Business Context and Reporting Period
Advanced Micro Devices, Inc. (AMD) filed this unaudited Form 10-Q for the 13-week quarter and 39-week year-to-date period ended September 30, 2017, compared with September 24, 2016. AMD develops x86 processors, graphics processors, server and embedded processors, semi-custom system-on-chip products, game-console technology and intellectual-property licenses. Its reportable segments are Computing and Graphics and Enterprise, Embedded and Semi-Custom.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net revenue | $1.643 billion | $1.307 billion | $3.849 billion | $3.166 billion |
| Gross profit | $573 million | $59 million | $1.308 billion | $647 million |
| Gross margin | 35% | 5% | 34% | 20% |
| Operating income (loss) | $126 million | $(293) million | $122 million | $(369) million |
| Net income (loss) | $71 million | $(406) million | $(18) million | $(446) million |
| Diluted EPS | $0.07 | $(0.50) | $(0.02) | $(0.56) |
- Computing and Graphics revenue increased 74% year over year to $819 million in Q3, driven by higher graphics and Ryzen desktop processor sales, stronger product mix and IP-related revenue. Segment operating income was $70 million versus a $66 million loss.
- Enterprise, Embedded and Semi-Custom revenue declined 1% to $824 million. Lower semi-custom SoC sales were largely offset by IP-related revenue and AMD EPYC datacenter processor sales. Segment operating income declined to $84 million from $136 million.
- Research and development expense increased 22% to $315 million in Q3 and 16% to $860 million for the first nine months. Marketing, general and administrative expense increased 13% to $132 million in Q3.
- Cash and cash equivalents were $879 million at September 30, 2017, down from $1.264 billion at December 31, 2016. Total assets were $3.586 billion and stockholders’ equity was $520 million.
- Year-to-date cash flow from operations was negative $315 million, compared with negative $98 million in the prior-year period. Investing cash flow was negative $71 million, including $69 million of capital expenditures; financing cash flow was positive $1 million.
- Debt consisted of $70 million of short-term revolving borrowings and $1.356 billion of long-term debt, net. The principal amount of outstanding notes was approximately $1.667 billion, excluding the revolving facility. The revolving facility had $327 million available for future borrowings, $19 million of letters of credit outstanding and AMD was in compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- AMD moved from a substantial operating and net loss in Q3 2016 to operating income of $126 million and net income of $71 million in Q3 2017.
- The prior-year period included a $340 million charge related to the sixth amendment to the GLOBALFOUNDRIES wafer supply agreement: a $100 million payment and a $240 million warrant valuation. This significantly depressed prior-year gross margin and operating results.
- Q3 2017 results benefited from stronger Computing and Graphics product mix, graphics demand, Ryzen processor sales and IP-related revenue. The filing states that GPU demand was also supported in part by cryptocurrency mining, a volatile source of demand.
- Year-to-date results continued to show a net loss, despite the improvement in revenue and operating income. The prior-year nine-month period benefited from a $150 million gain on the sale of equity interests in the ATMP joint venture, while 2017 included $52 million of THATIC licensing gain and $17 million of development and other service credits to research and development expense.
- Accounts receivable increased to $771 million from $311 million at December 31, 2016, and inventory increased to $794 million from $751 million, contributing to working-capital cash use.
- The $805 million principal amount of 2.125% convertible senior notes became convertible at the holder’s option from October 1 through December 31, 2017. AMD stated that it currently intended to deliver common shares upon conversion.
Guidance, Outlook, Commentary and Risks
- Management stated that it expected to meet its 2017 wafer purchase target under the GLOBALFOUNDRIES agreement. Obligations to GLOBALFOUNDRIES for expected purchases through 2020 were approximately $2.9 billion, and future purchases beyond 2020 were expected to remain material.
- The filing references anticipated fourth-quarter 2017 sales but does not provide a clear quantitative revenue or margin guidance value in the supplied text.
- AMD believes existing cash and the secured revolving credit facility will fund operations, including capital expenditures, for the next 12 months. Management also cautioned that external financing may be needed to meet future debt obligations if operating cash flow is insufficient.
- AMD’s principal risks include intense competition from Intel and NVIDIA, reliance on third-party foundries and assembly providers, manufacturing yields and supply constraints, semiconductor cyclicality, product-launch execution, customer concentration and demand volatility.
- Sony, Microsoft and HP collectively represented approximately 49% of Q3 revenue, creating meaningful customer-concentration risk.
- International sales represented 72% of Q3 revenue and 75% of nine-month revenue. AMD uses foreign-currency hedges, but currency movements remain a risk.
- AMD adopted goodwill impairment guidance early in Q3 2017 without a current material impact. The company was evaluating several future accounting standards, including revenue recognition, leases, credit losses and financial instruments. It expected to adopt the new revenue standard in fiscal 2018, likely using the full retrospective method; the most significant expected effect was accelerated recognition of certain distributor revenue.
- The Hatamian securities class action was subject to a settlement agreement signed October 9, 2017, funded entirely by certain insurance carriers and subject to court approval. AMD stated that the potential liability was not expected to be material. AMD was dismissed from the ZiiLabs patent proceedings after obtaining a license; the related obligation was not material. The Dickey consumer litigation remained pending, but management did not expect a material adverse effect.
Investor Verification Checklist
- Verify whether the Q4 2017 conversion of the 2.125% notes resulted in share issuance, cash payment or a combination, and quantify the related dilution.
- Monitor operating cash flow, accounts receivable and inventory levels given the $315 million year-to-date operating cash outflow.
- Assess AMD’s ability to fund approximately $2.9 billion of stated GLOBALFOUNDRIES obligations through 2020 while maintaining product investment.
- Separate recurring operating performance from IP licensing income, distributor accounting changes and other unusual items.
- Track Computing and Graphics momentum, EPYC adoption and the sustainability of GPU demand associated with cryptocurrency mining.
- Review customer concentration, third-party manufacturing capacity, Intel and NVIDIA competition, and the company’s ability to meet product-launch and wafer-purchase commitments.