AMD-GlobalFoundries’ new wafer deal: What it means December 7, 2012 - AMD and GlobalFoundries have finalized amendment of their wafer supply arrangement, establishing fixed pricing and other terms for 2013. Earlier this year AMD and GlobalFoundries amended their wafer supply deal to a "take-or-pay" structure, which gave AMD flexibility to source 28nm parts from other foundries. (AMD also officially gave up its remaining ownership interest and board seat in GlobalFoundries.) In AMD’s 3Q12 results call, execs noted they were renegotiating that WSA; those negotiations appear to have concluded, with the following results: - Lowered wafer purchase commitments for 4Q12, to $115M; - A $320M payment (spread out in three installments) to terminate the current take-or-pay agreement, associated with that adjusted 4Q12 commitment; - Wafer purchase commitments in fiscal 2013 of $1.5B; - Wafer purchase commitment of $250M in fiscal 1Q14; - Reduction in further reimbursements to GlobalFoundries for R&D costs, as AMD moves to standard 28nm process technology. With this renegotiated WSA, AMD says it will return to free cash flow generation in 2H13. "GlobalFoundries’ performance in meeting our delivery requirements in 2012 was strong and they remain a strategic and important foundry partner moving forward," stated Rory Read, AMD president/CEO. "We are committed to develop and grow our business with GlobalFoundries, increasing our engagement across our industry-leading APU and graphics roadmaps. The newly amended agreement is another step we are taking to further strengthen our relationship with GlobalFoundries as well as AMD’s financial foundation." What the analysts think Wall Street analysts generally see a mixed blessing in the move for AMD, providing some short-term relief and flexibility (as does the sale/leaseback of its Austin facility), but believe the move doesn’t solve the broader problem of longer-term liquidity, and that the company will have to take on new debt by midyear. - Cash required to run the business is approaching ~$700M, so AMD might need to issue more debt, notes Barclays’ CJ Muse. More importantly, he sees "no change to our ongoing concerns of competitive pressure from both the high-end (Intel) and low-end (ARM) with traction in ARM servers." - "AMD incrementally lowered its near-term costs but also gave up some long-term flexibility," sums up Deutsche Bank’s Ross Seymore. He points out that AMD still lacks flexibility in its foundry multisourcing strategy, given its commitment to have GlobalFoundries make all its microprocessors in 2013. - John Pitzer from Credit Suisse thinks even the renegotiated WSA is "expensive" at 33% of COGS and 19% of AMD’s market capitalization. - The new WSA’s complexity is itself "a negative," thinks Craig Berger from FBR Research. He agrees that more debt financing will be required, and also echoes worries about the PC market’s stagnation — low-end PC users (surfing the Web, checking e-mail) have swung over to using tablets and smartphones for that functionality, a trend he thinks is increasing in emerging markets with lower-cost options. Berger also questions whether AMD really can get to free cash flow by 2H13, without clarity into the company’s internal revenue or gross margin assumptions. He notes that AMD was almost net-cash-neutral a year ago, but has since paid out a lot to GlobalFoundries in take/pay and termination fees, acquired SeaMicro, "and operationally burned cash." Adding up existing commitments, AMD likely will be below the aforementioned $700M baseline for operating cash, which will mean additional financing. - Vijay Rakesh with Sterne Agee, though, sees a more positive near-term scenario for AMD, with "multiple liquidity options" including a similar sale/leaseback for its Santa Clara facility, access to ~$500M in secured loans, and monetizing its IP portfolio of thousands of patents (including those obtained through acquisitions) which he says could amount to $2.2B.