Good day, ladies and gentlemen, and thank you for standing by. My name is Huey, 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 in a listen-only mode. Later, you'll be asked to join us in a 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.
Good morning and welcome to AMD's conference call and webcast to discuss an amendment to our wafer supply agreement with GlobalFoundries. Today's short conference call and webcast is hosted by Thomas Seifert, Senior Vice President and Chief Financial Officer of AMD. Thomas will be accompanied by Devinder Kumar, Senior Vice President and Corporate Controller for the question-and-answer portion of the call. 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 30 days. There will also be a telephone replay available for 10 days. The number is 888-266-2081. Outside of the United States, the number is 703-925-2533. The access code for both is 1570740.
The webcast of this event is a slide and audio event, so you are encouraged to log on to the Investor Relations homepage on amd.com to view the slide presentation that Thomas will be referencing this morning. This slide presentation is also downloadable from the Investor Relations homepage on amd.com. Before we begin today's call, 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. The semiconductor industry is generally volatile, and market conditions are particularly difficult to forecast. We encourage you to review our filings with the SEC, where we discuss the risk factors that could cause actual results to differ materially from our expectations.
You'll find detailed discussions about such risk factors in our most recent SEC filings, AMD's annual report on Form 10-K for the year ended December 31, 2011. Now, with that, I'd like to hand the call over to Thomas. Thomas?
Good morning, everyone, and thank you for joining us on the call. We're here to discuss the key elements of the 2012 amendment to AMD's wafer supply agreement with GlobalFoundries. AMD and GlobalFoundries have made significant progress last year to strengthen our relationship, and the amendment to the wafer supply agreement demonstrates we remain committed as long-term strategic business partners. I'll walk you through some slides outlining the updated and new terms of the amendment, and then we'll open the call for questions. At that point, I'll invite my colleague Devinder Kumar to participate in the discussion. Let's get started and move to slide two. As you review our cautionary statement, I would like to remind everyone that we expect to announce our first fiscal quarter 2012 results on April 19. Therefore, we'll only be discussing today's announcement on this call.
We'll not be discussing other topics such as Q1 progress or today's market and demand conditions. Slide three. To start off, I will quickly review the origin and nature of the wafer supply agreement that was in place prior to today's announcement. I will then define the terms of the 2012 amendment, and last but not least, I'll discuss our expectations regarding the financial impact of the amendment. Slide four. When AMD embarked on its strategy of pursuing a fabless business model through the creation of GlobalFoundries, it was about two fundamental things. First, it was about ensuring that AMD has access to world-class leading-edge semiconductor manufacturing without the obligation to capitalize the capacity on our own. Second, it was about leveraging AMD's 40+ years of semiconductor expertise, opening doors to the entire industry in order to help serve the growing needs for access to leading-edge manufacturing.
As a result, today, AMD is leaner, more nimble, and focused on continuing to achieve consistent profitability, delivering on our strengths of design and innovation. Let me remind you of the wafer supply agreement construct that was in place just prior to the amendment. You'll recall the purpose of the WSA is to define the terms by which AMD purchases products manufactured by GlobalFoundries, an agreement that lasts until 2024. Under the original wafer supply agreement prior to 2011, we have been paying GlobalFoundries for wafers on a cost-plus basis, which included fixed costs on certain GlobalFoundries fabs and trace thin. We were to return to the cost-plus model as of January 2012, originally anticipated to commence this year, whereby AMD's wafer pricing would have been based on the fixed cost of only that capacity attributable to AMD's forecasted demand.
However, to ensure we continue working with GlobalFoundries to develop a pricing strategy that aligns to our business case and is mutually beneficial, we amended the agreement again in 2012, which is what I will walk you through today. Slide five. Let me outline the key elements of the 2012 amendment. First, we negotiated fixed wafer pricing based on a take-away arrangement in 2012 and the pricing framework for 2013. Second, GlobalFoundries waived the additional quarterly payment obligation from the 2011 wafer supply agreement amendment. Third, GlobalFoundries waived the exclusivity arrangement for AMD to manufacture certain 28 nm APU products at GlobalFoundries for a specified period. As a result, AMD agreed to pay GlobalFoundries a cash payment of $425 million over a period of two AMD fiscal years, stretching out to fiscal 2013. AMD transferred its remaining ownership interest in GlobalFoundries to GlobalFoundries and no longer has a GlobalFoundries board seat.
Slide six. How does this amendment impact our financials? In 2011, we paid GlobalFoundries $904 million for wafers, and in 2012, we expect to pay approximately $1.5 billion. We expect to record a one-time GAAP charge in the first quarter of this year of $703 million associated with the exclusivity arrangement for AMD to manufacture certain 28 nm APU products at GlobalFoundries for a specified period. I'll explain what constitutes this charge on the next slide. These terms have already been contemplated in the guidance provided for 2012 at our Financial Analyst Day , and therefore our 2012 gross margin expectations have not changed. Slide seven. The $703 million one-time GAAP charge will be recorded in the cost of sale P&L line item. The charge consists of a cash payment to GlobalFoundries of $425 million. $150 million of this amount is being paid today, March 5.
The balance of the $275 million will be paid in cash over two fiscal years, stretching into 2013 as outlined on slide seven. The remaining portion of the one-time charge is a $278 million non-cash expense for AMD's equity ownership transfer to GlobalFoundries. As this charge was contemplated in time for our earnings announcement on January 24, we recognized that it will not impact our Q1 non-GAAP gross margin guidance set at 45%, and therefore the guidance still stands. Our 2012 guidance, as announced at AMD 's Financial Analyst Day on February 2, 2012, also remains unchanged. We see no further impact to our financial model at this time resulting from the 2012 amendment, and we are pleased to have arrived at this agreement with our partners at GlobalFoundries. Slide eight.
In summary, the amended wafer supply agreement enables AMD to once again achieve a pricing strategy that more closely aligns to our business case. It gives us 28 nm production flexibility to best execute our roadmap and balances our manufacturing supply chain. It demonstrates AMD and GlobalFoundries remain committed as long-term strategic partners. Now, with that, I would like to hand the call back to Ruth for questions and answers. Ruth?
Operator, we'd be happy for you to poll the audience for a question-and-answer session, please.
Yes, ma'am. Ladies and gentlemen, if you would like to ask a question at this time, 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, to queue up for a question, please press star, then one on your touch-tone phone. One moment for questioners to queue. Our first questioner in queue is JoAnne Feeney with Longbow Research. Your line is open. Please go ahead.
Hi, good morning, and congrats on getting this done. I just have a couple of questions. One is, what's the volume minimum, if there is one, for your arrangement with GlobalFoundries? At what level of sales would you have to hit in order for some gross margin upside to come into play, given the fixed wafer pricing that you're into now?
Very, very good question. We are not going to comment on the volume that is behind this agreement. That would reveal too much competitive information, of course. The impact on the gross margin is not primarily a factor of volume. It's more a factor of yield performance since the wafer prices are fixed.
Given what you know so far about progress at 32 nm, do you anticipate upside to yield, or do you feel like you have that pretty well understood at this point and so you're locking in to some degree that gross margin?
We have provided what we think is good gross margin guidance for this quarter and for the remainder of the year. At this point, we have no reason to adjust or correct that guidance. Let me say we have been really pleased with the progress GlobalFoundries and AMD have been making on 32 nm last year, significant progress, and we are happy about the trajectory with which we entered 2012.
Okay, I'll let someone else jump in and get back in the queue if they don't ask all of my other questions. Thanks.
Thank you.
Thank you, ma'am. Our next questioner in queue is David Wong with Wells Fargo. Your line is open. Your questions, please.
Thank you very much. Is there any change to GlobalFoundries' commitment to developing 22 nm technologies suitable for your processes in the future?
No, not at all. The partnership of the two companies on technologies moving forward is unchanged. We have very strong and engaging discussions on the roadmap, and we will provide updates on our roadmap as we proceed. This is not a reflection of disengagement on future notes.
Is there a contractual commitment on GlobalFoundries' part, or are you just saying it's mutually beneficial?
We have a strong desire and also a contractual obligation to work together. Both parties have every intent to move in that direction.
Okay, great. My other question is, which products were you originally planning to do at GlobalFoundries, which you might now make elsewhere with this new arrangement?
We are not disclosing specific products that are covered by this agreement at this point in time.
Perhaps you can let us know this new flexibility. Is the plan to sort of dual-source the same products, or is it that there will be new product families that you might qualify elsewhere now?
At this point in time, it's not about second sourcing.
Okay, great. Thanks very much.
Thank you, sir. Our next questioner in queue is Vivek Arya with Bank of America. Please go ahead. Your line is now open.
Hi, Vivek. Are you on mute? We can't hear you.
Yes, can you hear me now?
Yes, we can hear you now. Thank you.
Okay, sorry. Thomas, you mentioned 28 nm product flexibility. Just so that we are clear, who is the preferred foundry for 28 nm APUs and GPUs? Is it GlobalFoundries? Is it TSMC? Where I'm coming from is that recently NVIDIA mentioned very high costs and limited availability of 28 nm wafers. How do you overcome those industry constraints?
Very good question. Starting with your last question first, I think that is one important reason why we think we need a balanced manufacturing partnership strategy. We will have 28 nm APU products at both foundries, so we will have 28 nm APU products at GlobalFoundries. We believe we have put in place a mutually beneficial agreement with GlobalFoundries that will allow us to balance our manufacturing partnership and risk. At the same time, it will allow GlobalFoundries to further diversify their customer footprint.
If you look at the 28 nm availability, are you satisfied with the availability of what the industry is able to provide today?
We are ramping our capacity at 28 nm for graphic products, if that is what you refer to at this point in time, and we are satisfying customer demand here.
Okay. Just lastly, you mentioned that in 2013 you will establish a framework for wafer pricing. Is that with GlobalFoundries? Is that with others? How should we look beyond 2012 for what wafer pricing would be?
Yes, very good question. The statements we make today are solely with respect to our relationship to GlobalFoundries. The important thing is that we have put in a framework today for wafer pricing in 2013, and we'll talk about this when we think it's the right time to talk about 2013.
Great. Thank you.
Thank you. Our next questioner in queue is Romit Shah of Nomura. Please go ahead. Your line is open.
Yeah, hi, Thomas. I'm just trying to understand what you guys are actually getting because you're paying $700 million, which is about 13% of your market cap. You highlighted two things. One is you're going from a good-bye agreement in 2011 to take or pay in 2012, which I think would be less favorable for you. It sounds like you're also getting some flexibility. Looking at your 8-K, it sounds like it's just for specific products for a specific amount of time.
Yeah, I think that there are a couple of good questions. I think the main benefits are the following, and as I summarized them on the call. We moved to a fixed wafer price agreement for this year. I think that is an important statement for both GlobalFoundries and us because it tells you that our partnership has matured. While a die pricing agreement allows you to protect the downside, a fixed wafer pricing agreement allows you to attack upside. We both believe that yields have progressed to a degree and maturity that we can make this transition. I think that is a very important statement in terms of benefits for both parties. The second benefit, I think, is that the original payments of $420 million that AMD would have been obligated to pay this year have been waived.
I think it's also important to point out the flexibility we have on the specified products on 28 nm because this, as I said, allows us to better balance our manufacturing strategy. It also allows, as I said, GlobalFoundries to address a more diversified customer base at this point in time. When you look at the $700 million, I think it's important to point out that only a part of it is cash, $425 million. The cash impact is not in one year. It's stretched over two fiscal years. If you bring all those factors together, I think it's a very fair, very balanced agreement for both parties. I think it allows us both to move forward in a committed way.
Thomas, just to clarify, the successor to Llano, that your mainstream 28 nm part will be done at another foundry, but then after that, you're going to have to come back to GlobalFoundries exclusively?
Let me correct some of the things you said. The successor product to Llano is the product that we call Trinity. It's manufactured on the 32 nm node, and it's manufactured at GlobalFoundries. We said in our call that we are excited about Trinity because it takes Llano performance to the next level. It pretty much allows us to keep the same performance on Llano in half the power envelope. It's the premier product for the ultra-thin market. We have designed wind momentum at this point and at this time that is stronger than what we had on Llano last year. That's a very important statement I would like to make. That product is manufactured at GlobalFoundries and takes all the learning on the 32 nm node that we and GlobalFoundries had last year into the launch of this product.
Okay, so that's Trinity. At 28 nm, your mainstream part at 28 nm, that's going to go to another foundry supplier?
No, that is not really true. If you look at the roadmaps that we have presented at Financial Analyst Day, there is a 28 nm successor product to Trinity on the roadmap that we will ramp next year, and that is also manufactured at GlobalFoundries.
Operator, we'll take next question, please.
Okay, our next questioner in queue is Stacy Rasgon with Sanford Bernstein. Please go ahead. Your line is open.
Hi guys, thanks for taking my questions. Firstly, you've just agreed to pay a fairly sizable amount to get out, at least for a time, from underneath 28 nm exclusivity. I recognize you were going to make that payment anyway for a different purpose under the old agreement. Even so, what is this payment now in return for that exclusivity? What does that say about your confidence in GlobalFoundries' ability to actually ramp their 28 nm process in a timely fashion?
I think it's a good statement. As we said, we are really happy with the progress both parties have been making and the trajectory with which we enter into this year on the technology nodes. I think the agreement is not less, but also not more than putting really a mutually beneficial agreement in place that allows us to better balance risk moving forward, but also gives GlobalFoundries the ability to further diversify their customer base. This is it.
Okay, can you give us a feeling for a specified period of time? How long of a specified period of time is this exclusivity agreement waived?
At this point in time, we cannot be more specific than that because it covers certain arrangements we have with customers. We feel comfortable about the agreement with respect to the products and the timelines we have put in place.
Got it. Quickly around the cash, you just agreed to buy SeaMicro the other day. You've got $250 million of this coming this year. You have $500 million debt or so that comes due in the middle of the year. What are your plans for liquidity? Where do you see your liquidity by the end of the year? Are you still going to pay that tranche of debt down, or do you think you're going to refinance it now?
That's a very good question. You know, when we made the statements we'd made on Financial Analyst Day, we knew in part what was coming towards us. Just let me remind you of the quick major items, how the math is going forward. We entered the year with about close to $2 billion of cash. If you look at last year's free cash flow performance of $500 million- $600 million, and you just assume for a second that we are going to be in a similar position this year, you end up at $2.6 billion. You subtract our obligations under the current wafer supply agreement, the SeaMicro acquisition, and the debt that is going to mature in the summer. We still should be in a comfortable range of the $1.5 billion that we guided for as the optimal cash balance for AMD.
Got it. Thank you, guys.
Thank you. Next questioner in queue is Glen Yeung with Citi. Your line is open. Please go ahead.
Thanks. Congratulations on the deal. Hey Thomas, it sounds like $1.5 billion is what you intend to pay to GlobalFoundries this year, and that's at the low end of what I think you intended to pay them originally. Should we assume that the wafer amount within that is approximately the same?
You cannot make any deductions with respect to the wafer volume behind that deal because the mix has changed in terms of what we expect, and also yield performance has significantly changed to the better.
Changed to the better. Okay, thanks. The second question is, now that you are on a fixed wafer situation with GlobalFoundries, what in the agreement have you put in to incentivize GlobalFoundries to continue to work on yield?
I think the benefits in terms of working on yield are so overwhelming in terms of having a more stress-free environment on both sides, also freeing up capacity and management attention on the foundry side to get other work done and diversify the customer footprint and move more capacity through the factory and wafer through the factory. I think with the arrangements we have today and the level the partnership has developed, I think we feel both that we have the right ingredients in place to move forward and make this a successful year.
Can I just have one last question, which is, is there a scenario under which yields could be so much better than you think that you actually don't need all the wafers that you're obligated to purchase from them?
We've crossed that bridge when we get there.
Okay, fair enough.
Thank you. Next questioner in queue is John Pitzer with Credit Suisse. Please go ahead. Your line is open.
Good morning, guys. Congratulations. Thanks for letting me ask the question. Thomas , just out of curiosity, if you go back and look at the wafer supply agreement you had in place with GlobalFoundries at 45 nm and at 32 nm, do you think having more flexibility in other foundries would have led to a better economic outcome for you guys, or was the most favored nation status you enjoyed with GlobalFoundries giving you kind of preferential pricing? What you're doing today is more about kind of access to yield at other foundries going forward.
You know, it's always easy to play the Monday morning quarterback and comment what would have been different. I think we both have to realize that moving from an integrated manufacturer into two separate companies and both pursuing a new strategy is not an easy transition. At the same time, we were ramping on our side challenging products, and on the GlobalFoundries side, we were ramping challenging technology nodes. I think I said it on one of my earlier calls this year that partnerships are defined that you work together in good times and also in difficult times. I think the work and effort and focus we've put in during those hard times are benefiting both of us now moving forward. Now the partnership has matured, and it's time for both of us to continue to work in our respective strategic directions.
One for sure is for GlobalFoundries to be in a position to further diversify their customer base and us becoming larger and finding a good balance to our manufacturing partnership and risks. I think this agreement is just a reflection of that.
Thomas, as a follow-up, it was my understanding that SOI was going to be off the roadmap for you guys after 32 nm anyhow. Is that the case? As we think about 28 nm either at GlobalFoundries or at another partner, what kind of milestones or timelines should we be thinking about as far as first silicon and proof of concept?
With respect to SOI, we made statements that on 28 nm, all of our products will be on bulk, and that is certainly true. I'm not sure what milestones you refer to, but the progress we've been making on our technology roadmap and product roadmap, as disclosed on our Financial A nalyst Day, is looking very promising. We make good progress according to those milestones so far.
Great, thanks guys. Congratulations.
Thank you. Our next questioner in queue is Craig Ber ger with FBR Capital Markets. Please go ahead.
Hey guys, thanks for taking my question. Can you help us understand how much production at 28 nm might be at GlobalFoundries versus others in 12 nm or 13 nm?
We are not disclosing the exact split of our capacity and our sourcing. We have not done this in the past, and we will not provide guidance on such a detail moving forward.
Can you help us understand what the cost per good die is under the new agreement versus the old agreement, or how costs might improve in 2012 versus 2011, as we keep in mind that yields are also improving?
Yeah, we will not provide guidance on cost information or product level.
Can you help us understand what the gross margin implications are if GlobalFoundries tracks as expected with yield improvements, and what upside yields or downside yields might mean to gross margins?
We have a plan in place with the foundries, and if they execute the plan, this will allow us to get to the guidance we have put forward for this quarter and for the remainder of the year.
Can you just remind us what revenue assumptions are baked into that gross margin guidance?
We guided for a market to grow at about 5% at the beginning of the year at our Financial Analyst Day, and we thought in the CPU segment, we were going to outgrow the market.
Great, thank you.
Operator, we'll take two more questions, please.
Yes, ma'am. Next questioner in queue is James Covello with Goldman Sachs. Please go ahead. Your line is open.
Great, good morning. Thanks so much for taking the question. Thomas, could you talk about the pros and cons of maybe using two foundries going forward versus more than two foundries going forward? In other words, could you see yourself taking a strategy of using more than two foundries going forward, and what would drive you to do that? Thank you.
We are happy with where we are at this point in terms of balancing risk. Adding more partners is a significant complexity, something you would entertain maybe if you are bigger, but at the scale we are today, we are happy with the arrangements we have in place.
Okay, and then if I could ask as a follow-up, it's a little bit of a backward-looking question, which isn't always the most helpful, but I'm curious as to the perspective, particularly maybe on the board level. At the time of the original announcement with GlobalFoundries, one of the pitches to Wall Street was that your equity stake in GlobalFoundries could potentially be very valuable down the road. Of course, now that hasn't played out that way. Was there any hesitation on the part of the board to give up the equity stake given what the original pitch had been to the investment community on that front? Thanks.
Good question, but we all have to realize that the business model has developed over the last two years in terms of plans and intents and progress. As I said, we found it to be a very fair agreement for both parties with respect to the gifts and takes that were put on the table, and we are happy with the outcome of the negotiations, I think, as GlobalFoundries is.
Okay, thanks so much. Good luck.
Thank you.
Thank you, sir. We have time for one final question. Our final question comes from Doug Freedman with RBC Capital Markets. Please go ahead.
Great, thanks for taking my question. Thomas, given that there's now really a complete separation between GlobalFoundries and AMD, is there any impact on your operating lines going forward? Have you been sort of assisting on the R&D line and any SG&A impacts that we should expect?
As I said before, it's a good question. We have, once at our Financial Analyst Day, when we provided guidance on our financial model for this year, included the impact pretty much of this agreement. At this point in time, our commitment towards operating expense guidance, be it on the R&D or on the SG&A side, is unchanged for the remainder of the year.
Okay, can you help us dial in sort of what the quarterly impact has been in regards to consolidating your equity ownership stake of GlobalFoundries? I believe they've been running losses. What should we remove there from the non-operating income?
There was already a complete separation before we entered into this agreement, and there will be no further impact moving forward other than the charge that we have outlined. We already moved to the cost of the accounting method in 2011 and eliminated those influences.
Going back on the gross margin question, would you say that this agreement has brought in more or less gross margin beta than you would have seen otherwise, meaning volatility or variation?
That's a very good question. You know, when you are on a die pricing agreement in general, you protect the downside and you reduce volatility. With a wafer price agreement, with a fixed wafer price agreement, you have opportunity on upside if the yields mature in the right direction. If you're working together with GlobalFoundries, you continue to have the progress we started to see in the third and fourth quarter of last year, that would offer some upside. I think the beta is higher, and it's always, it's now down to a confidence call on where yields are.
Great, thank you.
You're most welcome.
We'd like to thank everybody for joining the call this morning. Operator, that concludes our call.
Thank you. Ladies and gentlemen, once again, this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.