ADVANCED MICRO DEVICES INC quarterly report, Q1 FY2022

AMD 2022 Q1 Form 10-Q Summary

Business Context and Reporting Period

Advanced Micro Devices, Inc. is a global semiconductor company offering CPUs, GPUs, server and embedded processors, semi-custom SoCs, FPGAs, adaptive SoCs and related development services. This unaudited report covers the 13 weeks ended March 26, 2022, compared with the 13 weeks ended March 27, 2021.

AMD completed its $48.8 billion acquisition of Xilinx on February 14, 2022. Xilinx results are included from the acquisition date through quarter-end and are reported as a separate operating segment.

Key Financial Metrics

Metric	Q1 2022	Q1 2021	Change
Net revenue	$5.887 billion	$3.445 billion	Up 71%
Gross profit	$2.818 billion	$1.587 billion	Up 78%
Gross margin	48%	46%	Up 2 percentage points
Operating income	$951 million	$662 million	Up 44%
Net income	$786 million	$555 million	Up 42%
Diluted EPS	$0.56	$0.45	Up $0.11
Cash flow from operations	$995 million	$898 million	Up $97 million

Approximate operating margin was 16% in Q1 2022 versus 19% in Q1 2021, and approximate net margin was 13% versus 16%, reflecting acquisition-related amortization, costs and higher operating expenses.

Computing and Graphics revenue was $2.802 billion, up 33%, driven by higher Ryzen and Radeon average selling prices, partially offset by a 7% decline in unit shipments in a tight supply environment.
Enterprise, Embedded and Semi-Custom revenue was $2.526 billion, up 88%, driven by EPYC processors, semi-custom products and embedded sales.
Xilinx contributed $559 million of revenue and $233 million of operating income for the post-acquisition period.
Research and development expense increased 74% to $1.060 billion; marketing, general and administrative expense increased 87% to $597 million.
Licensing gain was $83 million, compared with $4 million in the prior-year period, primarily from a milestone achievement and royalty income.
Other expense was $42 million, including a $44 million decrease in the fair value of an equity investment.
The effective tax rate was 12.6%, compared with 13.8% in the prior-year period. The 2022 rate benefited from the geographic mix of income, research credits, FDII benefits and a GILTI accounting change.

Liquidity, Debt and Capital Allocation

Cash, cash equivalents and short-term investments totaled $6.532 billion at March 26, 2022, compared with $3.608 billion at December 25, 2021. The increase primarily reflected cash and investments acquired with Xilinx.
Cash provided by operating activities was $995 million. Investing cash flow was $3.158 billion, including $2.366 billion of cash acquired with Xilinx. Financing cash flow used $1.948 billion, primarily for share repurchases.
Principal debt increased to $1.813 billion from $313 million, primarily from $1.5 billion of Xilinx notes assumed in the acquisition. Net debt was $1.787 billion.
AMD repurchased 15.8 million shares for $1.9 billion during the quarter. Approximately $8.3 billion remained available under the repurchase program at quarter-end.
AMD had no borrowings under its existing $500 million revolving facility at quarter-end and had $14 million of letters of credit outstanding.
On April 29, 2022, after quarter-end, AMD entered into a new five-year, $3.0 billion unsecured revolving credit facility and terminated the prior $500 million facility.

Material Changes Versus the Prior Comparable Period

Revenue increased 71%, led by strong growth in Computing and Graphics and Enterprise, Embedded and Semi-Custom, plus the addition of Xilinx revenue.
Gross margin improved by two percentage points despite $479 million of Xilinx intangible amortization and $208 million of acquisition-related costs.
Operating expenses increased substantially because of Xilinx, higher headcount, product development and go-to-market activity.
Balance sheet assets rose to $66.915 billion from $12.419 billion, primarily due to the Xilinx acquisition, which added $22.794 billion of goodwill and $27.308 billion of identified intangible assets on a preliminary basis.
Total stockholders’ equity increased to $55.333 billion from $7.497 billion, primarily due to the issuance of AMD shares as Xilinx acquisition consideration.
Inventory increased to $2.431 billion from $1.955 billion, while accounts receivable increased to $3.677 billion from $2.706 billion.

Outlook, Commentary, Risks and Unusual Items

Management stated that cash, short-term investments, operating cash flow and the new revolving credit facility are expected to fund operations, capital expenditures and purchase commitments over the next 12 months and beyond. The filing does not provide a formal quantitative revenue or earnings forecast.

Management described demand as strong but noted tight supply conditions and a strategic focus on premium and higher-end products.
AMD expects international sales to remain significant; international sales were 69% of Q1 revenue.
AMD expects historically higher revenue in the second half of the year, although seasonality may be affected by market conditions and product transitions.
AMD entered into an agreement to acquire Pensando Systems for approximately $1.9 billion, with closing expected in Q2 2022 subject to customary conditions and regulatory approval.
Future acquisition-related intangible amortization is estimated at $3.0 billion for the remainder of 2022 and $2.780 billion in 2023, assuming no impairment.
Unconditional purchase commitments totaled $9.987 billion, including $6.463 billion due during the remainder of 2022. These commitments primarily relate to wafers, substrates, software and technology licenses.
Key risks include reliance on third-party foundries and assembly providers, supply constraints, semiconductor cyclicality, intense competition from Intel and other competitors, customer concentration, export controls and geopolitical developments, COVID-19 effects, cybersecurity, product execution, litigation and integration of Xilinx.
AMD reported limited COVID-19-related disruptions during the quarter but continues to monitor supply-chain, workforce and operational effects.
Management concluded that disclosure controls were effective at the reasonable assurance level; Xilinx systems and control processes were still being integrated.

Most Important Facts for Investors to Verify

Separate the underlying operating performance of AMD’s legacy businesses from the partial-quarter contribution and acquisition-related effects of Xilinx.
Assess the recurring impact of approximately $479 million of quarterly Xilinx intangible amortization and the expected future amortization schedule.
Monitor supply availability, wafer and substrate commitments, inventory growth and the effect of constrained unit shipments on future revenue and margins.
Evaluate whether the $8.3 billion remaining share-repurchase authorization is consistent with liquidity needs, acquisition funding and debt obligations.
Review the preliminary Xilinx purchase-price allocation, goodwill and intangible-asset valuations for later measurement-period adjustments or impairment risk.
Track the closing and financing implications of the planned Pensando acquisition and the use of the new $3.0 billion revolving facility.
Review customer concentration, international exposure, export-control developments and pending intellectual-property litigation, including matters inherited with Xilinx.