Greetings, and welcome to AMD's sixth amendment to the WSA with GLOBALFOUNDRIES conference call. At this time, all participants are in listen-only mode, and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Ms. Ruth Cotter, Senior Vice President in Human Resources, Corporate Communications, and Investor Relations. Thank you, Ms. Cotter. You may begin.
Thank you, and welcome to the conference call. By now, you should have had the opportunity to review a copy of the press release and slides issued early this afternoon. If you've not reviewed these documents, they can be found on AMD's website at ir.amd.com. Participants on today's conference call are Lisa Su, our President and Chief Executive Officer, and Devinder Kumar, our Senior Vice President, Chief Financial Officer, and Treasurer. This is a live call and will be replayed via webcast on amd.com. Today's discussion contains forward-looking statements based on the environment as we currently see it. Those statements are based on current beliefs, assumptions, and expectations, speak only as of the current date, and as such, involve risks and uncertainties that could cause actual results to differ materially from our current expectations. Please refer to the cautionary statements in today's press release for more information.
You will 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 June 25th, 2016. This call is expressly to address today's WSA announcement, and we will not be discussing the current quarter or any near-term financial guidance. With that, I'd like to turn the call over to Lisa. Lisa?
Thank you, Ruth, and good afternoon to all those listening in today. Over the last 18 months, we have been diligently executing our strategic plan to improve our financial performance by building great products, strengthening our customer relationships, and simplifying our business. In the past six months alone, we've released our game-changing Polaris architecture, gained eight points of discrete graphics share in the first half of the year, announced a new joint venture and IP licensing transaction targeting the large Chinese server market, completed our ATMP joint venture transaction, and returned to non-GAAP operating profitability in the second quarter. Although we have more work to do, I am pleased with the initial results and the progress we have made. We are clearly executing the right long-term strategy for AMD.
Today, we are announcing another important step in our strategic plan, which strengthens our ability to build great products and improves the predictability of our long-term financial model. I am pleased to share that we have signed the sixth amendment to our wafer supply agreement, or WSA, with GLOBALFOUNDRIES. This five-year comprehensive amendment addresses strategic technology collaboration, product sourcing flexibility, and business model alignment with GLOBALFOUNDRIES through 2020. GLOBALFOUNDRIES is our strategic manufacturing partner, and its Fab 8 in Malta, New York, plays a significant role in providing leading-edge 14-nanometer capacity for our graphics and processor products, including the recently launched Polaris GPUs and our upcoming Zen-based processors. With today's WSA amendment, we are further strengthening our relationship with GLOBALFOUNDRIES by combining a framework for continued access to leading-edge technology with greater operational flexibility and financial predictability in our manufacturing model.
The key elements of the sixth amendment include establishing a comprehensive framework for technology collaboration between AMD and GLOBALFOUNDRIES for the 7-nanometer technology node, building on the success of the 14-nanometer node. Providing AMD with important flexibility to source foundry services for certain products with another foundry across the 14-nanometer and 7-nanometer technology nodes. Setting a new operational framework with GLOBALFOUNDRIES over the five-year term that includes a methodology for long-term pricing and annual wafer purchase targets that are based on our current expectations of business and market requirements, thereby helping to provide better financial and operational predictability for both companies. As part of the consideration for this amendment, we will make a cash payment to GLOBALFOUNDRIES and issue a warrant to a Mubadala-owned company to purchase shares of our stock. Devinder will provide additional details on the financial terms later on in this call.
AMD has made strong progress across the company over the past 18 months, and we remain focused on the ongoing ramps of our semi-custom SoCs, Polaris GPUs, and seventh-generation APUs, all of which are going very well. We are also making excellent progress executing to our roadmap of high-performance products, including Zen and our next-generation Vega GPU architecture, which we believe can drive long-term growth in 2017 and beyond. With today's announcement, we are taking the next steps required to make sure that we have the right technology and manufacturing framework in place to support our products and our business through 2020. This multi-year amendment creates a stronger foundation for AMD as we reaffirm GLOBALFOUNDRIES' strategic importance as our manufacturing partner while putting in place a manufacturing strategy with the flexibility necessary to develop
Multiple generations of great products for years to come. Now I'd like to turn the call over to Devinder to provide some additional color on the financial aspects of today's announcement. Devinder?
Thank you, Lisa, and good afternoon, everyone. I'd like to take a few minutes to walk you through a few of the key financial elements of today's announcement before we break into some Q&A. As a reminder, the WSA has been in place since 2009 and runs through 2024. Having been personally involved with multiple annual amendments, I cannot stress enough the importance of putting in place a five-year amendment that aligns with our long-term product and financial goals. As Lisa shared, the amendment has been designed to provide AMD with both enhanced manufacturing flexibility and greater financial predictability by establishing a five-year operational framework with GLOBALFOUNDRIES that is in line with AMD's long-term target financial model. The key financial and operational elements of the sixth amendment of the WSA include fixed wafer prices for 2016 and a clear framework for establishing annual wafer pricing from 2017 to 2020.
Annual wafer purchase targets, which increase annually from 2016 through 2020, aligned to current business expectations. The flexibility to manufacture certain products at another foundry. A framework to address changes in annual demand. If an annual wafer purchase target is not met, we expect to pay GLOBALFOUNDRIES a portion of the difference between our actual wafer purchases and the target for that year. In consideration of the flexibility to manufacture certain products at another foundry and changes to the operational model, we agreed to the following financial terms. We will pay GLOBALFOUNDRIES a total of $100 million in quarterly installments of $25 million over the next four quarters, beginning in the fourth quarter of 2016 through the third quarter of 2017. We will issue a warrant to a wholly-owned subsidiary of Mubadala to purchase 75 million shares of AMD stock at $5.98 per share by February 2020.
The warrant can only be exercised if Mubadala's overall ownership of AMD stock does not exceed 19.9% at any given time. Starting in 2017, we will make payments to GLOBALFOUNDRIES based on the volume of certain wafers purchased from another foundry supplier. These payments will be accounted for in our quarterly wafer purchases from GLOBALFOUNDRIES. As a result, in the third quarter of 2016, we expect to record a one-time charge of approximately $335 million, consisting of the $100 million cash payment and a non-cash charge of approximately $235 million attributed to the issuance of the warrant. In 2016, we expect overall wafer purchases of approximately 650 million from GLOBALFOUNDRIES. This consists of approximately 495 million of wafer purchases to be taken under the sixth amendment of the 2016 WSA, and 155 million of wafer purchases taken earlier this year under the fifth amendment of the WSA.
Today's announcement demonstrates that the long-term strategic partnership between AMD and GLOBALFOUNDRIES continues to be mutually beneficial for both companies. The terms of the sixth amendment to the WSA provide both AMD and GLOBALFOUNDRIES with greater financial predictability and support AMD's long-term target financial model. With that, I'll turn it back to Ruth. Ruth?
Thank you, Devinder. Operator, if you could poll the audience, please, for a question and answer session.
Sure thing. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line has entered the question queue, and you may press star two if you'd like to remove your question from the queue. As a reminder, for any participant that is using speaker equipment, it might be necessary that you pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first question comes from the line of Vivek Arya from Bank of America Merrill Lynch. Please proceed with your question.
Thanks for taking my question. Sort of had two parts, both related to the accounting treatment of this. First is, how should we look at the diluted share count given the warrant? Do we need to make any changes from Q3 onwards? More importantly, why isn't this a part of your ongoing OpEx? Because it's the sixth time that it's being done, so it's obviously a recurring part of supporting your internal efforts. Why is this a one-time charge, and why isn't it being treated as an ongoing part of OpEx? Thank you.
I think two parts of the question. If you're asking about the first part on the dilution for EPS purposes, as you probably know, if you're doing a calculation for EPS on a diluted basis, you obviously include the shares if the warrants are in the money and you have net income and it's dilutive, then the basic EPS is the basic EPS, and the diluted would include that portion. In the limit or in the max, I guess, if you put it that way, there's 75 million shares that could be issued under the warrant that was issued to Mubadala. As far as the second portion is concerned, Vivek, from an accounting standpoint, it is a one-time charge, the cash portion of $100 million and the value of the warrants at $235 million.
You are right that there have been several amendments to the WSA, but this particular amendment is a five-year amendment overall and very different from that standpoint compared to the prior amendments that we have done.
I understand the amendment part, Devinder. My question is that you obviously need to work with GLOBALFOUNDRIES to make products and to ensure their success. If you were owning these fabs, this would be part of your ongoing OpEx. Just because you're dealing with a supplier, why isn't it a cost of doing business and hence a part of OpEx? I'm just trying to understand the accounting treatment for this. Why is it one time?
Yeah, I think in the end, it is a cost of doing business. There's $100 million of cash to be paid, starting Q4 of 2016, through the first three quarters of 2017. The accounting is the accounting, and the accounting from our standpoint, the way the accounting dictates, is a one-time charge in Q3 2016.
Thank you.
Our next question comes from the line of Mr. Matt Ramsay from Canaccord Genuity. Please proceed with your question.
Thank you very much. Good afternoon. Lisa, I noticed that in the agreements, nowhere do you guys talk at all about 10 nanometer. Maybe you could update us a little bit on the plans there. Do you have ultimate flexibility for choosing a foundry partner if you choose to bring to market 10-nanometer products? Even on the 14 or the seven-nanometer nodes, are there certain limits to which you can use outside foundry? If there's anything that you could help us with there, that'd be really appreciated. Thanks.
Sure. Yeah, thanks for the question, Matt. Look, it's fair to say that we're not talking about our overall technology roadmap here. From our current visibility, we see that 16 nanometer and 14 nanometer are major nodes for us, and we'll be doing a lot of products in those nodes. We believe seven nanometer will also be a major node. That's why it's called out that way. Second question, relevant to the products. I think the flexibility and the access to leading-edge process technology is very important for our high-performance roadmap. We will continue to collaborate closely with GLOBALFOUNDRIES at the 14 nanometer and seven-nanometer node. The flexibility is helpful across our product roadmap as we think about sort of the performance and the overall roadmap that we'd like to put together.
No, that makes sense. As follow-up, Devinder, a couple of things for you. I guess one is, I thought it was interesting in the agreement that there could be some payments from AMD to GF after Q2 of 2017 based on wafers purchased from another foundry supplier. Maybe you could, to the extent that you can, give us a little more detail there. Secondly, for the remainder of this year, how do you see the gross cash amount trending on the balance sheet? Thanks.
I think I'll take the second one first. I think as far as the cash for the near term, I'm not commenting on the near-term guidance or expectation from a cash standpoint. As we said pretty clearly, in Q4 of 2016, there will be a cash payment of $25 million to GLOBALFOUNDRIES, and that $25 million will be repeated for three quarters in 2017. To your first question, in terms of the additional payment that I referred to in the script, that starts in 2017, whereby we'll be making payments to GLOBALFOUNDRIES based on the volume of certain wafers purchased from another foundry supplier. We'll obviously provide more specifics on that as we get closer to the timeframe.
Overall, I think that the takeaway is with the amendment and the pricing framework we have, including the payments that will start in 2017 for wafers made at another foundry supplier, all of that is in support of our long-term financial model and gives us, as I said in the prepared remarks, better financial predictability.
All right. Thank you.
Sure. Thank you.
Our next question comes from the line of Mr. Joe Moore from Morgan Stanley. Please proceed with your question.
Great. Thank you. I feel like I'm missing something obvious, but just to make sure I understand, the warrants that you're issuing to Mubadala, it says they can only sell if they'll be below 20% ownership, but they're above 18% ownership now. Just what exactly does that mean? Is your expectation that you'd eventually be issuing those shares?
The warrant's exercise period is three and a half years, from the issue date all the way to February 2020. I think, as we said on the call, there is a restriction from a viewpoint of their ownership not going over 19.9% if they were to exercise the warrant. The exercise can occur as long as the ownership of Mubadala in AMD is not greater than 19.9%. You are right, it's at about 18% right now, and so the exercise of the warrants during that time period will have the restriction of ownership not going above 19.9%.
Okay, just for my edification, if you end up not issuing the shares, what happens to the value of the warrant that you're writing down on this one-time write-off, do you reverse that at some point?
The warrants have been issued, there are some details in the warrant agreement that we have filed with the 8-K that you can probably review. I know it's still early because it just went out, there are some provisions for Mubadala to go ahead and transfer the warrants if they so choose. That is something that I think is covered in the warrant agreement that's covered. From an accounting standpoint, I think the charge is taken in terms of issuing the warrant in Q3, and the $100 million fixed payment and the $235 for the warrant agreement issuance will be taken in Q3, and there is no reversal of that once you go ahead and take the charge in Q3.
Okay. Thank you very much.
Sure.
Operator, we'll take questions from about a couple more folks, please.
No problem. Our first question comes from the line of David Wong from Wells Fargo.
Thanks so much. You note that you're paying GLOBALFOUNDRIES and you have penalties for not making your target. Are there any penalties for GLOBALFOUNDRIES if they miss any technology targets?
I think, David, I missed the first part of your question. Can you just repeat it again?
Well, you have penalties if you don't buy wafers under the agreement. Are there any penalties for GLOBALFOUNDRIES if they miss any technology or other targets?
I see. I think, David, maybe the way I would think about it is, again, this is a fairly comprehensive amendment to the WSA, and it does cover technology collaboration, including technology milestones as well as some of the business framework. It's fair to say that, I think with this technology collaboration, we will be able to ensure that both GLOBALFOUNDRIES and AMD are able to execute on that roadmap. Relative to the penalties, I think the way I'd like to think about this is, it is a more set out model than we've had in the past. In the past when we did annual amendments, it was actually sometimes unpredictable in terms of what happened in a given year. Now we have a framework. We've set out annual targets.
We believe that these targets are in line with our current business and market outlook, as well as the products that we're sourcing. We expect to operate within that framework.
Great. My other question, are the wafer prices that you're paying under this agreement roughly what they would be if AMD had no constraints and bought equivalent technology from another foundry? Or are you actually getting wafers at below market price?
David, I don't think I would comment on specific pricing, just given the detail there. I would say that the pricing framework, again, gives us good predictability as we go through the five-year period. It supports, as Devinder said, our financial models and our expectations for our product margins as we go through time.
Great. Thanks very much.
Thanks, David.
Our next question comes from the line of Mr. John Pitzer from Credit Suisse. Please proceed.
Good afternoon, guys. Thanks for letting me ask the question. I guess, Lisa, my question to you about the flexibility that this new WSA gives you, I'm just kind of curious, does this mean that you're going to be dealing more with TSMC around that flexibility, or does it envision actually you bringing up a third foundry? Regardless if it's just an ability to work with TSMC on a larger volume basis or bringing up a third foundry, how do you manage the OpEx cost around that flexibility? Because I would assume if you're trying to optimize products for a couple of different processes or three different processes, there might be an incremental OpEx burden.
Good point, John. Look, if you look at our current manufacturing strategy, we use GLOBALFOUNDRIES and TSMC as our primary manufacturing partners. I think as we go forward, our goal is to make sure that we do have some flexibility in manufacturing strategy. Just given our portfolio and what we need to accomplish, I think having flexibility is extremely important. Relative to the partner or partners, I don't think I will comment on specific future sourcing. I think it's fair to say that the OpEx that we have been running up through now and expect to run as we go forward does contemplate two foundry sources, and it has been beneficial to us. We've done a massive FinFET ramp, and having that flexibility is helpful.
As my follow-up, Devinder, I apologize. I'll chalk it up to maybe it being the lazy day of summers, but I guess I still don't quite understand the incremental payment that you may be making to GLOBALFOUNDRIES based upon wafers procured from an additional foundry. Can you help me understand that just a little bit better?
Yeah, I can. I think in 2017, the way the amendment works is for certain wafers that are purchased from another foundry supplier, we will be making payments to GLOBALFOUNDRIES. Like I said, specifically, obviously we'll address that as we get closer to the timeframe, but it is all contemplated in support of our long-term target financial model.
Perfect. Thanks, guys.
Great. Operator, that concludes our short call this afternoon. If you could wrap it up, please.
Thank you, ladies and gentlemen. This does conclude our teleconference for today. We thank you for your time and participation, and you may disconnect your lines at this time. Have a wonderful rest of the day.