ADVANCED MICRO DEVICES INC quarterly report, Q3 FY2018

Advanced Micro Devices, Inc. — Q3 2018 Form 10-Q Summary

Business context and reporting period

AMD is a global semiconductor company offering x86 microprocessors, GPUs, professional graphics products, server and embedded processors, semi-custom SoCs, game-console technology and intellectual-property licensing. The filing covers the 13-week quarter and 39-week year-to-date period ended September 29, 2018, compared with September 30, 2017. Fiscal year 2018 ends December 29, 2018.

Financial performance and key metrics

Metric	Q3 2018	Q3 2017	9M 2018	9M 2017
Net revenue	$1.653 billion	$1.584 billion	$5.056 billion	$3.913 billion
Gross margin	$661 million; 40%	$571 million; 36%	$1.910 billion; 38%	$1.335 billion; 34%
Operating income	$150 million	$119 million	$423 million	$129 million
Net income (loss)	$102 million	$61 million	$299 million	$(14) million
Diluted EPS	$0.09	$0.06	$0.28	$(0.01)
Cash flow from operations	Not separately disclosed for the quarter	Not separately disclosed for the quarter	$(36) million	$(312) million

• Computing and Graphics revenue increased 12% year over year to $938 million in Q3 and increased 52% year to date to $3.139 billion. Q3 unit shipments increased 20%, while average selling price decreased 10%, primarily because of lower Radeon pricing and product mix.
• Enterprise, Embedded and Semi-Custom revenue decreased 5% year over year to $715 million in Q3, primarily due to lower semi-custom and IP-related revenue, partially offset by higher EPYC server revenue. Year-to-date revenue increased 4% to $1.917 billion.
• Research and development expense rose 13% in Q3 to $363 million and 21% year to date to $1.063 billion. Marketing, general and administrative expense rose 12% in Q3 to $148 million and 11% year to date to $424 million.
• Cash, cash equivalents and marketable securities totaled approximately $1.056 billion at September 29, 2018, versus $1.185 billion at December 30, 2017. Total cash, cash equivalents and restricted cash was $1.051 billion.
• Accounts receivable increased to $1.207 billion from $454 million at year-end, including $331 million of unbilled receivables related primarily to semi-custom products recognized under non-cancellable purchase orders. Inventory was $738 million, versus $694 million at year-end.
• Capital expenditures were $122 million year to date, compared with $69 million in the prior-year period. Net cash used in investing activities was $132 million, and financing activities provided $28 million.
• Aggregate principal debt obligations were approximately $1.6 billion. Debt carrying values included $136 million of short-term debt and $1.167 billion of long-term debt, net. The secured revolving credit facility had $70 million outstanding, $26 million of letters of credit, and up to $205 million available for additional borrowing.

Material changes versus the prior comparable period

• Revenue growth and improved product mix increased gross margin to 40% in Q3 from 36% and to 38% year to date from 34%.
• Operating income improved to $150 million in Q3 from $119 million and to $423 million year to date from $129 million. Year-to-date results benefited from stronger Computing and Graphics performance and did not include the $52 million licensing gain recorded in 2017.
• Net income improved to $102 million in Q3 from $61 million and to $299 million year to date from a $14 million loss.
• AMD recognized $86 million of IP-related revenue in Q3 upon completion of technology milestones under its THATIC development and IP agreement. This revenue contributed to the period’s results and is not necessarily recurring.
• AMD adopted ASC 606 using the full retrospective method. The standard accelerated recognition for certain semi-custom, distributor and IP-related arrangements and is expected to shift some semi-custom revenue from the second half to the first half of the year.
• AMD settled $87 million of 6.75% senior notes and $10 million of 7.50% senior notes with treasury shares during Q3. The remaining principal amounts were $66 million and $337 million, respectively.
• The 2.125% convertible notes became convertible at the holders’ option from October 1 through December 31, 2018. AMD stated that its current intent was to deliver common shares upon conversion, creating potential dilution.

Guidance, outlook, commentary and risks

• Management reported strong customer demand for new products, including second-generation Ryzen Threadripper processors, Zen-based Athlon and AMD PRO desktop processors, and Vega-based offerings.
• AMD expects international sales to remain a significant portion of revenue; international sales represented 74% of Q3 revenue and 79% of year-to-date revenue.
• Management believed cash and cash equivalents together with availability under the secured revolving line of credit would fund operations, including capital expenditures, for the next 12 months, but noted that future financing may not be available on favorable terms or at all.
• GLOBALFOUNDRIES placed its 7nm FinFET program on hold indefinitely. AMD is focusing its 7nm product portfolio on TSMC and was discussing modifications to its wafer supply agreement with GLOBALFOUNDRIES. Contractual obligations to GLOBALFOUNDRIES totaled $2.452 billion, including expected and minimum purchases through 2020.
• Key risks include intense competition from Intel and other semiconductor companies, dependence on third-party foundries and assembly/test providers, manufacturing yields and capacity, semiconductor cyclicality, customer and distributor concentration, GPU demand volatility related to cryptocurrency mining, product security vulnerabilities, cybersecurity, foreign operations and tariffs, debt service and refinancing requirements, and potential dilution from convertible notes and warrants.
• AMD disclosed multiple securities, consumer and shareholder derivative matters related principally to alleged disclosures concerning Spectre vulnerabilities. Management stated that potential liability was not expected to have a material adverse effect, although outcomes remain uncertain.
• The company had no off-balance-sheet arrangements and concluded that its disclosure controls and procedures were effective as of September 29, 2018.

Most important facts for an investor to verify

• Whether revenue growth and the 40% gross margin were sustained after the $86 million THATIC IP-related revenue item and the adoption effects of ASC 606.
• Whether Computing and Graphics growth, EPYC adoption and new-product launches offset weaker Radeon channel conditions, lower cryptocurrency-related demand and declining semi-custom revenue.
• Progress and final terms of any amendment to the GLOBALFOUNDRIES wafer supply agreement, including minimum purchase obligations and payments.
• Cash conversion and working-capital trends, particularly the large increase in accounts receivable and the continued year-to-date use of operating cash.
• Repayment or refinancing of the $66 million 6.75% notes due in 2019 and the company’s ability to manage approximately $1.6 billion of aggregate principal debt obligations.
• The number of shares issued upon any conversion of the 2.125% convertible notes and any exercise of the 75 million-share warrant.
• Developments in Spectre-related litigation, product-security remediation costs and any resulting customer or reputational effects.