Investor Update

Aug 31, 2016

Greetings, and welcome to AMD's 6th Amendment to the WSA with Global Foundries Conference Call. At this time, all participants are in a listen only mode and a question and answer session will follow the formal presentation. 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, 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 25, 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. Now 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 6 months alone, we released our game changing Polaris architecture, gained 8 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 Q2. 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 6th amendment to our Wafer Supply Agreement, or WSA, with GlobalFoundries. This 5 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 6th 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 and setting a new operational framework with GlobalFoundries over the 5 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 company over the past 18 months, and we remain focused on the ongoing ramps of our semi custom SoCs, Polaris GPUs and 7th generation APUs, all of which are going very well. We are also making excellent progress executing to our road map 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 multiyear 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 and A. As a reminder, the WSA has been in place since 2,009 and runs to 2024. Having been personally involved with multiple annual amendments, I cannot stress enough the importance of putting in place a 5 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 5 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 6th Amendment of the WSA include fixed price 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 $100,000,000 in quarterly installments of $25,000,000 over the next 4 quarters beginning in the Q4 of 2016 through the Q3 of 2017. We will issue a warrant to a wholly owned dollars 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. And 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 Q3 of 2016, we expect to record a one time charge of approximately $335,000,000 consisting of the $100,000,000 cash payment and a non cash charge of of wafer purchases of approximately $650,000,000 from Noble Foundries. This consists of approximately $495,000,000 of wafer purchases to be taken under the 6th Amendment of the 2016 WSA and $155,000,000 of wafer purchases taken earlier this year under the 5th 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 6th 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. And 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 2 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 Cluity onwards? And then more importantly, why isn't this a part of your ongoing OpEx? Because it's the 6th time that it's being done. So it's obviously a recurring part of supporting your internal effort. So why is this a onetime 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 is dilutive than the basic EPS is the basic EPS and the diluted would include that portion. So in the limit or in the MAX, I guess, if you put it that way, there's 75,000,000 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 onetime charge. The cash portion of $100,000,000 and the value of the warrants at $235,000,000 And you are right that there have been several amendments to the WSA, but this particular amendment is a 5 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. So 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 onetime? Yes. I think in the end, it is a cost of doing business. There's $100,000,000 of cash to be paid starting Q4 of 2016 through the 1st 3 quarters of 2017. But the accounting is the accounting. And the accounting from our standpoint, the way the accounting dictates is a onetime charge in Q3 2016. Thank you. And 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. So 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? And then even on the 14 or the 7 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. Yes. Thanks for the question, Matt. So look, it's fair to say that we're not talking about our overall technology road map here. But 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. And we believe 7 nanometer will also be a maker node. And so that's why it's called out that way. Second question, relative 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 7 nanometer node. But 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. And then 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 Wasser's purchase from another foundry supplier? Maybe you could to the extent that you can give us a little more detail there. And then secondly, for the remainder of this year, how do you see the gross cash amount trending for on the balance sheet? Thanks. I think I'll take the second one first. So I think as far as the cash for the near term, I'm not commenting on the cash standpoint. But as we said pretty clearly, in Q4 of 2016, there will be a cash payment of $25,000,000 to GlobalFoundries, and that $25,000,000 will be repeated for 3 quarters in 2017. To your first question, in terms of the additional payments 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 vapers purchased from another foundry supplier. We'll obviously provide more specifics on that as we get closer to the time frame. But 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. And our next question comes from the line of Mr. Joe Moore from Morgan Stanley. Please proceed 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. So just what exactly does that mean? And is your expectation that they would that you'd eventually be issuing those shares? The warrants exercise period is 3.5 years from the issue date all the way to February 2020. And 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. So the exercise can occur as long as the ownership in of Mubadala and AMD is below is not greater than 19.9%. And you are right, it's at about 18% right now. And so the exercise of the warrants within that time period will have the restriction of ownership not going above 19.9%. Okay. And then just for my clarification, if you end up not issuing the shares, what happens to the value of the warrant that you're writing down in this one time write off? Do you reverse that at some point? The warrants have been issued and there are some details in the warrant agreement that we have filed with the 8 ks that you can probably review. I know it's still early because it just went out, but there are some provisions from the borrower to go ahead and transfer the warrants if they so choose. But that is something that I think is covering 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 $100,000,000 fixed payment and the $235,000,000 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. Operator, we'll take questions from about a couple of more folks, please. No problem. And our first question comes from the line of David Wong from Wells Fargo. Thanks very 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, I mean, you have penalties if you don't buy wafers under the agreement. So are there any penalties for global foundries if they miss any technology or other targets? I see. So 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. So 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 road map. And then 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. So we expect to operate within that framework. Great. And 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 wafer wafers at below market price? David, I don't think I would comment on specific pricing just given the detail there. But I would say that the pricing framework again gives us good predictability as we go through the product margins as we go through expectations for our product margins as we go through time. Great. Thanks very much. Thanks, David. Your next question comes from the line of Mr. John Pitzer from Credit Suisse. Please proceed. Yes. Good afternoon, guys. Thanks for letting me ask the question. I guess, Lisa, my question to you about the flexibility that this new WSSA 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? And 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 3 different processes, there might be an incremental OpEx burden. Yes. Good point, John. So look, we if you look at our current manufacturing strategy, we use GlobalFoundries and CSMC 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. But 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 2 foundry sources and it has been beneficial to us. I mean we've done a massive FinFET ramp and having that flexibility is helpful. And 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 by from an additional foundry. Can you help me understand that just a little bit better? Yes, I can. I mean, I think in 2017, the way the amendment works is for wafers or certain wafers that are purchased from another foundry supplier, we will be making payments to GlobalFoundries. And like I said, specifically, obviously, we'll address that as you get closer to the timeframe, but it is all contemplated in support of our long term target financial model. Okay. 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.