AMD Scaling Back Chip Purchases from GlobalFoundries

By Kevin Parrish
published

To save money, AMD is reducing its wafer order agreement with Globalfoundries.

On Thursday AMD said that it has successfully amended its Wafer Supply Agreement (WSA) with Globalfoundries Inc as part of its new operating model revealed during its third quarter 2012 earnings announcement. As a result of the amendment, AMD expects to return to free cash flow generation in the second half of 2013.

To help the struggling microprocessor company conserve cash in a declining PC market, the company has changed its agreement with Globalfoundries so that it can scale back on wafer purchases. Just recently the company said it plans to sell its campus in Austin, Texas – and then lease it back – in order to raise cash. The company has also been laying off engineers while looking for new markets, eager to keep its cash reserve from dipping too low.

"Today's announcement demonstrates that the long-term strategic partnership between AMD and Globalfoundries continues to benefit both companies," said Rory Read, president and chief executive officer, AMD. "Globalfoundries' performance in meeting our delivery requirements in 2012 was strong and they remain a strategic and important foundry partner moving forward."

AMD said that it estimates a $115 million purchase with Globalfoundries in the fourth quarter 2012 and $1.15 billion in fiscal 2013. The company said it was also committed to purchasing wafers from Globalfoundries for approximately $250 million during the first quarter of 2014. As for the rest of 2014, AMD will make negotiations for the remainder sometime in 2013.

"AMD will make a termination payment of $320 million related to the take-or-pay agreement with Globalfoundries associated with the adjusted wafer purchase commitments in fourth quarter 2012," the company said.

The cash impact of Globalfoundries' termination fee, according to AMD, will spread over several quarters. The first $80 million payment will be made by December 28, 2012, and the second $40 million payment will be made by April 1, 2013. A $200 million promissory note issued by AMD to Globalfoundries is due on December 31, 2013.

AMD said that as it moves to standard 28-nm process technology, the company will reduce future reimbursements to Globalfoundries for certain research and development costs.

"We are committed to develop and grow our business with Globalfoundries, increasing our engagement across our industry leading APU and graphics roadmaps," Read added. "The newly amended agreement is another step we are taking to further strengthen our relationship with Globalfoundries as well as AMD's financial foundation."

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Kevin Parrish
29 Comments Comment from the forums
  • A Bad Day
    "AMD will make a termination payment of $320 million related to the take-or-pay agreement with Globalfoundries associated with the adjusted wafer purchase commitments in fourth quarter 2012," the company said.

    Ouchy for a faltering company...
    Reply
  • DRosencraft
    Logical step not to buy large quantities of a product you can't manufacture and then sell. If you're not gonna sell as much processors, then no need for all those wafers sitting around. The concern is, what makes this worrying, is the image it sends that AMD is weak and isn't expecting to make any waves next year with any new products. Or from another more optimistic perspective they could be setting themselves up for trouble of supply shortages if they do make a strong come back. AMD is in so much flux right now, but at least they still have some cash reserves and a forthcoming return to profitability in the not too distant future.
    Reply
  • abbadon_34
    They should have cut the prices across the board on all cpu to make them value competative, they could own the first or second SMB if the price was right
    Reply
  • tomfreak
    u cant sell ur chips as much if u cant put aggressive price like u did back then in Athlon64 era.
    Reply
  • A Bad Day
    abbadon_34They should have cut the prices across the board on all cpu to make them value competative, they could own the first or second SMB if the price was right
    It would be stupid to engage in a price war against Intel, who has a much larger cash reserve and better fab plants. They can produce processors at lower profit margins because the manufacturing cost per processor is less than AMD's suppliers.
    Reply
  • jaber2
    Why didn't AMD do like intel and fab own waffers? you'd think they would have better control over engineering and quality, the best thing AMD can do now is spend its energy on the expanding smart phone and tablet market, which Intel just decided to get into
    Reply
  • stickmansam
    jaber2Why didn't AMD do like intel and fab own waffers? you'd think they would have better control over engineering and quality, the best thing AMD can do now is spend its energy on the expanding smart phone and tablet market, which Intel just decided to get intoGlobal Foundries is their old fab but it was getting too much downtime due to low sales so they decided to spin it off so if GF was losing money, it wouldn't effect AMD. What AMD should have done was to fab for other companies to make up the shortfall and not expand the fabs. That way they can keep more of the profit margin in house. Something that sort of make sense back then is coming back to bite them a new one.
    Reply
  • matt_b
    StickmansamGLobal Foundries is their old fab but it was getting too much downtime due to low sales so they decided to spin it off so if GF was losing money, it wouldn't effect AMD. What AMD should have done was to fab for other companies to make up the shortfall and not expand the fabs. That way they can keep more of the profit margin in house. Something that sort of make sense back then is coming back to bite them a new one.You know, I thought the same thing. Of course I am not an insider to AMD to know what all went on, but common sense would say that if you have idle time, down time, or just plain under-utilization, then you try to contract out with other suppliers/businesses to become customers and put a margin of profit back in your pocket. Not only does this give the opportunity to diversify your income (you could be doing poorly while your other customer's demands for chip wafers is skyrocketing), but it also keeps overall quality at a higher level because you still retain production control of your product. It was a bad move back then I thought.
    Reply
  • A Bad Day
    OR, the fab plants that AMD owned cost too much for them to maintain, so they figured why not get rid of it.
    Reply
  • tomfreak
    A Bad DayIt would be stupid to engage in a price war against Intel, who has a much larger cash reserve and better fab plants. They can produce processors at lower profit margins because the manufacturing cost per processor is less than AMD's suppliers.it would be stupid to buy a cpu that is not price competitive against Intel.

    oh of cos I will get thumbdown for this as usual.
    Reply