Intel (NASDAQ:INTC) denies allegations by arch-rival Advanced Micro Devices (NASDAQ: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
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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