Intel: Is AMD's Foundry a Subsidiary or Not?

Intel (INTC) denies allegations by arch-rival Advanced Micro Devices (AMD) that it is trying to derail AMD’s plan to create a spinoff called The Foundry. AMD is banking heavily on The Foundry to raise the company’s fortunes, which are sagging under a recession, a cash/credit crunch and Intel’s current upper hand in the companies' rivalry. AMD announced a 33% drop in y/o/y profits in Q4 while losses exceeded revenues.

At issue is whether The Foundry, a joint manufacturing venture between AMD and foreign backers, should be allowed to use Intel's patented x86 processor technology that AMD uses legally under a licensing agreement. AMD says The Foundry is a subsidiary, Intel says it isn’t.

AMD accuses Intel of bullying here to prevent the JV. Intel is being probed for anti-trust practices, so the accusations might not seem unfounded. But AMD’s Q408 conference call shows there may be something to Intel’s worry about its proprietary rights going to a third party:

In the early stages, obviously as we are the only, we're the anchor tenant and the only customer through typical accounting regulations, we'll have consolidation. As Foundry Co executes its game plan and brings on third-party revenue, we will have the ability at some points in time in the future to not consolidate.

And then as time goes on and capital calls are required to fund that business to make the large capital investments to build out different clusters, we will, as we've said in the past, most likely not participate in those capital calls and our ownership will decline as time goes on. Through a combination of all those things, it will become just an investment by AMD and then eventually it just kind of winds its way out as this time goes on.

The Foundry Company is not going to be a cash flow implication to AMD The Product Company.

If the deal is held up in any way, AMD could suffer mightily:

Q: Regarding the breakeven at $1.3 billion. If you do some math on that, it would seem to equate to roughly down 10% in the March quarter. I know you're not giving specific guidance, but it would require roughly a 30% sequential improvement in June to get there in the breakeven quarters as you're talking about. Your biggest competitor is talking about down 15% and not really even giving guidance.

A: When we talk about the $1.3 billion breakeven model, what we're talking about is, where we are sitting with the cost structure of the company, with the goal being given the severely limited visibility that we have in the business to preserve and generate cash on the one hand, while preserving on long-term investments particularly in the product roadmap and those two priorities land us at an operating expense level that Bob defined in his opening remarks. Those remarks are not intended to forecast, where revenue is going to be over the course of the next two quarters

Margins:

Q: Relative to that 40% gross margin target, you said the comfort level has to do with the Foundry Company. I guess I'm a little bit concerned, given where utilization rates are going to bottom, given your inventory levels, Intel's inventory levels, NVIDIA’s inventory levels, the pricing is never the first casualty in a downturn, it is the second. So, I guess at what point does pricing start to impact that 40% comfort level? How much of a move do we need to see before you start to get nervous about that statement on 40% gross margins?

A: We feel comfortable based upon where we're at, what we see in the marketplace that a 40% gross margin seems doable. And the current quarter's results show, if you look at it over a period of time even in 2008, even though maybe we haven't been always in the best position from a product offering, we've been in that 40% kind of zone.

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Comments

[Smart1:]

I will ask the same question I have asked on other forums. Even if "The Foundry Company" is allowed to go ahead with the X86 stuff (which does not sound likely), how do they hope to compete with the likes of TSMC, Chartered etc.....????. That would be almost impossible even if they were on a level playing field with those companies but they are not. First, their fabs are in Germany and potentially New York (no way that will ever happen). Second, being in the 3rd party semiconductor manufacturing business requires an extensive and complex customer interface infrastructure which "The Foundry Co" appears to lack completely. Thirdly, and perhaps most important, it requires customer confidence. Customers know how difficult some of this stuff is and will take years to build confidence in a brand new supplier (especially one also building their own [AMD's] product in the same fabs).

Jan 26 12:23 PM

[principle:]

Smart1 you say words but not much of an argument.

The point of this article is even wrong. AMD's point in the matter is that intially they will be the only customer. And as customers grow they will not be the owners of the products being built so its not consolidated, but they will still have a share of the company, however diluted it gets and however big the company grows to. And the only products that are X86 will be theirs. So in effect they will own the part which is using the license from Intel.

AMD does not have to do all of the advertising and finding the customers. They have the backing of a nation in a way to do that who probably has a lot of clout in some arenas of business.

The foundry compnay with AMD's help can offer co-developed with IBM advanced intelectual property libraries that will be attractive.

And why would anyone doubt the completion of a fabrication plany in NY? As long as the foundry company is formed it is going to happen.

Jan 26 03:50 PM

[Smart1:]

When that deal started, oil was $150/barrel. The Abu Dhabi people are not stupid, they will realize the problems of this deal eventually, if not already. You don't find customers for a semiconductor foundry by advertising. You find them by demonstrating reliability and competence in that business, neither of which AMD or their partners have. I can't believe anyone still believes that fab in NY will be built any time soon, if ever.

Jan 26 03:57 PM

[principle:]

Yes, demonstration, lets see, who is the only company in the world able to compete with Intel on x86 cpus? What are the fastest supercomputers built running on, lets see AMD. And do you not know of AMD's codevelopment of advanced libraries with IBM? AMD does impressive work, they make the most advanced computer chipsets and the faster graphics processors, as well as the most efficient cpus.

AMD is one of the most impressive semiconductor design and fabrication houses. Except for a couple blunders with Barcelona, they have been successful with first time silicon, which is impressive. They also manufacture at 65 and 45nm. Who else has mature 45nm libraries for hire? Who?????? Who can afford to pay anyone to develop masks and test and dice silicon and make anything at 45nm???? Intel can.

I was working on a project not long ago, and I wish we had mature 90nm libraries in the US, we do now but it was only like a year ago. Just because someone claims they have something its not always true, getting useful libraries with reliable things like basic resistors and capacitors and such can be difficult at the smaller sizes. AMD did it the first time with their 45nm cpus.

Jan 26 08:08 PM

[Smart1:]

Building your own stuff is far different than building somebody else's at a competitive cost....By the way, AMD is also the only semiconductor company in history to lose $6.5Bn (with a B) in two years. I don't call that competing....Their losses in Q4 were greater than their revenue. What customer company in their right mind would put a critical design into a company in that much trouble (who has never done foundry work before)...?

Jan 26 08:32 PM

[principle:]

selling foundry time will make them more competitive. they run the foundry now. They have the services, their people deal with thier people, now they just have to deal with more people. How is building other people stuff far different, explain it. Technically its very the same, its just customer service wise different. Now their people will be more fully utilized. How many of anything have you ever designed and had fabricated at a foundry?

Its a capital investment cost, and a price war where they lost money, somewhat on purpose to try to gain marketshare, but it was a dumb management, not incompetent technicians and engineers. Look at the flash industry, none of them really do great either trying to be competitive.

Its not AMD either so no they havent lost $6.5B, its a "new" company, different venture. The best part of AMD, the pure fabrication side is in question, not thier dumb management.

Jan 26 11:52 PM

[Smart1:]

I have had hundreds of millions of dollars worth of parts fabricated in foundries. You will never understand.....Go ahead and buy some AMD stock....!!!

Jan 27 11:26 AM

[principle:]

You paid for them, you received the items? Did you design or develop them, did you negotiate the IP licenses, did you manage the foundry tape outs and testing and dicing, or just the easy production part? I have done a lot of work with more than one foundry from concept to production, from 300nm to 90nm feature sizes.

Jan 27 05:46 PM

[Smart1:]

Then you certainly should know better.....

Jan 27 07:02 PM