AMD bites bullet, slashes chip orders

Downside: hefty penalty. Upside: leaner inventory

The slumping PC market has put the hurt on AMD to the extent that the struggling chipmaker has sharply reduced its Wafer Supply Agreement (WSA) with its chip-baking partner, GlobalFoundries.

AMD estimates that it will purchase $115m worth of wafers from GlobalFoundries this quarter under the amended WSA. The previous agreement between AMD and the company, which it spun off in a deal with the Abu Dhabi–based investment firm ATIC in 2009, had been for $500m worth of chips.

A change of that magnitude will cost AMD a pretty-penny penalty. As part of the amended WSA, AMD will pay GlobalFoundries a "termination payment" of $320m, with $80m to be paid by the end of this year, $40m by the first of April, and a $200m promissory note due to GlobalFoundries by the end of 2013.

As might be expected, AMD CEO Rory Read put the best possible spin on the news. "Today's announcement demonstrates that the long-term strategic partnership between AMD and GlobalFoundries continues to benefit both companies," he said in a statement released when the announcement was made, after the markets closed on Thursday.

Speaking of markets, AMD's stock price was hovering around $2.35 per share as we clicked Publish on this article, well below its 52-week closing high of $8.25, which it hit in March of this year. That said, $2.35 is a good bit better than AMD's lowest close of the past year, which was $1.88 on the Monday after this Thanksgiving.

Despite the news of the amended WSA and the termination payment, don't think that AMD is getting ready to fold up its tent and trudge into history. As part of the new agreement, for example, the company has committed to buying $250m worth of chips from GlobalFoundries in the first quarter of next year, and estimates that its 2013 purchases will total $1.15bn.

AMD also notes that as it standardizes on 28-nanometer chip technology from GlobalFoundries, it will reduce the amount of research and development funds that it has been providing to the chip-baker – and any such savings can only help the company's bottom line.

This October, AMD announced that it would leverage the fabric clustering technology "secret sauce" it acquired when it bought SeaMicro in March to create ARM-based server chips as part of what Read called the company's plan to "reset and restructure" itself.

Those Opteron chips, however, which will be based on ARM's recently announced Cortex-A57 design, won't see the light of day until 2014. For AMD fans – and, full disclosure, your Reg reporter counts himself among them – 2013 will be a year of finger-crossing. ®