Wednesday, April 6, 2011

AMD's carrot for GloFo, patience for CEO

AMD has revised its wafer supply agreement with Globalfoundries, apparently to help light a fire under the foundry to keep its leading-edge process technology up to snuff -- but perhaps there's another reason.

The two firms' original WFA signed in 2009 involved a "cost-plus" payment plan (fixed regardless of utilization or yields). The amended one changes those terms for 2011 to fixed prices for 45nm wafers, but based on "good die" for 32nm wafers. AMD anticipates payments to GF will total $1.1B-$1.5B in 2011 (vs. $1.2B in 2010). The "cost-plus" terms will revert again in 2012, bumping up AMD's annual payments to $1.5B-$1.9B, with bonuses if GF meets goals for 32nm capacity.

In a post-PR presentation, AMD execs acknowledged that the changing terms are in response to what were "challenges relating to 32nm yield ramp at GF" (which caused a chip-launch shuffle) but that those yields are now "in-line with our expectations." (Now those the terms just offer a bit more of a carrot for GF to keep its 32nm yields up.) Other reasons for the change were to tighten pricing options and provide better cost visibility for its 32nm ramp.

In addition to yield insurance, AMD also pledges to give GF a little extra in 2012 if 32nm capacity benchmarks are met -- so this rearrangement of pricing terms is not just about making up for past slipups, but rewarding future availability.

Ultimately there could be a higher goal here -- all this talk about 32nm yield and incentives is really just a way to smooth out the company's margins over the next year or two, concludes Charlie Demerjian at SemiAccurate. John Pitzer with Credit Suisse notes that AMD's gross margins are basically unchanged at 4%-48%, but sees long-term targets rising to 50% due to decreasing cost/die and favorable mix.

Meanwhile, AMD's search for a new CEO "seems stalled," says MarketWatch's Therese Poletti. Why? It's a unique exec and personality who'd be willing to square up to longtime dominant rival Intel, plus emerging fabless heavyweights Nvidia and Qualcomm as well as ARM, notes Raymond James analyst Hans Mosesmann. Both AMD and Intel are still weighted heavily to PCs (currently a slumping sector), and largely criticized for (so far) missing the boat to mobile devices, smartphones, and tablets and new Apple and Google devices utilize ARM's architecture, a battle front for both chip companies. Look for clarity (or at least investor inquiries) at AMD's quarterly earnings call in a couple of weeks. Mosesmann speculates that the matchmaking efforts have "been tougher than [...] they thought," but that it's still too soon to judge. "You don't want them to rush," he notes.

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