A bit earlier than previously expected, AMD announced the details of their new amended Wafer Supply Agreement (WSA) for 2013 in a conference call yesterday. The event was hosted by Devinder Kumar, AMDs interim CFO and corporate controller. As part of the call, the restructuring plans laid out during the third quarter earnings call were reiterated again.
The New Agreement
One major component of the 2013 WSA is a reduction of wafer orders for the fourth quarter of 2012. AMD was in a take or pay agreement and committed to a wafer volume of $1.5 billion throughout 2012. Of this amount, some $500 million was still outstanding. Now, due to the changing market conditions, AMD will consume only $115 million in the fourth quarter and has to pay a $320 million termination fee because of the reduced amount. Overall AMD will pay $1.1 billion for wafers in 2012. In terms of the bottom line, AMD will save $65 million compared to the original agreement even after including the termination fee.
The termination fee will be paid over several quarters; $80 million have to be paid in the fourth quarter of 2012, $40 million in the second quarter of 2013, and the remaining $200 million in the first quarter of 2014 as a promissory note issued to GLOBALFOUNDRIES. Also note that in the first quarter of 2013 the last payment of $175 million related to the 2012 WSA will be due.
The other major part of the new agreement contains information about the volume of wafers AMD has committed to purchase throughout 2013. Under the new WSA, AMD committed to a volume of $1.15 billion in 2013 and $250 million in the first quarter of 2014. The early commitment for 2014 seems to be a bit odd but even when directly asked on this matter, Devinder slightly dodged the question, stating this is not something analysts should focus on too much. Under the new agreement AMD will pay a fixed price per wafer similar to the 2012 WSA. The new commitments are again under a take or pay regime, so in case AMD slips yet again, there would be another round of penalties invoked.
In the question and answer session following the prepared statements it was clarified that the wafer pricing works out to be very similar to the prices AMD was paying in 2012. In other words, from a gross margin perspective the new WSA is expected to be neutral. In the unlikely case that business will be better than expected and AMD needs more wafers than allocated, they expect GLOBALFOUNDRIES to be happy to get into talks about that. However, if that occurs, the price per wafer is not covered by the agreement for the additional wafers.
The interim CFO also disclosed that the company will go into negotiations for the 2014 WSA as early as June 2013 where they already want to discuss their wafer profile and pricing for 2014 as well as their needs from a volume perspective. At this point it is not clear whether negotiating this early about the next year is advantageous for the company.
Departure From SOI
As we reported when AMD announced the 2012 WSA, AMD will depart from SOI technology at the 28nm node and going forward will employ bulk technology instead. The new information in this regard is that this reduces reimbursements to GLOBALFOUNDRIES for future research and development costs. The savings are expected to be around $20 million per quarter which would help the company reach their new quarterly operating expense target of $450 million.
Exclusivity Agreement
Unlike the limited waiver of exclusivity in their 2012 WSA, there is no such clause in the 2013 WSA.
"We are obligated to make all microprocessor products at GLOBALFOUNDRIES, and we will do that." said Devinder Kumar during the call.
What this means is that at 28nm and below, any CPU or APU will be made exclusively at GLOBALFOUNDRIES for the time being. This is unlike the present situation where AMD’s low power APUs based on the Ontario and Zacate cores (Brazos platform) are manufactured at 40nm at TSMC.
This agreement with GLOBALFOUNDRIES already lead to the cancellation of the Krishna and Wichita products which were originally planned to be introduced in early 2012. They were reported to be 28nm die shrinks of the current Zacate and Ontario 40nm APUs. GLOBALFOUNDRIES did not have the planned process technology ready for prime time, which is why AMD decided to give Brazos a second wind with Brazos 2.0 and slightly higher clock rates. For 2013 a real replacement codenamed Kabini based on the Jaguar architecture is planned featuring up to four cores. According to recent statements by AMD’s CEO, Kabini is on track for an early 2013 release.
In addition to their microprocessors, AMD also plans to manufacture a limited amount of GPUs at GLOBALFOUNDRIES at 28nm or below in the future. It will be interesting to see which products will be affected by this going forward.
"As part of our prior amendment, we are also committing to make some GPU products at or below [the] 28nm technology node at GLOBALFOUNDRIES." commented Devinder Kumar on the situation.
AMD Seeking New Ways To Rake In Cash
The recently reported sell and lease back of AMD’s Austin campus is expected to happen in the first quarter of 2013. It should yield $150-200 million in cash. The $175 million charge due in the same quarter is basically offset by this transaction. The companies also has other ways to raise cash such as securing debt, but at this point there are no plans to go down this route.
Devinder Kumar also noted that "We have not monetized any of our IP in a significant manner."
This alludes to the possibility of AMD licensing its IP to third parties in the future, should the need for cash arise.
