Good day, ladies and gentlemen. Thank you for standing by. My name is Huey. 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 speaker's 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 Cotter, Vice President of Investor Relations for AMD. Please go ahead.
Thank you, Huey. Good afternoon. Welcome to AMD's conference call and webcast to discuss the third amendment to our wafer supply agreement, or 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 specified otherwise. I'd like to remind you that this is a live call. A replay will be available later today via webcast on ir.amd.com for 90 days. There will also be a telephone replay available for 10 days. The number is 888-266-2081. Outside of the U.S., the number is 703-925-2533. The access code for both is 1600023.
The webcast of this event is a slide and audio event. You're encouraged to log on to the investor relations homepage on amd.com to view the slide presentation 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 the 11th, next Tuesday. Our fourth quarter quiet time will begin at the close of business on Friday, December 14th. In addition, I'd like to advise you that we've changed the date of our fiscal fourth quarter and 2012 earnings announcement to Tuesday, January 22nd, 2013. Lastly, we will only be discussing today's announcement on this call. We will not be talking about other topics such as fourth quarter progress or today's market and demand conditions.
Before we begin the call today, I'd like to caution everyone that we will be making forward-looking statements about management's expectations. Investors are cautioned that those statements are based on current beliefs, assumptions, 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. In particular, AMD's quarterly report on Form 10-Q for the quarter ended September 29th, 2012. With that, I'd like to hand the call over to Devinder as we transition to the second slide 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 third 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 third amendment, then we'll open the call up for questions. Let's move to slide three. 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 third quarter earnings call in October. We'll go to the terms of the amendment and the financial modeling impact of those terms. Let's go to slide four.
On our third quarter 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%-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-based businesses. In addition, we have targeted to lower our expense structure approximately 25% by the third quarter of 2013 as compared to the first quarter 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 five. Today, we are announcing the third 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 third amendment of the wafer supply agreement establish wafer volumes and fixed wafer pricing for wafer purchases between the fourth quarter of 2012, which is this quarter, and the first quarter of 2014. Let's go to slide six. In response to weak macro and PC industry dynamics which we discussed on our third quarter earnings call, we have decreased our wafer purchase commitments for the fourth quarter to $115 million.
The second amendment to the WSA was a take-or-pay arrangement for $1.5 billion, and we had a remaining obligation for $500 million in the fourth quarter of 2012 to GlobalFoundries for wafer purchases. Our new revised lower purchase wafer commitment from $500 million to $115 million for the fourth quarter requires AMD to make a termination payment of $320 million, the details of which I will discuss shortly. We expect to pay GlobalFoundries a total of $1.1 billion for wafers in 2012. This, coupled with a termination payment, results in a $65 million cash savings versus prior expectations for wafer payments to GlobalFoundries. The 2013 amendment also outlines that AMD will purchase, at fixed wafer prices, $1.15 billion worth of wafers in 2013. We also committed to purchasing $250 million worth of wafers in the first quarter of 2014.
Separately, as AMD moves to standard 28 nanometer process technology at GlobalFoundries, we are significantly reducing reimbursement to GlobalFoundries for future R&D costs. We anticipate these savings to be approximately $20 million per quarter over the next several years, which also helps us drive towards our operating expense target of $450 million by the third quarter of 2013. Slide seven, please. Let me quickly touch on the termination fee I mentioned earlier. As the second amendment had a take-or-pay clause, our reduced fourth quarter wafer purchase commitments resulted in a $320 million payment. The $115 million in wafer purchase in the fourth quarter and the $320 million termination fee add up to $435 million, which is a savings of approximately $65 million this quarter, versus the approximately $500 million previously anticipated to be paid to GlobalFoundries in Q4.
As we see the PC market continuing to be under pressure for the next several quarters, buying additional wafers in the fourth 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 quarters from the fourth quarter of 2012 to the first quarter of 2014. We will pay $80 million this quarter, $40 million in the second quarter of 2013, and the rest will be paid in the first quarter of 2014. From an accounting standpoint, we currently expect to record a one-time charge of $165 million in the fourth 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&L and to the balance sheet. The gross margin impact related to this charge is expected to be $215 million, made up of the Q4 one-time charge of $165 million, plus a $50 million COGS expense. $110 million of the $320 million termination payment is capitalized in inventory this quarter and expensed over Q4 2012 and Q1 2013. The $50 million is what we expect to expense in the current quarter. Let's move on to slide eight. Liquidity and cash management remain a key focus for AMD. The third amendment to the WSA supports that strategy by spreading cash payments to GlobalFoundries out through Q1 of 2014.
The table on this slide lists 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 fourth quarter, we expect our cash balance to be in the optimal zone of approximately $1.1 billion at the end of the fourth quarter of 2012. Let's move to slide nine. As discussed at our third-quarter earnings announcement, we expect operating expenses to be approximately $450 million by the third quarter 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 fourth quarter 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 2013.
In addition, as mentioned earlier, we expect our cash balance to be in the optimal zone of $1.1 billion as of the end of this quarter. Next slide, please. 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 third 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 commitments with our business expectations. Thank you for your participation on this call.
I will now turn the call back to Ruth to kick off the question-and-answer session. Thank you. Ruth?
Thanks, Devinder. Huey, could you open up the lines, please, we'd be happy to take some questions.
Sure thing. Ladies and gentlemen, at this time, if you would like to ask a question, please press star then one on your touch tone phone. If your question has been answered or wish to remove yourself from the queue, you may press the pound key. Again, if you would like to ask a question at this time, please press star then one on your touch tone phone. One moment for questioners in the queue. Our first question comes from Hans Mosesmann with Raymond James. Please go ahead. Your line is open.
Thanks very much for the opportunity. A question regarding your other foundry. Is there going to be a shift in your wafer purchases there? If so, are they going to be GPUs, APUs, CPUs? Any detail there would be very helpful. Thanks.
Thank you for the question. I don't think I'm going to get into the details of the mix of business between the two foundries, I will say very specifically that we are very fortunate to be working with two foundries. We have commitments to GlobalFoundries under the WSA, which we maintain and keep, are committed to growing our business with GlobalFoundries over time.
Okay. As a follow-up, do you intend with GlobalFoundries to go to sub 28 nanometer nodes?
GlobalFoundries is planning to go to the 28 nanometer node, I expect that they will go to the 20 nanometer technology node. 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 $225 million left to pay on December the 30th of this year. The $320 million payment, is that instead of or is it an addition to the outstanding payment left from the old agreement?
The $225 that you referenced, $50 million of the $225 was paid early in this quarter, and $175 remains to be paid, and that is going to be paid in our Q1 2013. That is due on December 31st, 2013, although we have the option to pay it earlier. As far as the $320 million is concerned, that is part of the third amendment of the WSA, and the payment profile for that, as I indicated on the slide, is $80 million in Q4, which is this quarter, $40 million in Q2 of 2013, and the remaining amount, $200 million in Q1 of 2014.
Okay. Do I understand correctly, prior to this agreement, you had the old agreement, which had some charges, and essentially, your take-or-pay requirements, you had take-or-pay requirements until the end of this year, but there were no take-or-pay requirements for 2013. These numbers that you've thrown out in terms of your expected wafer 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 $1.15 billion in 2013 is on a take-or-pay arrangement.
Also, you said that there's fixed wafer pricing. Given that you have a take-or-pay arrangement, is your fixed wafer pricing roughly equivalent to normal market prices from GlobalFoundries, or is it lower than market prices?
I can't comment on market pricing. What I can share with you is if you look at the 2012 arrangement that we had at $1.5 billion overall when we signed the previous amendment and the $1.15 billion 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. Overall, I think the way you can look at it is the wafer prices between 2012 and 2013 are about the same.
Okay, that's helpful. My final one is when you said that you expect to achieve free cash flow being positive in the second half of 2013, and you also had a number for the amount operating expenses will be reduced. Is this essentially the same assumption as the break-even? I think on your earnings call, you had a $1.3 billion break-even number you expected to achieve by third quarter of next year. Are these numbers all consistent, or are you referring to even lower expenses and lower break-even than you had expected as of your last call?
Yeah, the $450 million 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. That's no change at all. As far as the $1.3 billion you mentioned, we've mentioned that number as 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 2013, and this amendment that we are signing today helps us achieve that in the second half of 2013.
Excellent. Thank you very much.
Thank you.
Thank you, sir. Our next question comes from the line of Craig Berger with FBR Capital Markets. Your line is now open. Please go ahead.
Hi there. Thanks for taking my question. I am referring to your slide nine, where you guide second half 2013 to be free cash flow positive. I am 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. What I can share with you is, as I said in my prepared remarks, that the impact on gross margin, excluding the termination payment of the amendment we signed, is neutral from a gross margin standpoint. Making assumptions from a business standpoint as to what the revenue would be in 2013 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 2013.
It is 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 $1.1 billion of cash that you're expecting to exit Q4, including the two quarterly payments that you're expected to make to GlobalFoundries this quarter, I think you said it was on December 31st. Does that fall into your calendar Q4, or is December 31st in your calendar Q1 already?
The $1.1 billion that we are going to end up with in Q4 includes the $50 million payment I referenced earlier and the $80 million of the $320 million take-or-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 million payment that is due on December 31st, because that falls in our fiscal Q1 of 2013.
Great. My last question is, now that this third wafer supply agreement has been reached, should investors expect the company to start providing gross margin guidance again as of the first quarter?
We have not decided that. One of the reasons we did not provide gross margin guidance in our Q3 earnings call is because of the choppiness in the market. There are headwinds and tailwinds, as is typical. Right now, trend lines are broken in terms of where the PC market is. Our preference was not to provide gross margin guidance. 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 call, which, as Ruth mentioned, is scheduled for January 22nd.
One last question. How do you assess your ability to raise cash through debt or other means as we get into 2013?
That's a good question. There's been a lot of questions and a lot of press written about AMD's cash situation and liquidity profile. I can share with you from an overall standpoint, Q4, we end up, as I said, at the $1.1 billion level. We have several liquidity triggers that we could pull. There is a lot of discussion out in the market, which we have confirmed, that we are in the market to do a sale-leaseback transaction for our Austin campus. That, we think, can net us about $150 million-$200 million 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 debt 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. Many different options available to us. I think the key message would be that we have said that we would maintain a minimum of $700 million, which, given our reduced size of the business and in particular the reduced OpEx, we feel we can run the business at $700 million. We would like to target to maintain it at an optimal level of $1.1 billion, and I think you can see our cash balances somewhere between the minimum $700 million and the $1.1 billion. Obviously, I would like to be closer to the $1.1 billion, and just by pulling a couple of the liquidity triggers that I mentioned earlier, we could be at the $1.1 billion level for 2013.
Thank you.
Thank you, sir. Our next question comes from the line of C.J. Muse with Barclays. Please go ahead.
Good afternoon. Thank you for taking my question. First question, can you discuss the obligations you have beyond 2013 under the WSA? Here trying to see whether there's any future cash outflows that we should be thinking about.
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. 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 2013, by the June 2013 timeframe, to go ahead and try to come to an agreement on what the wafer profile looks like for 2014, then decide what wafer volumes and wafer prices we need in that time period. Nothing definitive right now.
That's helpful. As a quick follow-up, you talked about reaching optimal cash levels exiting 2012 rather. How should we think about the cash balance into Q1, Q2 of next year? At what level would a secured debt offering or some other source of financing be necessary to sustain that comfort level on the cash side? Sorry.
If you start 2013 at the $1.1 billion level, which is where we think we'll end up at the end of Q4, paying the $175 million that I talked about earlier in Q1 of 2013 reduces that. Even with the sale-leaseback transaction, that exactly offsets more or less the payment that goes out. 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 million minimum target and then try to get closer to the $1.1 billion. 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 Vivek with Bank of America Merrill Lynch. Please go ahead. Your line is open.
Hi, this is Ashish Rao for Vivek Arya. Question, it looks like you're going to purchase $1.2 billion worth of chips from GlobalFoundries this year, and you're committing to $1.15 billion in purchases in 2013. That's only down 4% year-on-year. Wondering why wouldn't you set a lower bar for 2013 purchase commitments more, say in the level of, say, $1 billion 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 two or three quarters, in the back half of 2013, things might improve. Overall, from a standpoint of the wafer supply, we are very comfortable with the $1.15 billion 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. With this one, it appears that you're moving some production of APUs back towards GlobalFoundries. 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 nm products. You rightly observed that in this particular amendment, there is no limited waiver of exclusivity 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 also committing to make some GPU products at or below 28 nm technology node at GlobalFoundries. 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 that we make at either one of the foundries that we have a relationship with.
Okay. Thank you.
You're welcome.
Thank you, sir. Our next question comes from the line of Patrick Wong with Evercore Partners. Please go ahead. Your questions please.
Hi, guys. This is Mike calling in for Patrick. Quick question for you guys. You guys talked about savings of $20 million per quarter for R&D from this agreement. Could you tell us what the estimated R&D is supposed to be for 2012?
In 2012, along the similar arrangement that we had, the R&D expenses were in the range of about $50 million.
About $50 million in 2012, going forward it's about $20 million of savings per quarter?
It would have been about $20 million, and what I'm saying is that $20 million 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. Then on the $450 million target breakeven level, are there any other actions you need to take to reach that level, or are they all complete now?
There are, as I said on the earnings call 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 two more callers, please.
Yes, ma'am.
Thank you.
Next questioner 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 $1.15 billion worth of the wafers, how often does that get 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.
That will be a good thing.
There's no guarantee of what the price would be?
There is no guarantee for the price.
Okay. just one other on the products that can be manufactured, would the planned ARM server products be manufactured at GlobalFoundries under this agreement?
Yeah. 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. We have time for one final question. Our final question will come from the line of Steven Eliscu with UBS. Please go ahead.
Thank you. First question is just, if we look at 2012 and losing share here three consecutive quarters, what can you tell us about 2013, especially as we go into the first part of 2013 with the ramp of Trinity that gives us, and later on with Kaveri, that gives us confidence that you can maintain your minimum cash balance through the year?
Yeah, as Ruth said earlier, I'll reiterate, this particular call is more to talk about the third amendment to the WSA. I'm not going to get into a discussion about the outlook from a revenue or product standpoint in 2013. I apologize for that.
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 first part of 2014? What is special about including that?
That's not indicative of anything. It's just part of the overall negotiation from a viewpoint of volumes of GlobalFoundries from a production standpoint and us from a wafer supply standpoint that we negotiated. I wouldn't read too much into the fact that we have some volumes we are taking in Q1 of 2014.
Yeah.
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 of January, if not sooner. Thank you.
Thank you.
Thank you, presenters. 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.