AMD reduces GlobalFoundries wafer order, penalized $320 million

[Shawn Knight]

AMD’s prospects just keep taking a turn for the worse as we approach 2013. The chip maker has suffered from a slow CPU market and increased pressure from rival Intel which has subsequently forced them to reduce their wafer purchase commitments with GlobalFoundries.

The decision to break contract with GlobalFoundries was likely done to avoid having excess inventory that would result in further write-downs in the near future. AMD originally agreed to buy $500 million worth of silicon during the fourth quarter but now will only spend $115 million.

Of course, the semiconductor foundry didn’t just let AMD out of the contract without penalty. The chip maker agreed to a termination payment of $320 million that will be paid over several quarters as follows.

$80 million will be due by December 28, 2012, another $40 million will have to be paid by April 1, 2013 and AMD signed a promissory note valued at $200 million that’s due by December 31, 2013.

AMD said the termination fee will result in a one-time charge of $165 million that will show up on their fourth quarter results. In a press release on the matter, the company said they expect to return to free cash flow generation in the second half of 2013.

AMD CEO Rory Read said the announcement demonstrates that the long-term strategic partnership between the two companies continues to be beneficial on both sides. He praised GlobalFoundries for meeting their delivery requirement in 2012 and looks forward to developing and growing AMD with their help.

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https://www.techspot.com/news/51040-amd-reduces-globalfoundries-wafer-order-penalized-320-million.html

 

[captainawesome]

(sadface)

 

[Blue Falcon]

This math makes me confused. So AMD will still buy $115 million wafers and pay a $320 million penalty over time or roughly $435 million instead of buying $500 million of wafers? That sounds like only $65 million saved, but in the case of buying $500 million of wafers, they could at least sell them, even if it means lower prices. This way they are throwing $320 million at nothing.

 

[Whiskey11]

AMD has been making terrible decisions ever since they got rid of Dirk Meyer. They wanted to focus on mobile devices but realised they can't do it meanwhile totally disregarded the PC market. AMD use to be an innovative company, now they are making obsolete CPUs, selling of assets and laying off people. Looking at these numbers they would have been better of just over producing the CPUs and selling $320 million worth for $65+ million, hence making a lesser loss and at the same time regaining some market share.

 

[dividebyzero]

This math makes me confused. So AMD will still buy $115 million wafers and pay a $320 million penalty over time or roughly $435 million instead of buying $500 million of wafers? That sounds like only $65 million saved, but in the case of buying $500 million of wafers, they could at least sell them, even if it means lower prices. This way they are throwing $320 million at nothing.

Makes fiscal sense to me.
1.AMD are already carrying more than enough inventory, why add more processors only to have to write down (again) their value sometime in the next couple of quarters
2.AMD's own guidance for Q4 2012 is lowered revenue in the face of Intel's continued dominance (pretty much borne out by semiconductor sales this year), so excess production will end up as inventory
3.Ending the present wafer agreement with Glofo, frees up the opportunity for AMD to court TSMC. If nothing else, having the option of more than one foundry gives AMD price negotiating leverage.

At this point in time, AMD have little option but to look for expenditure reductions at every turn. If they need to sell their real estate and restructure debt, they really don't have much in the way of options

 

[Blue Falcon]

I don't think you understood what I am saying. Even if you buy $320 million of wafers and sell them for 75% of the original MSRP price, that's still more profits than taking a $320 million loss straight up. The reason they have inventory built-up is due to lower demand. So drop prices then and see those CPUs selling better. Drop A10-5800K from $125 to $99, FX8320 from $169 to $129. I am sure they'll sell way more.

 

[cliffordcooley]

I don't think you understood what I am saying. Even if you buy $320 million of wafers and sell them for 75% of the original MSRP price, that's still more profits than taking a $320 million loss straight up.

Thats assuming there is a market for those wafers. Who would they sell to that is not already under a contract, for the wafers they need.

 

[dividebyzero]

I don't think you understood what I am saying. Even if you buy $320 million of wafers and sell them for 75% of the original MSRP price, that's still more profits than taking a $320 million loss straight up. The reason they have inventory built-up is due to lower demand. So drop prices then and see those CPUs selling better. Drop A10-5800K from $125 to $99, FX8320 from $169 to $129. I am sure they'll sell way more.

A10-5800K from $125 to $99, means
A10-5600K from $110 to ?
A10-5400K from $75 to ?
A4-5300 from $65 to ?
Using your rationale, AMD would be destroying their margins through the whole product stack, and the miracle of AMD actually selling these processors is made even more unlikely since this tranche of APU/CPU's wouldn't hit the channel until Q1 2013...just in time to be Osborned by talk of Richmond, thus duplicating Llano's unsellable parts leading up to Trinity's launch.
So either write off now of write off in a quarter or two and add in die fusing/binning and packaging (both for the die itself and the physical SKU packaging), shipping and warehousing costs.

 

[captainawesome]

dividebyzero I was on the same path of under-understanding until you schooled me, in fact, I wanted to ask the exact same question as Falcon over there. I guess there is SOME reason Rory is CEO.

 

[lipe123]

Also they are not losing the 320mil all at once, where if they went through with the orig deal they would have had to pay the full 500mil for services/products.

It's no different that taking a loan out to pay something off over time, with a mere 115mil down they get out of the 500mil contract and pay the 320 mil off over 4 smaller payments that they can hopefully cover with selling the existing stock.

Still the bottom line is AMD is not doing anywhere near as well as intel and its pretty sad that they are in this slump.

 

[Cota]

Its sad watching AMD fail in all sides, and yet managing to screw it in other ways.