AMD Puts Brave Face On New GlobalFoundries Agreement

AMD announced late today that it's reached a new wafer supply agreement (WSA) with GlobalFoundries. This is the second time AMD has renegotiated the agreement this year, and while the new arrangement offers Sunnyvale some needed flexibility, it carries further penalties as well.

First, a few quick explanations. The WSA governs the purchase and manufacture of microprocessors. AMD agrees to buy a certain number of wafers from GF per quarter and it negotiates payment for those wafers in several different ways. In 2011, AMD and GF agreed that Sunnyvale only had to pay GlobalFoundries for fully functional chips. At the time, GlobalFoundries was having problems ramping Llano. This agreement heavily favored AMD by ensuring that the company wasn't stuck buying entire wafers of non-functional product. The 2012 and new 2013 agreements mandate a take-or-pay arrangment in which AMD either buys GF's product <em>or</em> pays the company a provisional amount in exchange for not purchasing.

The Big Ugly

There's no way to sugarcoat the "ouch" factor on this. Previously, AMD expected to buy $500M worth of wafers from GF in Q4 2012. It has slashed this amount to $115M. That doesn't mean AMD's sales in Q4 will be ~22% of normal. Remember, it takes time for the wafers the company buys in any given quarter to be turned into processors.

What it does mean, however, is that AMD is taking drastic steps to prevent the sort of inventory buildup that left it no choice but to take a hefty writedown in Q3. The CPU designer is trying to spin the situation as a positive, since the combined cost of its $115M worth of wafers and $320M penalty payment to GF only works out to $435M as opposed to the $500M it expected to spend, but this isn't a good sign.

The APU design firm announced several other cost-saving measures, including R&D cost reductions of $20M per quarter. Previously, those dollars went to the custom R&D work GF did for AMD and the SOI production lines it maintained. AMD intends to transition to standard bulk silicon for future products and won't need to invest in this segment the same way.

Company executives reiterated that they intend to return to positive cash flow by the second half of next year, but were mum on the particulars of how this would be accomplished. Previous statements have indicated that AMD needs to maintain between $700M and $1.1B in cash per quarter to meet its ongoing need, and the firm believes it can still do this under the new arrangement.

GlobalFoundries and AMD remain intimately dependent on each other, but it's hard not to think that GF has taken AMD to the cleaners this past year. In March, AMD announced that it would be paying GF $730M <em>and</em> giving up its share of the company. Today's penalty means that AMD's erstwhile foundry division has pocketed over a billion dollars worth of penalty payments from a partner that can't really afford to pay them.