AMD has dramatically dropped its orders with GlobalFoundries, taking a major financial hit in doing so and revealing weaker than expected demand for its products.
AMD has renegotiated its wafer supply agreement with once-and-former subsidiary GlobalFoundries, slashing its requirements in the face of slumping demand and growing excess inventory.
Under the companies' previous supply agreement, AMD was to purchase around $500 million in wafer output for its GPU, CPU and APU products in the fourth quarter of the financial year. This figure has now been dramatically revised to just $115 million, indicating the demand for the company's new family of accelerated processing units has not been quite as healthy as AMD had hoped. It's also a reaction to an inventory write-down
in the third quarter, a move which cost the company an estimated $100 million due to component oversupply.
That's a situation AMD can't afford to repeat - hence the decision to renegotiate its wafer supply agreement with GlobalFoundries. Sadly, the savings won't be quite as dramatic as the agreement suggests: under the newest agreement, AMD must pay a termination fee for wafers it had agreed to purchase but now no longer requires. This fee, totalling $320 million, means that AMD will be paying $435 million to GlobalFoundries but only receiving $115 million in parts - although, looking on the bright side, the termination payment is being spread out with a $80 million payment due at the end of this year, a further $40 million by the start of April 2013 and the remaining $200 million in the form of a promissory note which falls due on the 31st December 2013.
The new wafer supply agreement also lowers the company's requirements for upcoming quarters, with AMD now looking to spend no more than $1.15 billion with GlobalFoundries over the 2013 financial year. Thus far, neither company has agreed on purchase agreements for 2014, beyond the promise of a $250 million order in the first quarter of that year.
'Today's announcement demonstrates that the long-term strategic partnership between AMD and GlobalFoundries continues to benefit both companies,
' claimed AMD's president and chief executive Rory Read, in an attempt to put a brave face on what is quite a dramatic misjudgement in demand on his company's part. 'GlobalFoundries' performance in meeting our delivery requirements in 2012 was strong and they remain a strategic and important foundry partner moving forward. We are committed to develop and grow our business with GlobalFoundries, increasing our engagement across our industry leading APU and graphics roadmaps. The newly amended agreement is another step we are taking to further strengthen our relationship with GlobalFoundries as well as AMD's financial foundation.
Read's comments aside, the new wafer supply agreement does demonstrate one thing: there is to be some belt-tightening ahead at AMD, and things are likely to get worse before they get better.