Advanced Micro Devices, Inc. — Form 10-Q Summary
Business context and reporting period
AMD is a global semiconductor company offering x86 processors, graphics processing units, server and embedded processors, semi-custom system-on-chip products, development services and intellectual-property licensing. The filing covers the 13 weeks ended March 30, 2019, compared with the 13 weeks ended March 31, 2018. The financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net revenue | $1.272 billion | $1.647 billion | Down 23% |
| Gross profit | $521 million | $597 million | Down 13% |
| Gross margin | 41% | 36% | Up 5 percentage points |
| Operating income | $38 million | $120 million | Down 68% |
| Net income | $16 million | $81 million | Down 80% |
| Diluted EPS | $0.01 | $0.08 | Down |
| Operating cash flow | $(213) million | $(107) million | Greater use of cash |
| Capital expenditures | $62 million | $46 million | Up |
Research and development expense increased 9% to $373 million, while marketing, general and administrative expense increased 27% to $170 million. Interest expense declined to $27 million from $31 million. AMD recorded a $13 million income tax benefit, compared with an $8 million tax provision in the prior-year quarter.
Cash, cash equivalents and marketable securities totaled $1.194 billion at March 30, 2019, including $978 million of cash and cash equivalents and $216 million of marketable securities. Total assets were $4.931 billion and stockholders’ equity was $1.788 billion.
Debt consisted of $70 million of short-term debt and $1.024 billion of long-term debt on the balance sheet. Aggregate principal debt was approximately $1.4 billion. AMD had $119 million available for future borrowings under its secured revolving credit facility, with $26 million of letters of credit outstanding, and was in compliance with its covenants.
Material changes versus the prior comparable period
- Computing and Graphics revenue declined 26% to $831 million, primarily because of lower Radeon channel demand following the decline in blockchain-related demand. Higher Ryzen processor and datacenter GPU demand partially offset the decline. Segment operating income fell to $16 million from $138 million.
- Enterprise, Embedded and Semi-Custom revenue declined 17% to $441 million because of lower semi-custom revenue, partially offset by higher EPYC server revenue. Segment operating income increased to $68 million from $14 million, primarily due to a $60 million licensing gain.
- Gross margin improved to 41%, primarily due to a greater contribution from higher-margin Ryzen products.
- Operating cash flow deteriorated to negative $213 million, mainly because of working-capital changes, including timing of accounts-payable payments and a $110 million increase in inventories.
- Financing cash flow was positive $286 million, driven largely by $449 million received from the exercise of a Mubadala-affiliated warrant for 75 million AMD shares. AMD also repaid or repurchased debt, including the remaining $66 million principal amount of its 6.75% Senior Notes and portions of its 7.50% and 7.00% Senior Notes.
- AMD adopted the new lease standard and recognized operating lease right-of-use assets of $214 million and long-term operating lease liabilities of $213 million at quarter-end. The adoption did not affect reported earnings or cash flows.
Guidance, outlook, commentary and risks
The filing does not provide a clear numerical revenue or earnings outlook for the full year. Management stated that cash, cash equivalents, marketable securities and the secured revolving credit facility are expected to fund operations and capital expenditures for at least the next 12 months, while noting that additional financing may not be available on favorable terms or at all.
AMD expects international sales to remain significant and identifies seasonal pressure in first-quarter PC sales and semi-custom game-console sales. The company expects future purchases from GLOBALFOUNDRIES to remain material. Under the January 2019 amendment to the wafer supply agreement, AMD has purchase targets through 2021 and may owe payments if it fails to meet those targets. The agreement remains in place through March 1, 2024, while AMD has flexibility to use other foundries for products manufactured at 7 nm and smaller nodes.
Material risks include intense competition from Intel and other semiconductor vendors; reliance on third-party foundries and assembly, test, mark and packaging suppliers; manufacturing yield and capacity constraints; semiconductor cyclicality; dependence on a limited number of customers and distributors; inventory and demand volatility; product security vulnerabilities and cybersecurity incidents; international, tariff and foreign-exchange exposure; debt service and refinancing requirements; intellectual-property claims; and potential tax, environmental and regulatory liabilities.
The 2.125% Convertible Senior Notes due 2026 became convertible at the holder’s option during the second quarter of 2019. AMD stated that it intended to deliver common shares upon conversion, creating potential dilution. The filing also records a $5 million contingent legal loss accrual and an $8 million loss on debt extinguishment and repurchases.
Pending legal matters include shareholder derivative appeals, litigation concerning alleged Spectre-related processor disclosures, and MediaTek patent-infringement proceedings in the United States and China. Management stated that potential liabilities are not expected to have a material adverse effect, based on information currently known.
Most important facts for investors to verify
- Whether the sharp revenue decline, particularly in Radeon channel and semi-custom products, persists beyond the first quarter.
- Whether Ryzen and EPYC growth can offset weakness in PC graphics and game-console semi-custom demand.
- Whether the 41% gross margin is sustainable as product mix, pricing and semiconductor demand change.
- Inventory growth, negative operating cash flow and the timing of working-capital normalization.
- Potential dilution from conversion of the $805 million principal amount of convertible notes.
- AMD’s ability to meet GLOBALFOUNDRIES wafer purchase targets and manage its remaining supply obligations.
- Availability under the secured revolving facility, debt maturities, covenant compliance and refinancing capacity.
- Developments in MediaTek patent litigation, shareholder appeals and other contingencies.
- Execution of the 7 nm product roadmap and reliance on third-party manufacturing capacity and yields.