Business Context and Reporting Period
Advanced Micro Devices, Inc. (AMD) filed this unaudited Form 10-Q for the 13 and 26 weeks ended June 25, 2022, compared with June 26, 2021. AMD is a global semiconductor company serving data center, client computing, gaming and embedded markets. The period includes Xilinx results from its February 14, 2022 acquisition and limited Pensando results following the May 26, 2022 acquisition.
AMD revised its reportable segments to Data Center, Client, Gaming and Embedded; prior-period segment information was retrospectively adjusted.
Financial Performance and Position
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Net revenue | $6.550 billion | $3.850 billion | $12.437 billion | $7.295 billion |
| Gross profit | $3.028 billion | $1.830 billion | $5.846 billion | $3.417 billion |
| Gross margin | 46% | 48% | 47% | 47% |
| Operating income | $526 million | $831 million | $1.477 billion | $1.493 billion |
| Net income | $447 million | $710 million | $1.233 billion | $1.265 billion |
| Diluted EPS | $0.27 | $0.58 | $0.81 | $1.03 |
| Cash flow from operations | Not separately provided | Not separately provided | $2.033 billion | $1.850 billion |
Approximate Q2 operating and net margins were 8.0% and 6.8%, respectively; six-month operating and net margins were approximately 11.9% and 9.9%.
- Segment Q2 revenue was $1.486 billion for Data Center, $2.152 billion for Client, $1.655 billion for Gaming and $1.257 billion for Embedded.
- Q2 Data Center revenue increased 83%, Client revenue increased 25% and Gaming revenue increased 32%. Embedded revenue increased substantially, primarily because of Xilinx.
- Q2 operating expenses included $1.023 billion of acquisition-related intangible amortization, comprising $407 million in cost of sales and $616 million in operating expenses.
- Research and development expense rose 97% year over year to $1.300 billion; marketing, general and administrative expense rose 74% to $592 million.
- Cash, cash equivalents and short-term investments totaled approximately $6.0 billion at June 25, 2022, compared with $3.6 billion at December 25, 2021.
- Total debt principal was $2.813 billion, compared with $313 million at year-end 2021. Net debt was $2.777 billion after discounts and issuance costs.
- AMD had no borrowings under its new $3.0 billion, five-year unsecured revolving credit facility and stated that it was in compliance with the facility’s covenants.
Material Changes Versus the Prior Comparable Period
- Revenue increased 70% in Q2 and 71% for the first six months, led by higher EPYC server processor sales, higher Ryzen mobile processor sales, increased semi-custom gaming revenue and the addition of Xilinx.
- Operating income declined 37% in Q2 and was broadly stable for the first six months, primarily because of acquisition-related intangible amortization, higher operating expenses and acquisition costs.
- Net income declined 37% in Q2 and 3% for the first six months. Diluted EPS declined more than net income because of the 429 million shares issued for the Xilinx acquisition.
- AMD completed the $48.8 billion Xilinx acquisition, including $48.5 billion of stock consideration, and recorded $22.8 billion of Xilinx goodwill and $27.3 billion of acquired intangible assets on a preliminary basis.
- AMD completed the Pensando acquisition for approximately $1.9 billion, with preliminary purchase consideration of $1.7 billion, including $1.1 billion of goodwill.
- Six-month investing cash flow benefited from $2.366 billion of cash acquired with Xilinx and was reduced by $1.558 billion paid for Pensando. Financing cash flow included $2.835 billion of share repurchases and $991 million of debt proceeds.
- Inventory increased to $2.648 billion from $1.955 billion at year-end, while accounts receivable increased to $4.050 billion from $2.706 billion.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear numerical revenue or earnings outlook for future periods. Management stated that cash, short-term investments, operating cash flow and the revolving credit facility are expected to fund operations, capital expenditures and purchase commitments for the next 12 months and beyond.
- AMD had $10.685 billion of unconditional future purchase commitments, primarily for wafers, substrates, software, technology and intellectual-property licenses.
- Management expects substantial future amortization of acquisition-related intangibles: approximately $2.011 billion for the remainder of 2022 and $2.819 billion in 2023, assuming no impairment.
- A GILTI accounting policy change created $863 million of deferred tax liabilities and increased Q2 and six-month net income by $65 million and $136 million, respectively, versus the former method.
- A one-time or unusual licensing gain of $89 million was recognized during the first six months, including a milestone achievement.
- AMD’s effective tax rate was 10.8% in Q2 and 11.9% for the first six months, primarily reflecting FDII benefits and research credits.
- Key risks include semiconductor cyclicality, weakening PC or gaming demand, intense competition from Intel and other vendors, dependence on TSMC, GlobalFoundries and other suppliers, supply-chain constraints, customer concentration, export controls and geopolitical conditions, cybersecurity, product execution, and integration of Xilinx and Pensando.
- AMD disclosed patent litigation involving Polaris and Xilinx, and litigation involving Analog Devices and Xilinx. Management stated that reasonably possible losses from disclosed and other legal matters are not expected to have a material adverse effect, although outcomes remain uncertain.
- Management reported effective disclosure controls and procedures, while noting that Xilinx operations, control processes and information systems were still being integrated.
Most Important Facts to Verify
- Whether post-acquisition revenue growth, especially from Xilinx’s Embedded business, is sustainable after the comparable-period benefit of acquisition accounting is normalized.
- The effect of approximately $25.0 billion of remaining acquisition-related intangible amortization on future reported gross margins, operating income and EPS.
- Progress toward integrating Xilinx and Pensando, including realization of expected synergies and the risk of goodwill or intangible-asset impairment.
- Whether inventory, receivables and supplier commitments remain aligned with customer demand amid potential PC, gaming and semiconductor-cycle weakness.
- Debt maturity and refinancing requirements, including the $312 million of notes due in 2022 and $750 million due in 2024.
- The impact of export controls, China-related restrictions, geopolitical events and reliance on third-party manufacturing capacity.
- Future cash uses, including the $7.4 billion of remaining share-repurchase authorization, capital expenditures, acquisitions and purchase commitments.