Business Context and Reporting Period
Advanced Micro Devices, Inc. is a global semiconductor company serving PC, gaming, data center and embedded markets with CPUs, GPUs, APUs, semi-custom SoCs, chipsets, development services and licensed intellectual property. This unaudited Form 10-Q covers the 13-week quarter and 39-week year-to-date period ended September 25, 2021, compared with September 26, 2020.
Financial Performance and Position
| Metric | Q3 2021 | Q3 2020 | Change |
|---|
| Net revenue | $4.313 billion | $2.801 billion | Up 54% |
| Gross profit | $2.086 billion | $1.230 billion | Up 70% |
| Gross margin | 48% | 44% | Up 4 percentage points |
| Operating income | $948 million | $449 million | Up 111% |
| Net income | $923 million | $390 million | Up 137% |
| Diluted EPS | $0.75 | $0.32 | Up 134% |
| Year-to-date metric | 9M 2021 | 9M 2020 |
|---|
| Net revenue | $11.608 billion | $6.519 billion |
| Gross profit | $5.503 billion | $2.896 billion |
| Gross margin | 47% | 44% |
| Operating income | $2.441 billion | $799 million |
| Net income | $2.188 billion | $709 million |
| Diluted EPS | $1.78 | $0.59 |
- Q3 Computing and Graphics revenue was $2.398 billion, up 44%, driven by higher sales and an 83% increase in average selling price, partly offset by a 23% decline in unit shipments.
- Q3 Enterprise, Embedded and Semi-Custom revenue was $1.915 billion, up 69%, primarily reflecting higher EPYC server processor and semi-custom product sales.
- Research and development expense increased 51% to $765 million in Q3; marketing, general and administrative expense increased 38% to $376 million.
- Q3 other income, net included a $60 million gain from an increase in the fair value of an equity investment. Nine-month results also included an $8 million equity investment impairment and a $7 million loss on convertible-debt conversions.
- Q3 and nine-month effective tax rates were 8.2% and 11.5%, respectively, compared with 3.0% for both prior-year periods.
- Cash and cash equivalents were $2.440 billion at September 25, 2021, compared with $1.595 billion at December 26, 2020. Short-term investments were $1.168 billion, bringing cash, cash equivalents and short-term investments to approximately $3.6 billion.
- Nine-month operating cash flow was $2.699 billion, compared with $517 million in the prior-year period. Investing cash flow was negative $686 million, and financing cash flow was negative $1.168 billion.
- Inventory increased to $1.902 billion from $1.399 billion at year-end, primarily due to product builds supporting customer demand. Prepayments for long-term supply agreements contributed to a $284 million increase in prepaid expenses and other assets.
- Total debt principal was $313 million, including $312 million of 7.50% senior notes due August 2022. AMD had no borrowings under its $500 million revolving credit facility and was in compliance with covenants; $14 million of letters of credit was outstanding.
Material Changes Versus the Prior Comparable Period
- Revenue growth was broad-based, with particularly strong expansion in Enterprise, Embedded and Semi-Custom, whose nine-month revenue increased 137% to $4.860 billion.
- Gross margin improved because of a richer mix of EPYC, Ryzen and Radeon processor sales.
- Operating expenses rose substantially as AMD increased headcount, product development, go-to-market activity and employee incentives. Nine-month acquisition-related costs were $33 million.
- AMD generated substantially higher operating cash flow but invested more heavily in inventory, supply capacity and short-term investments.
- AMD repurchased 7.2 million shares for $750 million in Q3 and 10.4 million shares for approximately $1.0 billion during the first nine months. Approximately $3.0 billion remained available under the $4 billion authorization at quarter-end.
- Debt declined from $338 million of principal at December 26, 2020, partly because holders converted $25 million of convertible notes into approximately 3 million AMD shares.
Guidance, Outlook, Commentary and Risks
- Management reported strong demand across the business and is making strategic investments in long-term supply-chain capacity. The filing does not provide a specific formal revenue or earnings forecast for the next quarter or full year.
- Management expects cash, short-term investments, operating cash flow and the revolving credit facility to fund operations and capital expenditures for at least the next 12 months and beyond, while noting that external financing may not be available on favorable terms.
- COVID-19 caused limited financial disruption in Q3, but continued to affect global logistics, supply availability and manufacturing operations. Industry-wide component shortages also affected OEM customers.
- AMD had $6.566 billion of unconditional purchase commitments at September 25, 2021, primarily for wafers, substrates, software, technology and intellectual-property licenses. These commitments include $2.162 billion for the remainder of 2021 and $2.477 billion for 2022.
- The pending all-stock acquisition of Xilinx was valued at approximately $35 billion when announced. Stockholder approvals and certain regulatory approvals had been obtained, but other closing conditions remained outstanding. Management expected closing by the end of calendar year 2021. Certain termination circumstances could require AMD to pay Xilinx $1.0 billion or $1.5 billion.
- Key risks include reliance on third-party foundries and assembly, testing, marking and packaging providers; semiconductor supply constraints and manufacturing yields; intense competition from Intel, Nvidia and ARM-based offerings; customer concentration; product-cycle and demand volatility; export controls and U.S.-China trade restrictions; cybersecurity; litigation; and the execution and integration risks associated with the Xilinx transaction.
- AMD disclosed ongoing patent litigation, including matters involving Quarterhill-related entities, Monterey Research and Future Link Systems. Management believes the potential liability of the disclosed proceedings is not expected to have a material adverse effect, based on information currently known.
Important Facts for Investors to Verify
- Whether elevated demand, premium product mix and 48% quarterly gross margin are sustainable as supply constraints and product transitions evolve.
- The status, timing, conditions and financial effects of the Xilinx acquisition, including any required regulatory approvals, termination-fee exposure and post-closing integration costs.
- AMD’s ability to satisfy $6.566 billion of purchase commitments without creating excess inventory or margin pressure if demand weakens.
- The timing and refinancing or repayment plan for the $312 million of senior notes due August 2022.
- Inventory growth, supplier prepayments and dependence on TSMC, GlobalFoundries and ATMP joint ventures for adequate capacity.
- Future effects of the $4 billion share-repurchase program on liquidity, share count and capital allocation.
- Potential outcomes of disclosed patent litigation, export-control developments, COVID-19-related supply disruptions and cybersecurity incidents.
