AMD 2019 Q2 Form 10-Q Summary
Business context and reporting period
Advanced Micro Devices, Inc. filed its quarterly report for the 13 weeks ended June 29, 2019, with comparative periods ended June 30, 2018. AMD develops x86 processors, graphics processors, server and embedded processors, semi-custom system-on-chip products, development services and licensed intellectual property. Reportable segments are Computing and Graphics and Enterprise, Embedded and Semi-Custom.
During the quarter, AMD introduced third-generation Ryzen desktop processors, Ryzen 3000 processors with Radeon graphics, Ryzen Pro and Athlon Pro mobile processors, Radeon RX 5700-series graphics cards and the Ryzen Embedded R1000 SoC.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenue | $1,531 million | $1,756 million | $2,803 million | $3,403 million |
| Gross profit | $621 million | $652 million | $1,142 million | $1,249 million |
| Gross margin | 41% | 37% | 41% | 37% |
| Operating income | $59 million | $153 million | $97 million | $273 million |
| Net income | $35 million | $116 million | $51 million | $197 million |
| Diluted EPS | $0.03 | $0.11 | $0.05 | $0.19 |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(183) million | $(162) million |
Q2 revenue declined 13% year over year, while gross margin improved by four percentage points. The higher margin reflected greater sales of Ryzen and EPYC processors, which carried higher margins than the corporate average. Research and development expense rose 4% to $373 million, and marketing, general and administrative expense rose 33% to $189 million.
Segment performance and material changes
- Computing and Graphics: Q2 revenue decreased 13% to $940 million, primarily because of lower Radeon channel sales and lower graphics-channel memory demand following the decline in blockchain-related demand. Higher Ryzen processor and datacenter GPU demand partly offset the decline. Segment operating income fell to $22 million from $117 million.
- Enterprise, Embedded and Semi-Custom: Q2 revenue decreased 12% to $591 million, mainly from lower semi-custom revenue, partly offset by higher EPYC server processor sales. Segment operating income increased to $89 million from $69 million.
- Year-to-date segment results: Computing and Graphics revenue fell 20% to $1.771 billion and operating income fell to $38 million from $255 million. Enterprise, Embedded and Semi-Custom revenue fell 14% to $1.032 billion, while operating income rose to $157 million from $83 million, including a $60 million licensing gain.
- International exposure: International sales represented 71% of Q2 revenue and 74% of year-to-date revenue, compared with 82% for both comparable 2018 periods.
Cash flow, liquidity, debt and balance sheet
- Cash, cash equivalents and marketable securities totaled $1.128 billion at June 29, 2019, compared with $1.156 billion at December 29, 2018. Cash and cash equivalents were $963 million, and marketable securities were $165 million.
- Year-to-date operating cash flow was negative $183 million, driven largely by working-capital changes and higher wafer purchases. Investing cash flow was negative $180 million, including $120 million of capital expenditures and $231 million of marketable-securities purchases. Financing cash flow was positive $248 million.
- Aggregate debt principal was approximately $1.3 billion at June 29, 2019, compared with $1.5 billion at year-end. Balance-sheet debt, net of discounts and issuance costs, was $1.031 billion.
- AMD repaid $70 million under its former secured revolving line of credit and entered into a new five-year secured revolving facility of up to $500 million. No borrowings were outstanding under the new facility; $14 million of letters of credit were outstanding, and AMD was in compliance with its covenants.
- The $805 million principal amount of 2.125% convertible senior notes became convertible at the holder’s option from July 1 through September 30, 2019. AMD stated that its current intent was to deliver common shares upon conversion, creating potential dilution.
- Operating lease liabilities totaled $249 million on a present-value basis, including $38 million classified as current.
Guidance, outlook, commentary and unusual items
The filing does not provide a clear numerical revenue or earnings outlook for the full year. Management stated that available cash, marketable securities and the new revolving facility are expected to fund operations and capital expenditures for the next 12 months, while noting that additional financing may not be available on favorable terms or at all.
- AMD expects future purchases from GLOBALFOUNDRIES to remain material under the wafer supply agreement, which continues through March 1, 2024. Annual wafer purchase targets apply for 2019 through 2021, and failure to meet targets could require payments to GLOBALFOUNDRIES.
- The company recognized a $60 million licensing gain from the THATIC joint venture during the first six months of 2019. In June 2019, THATIC and related entities were added to the U.S. Commerce Department’s Entity List, and AMD stated that it was complying with applicable U.S. law.
- A $7 million contingent legal-loss accrual was recorded in Q2 and a $12 million accrual was recorded year to date. Stock-based compensation expense was $45 million in Q2 and $86 million year to date.
- AMD completed the exercise of a warrant by West Coast Hitech for 75 million shares at $5.98 per share, generating $449 million of financing cash flow and increasing shares outstanding.
- Material risks include intense competition from Intel and other semiconductor companies, dependence on third-party foundries and assembly providers, manufacturing yields and capacity, semiconductor cyclicality, customer concentration, product security vulnerabilities, international trade restrictions, currency exposure, debt and covenant requirements, and intellectual-property litigation.
- AMD disclosed ongoing or potential litigation involving Spectre-related consumer and shareholder claims, MediaTek patent claims in the United States and China, the Dickey consumer class action, and Quarterhill-related patent claims. Management stated that currently known potential liabilities are not expected to have a material adverse effect, although outcomes remain uncertain.
Most important facts for investors to verify
- Whether the Ryzen, EPYC and new Radeon product launches offset continued weakness in semi-custom, Radeon channel and blockchain-related demand.
- Whether the 41% gross margin is sustainable as product mix, pricing and manufacturing costs change.
- AMD’s ability to generate positive operating cash flow while inventories increased to $1.015 billion from $845 million at year-end.
- Potential dilution and cash-versus-share settlement outcomes associated with the convertible notes.
- Compliance with GLOBALFOUNDRIES wafer purchase commitments and the effect of any required shortfall payments.
- Financial and operational consequences of the THATIC Entity List designation and the loss or delay of related licensing or royalty receipts.
- Progress and potential exposure in the MediaTek, Dickey, Quarterhill and remaining Spectre-related proceedings.