Yahoo Finance AMD Taps Licensing Business to Boost Cash Flow
What Do AMD's 1Q16 Earnings and Guidance Say about Its Future?
AMD eyes licensing to boost cash flow
In the previous parts of the series, we saw that Advanced Micro Devices (AMD) is looking to expand its EESC (Enterprise, Embedded, and Semi-Custom) business by launching new products such as Zen and securing new design wins for semi-custom processors.
However, the company needs large capital to grow in this space, and it’s currently cash strapped. So, it’s ventured into licensing to leverage its rich intellectual property portfolio to generate more revenue. Qualcomm (QCOM) earns more than 90% of its operating profit from licensing.
AMD’s first licensing deal
On AMD’s 1Q16 earnings call, it announced a $293 million licensing agreement under which it would license its x86 processor and SoC (system-on-chip) technology to joint venture company Tianjin Haiguang Advanced Technology Investment, which comprises public and private Chinese (MCHI) companies.
The licensing fee of $293 million is subject to the completion of some development milestones. As there is no definite timeline for bringing products to the market, there’s the possibility of payment delays.
AMD gained $7 million from the licensing deal in 1Q16, and it expects to gain about $52 million in 2016. Over and above the licensing fee, AMD will also receive a royalty fee on the chips sold by the Tianjin Haiguang in China.
Possible challenges
AMD will benefit from this deal, as it may open up China’s data center market, where web service companies such as Alibaba (BABA) and Baidu run huge data centers. However, Intel (INTC) may challenge the deal on the grounds that it licensed the x86 technology to AMD, and AMD cannot sub-license it to a third party.
AMD has made assurances that the joint venture terms do not breach the sub-licensing clause. However, AMD’s licensing the x86 technology may attract the attention of the US authorities, who have banned Intel from supplying its high-end processors to China’s supercomputers due to national security concerns.
Possible licensing opportunities
AMD has a diverse intellectual property portfolio of x86, ARM, graphics, and SoCs. It’s looking to monetize this portfolio. Plus, it’s adding revolutionary technologies such as Zen and Polaris, which may attract many customers from various segments. Recently, there were rumors that Intel was in talks with AMD to license the latter’s GPU technology.
In the coming part of the series, we’ll look at AMD’s cash flows and the positive impact of licensing on its cash reserves.
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