AMD Slashes Chip Orders As PC Sales Slow

AMD has renegotiated its deal with its chip manufacturer spinoff Globalfoundries in an effort to save money and return to profitability

AMD is reducing the number of chips the company will order from foundry partner Globalfoundries over the next several quarters, the latest move by the chip maker to deal with the impact from the shrinking PC market.

AMD officials announced on 6 December that the amended wafer supply agreement (WSA) negotiated with Globalfoundries calls for the chip maker to buy about $115 million (£72m) in wafers in the fourth quarter, down from the $500 million or so that it originally agreed to buy.

Wafer spend

In addition, AMD will spend about $1.15 billion for wafers from Globalfoundries in 2013, essentially flat from the $1.115 billion AMD will end up spending in 2012, Sterne Agee analyst Vijay Rakesh said in a 7 December note.

AMD officials also said that they will pay Globalfoundries about $250 million in the first quarter of 2014, and that they will negotiate with their Globalfoundries counterparts next year on the rest of 2014.

In a statement, AMD President and chief executive Rory Read pointed to the renegotiated wafer agreement as an example of his company’s good working relationship with Globalfoundries – which was born in 2009 after AMD spun off its manufacturing business.

“Today’s announcement demonstrates that the long-term strategic partnership between AMD and Globalfoundries continues to benefit both companies,” Read said. “Globalfoundries’ performance in meeting our delivery requirements in 2012 was strong and they remain a strategic and important foundry partner moving forward.”

However, the driving force behind the new WSA is the continued decline of PC sales worldwide, driven in large part by the uncertain global economy and the rapid adoption by consumers of smartphones and tablets.

Flat third-quarter sales

Analysts from Gartner and IDC said in October that PC sales in the third quarter fell 8 to 9 percent, and market research firm IHS iSuppli forecast that, for the first time in 11 years, PC shipments will decline in 2012, dropping by 1.2 percent, to 348.7 million units.

“There was great hope through the first half that 2012 would prove to be a rebound year for the PC market,” Craig Stice, senior principal analyst for computer systems at IHS, said in a statement in October. “Now three quarters through the year, the usual boost from the back-to-school season appears to be a bust. … Optimism has vanished and turned to doubt, and the industry is now training its sights on 2013 to deliver the hoped-for rebound.”

AMD has felt the financial impact of the decline, as have other tech vendors – such as Intel, Hewlett-Packard and Dell – that have deep ties to the PC industry. AMD and Intel also are getting squeezed by competition from ARM Holdings, whose chip designs are found in the bulk of smartphones and tablets, a booming area in which both Intel and AMD would like to gain ground.

In the third quarter, AMD lost $150 million, and officials said another 9 percent drop in revenues could come in the fourth quarter. The chip maker is cutting 10 percent of its workforce as its looks to reduce expenses.

Reducing PC reliance

AMD officials also want to reduce the company’s reliance on the PC industry. The PC chip business accounts for about 85 percent of AMD’s revenues, and officials want to reduce that to 40 to 50 percent. They are focusing on several growth areas, including dense servers for such environments as cloud computing, ultra-portable devices – including tablets – and embedded devices.

The amended WSA is another step by AMD to reduce costs. However, it will cost the company. It will cost AMD a $320 million termination payment to amend the deal with Globalfoundries, including $80 million by 28 December. Another $40 million will come due by 1 April, 2013, and another $200 million will be paid to Globalfoundries by 31 December, 2013.

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