Advanced Micro Devices, Inc. — Form 10-Q Summary
Business context and reporting period
AMD is a global semiconductor company offering Ryzen, Radeon, EPYC, semi-custom, embedded and other processor and graphics products, as well as development services and intellectual-property licensing. The filing covers the 13-week quarter and 39 weeks ended September 28, 2019, compared with September 29, 2018. AMD reported two segments: Computing and Graphics and Enterprise, Embedded and Semi-Custom.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net revenue | $1.801 billion | $1.653 billion | $4.604 billion | $5.056 billion |
| Gross profit | $777 million | $661 million | $1.919 billion | $1.910 billion |
| Gross margin | 43% | 40% | 42% | 38% |
| Operating income | $186 million | $150 million | $283 million | $423 million |
| Net income | $120 million | $102 million | $171 million | $299 million |
| Diluted EPS | $0.11 | $0.09 | $0.15 | $0.28 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $51 million | $(86) million |
- Q3 segment revenue was $1.276 billion in Computing and Graphics and $525 million in Enterprise, Embedded and Semi-Custom. Segment operating income was $179 million and $61 million, respectively.
- As of September 28, 2019, cash and cash equivalents were $1.156 billion, marketable securities were $53 million, and total cash, cash equivalents and marketable securities were approximately $1.21 billion.
- Total assets were $5.253 billion and stockholders’ equity was $2.176 billion, compared with $1.266 billion at December 29, 2018.
- Net debt on the balance sheet was $872 million of long-term debt, with no short-term debt. Aggregate debt principal was approximately $1.1 billion.
- Net cash used in investing activities was $123 million, including $175 million of property and equipment purchases. Net cash provided by financing activities was $150 million.
- Inventory increased to $1.040 billion from $845 million at year-end 2018, while accounts receivable increased to $1.393 billion from $1.235 billion.
Material changes versus the prior comparable periods
- Q3 revenue increased 9%, operating income increased 24%, and net income increased 18%. The nine-month comparison was weaker: revenue declined 9%, operating income declined 33%, and net income declined 43%.
- Computing and Graphics Q3 revenue increased 36%, driven primarily by higher Ryzen processor sales, approximately 10% higher unit shipments and a 40% increase in average selling price. Nine-month segment revenue decreased 3%, primarily because of lower graphics-channel memory sales following the decline in blockchain-related demand.
- Enterprise, Embedded and Semi-Custom Q3 revenue decreased 27% because of lower semi-custom revenue, partly offset by higher EPYC server processor sales. Nine-month revenue decreased 19% on the same basis.
- Gross margin improved to 43% in Q3 and 42% for the nine months, primarily due to a greater mix of Ryzen and EPYC products with higher margins.
- Research and development expense increased 12% in Q3 and 8% for the nine months; marketing, general and administrative expense increased 25% and 28%, respectively, reflecting higher product-development and go-to-market activity.
- The nine-month results included a $60 million licensing gain related to the THATIC joint venture. The nine-month All Other operating loss also included a $12 million contingent legal-loss accrual.
- AMD reduced debt through redemptions, repurchases and conversions. It converted $126 million principal amount of convertible notes into approximately 16 million shares and repurchased portions of its 7.50% and 7.00% senior notes.
- West Coast Hitech exercised a warrant for 75 million AMD shares, generating $449 million of cash and increasing shares outstanding.
Guidance, outlook, commentary, risks and unusual items
- No specific quarterly or full-year revenue or margin guidance is provided in the filing text. Management states that cash, cash equivalents, marketable securities and the secured revolving facility are expected to fund operations and capital expenditures for the next 12 months.
- AMD launched second-generation EPYC processors in August 2019 and Ryzen Pro 3000 and Athlon Pro desktop processors in September 2019. Management identifies product execution, Ryzen demand and EPYC adoption as important growth drivers.
- The $500 million secured revolving facility had no borrowings outstanding and $14 million of letters of credit outstanding at quarter-end. AMD reported compliance with its covenants, including maximum total leverage and minimum interest-coverage requirements.
- The 2.125% convertible notes became convertible during the fourth quarter of 2019. Their outstanding principal was $679 million at quarter-end, and conversion could result in additional share dilution.
- AMD is subject to minimum annual wafer-purchase targets under its GlobalFoundries wafer supply agreement through 2021. Failure to meet targets could result in payments or excess inventory and higher unit costs.
- Key risks include intense competition from Intel and other semiconductor vendors, dependence on third-party foundries and assembly providers, supply and manufacturing-yield constraints, customer concentration, semiconductor cyclicality, product execution, inventory obsolescence, international trade restrictions and tariffs, export controls involving THATIC, cybersecurity and product vulnerabilities, intellectual-property litigation, and debt-service requirements.
- The filing reports no off-balance-sheet arrangements and states that management believes disclosed legal matters will not have a material adverse effect. The Dickey litigation settlement received preliminary court approval on October 4, 2019; Quarterhill patent litigation remained outstanding.
- AMD adopted the new lease accounting standard in 2019, recording operating lease right-of-use assets and liabilities. It expects the credit-loss standard effective in 2020 to have no material impact.
Investor verification checklist
- Verify whether Ryzen and EPYC growth continues to offset declining semi-custom and graphics-channel demand.
- Reconcile reported cash generation with rising accounts receivable and inventory balances.
- Monitor gross-margin sustainability as product mix, pricing and manufacturing costs change.
- Assess potential dilution from convertible-note conversions, employee awards and other warrants.
- Review GlobalFoundries wafer-purchase obligations and dependence on TSMC and other third-party manufacturers.
- Track THATIC-related licensing receipts, royalties and the impact of U.S. Entity List restrictions.
- Evaluate liquidity, debt maturities, revolving-facility covenants and the ability to refinance or service debt during industry downturns.
- Follow outstanding patent, consumer, product-security and other litigation, including potential settlements or injunctions.