Status Update

Dec 6, 2012

Slides

Good day, ladies and gentlemen, and thank you for standing by. My name is Huie, and I'll be your conference operator for today. At this time, I'd like to welcome everyone to AMD's conference call. All lines have been placed on a listen only mode. After the speakers' remarks, you'll be invited to participate in the question and answer session. As a reminder, this conference is being recorded today. I would now like to turn the conference over to Ms. Ruth Carter, Vice President of Investor Relations for AMD. Please go ahead. Thank you, Huie. Good afternoon, and welcome to AMD's conference call and webcast to discuss the 3rd Amendment to our Wafer Supply Agreement, at WSA with GlobalFoundries. Today's conference call and webcast is hosted by Devinder Kumar, Interim CFO and Corporate Controller. Any references on this call to annual or quarterly periods should be assumed to be our fiscal periods unless I'd like to remind you that this is a live call. A replay will be available later today via webcast on ir. Atmd.com for 90 days. There will also be a telephone replay available for 10 days, and the number is The webcast of this event is a slide and audio event, so you're encouraged to log on to the Investor Relations homepage on amd.com to view the slide presentation that that Devinder will be referencing. The slide presentation will also be downloadable from the IR homepage. I'd like to highlight a few dates for you. Devinder Kumar will present at the Raymond James Conference in New York on December 11, next Tuesday. Our Q4 quiet time will begin at the Toza business on Friday, December 14. In addition, I'd like to advise you that we've changed the date of our fiscal 4th Quarter and 2012 earnings announcement to Tuesday, January 22, 2013. And lastly, we will only be discussing today's announcement on this call. We will not be talking about other topics Before we begin the call today, I'd like to caution And expectations speak only as of the current date and involve risks and uncertainties that could cause actual Results to differ materially from our current expectations. Please refer to the cautionary statement in the slide deck and our press release for more information. You'll also find detailed discussions about our risk factors in our filings with the SEC and in particular AMD's quarterly report on Form 10 Q for the quarter ended September 29, 2012. Now with that, I'd like to hand the call over to Devinder as we transition to the second slide, so So you can review our cautionary statement. Devinder? Thank you, Ruth. Good afternoon, and thank you for joining us on the call. We are here to discuss the Key elements of the 3rd amendment to AMD's wafer supply agreement with GlobalFoundries. The long term strategic and business Partnership between AMD and GlobalFoundries continues to be strong and today's announcement demonstrates that. I will walk you through a short presentation to discuss the key terms of the 3rd amendment and then we'll open the call up for questions. Let's move to slide 3. Before we get to the terms of the amended WSA, I would like to quickly reiterate AMD's corporate Strategy, which we also discussed during our Q3 earnings call in October. Then we'll go to the terms of the amendment And the financial modeling impact of those terms. Let's go to slide 4. On our Q3 earnings call, we discussed how AMD is resetting its business to align with changing PC market fundamentals. This required restructuring actions to get back to consistent profitability, implementing efficiencies to simplify our product development cycles And continuing to innovate and deliver products in a timely manner. AMD will also diversify beyond the traditional PC market And drive 40% to 50% of our product portfolio to fast growing and adjacent markets Where we can differentiate and establish leadership. We have exciting opportunities for growth with our technology and IP In dense cloud servers, ultra low power form factors and embedded and semi custom markets, while protecting our core microprocessor and Graphics Space Businesses. In addition, we have targeted to lower our expense structure approximately 25% By the Q3 of 2013 as compared to the Q1 of 2012, we believe we are on the right path to achieve our goals And we have established a business plan and financial model to support our strategy and roadmaps. Let's go to slide 5. Today, we are announcing the 3rd amendment to our wafer supply agreement with GlobalFoundries. As a reminder, The purpose of the wafer supply agreement defines the term by which AMD purchases products manufactured by GlobalFoundries. The elements of the 3rd amendment of the wafer supply agreement establish wafer volumes and fixed wafer pricing for wafer purchases Between the Q4 of 2012, which is this quarter and the Q1 of 2014. Let's go to slide 6. In response to weak macro and PC industry dynamics, which we discussed on our 3rd At the earnings call, we have decreased our wafer purchase commitments for the Q4 to $115,000,000 The second amendment to the WSA was a take or pay arrangement for $1,500,000,000 and we had a remaining obligation $500,000,000 in the Q4 of 2012 to GlobalFoundries for wafer purchases. Therefore, Our new revised lower purchase wafer commitment from $500,000,000 to $115,000,000 for the 4th quarter Requires AMD to make a termination payment of $320,000,000 the details of which I will discuss shortly. We expect to pay GlobalFoundries a total of $1,100,000,000 for wafers in 2012. This coupled with a termination payment results in a $65,000,000 cash savings versus prior expectations for wafer purchase Paper payments to GlobalFoundries. The 2013 amendment also outlines that AMD will purchase at FX wafer prices $1,150,000,000 worth of wafers in 2013. We also committed to purchasing $250,000,000 worth of wafers in the Q1 of 2014. Separately, As AMD moves to standard 28 nanometer process technology at GlobalFoundries, we are significantly reducing reimbursement to GlobalFoundries for future R and D cause. We anticipate these savings to be approximately $20,000,000 per quarter over the next several years, Which also helps us drive towards our operating expense target of $450,000,000 by the Q3 of 2013. Slide 7 please. Let me quickly touch on the termination fee I mentioned earlier. As the second amendment has had a take or pay clause, our reduced 4th quarter wafer purchase commitments resulted in a $320,000,000 payment. The $115,000,000 in wafer purchases in the 4th quarter And the $320,000,000 termination fee add up to $435,000,000 which The savings of approximately $65,000,000 this quarter versus the approximately $500,000,000 previously anticipated to be paid the GlobalFoundries in Q4. In addition, as we see the PC market continuing to be under pressure for the next several quarters, Buying additional wafers in the 4th quarter as originally planned would have potentially led to excess inventory relative to our current demand profile and the business outlook. The termination fee has a cash payment profile that stretches over several From the Q4 of 2012 to the Q1 of 2014, we will pay $80,000,000 this Quarter $40,000,000 in the Q2 of 2013 and the rest will be paid in the Q1 of 2014. From an accounting standpoint, we currently expect to record a one time charge of $5,000,000 in the 4th quarter related to the termination fee. This charge is based on current pricing and demand Assumptions. This slide explains the nuances of the accounting treatment of this payment on our P and L and to the balance sheet. The gross margin impact related to this charge is expected to be $215,000,000 made up of the Q4 one time charge of 100 and $35,000,000 plus a $50,000,000 COGS expense, dollars 110,000,000 of the $320,000,000 termination payment is capitalized in inventory this quarter and expensed over Q4 2012 and Q1 2013. The $50,000,000 is what we expect to expense in the current quarter. Let's move on to slide 8. Liquidity and cash management remain a key focus for AMD. The 3rd amendment to the WSA supports that strategy By spreading cash payments to GlobalFoundries out through Q1 of 2014. The table on this slide List specific cash payments associated with the second and third amendments to the WSA as well as corporate restructuring cash charges, which we recently disclosed. Contemplating these specific cash outflows in the 4th quarter, We expect our cash balance to be in the optimal zone of approximately $1,100,000,000 at the end of the Q4 of 2012. Now let's move to slide 9. As discussed at our 3rd quarter earnings announcement, we expect operating expense This is to be approximately $450,000,000 by the Q3 of 2013. In terms of gross margin, excluding the termination payment, The impact of the WSA amendment to our gross margin is expected to be neutral in the Q4 of 2012 and in 2013. We remain focused on returning to positive free cash flow generation and we expect to be able to accomplish that in the second half of twenty thirteen. In addition, as mentioned earlier, we expect our cash balance to be in the optimal zone of $1,100,000,000 as of the end of this quarter. Next slide please. So in summary, Today's announcement demonstrates that the long term strategic partnership between AMD and GlobalFoundries continues to be mutually beneficial for both companies. AMD is pleased with the execution of GlobalFoundries in 2012 and with the terms of the 3rd amendment to the WSA, Which are better aligned with AMD's current business expectations. This amendment will help us maintain our liquidity profile And help us achieve our operating expense targets for a leaner and more sustainable operating model. We are operating in a very dynamic industry and we are pleased that we were able to align our wafer purchase Thank you for your participation on this call. I will now turn the call back to Ruth to kick off the question Thank you. Ruth? Thanks, Devinder. Huie, could you open up the lines please and we'd be happy to take Our first question comes from Hans Mostmann with Raymond James. Please go ahead. Your line is open. Thanks very much for Question regarding your other foundry. Is there going to be a shift in your wafer purchases there? And if so, Thank you for the question. I don't think I'm going to get into the details of the mix of business between the 2 foundries. But I will say very Typically that we are very fortunate to be working with 2 foundries. We have commitments of GlobalFoundries under the WSA, which we maintain and keep And are committed to growing our business with GlobalFoundries over time. Okay. And then as a follow-up, You intend with GlobalFoundries to go to sub-twenty 8 nanometer nodes? GlobalFoundries is Planning to go to the 28 nanometer node and I expect that they will go to the 20 nanometer technology node. But for details obviously you have to ask GlobalFoundries directly. Thank you very much. Thank you, sir. Our next question comes from the line of David Wong with Wells Fargo. Please go ahead. Your line is now open. Thank you. A number of clarifications. I think under the old agreement, the previous agreement, there was a 2 $55,000,000 left to pay on December 30th this year. So the $320,000,000 payment is that instead of Or is it an addition to the outstanding payment left from the old agreement? Yes. The $225,000,000 that you referenced, dollars $100,000,000 of the $225,000,000 was paid early in this quarter and $175,000,000 remains to be paid and that is going to be paid in our Q1, 2013. That is due on December 31, 2013 although we have the option to pay it earlier. As far as the $320,000,000 is concerned That is part of the 3rd amendment of the WSA and the payment profile for that as I indicated on the slide $80,000,000 in Q4, which is this quarter, dollars 40,000,000 in Q2 of 2013 And the remaining amount $200,000,000 in Q1 of 2014. Okay. And do I understand correctly prior to this agreement you had the old agreement, which had some charges and essentially your take or pay requirement, you had one take or pay requirements until the end of this year, but there were no take or pay requirements for 2013. Now these numbers that you've thrown out in terms of your expected Wafer payments in purchases in 2013, is there a take or pay element to this? Do you have a certain minimum you have to take from GlobalFoundries? Yes. The $1,150,000,000 in 2013 is on a take or pay arrangement. And it also you said that there's fixed wafer pricing. Given that you have take or pay arrangement, is your fixed wafer pricing roughly equivalent to normal market prices from GLOBALFOUNDRIES? Or is Lower than market prices. I can't comment on market pricing, but what I can share with you is if you look at the 2012 arrangement That we added $1,500,000,000 overall when we signed the previous amendment and the $1,150,000,000 that we are going in 2013 That's a reduction and you can do the math in terms of that. As far as 2013 is concerned, the wafer prices are fixed. But overall, I think the way you can look at It is the wafer prices between 20122013 are about the same. Okay. That's helpful. My final one When you said that you expect to achieve free cash flow being positive in the second half of twenty thirteen and you also had a And before the amount operating expenses will be reduced, is this essentially the same assumption as the breakeven? I think On your earnings call you had a €1,300,000,000 breakeven number you expected to achieve by Q3 of next year. Is that still Are these numbers all consistent? Or are you referring to even lower expenses and lower breakeven than you had expected as of your last call? Yes. The $450,000,000 expense structure OpEx by Q3 of next year is exactly the same number that I talked about on our earnings call for Q3 When we hosted in October, so that's no change at all. And as far as the $1,300,000,000 you mentioned, we mentioned That number is a revenue number, but that is not a guidance nor a statement of profitability or gross margin in terms of guidance for 2013. We're not providing any guidance for 2013 on this call. I am saying that we will be positive free Cash flow in the second half of twenty thirteen and this amendment that we are signing today helps us achieve that in the second half of twenty thirteen. Excellent. Thank you very much. Thank you. Thank you, sir. Our next question comes from the line of Eric Berger with FBR Capital Markets, your line is now open. Please go ahead. Hi, thanks for taking my question. I just am referring to Your slide 9, where you guide second half twenty thirteen to be Free cash flow positive and I'm just wondering what are the gross margin and or revenue assumptions that you're making in order to give that guidance? I'm not going to give guidance for revenue and our gross margin for 2013. But what I can I'll share with you as I said in my prepared remarks that the impact on gross margin excluding the termination payment of The amendment we've just signed is neutral from a gross margin standpoint. And making assumptions from a business standpoint as to what the revenue would be in 20 13 and what the gross margin would be, which I'm not about to share, I can tell you that we expect to be free cash flow positive in the second half of twenty thirteen. It's just difficult to understand that comment if you don't put any context around it in terms of revenues at all, Especially given the shrinkage in the PC market. My next question Is the $1,100,000,000 of cash that you're expecting to exit Q4, including the 2 quarterly payments that you're expected to make To GlobalFoundries this quarter, I think you said it was on December 31. Does that fall into your calendar Q4? Or is December 31 in your calendar Q1 already? The $1,100,000,000 that we are going to end up with in Q4 includes the $50,000,000 payment I referenced Earlier and the $80,000,000 of the $320,000,000,000 take up pay that we would make in Q4 of this year. We also have some additional Cash related restructuring charges that we are going to have in Q4, it does not include the $175,000,000 payment That is due on December 31, because that falls in our fiscal Q1 of 2013. Great. My last question is Now that this 3rd wafer supply agreement has been reached, should investors expect the company to Start providing gross margin guidance again as of the Q1. We have not decided that. One of the reasons We did not provide gross margin guidance in our Q3 earnings call. It's because of the choppiness in the market. There are headwinds and tailwinds as is typical. But right now trend lines are broken in terms of where the PC market is. So our preference was not to provide gross margin guidance And whether or not we provide gross margin on a go forward standpoint, we'll make that decision by the time we get to our Q4 earnings All which as Ruth mentioned is scheduled for January 22. One last question. How do you assess your ability to raise Cash through debt or other means as we get into 2013? So that's a good question. There's A lot of questions and a lot of press written about AMD's cash situation and liquidity profile. And I can share with you from an overall standpoint, Q4, we end up as I said at the $1,100,000,000 level. We have several liquidity triggers that we could pull. There is a lot of discussion out of the market which we have confirmed that we are in the market to do a sale leaseback transaction For Austin Campus that we think a net is about $150,000,000 to $200,000,000 sometime in Q1. There are other items that we could consider AR factoring. We have as you know all of the debt That AMD has is unsecured. We have secured that that we could go do if we wanted to do such a transaction. We have not monetized any of our IP in any significant manner, so many different options available to us. I think the key message would be that we I have said that we would maintain a minimum of $700,000,000 which given our reduced size of the business And in particular the reduced OpEx, we feel we can run the business at $700,000,000 We would like to target to maintain it at an And the $1,100,000,000 obviously, I would like to be closer to the $1,100,000,000 And just by pulling a couple of the liquidity triggers As I mentioned earlier, we could be at the $1,100,000,000 level for 2013. Thank you. Thank you, sir. Our next question comes from the line of C. J. Muse from Barclays. Please go ahead. J. Muse:] Yeah. Good afternoon. Thank you for taking my question. I guess first question, can you discuss the obligations you have beyond 2013 under the WSA? You're Trying to see whether there's any future cash outflows that we should be thinking about. I think it's hard to predict What the cash outflows would be from a viewpoint of definitive numbers, under the WSA, We are obligated to make all microprocessor products at GlobalFoundries and we will do that. And from that standpoint, how much cash outlay there is for The years after 2013 is dependent upon what our needs are from a wafer supply standpoint. We have also indicated That we are going to go ahead and get together before the second half of twenty thirteen by the June 2013 timeframe To go ahead and try to come to an agreement on what the wafer profile looks like for 2014 and then decide what wafer Volumes and vapor prices we need in that time period, but nothing definitive right now. That's helpful. And as a quick follow-up, you talked about Reaching optimal cash levels exiting 13 12 rather. How should we think about the cash balance Into Q1, Q2 of next year. And at what level would a secured debt offering or some other source of financing It'd be necessary to be at sustain that comfort level on the cash side, sorry. If you start 2013 at the $1,100,000,000 level, which is where we think we'll end up at the end of Q4, then paying the Paying the $175,000,000 that I talked about earlier in Q1 of 2013 reduces that. But even with the sale leaseback transaction that exactly That's more or less the payment that goes out. And I think you can look at it in those terms. If from an operating standpoint, cash goes down a little bit, We have other triggers that we could pull. Our goal is to stay definitely above the $700,000,000 minimum target and then try to get closer to the $1,100,000,000 So at this point, while you mentioned the secured debt transaction and so did I, we're not contemplating at least in the near term doing that kind of a transaction. Okay. Very helpful. Thank you. Thank you, sir. Our next question comes from the line of Vivekar with Bank of America Merrill Lynch. Please go ahead. Your line is open. Hi. This is Ashish Rao for Vivek Arya. So a question, It looks like you're going to purchase $1,200,000,000 worth of chips from GlobalFoundries this year and you're committing to $1,150,000,000 in purchases in In 2013, that's only down 4% year on year. Wondering why wouldn't you set a lower bar for 2013 And purchase commitments more say in the level of say $1,000,000,000 or so which might be more in line with current trends in the PC market? Hard to answer that question because I'm not giving guidance on what our revenue plans are for 2013. And therefore, you have to draw some conclusions from your standpoint as to what you think the market would be. We think while we are in a choppy period for the next, Let's say 2 or 3 quarters, in the back half of twenty thirteen things might improve. And overall from a standpoint of the wafer supply, we are very comfortable with the With the $1,150,000,000 that we have committed for 2013. Okay. The second question I have is the prior wafer supply agreements, it appeared that you were moving More of your microprocessor production towards multiple foundries, but then with this one, it appears that you're moving some production of APUs back toward GlobalFoundries. I mean, am I reading that correctly? And if so, why are you doing that? Without getting to the specifics, I would say you're right. In the last amendment, we had a limited waiver of exclusivity For certain 28 nanometer products and you rightly observed that in this particular amendment, there is no waiver of limited wave of accessory for any of the products, I will just repeat that from an obligation standpoint under the WSA, We make all of our microprocessors at GlobalFoundries. And as part of a prior amendment, We are also committing to make some GPU products at or below 28 nanometer technology node at GlobalFoundries. But it's hard to be more specific in terms of product movement between foundries and I don't want to get too discreet in this call about specific products Let me make at either one of the foundries that we have a relationship with. Okay. Thank you. You're welcome. Thank you, sir. Our next The question comes from the line of Patrick Wong with Evercore Partners. Please go ahead. Your questions please. Hi, guys. This is Mike McGrawley calling in for Patrick. A quick question for you guys. You guys talked about savings $20,000,000 per quarter for R and D from this agreement. Could you tell us what the estimated R and D is supposed to be for 2012? In 2012 along the similar arrangement that we had the R and D expenses were in the range of about $50,000,000 About $50,000,000 in 20.12, but going forward it's about $20,000,000 of savings per quarter? It would have Been about $20,000,000 and what I'm saying is that $20,000,000 that we were expecting to pay in 2013 does not have to be paid as part of A separate agreement that we came to with GlobalFoundries. Okay. Sounds good. And then on the $450,000,000 Target breakeven level, are there any other actions you need to take to reach that level? Or are they all complete now? They are, as I said on the earnings call in For the Q3 earnings call in October, there are some additional actions that we need to take and we are expecting to complete all of those actions in the first half Of 2013. Sounds good. Thanks guys. Thank you. Operator, we'll take 2 more callers please. Yes, ma'am. Thank you. Next question It comes from the line of Kevin Cassidy with Stifel Nicolaus. Please go ahead. Your line is open. Thanks for taking my question. Maybe on the other end of the spectrum, If you need more than $1,150,000,000 worth of the wafers, how often does Get I guess renegotiated or discussed is there another amendment that can be made anytime? If we get to the situation where we need more wafers with business being good, I'm sure our foundry partner will be very Happy to have that discussion with us. Okay. But there's no there's no guarantee of what the price would be? There's no guarantee for the price. Okay. And just one other on the Products that can be manufactured with the planned ARM server products be manufactured at GlobalFoundries under this agreement? Yes. I'm not going to get specific on this call for specific products in terms of where we source those products. Okay. Thank you. Thank you. Thank you. And we have time for one final question. Our final question will come from the line of Steven Ellifie with UBS. Please go ahead. Thank you. First question is just if we look at 2012 and losing share here 3 consecutive quarters, what can you tell us about 2013, especially as we go into the 1st part of 20 13, we have the ramp of Trinity that gives us and later on with Koviri That gives us confidence that you can maintain your minimum cash balance through the year. Yes. I would like to answer that question. But as Ruth said earlier and I'll reiterate, this particular call is more to talk about the 3rd amendment of the WSA. So I'm not going to get into a discussion about the outlook from a revenue or product standpoint in 2013. I apologize for that. And I'll try just one last one here. Just in terms of the amended wafer supply agreement, Can you give us a sense as to why you included the 1st part of 2014? What is special about Including that. I wouldn't read. I mean that's not indicative of anything. It's just part of the overall negotiation from From a viewpoint of volumes, Global Foundries from a production standpoint and us from a wafer supply standpoint that we negotiated, but I wouldn't read too much into the fact that we have some volumes we are taking In Q1 of 2014. Okay. Operator, that concludes our call for this afternoon. We'd like to thank everybody for participating and we'll look forward to Talking to you again on our earnings call on the 22nd January, if not sooner. Thank you. Thank you. Thank you, presenters. And again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and have a wonderful day. Attendees, you may disconnect at this time.