ADVANCED MICRO DEVICES INC quarterly report, Q1 FY2016

AMD 2016 First-Quarter Form 10-Q Summary

Business context and reporting period

Advanced Micro Devices, Inc. is a global semiconductor company offering x86 microprocessors, accelerated processing units, chipsets, discrete and professional graphics, server and embedded processors, semi-custom system-on-chip products, game-console technology and intellectual-property licensing. The filing covers the 13-week quarter ended March 26, 2016, compared with the 13-week quarter ended March 28, 2015.

Financial performance and position

Metric	Q1 2016	Q1 2015	Change
Net revenue	$832 million	$1.030 billion	Down 19%
Gross margin	$269 million	$326 million	Down 17%
Gross margin percentage	32%	32%	Flat
Operating loss	$68 million	$137 million	Improved $69 million
Net loss	$109 million	$180 million	Improved $71 million
Loss per diluted share	$0.14	$0.23	Improved $0.09
Cash flow from operations	$(42) million	$(172) million	Improved $130 million
Capital expenditures	$26 million	$22 million	Up $4 million

Implied operating margin was approximately negative 8.2%, compared with negative 13.3% in the prior-year quarter. Implied net margin was approximately negative 13.1%, compared with negative 17.5%.

Computing and Graphics revenue was $460 million, down 14%, primarily because of lower notebook processor shipments, an 11% unit decline and a 5% average selling price decline. The segment operating loss improved to $70 million from $75 million.
Enterprise, Embedded and Semi-Custom revenue was $372 million, down 25%, primarily because of lower semi-custom SoC shipments. Operating income declined to $16 million from $45 million.
Research and development expense was $242 million, unchanged year over year. Marketing, general and administrative expense declined 20% to $105 million.
Results included a $7 million licensing gain related to the China joint ventures and a $3 million net reversal of restructuring and other special charges. The prior-year quarter included $87 million of restructuring and special charges, including the $75 million exit charge for the dense server systems business.
Interest expense was $40 million in both periods. Income tax provision was $1 million, compared with $3 million in Q1 2015.

Liquidity, debt and balance-sheet items

Cash and cash equivalents were $716 million at March 26, 2016, down from $785 million at December 26, 2015. Cash declined $69 million during the quarter.
Total debt was approximately $2.2 billion, consisting of $230 million of short-term debt and $2.006 billion of long-term debt on the balance sheet. Long-term debt had an estimated fair value of $1.476 billion versus a carrying amount of $2.002 billion.
The secured revolving credit facility had $230 million outstanding, $15 million of letters of credit and up to $79 million available for additional borrowings. AMD reported compliance with all required covenants.
Total assets were $2.981 billion and stockholders’ equity was a deficit of $503 million at quarter-end.
AMD stated that cash, restructuring savings and available revolver capacity were expected to fund operations and capital expenditures for the next 12 months, but noted that longer-term funding or refinancing may be required.
Contractual obligations totaled $4.467 billion, including $2.255 billion of note principal, $852 million of estimated aggregate interest, $299 million of operating leases, $643 million of purchase obligations and approximately $300 million of currently known obligations to GLOBALFOUNDRIES.

Material changes and unusual items

Revenue declined in both reportable segments, with the largest pressure in semi-custom SoCs and notebook processors. Gross margin percentage remained stable despite the revenue decline.
Operating and net losses improved substantially because of the absence of the prior-year dense-server exit charge, lower restructuring charges, lower marketing and administrative expenses, and the China JV licensing gain.
AMD formed China JV1 and China JV2 with Tianjin Haiguang Advanced Technology Investment Co., Ltd. and licensed intellectual property for approximately $293 million of milestone-based payments. AMD recognized $7 million of related operating income in the quarter and reported no obligation to fund losses beyond its investment.
AMD expected the sale of 85% of two assembly, testing, marking and packaging operations to Nantong Fujitsu Microelectronics to close in Q2 2016, subject to regulatory and other approvals. The transaction was valued at approximately $436 million, with expected net cash proceeds to AMD of approximately $320 million. Related assets and liabilities were classified as held for sale.
AMD purchased $208 million of wafer manufacturing and research and development services from GLOBALFOUNDRIES during the quarter and had approximately $300 million of currently known future obligations. The company was negotiating a sixth amendment to its wafer supply agreement and could not quantify obligations beyond that amount.
The 2015 restructuring plan, involving an approximately 5% global headcount reduction and other organizational actions, was expected to be substantially completed by the end of Q3 2016.

Guidance, outlook, management commentary and risks

The filing does not provide a specific quarterly revenue or earnings guidance figure. Management highlighted continued execution of its product roadmap, including Polaris GPU sampling, new APU and desktop processor launches, new embedded products and Radeon Pro Duo for virtual-reality content creation. Management also described the China licensing initiative and the planned ATMP joint ventures as strategic efforts to expand server opportunities, simplify the business and strengthen the balance sheet.

Key operating risks include declining PC demand, semiconductor cyclicality, intense competition from Intel and other graphics competitors, pricing pressure, product-transition execution and dependence on successful new products.
AMD relies heavily on third-party manufacturing, particularly GLOBALFOUNDRIES for microprocessor and APU production. Capacity, yield, pricing, technology transitions or failure to finalize the wafer supply agreement could adversely affect margins and supply.
Customer concentration is significant: the top five customers represented approximately 64% of Q1 revenue; five customers represented approximately 94% of Enterprise, Embedded and Semi-Custom revenue.
The Hatamian securities class action received class certification on March 16, 2016, and discovery was ongoing. AMD stated that any potential liability was not expected to materially affect financial condition, cash flows or results of operations. Related derivative lawsuits were stayed.
Substantially all U.S. and Canadian deferred tax assets remained subject to a valuation allowance. Gross unrecognized tax benefits were $39 million.
AMD identified substantial indebtedness, liquidity and refinancing needs, supply-chain dependence, customer concentration, foreign operations, intellectual-property litigation, cybersecurity, environmental matters and potential goodwill impairment as material risks.

Important facts for investors to verify

Whether revenue stabilizes or declines further in notebook processors and semi-custom SoCs, and whether the Computing and Graphics segment can reach profitability.
Progress, regulatory approval, closing and actual cash proceeds from the planned ATMP joint venture transaction.
Terms and financial impact of the sixth amendment to the GLOBALFOUNDRIES wafer supply agreement and the company’s ongoing wafer commitments.
Cash-burn trends, debt maturities, revolver availability and AMD’s ability to refinance or repay obligations while remaining dependent on external financing.
Achievement of the 2015 restructuring savings and completion of the restructuring plan without disrupting product development or operations.
Milestone payments and potential royalties from the China JVs, recognizing that future payments and royalties were contingent and not guaranteed.
Developments in the certified securities class action, derivative lawsuits and other litigation or regulatory matters.