AMD rejigs fab pact with GlobalFoundries

Updated Advanced Micro Devices has tweaked its wafer baking deal with GlobalFoundries, the spinout of its own foundry operations that owned by Advanced Technology Investment Company, the investing arm of the government of Abu Dhabi.

In a statement released on Sunday afternoon, AMD said that it was making changes to the wafer supply agreement between itself and GlobalFoundries, and that this amended agreement "delivers a pricing model that better aligns to AMD's business and incentivizes GlobalFoundries to continue improving 32nm yields."

You might have assumed that, given the fact that AMD is relying on those 32 nanometer processes for its future Opteron processors, GlobalFoundries was already properly "incentivized" to get the best yields possible so AMD could compete head-to-head with Intel's "Sandy Bridge" and "Westmere-EX" Xeon server processors. These Intel chips are made using the chip giant's own 32 nanometer processes.

Last July, when talking about its second quarter financial results, AMD said was not happy with yields on 32 nanometer processes at GlobalFoundries and had torearrange its desktop chip lineup because of this. AMD pushed out its quad-core "Llano" Fusion APU, which is implemented in GlobalFoundries' 32 nanometer processes to this year, while the dual-core "Ontario" APUs were pulled forward by many months. These latter chips are made using a 40 nanometer process by Taiwan Semiconductor Manufacturing Corp, which also makes ATI GPUs for AMD.

In its statement, AMD said that GlobalFoundries had formerly used a cost-plus methodology to come up with prices for chip wafers delivered to AMD; this methodology applied to processors as well as for Fusion accelerated processing units (APUs), which put processors and graphics processing units on the same chip.

Going forward in 2011, AMD is now promising to buy a fixed number of chips each quarter based on the current 45 nanometer processes as well as the developing 32 nanometer processes. Neither party said how many wafers AMD committed to buy, or if it was a greater or lesser quantity than before the changes in the agreement. The contract also calls for a change in commitments for increased output of specific GPUs and chipsets made for AMD by GlobalFoundries.

Under the revised agreement, AMD will pay a fixed price for 45 nanometer wafers delivered in 2011, and prices for 32 nanometer wafers were be based on "good die."

The revised agreement also calls for AMD to pay an additional quarterly fee to GlobalFoundries during 2012 if it hits 32 nanometer capacity targets by the beginning of 2012. This fee will be on top of wafer prices, which will revert to the cost-plus scheme for CPUs and APUs.

AMD said in its statement that it would be cutting a check of between $1.1bn and $1.5bn to GlobalFoundries for wafer baking in 2011 under the new pricing scheme and that if all went well, GlobalFoundries would be paid between $1.5bn and $1.9bn in 2012.

AMD added that it had already began accounting for its investment share in GlobalFoundries under the cost method during the first quarter of 2011. Now that GlobalFoundries has been merged with Chartered Semiconductor by ATIC, and because of "amendments to certain agreements," AMD will now recognize a non-cash gain of $492m in the first quarter.

AMD plans to host a conference call Monday morning at 8:30 am Eastern (April 4) and if there is any more to this deal, we'll bootnote it here.

Bootnote: Thomas Siefert, AMD's chief financial officer and interim CEO hosted a conference call on Monday morning, ahead of Wall Street opening for business, to talk about the revised wafer supply agreement.

Siefert said that AMD began negotiating the revised agreement last year, when 32 nanometer yields at GlobalFoundries were below expectations, forcing AMD to push out the launch of the Llano APUs, as mentioned above.

The good news is that 32 nanometer yields have improved and the Llano chips have started shipping for revenue last quarter, according to Siefert, and will begin appearing in products this quarter.

"Yields for 32 nanometer are on target," Siefert explained on the call. "We are in manufacturing mode. Yield is on expectation and we are shipping for revenue."

Then why keep the new deal in place? Siefert said that the new wafer supply agreement protects AMD from a potential downside – which he does not anticipate – should the 32 nanometer ramp not continue to improve as GlobalFoundries pumps out more chips, including the vital "Bobcat" chips for laptops and the "Bulldozer" chips for servers and workstations. The old wafer supply agreement had AMD paying for 32 nanometer wafers, whether they were good or bad. The new deal only pays for good wafers.

And significantly for GlobalFoundries, if the wafer-baker meets yield goals on 32 nanometer processes, it stands to bag $400m in bonus payments, according to Siefert. (This figure is cooked into the estimated $1.5bn to $1.9bn in payments that AMD expects to make to GlobalFoundries in 2012.)

The interesting bit of Siefert's call was that despite the change in chip costs to GlobalFoundries, AMD expects that gross margins for 2011 will remain unchanged at 44 to 48 per cent and at around 50 per cent in 2012. AMD's financial model assumes an improving mix of server and desktop chip sales and cost-cutting to maintain this balance, despite the increasing payments to GlobalFoundries. Last year, Siefert said, AMD paid $1.2bn to GlobalFoundries for chip manufacturing.

At the moment, 45 nanometer processes used to make processors are the volume line at GlobalFoundries. The 32 nanometer processes are expected to be the volume process in 2012 and GlobalFoundries expects to start ramping a new 28 nanometer process in the second half of 2011. While GlobalFoundries could eventually win some GPU and chipset business from AMD, Siefert said that this would not happen in 2012 but could happen – depending on yields and costs of then-current processes – sometime after this. ®