Business Context and Reporting Period
Advanced Micro Devices, Inc. filed this Form 10-K for the 52-week fiscal year ended December 29, 2018. AMD develops and sells x86 microprocessors, GPUs, APUs, chipsets, server and embedded processors, semi-custom SoCs for game consoles, and related intellectual property. The reportable segments are Computing and Graphics and Enterprise, Embedded and Semi-Custom.
The filing also provides unaudited fourth-quarter information for the quarter ended December 29, 2018. Prior-year amounts were retrospectively adjusted for adoption of ASC 606, Revenue from Contracts with Customers.
Financial Performance and Key Metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Net revenue | $6.475 billion | $5.253 billion | +23% |
| Gross margin | $2.447 billion; 38% | $1.787 billion; 34% | Margin up 4 points |
| Operating income | $451 million | $127 million | Improved $324 million |
| Net income | $337 million | $(33) million | Returned to profitability |
| Diluted EPS | $0.32 | $(0.03) | Improved |
| Operating cash flow | $34 million | $12 million | Improved $22 million |
| Capital expenditures | $163 million | $113 million | Increased $50 million |
- Fourth-quarter revenue was $1.419 billion, compared with $1.340 billion in the prior-year quarter. Fourth-quarter gross margin was $537 million, or approximately 38%; operating income was $28 million and net income was $38 million.
- Computing and Graphics revenue increased 39% to $4.125 billion, driven by higher Ryzen demand, a 15% increase in average selling price and a 17% increase in unit shipments. Segment operating income increased to $470 million from $92 million.
- Enterprise, Embedded and Semi-Custom revenue increased 3% to $2.350 billion, primarily due to higher EPYC server sales, partly offset by lower semi-custom revenue. Segment operating income increased to $163 million from $132 million.
- Research and development expense increased 20% to $1.434 billion; marketing, general and administrative expense increased 9% to $562 million.
- Cash, cash equivalents and marketable securities totaled $1.156 billion at year-end, versus $1.185 billion in 2017. Total assets were $4.556 billion and stockholders’ equity was $1.266 billion.
Debt, Liquidity and Commitments
- Total debt principal was $1.528 billion at year-end, down from $1.699 billion. Debt reported net of discount and issuance costs was $1.250 billion, including $136 million classified as current.
- Debt consisted primarily of $805 million of 2.125% convertible notes due 2026, $337 million of 7.50% notes due 2022, $250 million of 7.00% notes due 2024, and $66 million of 6.75% notes due March 2019.
- The secured revolving credit facility had $70 million outstanding, $26 million of letters of credit outstanding and up to $175 million available for future borrowings. AMD was in compliance with its covenants.
- Operating cash flow was modest relative to reported net income, largely because accounts receivable increased by $806 million and inventories increased by $151 million.
- Contractual obligations totaled $5.141 billion, including $2.435 billion of minimum obligations to GLOBALFOUNDRIES for 2019 through 2021, $349 million of estimated interest, and $322 million of operating lease commitments.
- Management stated that available cash, marketable securities and the revolving facility should fund operations and capital expenditures for the next 12 months, while cautioning that additional financing may not be available on favorable terms.
Material Changes Versus the Prior Comparable Period
- AMD moved from a $33 million net loss in 2017 to $337 million of net income in 2018, supported by revenue growth, higher-margin new products and improved operating leverage.
- Gross margin increased from 34% to 38%, primarily because newer products carried higher margins.
- Computing and Graphics became the primary growth driver, while Enterprise, Embedded and Semi-Custom grew modestly as EPYC sales offset lower semi-custom revenue.
- AMD adopted ASC 606 using the full retrospective method. The standard accelerated recognition for certain semi-custom products and distributor sales and changed the timing of certain intellectual-property revenue.
- AMD recorded a $45 million fourth-quarter impairment of technology licenses and $12 million of losses on debt extinguishment. Stock-based compensation increased to $137 million from $97 million.
- International sales represented 80% of revenue, up from 74%, increasing exposure to China, Taiwan, foreign exchange, tariffs and geopolitical conditions.
Guidance, Outlook, Commentary and Risks
- The filing does not provide a formal full-year 2019 revenue or earnings guidance figure. Management emphasized continued investment in Ryzen, Radeon, EPYC, 7-nanometer products and embedded offerings.
- In January 2019, AMD entered the Seventh Amendment to its wafer supply agreement with GLOBALFOUNDRIES. The amendment revised purchase commitments and pricing for 12-nanometer and larger nodes and provided greater flexibility to use other foundries for 7-nanometer and smaller nodes.
- AMD remains dependent on third-party foundries and assembly, test, mark and packaging providers. Manufacturing capacity, yields, supply disruptions and minimum purchase commitments could affect revenue, costs and margins.
- Intel remains the dominant x86 competitor, while Nvidia is the principal discrete-GPU competitor. Pricing pressure, product delays or weaker customer adoption could reduce market share and profitability.
- Sony Interactive Entertainment and Microsoft each contributed more than 10% of 2018 revenue. Customer concentration and dependence on game-console demand remain significant.
- The $805 million convertible notes became convertible during the first quarter of 2019. On February 5, 2019, West Coast Hitech notified AMD that it would exercise warrants for 75 million shares at $5.98 per share, expected to provide $448.5 million of proceeds but dilute existing holders.
- Pending litigation includes securities and consumer claims related to alleged Spectre vulnerabilities, shareholder derivative actions, patent litigation and the Bulldozer “eight cores” litigation. Management stated that potential losses were not expected to be material, but outcomes remain uncertain.
- AMD recorded approximately $3 million for environmental remediation at three Sunnyvale Superfund sites and stated that additional exposure was not expected to be material.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether Ryzen, EPYC and other new products can sustain revenue growth and the 38% gross-margin level amid semiconductor cyclicality and competitive pricing.
- Fourth-quarter and subsequent-period cash conversion, particularly accounts receivable, inventory and working-capital trends.
- Refinancing or repayment of the $66 million notes due March 2019 and the company’s ability to manage the remaining debt and contractual obligations.
- Actual dilution and cash proceeds from the 75 million-share warrant exercise and potential conversion of the 2.125% convertible notes.
- Compliance with GLOBALFOUNDRIES purchase targets and the operational impact of the January 2019 wafer supply amendment.
- Revenue concentration involving Sony, Microsoft and other major customers, and the durability of semi-custom game-console demand.
- Developments in Spectre-related litigation, patent claims and the Bulldozer class action.
- The effect of ASC 606 revenue timing, distributor inventory, price protection and returns on reported revenue and margins.