AMD Pays GF to get out of wafer commitment

[Arachnotronic]

Good thing Intel competes with itself on the desktop space. LGA 2011 v.s. LGA 1155.

It's a pretty great battle.

 

[podspi]

According to the article, that is just notebook marketshare, not overall or desktop.

But since laptops are becoming the big thing, this is very bad news. Unfortunately for AMD, laptops tend to be:

Intel/Intel
Intel/nVidia
AMD/AMD

And since nobody is really buying AMD-based products right now... Luckily OEM purchases are the type of thing that can recovery quickly if you have a good product and work on your relationships, which is what Mr. Read is supposed to be doing...


Aside, I once saw an AMD/nVidia-based machine. I thought that was funny...

 

[Ajay]

Good thing Intel competes with itself on the desktop space. LGA 2011 v.s. LGA 1155.

It's a pretty great battle.

Not really, X79 isn't the cutting edge platform that x58 was. It's lagging on features and, from what I've read, still has some bugs in it. I would hope Intel does at least a re-spin on it b/4 IVB-E. If x79 matched or bettered x77 in every way possible, then it would be a worthy contender.

 

[mrmt]

Probably not much different on the desktop parts. I think we have been back to the usual 60/40 split in that segment for months.

http://blogs.barrons.com/techtrader...losses-wells-sees-hope-in-cost-cuts-consoles/

Nope, we are not back to the usual volumes, it is 65/35 now, and there isn't much they can do. In a depressed market like this price is everything, and because they went for a GPGPU monster whatever price latitude they had is long gone. It's something like Bulldozer but not that bad, as Nvidia is in the same node.

 

[Idontcare]

According to the article, that is just notebook marketshare, not overall or desktop.

The point is that there is no good excuse for it.

AMD had access to the same foundry process tech, had engineers, had management, had the lead in marketshare...and yet they managed to mismanage themselves and allow Nvidia to mop the floor with them in yet another market segment. (they kinda failed to materialize in the HPC market, let alone GPGPU)

It is just sooooo AMD lately, just one more example that derpdozer wasn't the exception after all.

And now they've signed an agreement to become even more dependent on the second-best foundry by moving GPU production to it. GloFo couldn't get 32nm yields addressed in time to keep Llano relevant, couldn't get 28nm functional in time to keep the Brazos shrink worthwhile...and with that track record AMD is now going to tie the fate of their GPU business?

Nvidia must be doing happy dance right now.

 

[Idontcare]

According to the article, that is just notebook marketshare, not overall or desktop.

http://blogs.barrons.com/techtrader...losses-wells-sees-hope-in-cost-cuts-consoles/

Just wanted to quote the numbers directly from mrmt's link since they address the question head-on:

AMD’s market share in desktop computers in the quarter decline from 40.7% in Q2 to 35.7%, while Nvidia’s rose from 59.3% to 64.3%. In notebook computers, AMD’s share fell more dramatically, from 44.8% to 34.2%, while Nvidia’s share rose from 55.2% to 65.8%.

So desktop GPU marketshare is 35.7% versus notebook marketshare being 34.2%.

In other words - its bleak across the board.

 

[mrmt]

(2) the $500m Q4 take-or-pay contract was known WELL in advance, it has been a "known cost" to AMD for more than a year now and yet they waited until mid-quarter to drop this equity-robbing bombshell onto AMD's shareholders. That ain't right. It goes to show that absolutely no one at AMD, from the executive office to the BoD, has AMD's public shareholder's best interests in mind. They are negotiating behind closed doors in ways that are literally resulting in AMD equity being drained away and put into GloFo.

You know, one of the things I expected to change in AMD with Rory Read was disclosure. AMD has an entire history of being unfair with its shareholders. ATI, the fab spin off, the WSA, settlement with Intel, you name it. With a new CEO and a brand new executive team AMD had the chance to break with this culture of fooling their shareholders.

But it is clear by now that this isn't going to happen. Rory cannot give a straight answer even when someone asks his name, and Kumar, oh god, I feel sorry for the guy, he spends entire conferences tap dancing around the questions of the analysts. It is outright ridiculous.

But... it is easy to put the blame on those two and miss the big picture. The criticism is valid, but the most important bit here is that they are guilty to play their part in this opera buffa that became AMD management of lately, but they are not the ones writing the script.

Those 500 million, that take-or-pay clause that was in the WSA the entire time, this is not the kind of decision the BoD didn't vote and the main shareholders weren't asked on how they wanted it voted. It is a textbook corporate decision, and so was the decision to hide it from the other shareholders. And this didn't start today. It's been three CEOs and ten years already. It is safe to say that this is the institutional culture in AMD.

And whenever you have this kind of lack of transparency, a culture where misled your shareholders is SOP, you should not really fathom put your money in such a company. Every AMD conference has become a kind of kinder egg for their investors, where every time you open it there is a surprise inside, but always a bad and expensive one.

 

[Genx87]

The point is that there is no good excuse for it.

AMD had access to the same foundry process tech, had engineers, had management, had the lead in marketshare...and yet they managed to mismanage themselves and allow Nvidia to mop the floor with them in yet another market segment. (they kinda failed to materialize in the HPC market, let alone GPGPU)

It is just sooooo AMD lately, just one more example that derpdozer wasn't the exception after all.

And now they've signed an agreement to become even more dependent on the second-best foundry by moving GPU production to it. GloFo couldn't get 32nm yields addressed in time to keep Llano relevant, couldn't get 28nm functional in time to keep the Brazos shrink worthwhile...and with that track record AMD is now going to tie the fate of their GPU business?

Nvidia must be doing happy dance right now.

lol perfect gif. The next gif will be what happens in the movie. A death blow to the back of the head of AMD who is sitting in a chair drunk and unaware of its surroundings while Nvidia gives its opinion about "Huey Lewis"

 

[SickBeast]

I wonder why AMD wouldn't just cut prices so that they could use up the rest of the fab capacity rather than just paying them off like this.

They seem so poorly run as a company. People would buy AMD processors if they were a better deal than what you can get from Intel. I just paid $350 for my i3 laptop and there was nothing from AMD that interested me at this price point. The same goes for desktops; you can get a 2500k or a comparable Ivy Bridge chip for the same price as you would pay for a comparable AMD chip. AMD needs to cut their CPU prices anyway; why not do it and just produce more of them?

 

[Av9114]

When you enter in a take-or-pay contract you usually establish the "take" value reasonably below your consumption/sales forecasts, so the fact you had to pay means something went wrong with your sales/consumption predictions.

Does anyone know what a typical contract would look like? In this case it seems like they had to commit to 320M to get (up to?) 500M. Percentage wise is that typical?

Thanks in advance. The quantity and quality of knowledgeable posters here is amazing.

 

[jvroig]

I wonder why AMD wouldn't just cut prices so that they could use up the rest of the fab capacity rather than just paying them off like this.

They seem so poorly run as a company. People would buy AMD processors if they were a better deal than what you can get from Intel. I just paid $350 for my i3 laptop and there was nothing from AMD that interested me at this price point. The same goes for desktops; you can get a 2500k or a comparable Ivy Bridge chip for the same price as you would pay for a comparable AMD chip. AMD needs to cut their CPU prices anyway; why not do it and just produce more of them?

From their announcement, it was pretty clear it was a cash flow concern. Although they only saved an absolute amount of about $65M (peanuts), they don't have to pay the entire $320M "cancellation fee" (or whatever you want to call it) in the same period compared to actually ordering those wafers. Therefore, in a purely "cash flow management" thing, this move gives them more available cash in the short term (i.e., they get to keep >$200M much longer, not yet counting the $65M they would save in the end).

Is that a good, long-term, business-value creating move? Not necessarily, no. But being attached (trapped) to GloFo wasn't all that hot to begin with, so it's like being stuck between a rock and a hard place. When you're already being mugged and you are thinking "should i just try to kick the crap out of these guys, or should I just hand them over my wallet?", you really have no good options.

Will the move free up cash for them? Yes. If they bought the wafers, then their money is GloFo's, end of story. But the "cancellation/penalty fee" is only $80million to be paid by December 28, 2012, $40 million before April 1, 2013 as well as a $200 million promissory note due on December 31, 2013. So aside from saving $65M, they actually free up $200M for the entirety of 2013.

From a purely cash-flow perspective, if they needed every bit of cash on hand, this allows them to keep $265M for next year. Is this the best course of action? Maybe. If they absolutely need the cash to execute other plans and try to avoid becoming insolvent, perhaps.

At any rate, that is the one factor why they would decide to pay a penalty fee rather than buy actual product: cash flow management.

Like I said, having to make that choice already means they are between a rock and a hard place, so they really don't have an obvious good choice here. They are cash-strapped and made what they saw as the only option available to them to have more cash and try to survive 2013.

 

[mrmt]

From a purely cash-flow perspective, if they needed every bit of cash on hand, this allows them to keep $265M for next year. Is this the best course of action? Maybe. If they absolutely need the cash to execute other plans and try to avoid becoming insolvent, perhaps.

They didn't do anything for their solvency, What they did address is the liquidity issue and just for 2013.

When you listen to Devinder's word, he says that the cash will stay on an "optimal zone" of 1.1 billion this quarter, and that they will be back to free cash flow generation just in Q313. You just have to add 2+2 to see that there are more measures coming.

 

[mrmt]

I wonder why AMD wouldn't just cut prices so that they could use up the rest of the fab capacity rather than just paying them off like this.

Because they are already taking losses on their CPU business, if they start to sell for less they might go even deeper in the red.

 

[leper84]

I wonder why AMD wouldn't just cut prices so that they could use up the rest of the fab capacity rather than just paying them off like this.

They seem so poorly run as a company. People would buy AMD processors if they were a better deal than what you can get from Intel. I just paid $350 for my i3 laptop and there was nothing from AMD that interested me at this price point. The same goes for desktops; you can get a 2500k or a comparable Ivy Bridge chip for the same price as you would pay for a comparable AMD chip. AMD needs to cut their CPU prices anyway; why not do it and just produce more of them?

I would imagine part of that would have to do with the whole 'having way too much Llano when Trinity came out' fiasco. Might make potentially better financial sense to pay GF and not have a huge backlog of last-gen chips if/when they release something new next year.

 

[ShintaiDK]

I wonder why AMD wouldn't just cut prices so that they could use up the rest of the fab capacity rather than just paying them off like this.

2 issues.

1. Customers would expect the cut prices to continue. Meaning the margins get hurt. AMD is already at a below 50$ ASP.
2. The lower prices might not raise the volume at all. And certainly not to thr required level. See GPUs as well for this.

 

[jvroig]

They didn't do anything for their solvency, What they did address is the liquidity issue and just for 2013.

Thanks for clarifying that, my statement was too short and did not bother to differentiate. Cash flow management here is about liquidity (which is what is accomplished by freeing up >$200M for 2013). "Executing other plans" is what will contribute to avoiding insolvency.

The distinction isn't important to PC enthusiasts, so it's not really a sticking point. The point remains that they chose the route of going the cancellation/penalty fee rather than buy $500M-worth of wafers this quarter for cash flow management concerns.

When you listen to Devinder's word, he says that the cash will stay on an "optimal zone" of 1.1 billion this quarter, and that they will be back to free cash flow generation just in Q313. You just have to add 2+2 to see that there are more measures coming.

I'm sure that's the case, I just don't see how that's relevant to the layman's question of "why not just buy the damn wafers?". The answer really is just cash flow management. They need the cash for liquidity, which will enable them to execute other plans, which will in turn help them avoid insolvency and make a buck and turn things around and everything else they imagine as stewards of the company.

 

[Vesku]

AMD desperately needs to improve it's relationship with OEMs and instead the entire company is focused on replacing all the 2-ply toilet paper with 1-ply. I thought Rory Read's Lenovo experience was supposed to translate into design wins?

 

[mrmt]

The distinction isn't important to PC enthusiasts, so it's not really a sticking point. The point remains that they chose the route of going the cancellation/penalty fee rather than buy $500M-worth of wafers this quarter for cash flow management concerns.

Not only cash flow management but inventory management too. They are ordering 115 million in wafers from GLF this quarter. Expect apalling sales figures in Q412 and Q313.

 

[mrmt]

AMD desperately needs to improve it's relationship with OEMs and instead the entire company is focused on replacing all the 2-ply toilet paper with 1-ply. I thought Rory Read's Lenovo experience was supposed to translate into design wins?

What can he do? AMD has an inferior product and has to charge more to break even. Should he dance gangnam style in from of the OEMs? It is not a problem sales alone can solve, this is an engineering problem. AMD have to develop better products or at least products that offers more reasonable pricing to OEM.

As a matter of fact, I think he is doing something. I remember Rory enthusing about Brazos (IIRC he said that Brazos was "beautiful"), and since then Brazos volumes just went up, effectively cannibalizing single module Trinity/Athlon sales in notebooks and even on desktops. This is not something a mere salesman can do, this has to pass through executive levels and you can bet this decision bears Rory approval. Brazos should be the only product making money for AMD.

I understand this decisions brings desperation to AMD fans of the Athlon 64 days, but that's what has to be done. Focus on products that bring money for the company, and not in what make fanboys happy.

 

[Idontcare]

Will the move free up cash for them? Yes. If they bought the wafers, then their money is GloFo's, end of story. But the "cancellation/penalty fee" is only $80million to be paid by December 28, 2012, $40 million before April 1, 2013 as well as a $200 million promissory note due on December 31, 2013. So aside from saving $65M, they actually free up $200M for the entirety of 2013.

GloFo is basically a loan-shark in this scenario, giving out balloon-payment loans at ridiculously high effective interest rates when it is all said and done, to a customer that wouldn't otherwise accept the "help" if it weren't for their desperate situation.

Some states have made so-called payday loans illegal because it preys on a very specific type of psychological weakness that has been well studied by sociologists.

"I will gladly pay you on Tuesday for a hamburger today"

AMD has been backed into a financial corner and they are now making desperate decisions that any other business would refuse to consider. The psychology is the same, and the ramifications will be too.

The problem for GloFo though is that this is nothing but bad PR for them, no loan shark wants to develop the reputation of being a loan-shark unless all they want for clients are desperate customers who have fallen on very hard times...all bonafide clients with good credit ratings will avoid such loan sharks and opt to take their loans from a much more reputable bank (or foundry in this case, i.e. TSMC).

Fabless companies will view GloFo's opportunistic contracts and inflexibility for what it is, and they will vote with their wallets and elect to keep their business at TSMC or UMC or Samsung.

 

[Piotrsama]

Not only cash flow management but inventory management too. They are ordering 115 million in wafers from GLF this quarter. Expect apalling sales figures in Q412 and Q313.

But... didn't AMD increase orders to TSMC? (just wondering).

 

[ShintaiDK]

But... didn't AMD increase orders to TSMC? (just wondering).

I sure dont hope so with their disasterous GPU sales.

 

[mrmt]

But... didn't AMD increase orders to TSMC? (just wondering).

I don't know, but even if they did, Brazos is too small to make up for the losses in their big core line.

 

[Piotrsama]

I thought they moved some APUs or CPUs production to TSMC, but don't know for sure.

Yes, this paragraph doesn't really clarify. Sounds like APUs/CPUs, but...

For some new chip models, AMD has turned for production services to Taiwan Semconductor Manufacturing Co., which has produced its graphics chips. But Rory Read, AMD's CEO, stressed that Globalfoundries remains a key partner.

 

[beginner99]

So if you sum this all up it probably would have been better for AMD to keep the fabs themselves. They have no choice were to produce and now also no say what happens in foundry. Also if orders go down (fabs are not fully used) they suffer in both cases, probably even more now.

Sorry but that just proves how stupid their management was and the new guy now is putting the nails in the coffin. I mean if they have to lie and deflect all the time it's pretty obvious the truth isn't looking very good...