AMD’s new GLOBALFOUNDRIES semiconductor wafer agreement frees up 28nm choices

March 5, 2012 — AMD (NYSE:AMD) amended its wafer supply agreement (WSA) with GLOBALFOUNDRIES Inc., with a negotiated wafer price mechanism for 2012 (Marketwire). AMD will also transfer its remaining ownership interest in GLOBALFOUNDRIES to GLOBALFOUNDRIES, eliminating its equity stake in the foundry company. AMD relinquishes its board seat at the foundry.

GLOBALFOUNDRIES, celebrating its 3-year anniversary of operation, will now be wholly owned by the Advanced Technology Investment Company (ATIC), the company announced (BusinessWire).

"We’re pleased with GLOBALFOUNDRIES’ recent performance in meeting our delivery requirements across our product line," said Rory Read, CEO, AMD. AMD’s new management team — CEO Rory Read, CTO Mark Papermaster, SVP Lisa Su, and CSO Rajan Naik — is fairly aggressively pursuing change, noted FBR Capital Markets. AMD’s moving to a fabless model will mean that TSMC will play a larger role in manufacturing for the chip company, added Barclays Capital’s note.

Also read: AMD outlines SoC-centric strategy

The new agreement most notably gives AMD "flexibility to manufacture 28nm parts elsewhere," reports FBR Capital Markets. GLOBALFOUNDRIES waived the exclusivity arrangement for AMD to manufacture certain 28nm APU products at GLOBALFOUNDRIES for a specified period. As a result, AMD agreed to pay GLOBALFOUNDRIES a cash payment of $425 million, of which $150 million is being paid on March 5, 2012, $50 million will be paid by July 2, 2012, $50 million by October 2, 2012 and $175 million in the first quarter of 2013. In addition, AMD issued a promissory note to GLOBALFOUNDRIES for the payments due by October 2, 2012 and first quarter 2013. The decision will be good in the long term, Barclays states, but "the price doesn’t come cheap."

AMD and GLOBALFOUNDRIES established a wafer price mechanism with negotiated prices based on a take or pay arrangement in 2012, established a framework for wafer pricing in 2013, and agreed that AMD’s additional 2012 quarterly payment obligations specified in the 2011 amendment will be waived. This is a change from calendar year 2011, wherein AMD paid a fixed price for 45nm wafers and for only good die at 32nm, noted analysts at Sterne Agee. Barclays expects that yields at GLOBALFOUNDRIES have improved at 28nm, leading to the new agreement.

AMD expects to record a one-time charge of $703 million in Q1 2012 consisting of the above-mentioned $425 million cash payment and the remainder will be a non-cash charge.

AMD’s Q1 2012 non-GAAP gross margin guidance of approximately 45% and the 2012 non-GAAP gross margin guidance of 44%-48% remain unchanged.

"With more 32nm wafer supply coming on in 1Q12, and with AMD now seemingly able to pursue 28nm capacity aggressively at TSMC, AMD’s financial metrics could improve substantially in 2012 while new growth initiatives in servers take hold (SeaMicro)," conclude FBR’s analysts.

AMD (NYSE:AMD) is a semiconductor design innovator. For more information, visit http://www.amd.com.

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