation (ISIL) LSI (LSI) Maxim Integrated Products (MXIM) Micron Technology, Inc. (MU) National Semiconductor (NSM) NVIDIA Corp. (NVDA) PMC-Sierra (PMCS) RF Micro Devices (RFMD) Skyworks Solutions, Inc. (SWKS) Texas Instruments, Inc. (TXN) Xilinx, Inc. (XLNX)
In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. Stock Rating 1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. 2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12- month investment horizon. 3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12- month investment horizon. RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company.
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Equity Research Sector View 1-Positive - sector coverage universe fundamentals/valuations are improving. 2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating. 3-Negative - sector coverage universe fundamentals/valuations are deteriorating. Distribution of Ratings: Barclays Capital Equity Research has 1222 companies under coverage. 38% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 44% of companies with this rating are investment banking clients of the Firm. 46% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 39% of companies with this rating are investment banking clients of the Firm. 13% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 29% of companies with this rating are investment banking clients of the Firm. Barclays Capital offices involved in the production of Equity Research: London Barclays Capital, the investment banking division of Barclays Bank Plc (Barclays Capital, London) New York Barclays Capital Inc. (BCI, New York) Tokyo Barclays Capital Japan Limited (BCJL, Tokyo) São Paulo Banco Barclays S.A. (BBSA, São Paulo)
This publication has been prepared by Barclays Capital; the investment banking division of Barclays Bank PLC, and/or one or more of its affiliates as provided below. This publication is provided to you for information purposes only. Prices shown in this publication are indicative and Barclays Capital is not offering to buy or sell or soliciting offers to buy or sell any financial instrument. Other than disclosures relating to Barclays Capital, the information contained in this publication has been obtained from sources that Barclays Capital believes to be reliable, but Barclays Capital does not represent or warrant that it is accurate or complete. The views in this publication are those of Barclays Capital and are subject to change, and Barclays Capital has no obligation to update its opinions or the information in this publication. 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Equity Research
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