The seemingly headless AMD yesterday announced an amendment to their Wafer Supply Agreement (WSA) with GlobalFoundries. The WSA was originally agreed during formation of GlobalFoundries back in 2009. It sets out the terms AMD buys products from their manufacturing partner. In order to adapt the agreement to manufacturing development some changes have been implemented to reduce AMDs risk in this endeavor. In a conference call this morning AMDs interim CEO Thomas Seifert gave additional explanations to the initially somewhat confusing press release issued by AMD.
GlobalFoundries 32nm Wafer with test patterns
Until today, the agreement with GlobalFoundries looked as follows; AMD paid fixed amounts per wafer, regardless the amount of good chip actually yielded from it. Somewhat unrelated but also part of the agreement was that AMD would commit certain percentages (increasing annually) of their GPU and chipset business to GlobalFoundries once they were able to provide suitable bulk processes for these kind of products. Right now GPUs, chipsets and Bobcat-based Fusion processors are all exclusively manufactured by AMD’s other partner TSMC.
When the 32nm process was starting to ramp at GlobalFoundries last year, things looked dire. The yields were lower than expected and now developing as AMD had anticipated. This was the reason to enter negotiation with GlobalFoundries about a change of the agreement in the first place. They changed the pricing methodology from per wafer to per good die. This removes risk for AMD in case there are low production yields. Basically it means the two companies have agreed on a price per good die based on some expected yield percentage. If it were below, GlobalFoundries would have to run more wafers to produce the amount of chips AMD needs, but AMD would only pay for the working chips. Thus their operating margin will be unaffected by this change. According the release the number of wafer starts on 32nm for AMD should be fixed as well.
Now on the call early today AMD was very specific in that yields have improved a lot by the end of 2010, but at this point the agreement between the companies has probably been already set in stone. When the yields turn too good, it simply means that GlobalFoundries can fulfill AMDs orders at a lower cost. So there is really no risk involved for AMD and as things look, GlobalFoundries should be fine under the new conditions as well. 45nm chips will still be priced on a wafer-basis. The agreement also entails changes to the existing commitments regarding manufacturing GPU and chipset products at GlobalFoundries. Though the announcement is very unspecific in this regard and Seifert only stated in the Q&A session, that in 2012 we shouldn’t expect volume shipments of such products manufactured by GlobalFoundries. Seifert added that they plan to continue to source their chips from two partners, namely GlobalFoundries and TSMC.
Actually 32nm yields are very much in line with AMDs projections. Seifert was happy to state that Llano has started to ship for revenue already. In this quarter first systems based on the APU should be seen in the marketplace. Originally Bulldozer wasn’t mentioned in the announcement at all, but at the end of the Q&A session when asked, Seifert stated that there is very good progress on Bulldozer. Whatever this means, we can only hope it means it’s on track as well. Originally Llano was supposed to launch after Bulldozer. The information from this call allows the opposite to be true.
The new pricing mode will only be in place for the whole year of 2011 including the just ended first quarter. Come 2012, AMD will fall back to a wafer-based price model. This is connected with additional quarterly payments to GlobalFoundries based on how well their yields are. When they are above undisclosed percentage, the companies agreed on, AMD will make up to $400M additional payments. At this point, AMD expects GlobalFoundries to earn these payments and they have already been included in their guidance. Under the bottom line, for AMD there is not a lot of change, but the fiscal numbers should smooth out for the remainder of 2011 in order to make Wall Street happy.
AMD didn’t comment on other topics. They said due to their imminent earnings call in a few weeks, any other topics need to wait until then. Also on topics regarding their manufacturing they didn’t disclose more than necessary. Seifert also repeatedly dodged questions regarding the ongoing CEO search of the company. He especially avoided questions regarding specific yield numbers or which share of their shipments will be on 32nm come 2012. However he made a statement that their main volume of CPUs and APUs should be on 32nm in 2012.
In the 2nd half of 2011 their 28nm process should start to ramp up. They hope that on the 28nm and later the 20nm node they will be closer to Intel in regards to manufacturing. At the moment, AMD would consider a six-quarter gap between Intel and them in manufacturing technology comfortable. Though Seifert also stated, that success is not only based on manufacturing, but also sellthrough – an insight we can only hope AMD will incorporate in their future strategy.