AMD Amends Agreement With GlobalFoundries

AMD has revised its purchase agreement with Global Foundries in a move that will allow the CPU design firm to recognize a $492 million non-cash gain in Q1. Instead of purchasing 45nm and 32nm wafers on a "cost-plus" basis, Sunnyvale will pay GlobalFoundries a fixed price for products through the end of the year. Reactions to the change have been mixed. The fixed-price model allows AMD to only pay for viable 32nm parts, but raises questions about GlobalFoundries' 32nm yields.

AMD's ownership stake in GF has fallen considerably in the past two years, but GloFo remains Sunnyvale's premier foundry partner by a sizeable margin. According to the company's presentation, the original wafer purchase agreements were signed in 2009. This new agreement was brought about by "challenges" relating to the 32nm ramp and more closely aligns cost with yields, but does not change AMD's gross margin guidance for 2011. Given that gross margin is always predicted "plus or minus a couple of points," there's wiggle room built in. AMD affirms this later when it notes that 2011 guidance predicts a margin between 44 and 48 percent.

The temporary 2011 agreement specifies that AMD will pay a fixed rate on 45nm production, will pay for good 32nm die, and that AMD will make "an additional quarterly payment to GF during 2012 if GF meets conditions related to continued availability of 32nm capacity in 2012." The size of the payment is said to not exceed $400M and "is contemplated in our guidance for future purchase commitments to GF."

Bulldozer:  Coming soon, to a 32nm Cineplex near you. Along with Llano

AMD bought $1.2 billion in wafers from GF in 2010, expects to buy between $1.1B and $1.5B in 2011, and anticipates 2012 purchases of $1.1B to $1.9B. The company provides no estimates past 2012; we assume such purchase plans will depend on the popularity of AMD's GPU and CPU products, the company's manufacturing agreements with TSMC, and GlobalFoundries' ability to execute its own roadmaps and provide competitive pricing.

The general tone of AMD's announcement implies that GlobalFoundries' 32nm ramp has been neither as smooth nor as quick as either company would prefer. That said, both organizations made the announcement in stride. Indeed, AMD is much more interested in talking about the fact that Llano is now shipping for revenue. Whatever hiccups GF may have encountered, there's no sign that they've impacted the company's bulk silicon ramp on various process nodes.

With both Llano and Bulldozer rumored to be priming for launch, we'll soon know more about supply-side constraints, if any. Given AMD's current competitive position compared to Intel, it's in Sunnyvale's best interest to ramp production on all fronts as quickly as it can profitably do so. When Phenom II debuted, AMD's ability to ramp 45nm products was hampered by the economic downturn and the need to clear inventories of existing Phenom parts. The company hopes to avoid that anchor this time out. So long as demand remains strong, it should be able to do so.