ADVANCED MICRO DEVICES INC quarterly report, Q2 FY2018

Advanced Micro Devices, Inc. — Q2 2018 Form 10-Q Summary

Business context and reporting period

AMD is a global semiconductor company offering x86 microprocessors, GPUs, professional graphics, server and embedded processors, semi-custom SoCs, game-console technology and selected intellectual-property licenses. The filing covers the 13-week quarter and 26-week year-to-date periods ended June 30, 2018, compared with July 1, 2017. The financial statements are unaudited and reflect retrospective adoption of ASC 606 revenue recognition.

Key financial metrics

Metric	Q2 2018	Q2 2017	Six months 2018	Six months 2017
Net revenue	$1.756 billion	$1.151 billion	$3.403 billion	$2.329 billion
Gross margin	$652 million; 37%	$386 million; 34%	$1.249 billion; 37%	$764 million; 33%
Operating income	$153 million	$1 million operating loss	$273 million	$10 million
Net income (loss)	$116 million	$(42) million	$197 million	$(75) million
Diluted EPS	$0.11	$(0.04)	$0.19	$(0.08)
Net cash used in operating activities	Not separately provided for the quarter	Not separately provided for the quarter	$(131) million	$(381) million

Q2 revenue increased 53% year over year. Computing and Graphics revenue rose 64% to $1.086 billion, while Enterprise, Embedded and Semi-Custom revenue rose 37% to $670 million.
Computing and Graphics operating income was $117 million, versus $7 million in the prior-year quarter. Enterprise, Embedded and Semi-Custom operating income was $69 million, versus $16 million.
Research and development expense increased 25% to $357 million in Q2 and 26% to $700 million for the first six months. Marketing, general and administrative expense increased 12% to $142 million in Q2.
Cash, cash equivalents and marketable securities totaled $983 million at June 30, 2018, compared with approximately $1.2 billion at December 30, 2017. Cash and cash equivalents alone were $948 million.
Accounts receivable increased to $1.118 billion from $454 million at year-end, including $349 million of unbilled receivables. Inventory increased to $750 million from $694 million.
Total assets were $4.103 billion and stockholders’ equity was $879 million at quarter-end.
Six-month investing cash outflows were $124 million, including $89 million of capital expenditures. Financing cash inflows were $20 million, primarily from employee equity-plan proceeds, partly offset by debt repurchases.

Debt and liquidity

Debt carrying amounts were $223 million of short-term debt and $1.170 billion of long-term debt, or approximately $1.393 billion in total net carrying value. Aggregate principal debt obligations were approximately $1.7 billion.
The $805 million principal amount of 2.125% convertible notes due 2026 became convertible at the holder’s option from July 1 through September 30, 2018. AMD stated its current intent was to deliver common shares upon conversion.
The $153 million outstanding principal amount of 6.75% notes was classified as short-term debt and was due in March 2019. AMD also had $347 million of 7.50% notes due 2022 and $310 million of 7.00% notes due 2024.
The secured revolving credit facility had $70 million outstanding, $31 million of letters of credit and up to $339 million available for future borrowings. AMD was in compliance with its covenants.
Management stated that cash and the revolving credit facility were expected to fund operations and capital expenditures for the next 12 months, while noting that adverse market conditions could limit access to external financing.

Material changes versus the prior comparable period

AMD moved from a Q2 2017 net loss of $42 million to Q2 2018 net income of $116 million, and from a $1 million operating loss to $153 million of operating income.
Revenue growth was driven by higher Radeon and Ryzen sales, increased semi-custom revenue and higher EPYC server revenue. Computing and Graphics benefited from a 45% increase in average selling price and a 15% increase in unit shipments.
Gross margin expanded three percentage points to 37% in Q2, primarily from the ramp of newer products with higher margins.
Interest expense declined slightly to $31 million from $32 million in Q2, while other income was $1 million compared with $3 million of other expense in the prior-year quarter.
There was no licensing gain in 2018, compared with a $25 million Q2 2017 gain and a $52 million first-half 2017 gain. The 2018 operating improvement therefore occurred despite the absence of that prior-period item.
AMD adopted ASC 606 using the full retrospective method. The adoption accelerated recognition for certain custom products, distributor sales and intellectual-property arrangements and is expected to shift some semi-custom revenue from the second half to the first half of the year.
Operating cash use improved to $131 million for the first six months from $381 million, but remained negative. Higher revenue-related collections were partly offset by higher wafer purchases, labor costs and working-capital requirements.

Guidance, outlook, risks and unusual items

The filing does not provide clear quantified full-year revenue or earnings guidance. Management expressed confidence in its long-term growth strategy and expected continued demand for new products, but stated that quarterly and seasonal results can vary materially.
AMD expected to meet its 2018 wafer purchase target under its GLOBALFOUNDRIES agreement. Obligations to GLOBALFOUNDRIES totaled $2.544 billion in the contractual-obligations table, including expected and minimum purchases through 2020.
Key operating risks include intense competition from Intel and Nvidia, dependence on third-party wafer foundries and assembly providers, manufacturing yields and capacity, customer concentration, semiconductor cyclicality, product demand and pricing, and supply-chain disruptions.
GPU demand was affected in part by cryptocurrency-mining demand, which management described as volatile. International sales represented 82% of Q2 revenue.
AMD continued to evaluate the tax effects of the Tax Cuts and Jobs Act, including GILTI. Substantially all U.S. and Canadian deferred tax assets remained subject to a valuation allowance, and gross unrecognized tax benefits were $49 million.
Litigation included securities and derivative actions relating to alleged disclosures concerning Spectre vulnerabilities, a consumer action concerning Bulldozer “eight cores” marketing, and patent infringement complaints filed after quarter-end by entities associated with Quarterhill. Management stated that potential liabilities were not expected to materially affect financial condition or results, based on information then known.
AMD entered into a 10-year operating lease for approximately 270,000 square feet of office space in China, with estimated base rent of approximately $72 million over the lease term, excluding certain operating expenses and taxes.

Important facts for investors to verify

Whether revenue growth and the 37% gross margin were sustained after the ASC 606 timing changes and the initial ramp of Ryzen, Radeon and EPYC products.
The conversion, refinancing or repayment outcome for the $805 million convertible notes and the $153 million of notes due in 2019.
Whether AMD generated positive operating cash flow after the quarter, given the $131 million first-half operating cash outflow and increased receivables and inventory.
Actual wafer purchases and any potential shortfall payments under the GLOBALFOUNDRIES agreement.
The effect of cryptocurrency-mining demand, semiconductor cyclicality, competitive pricing and customer concentration on GPU and semi-custom revenue.
Potential financial, reputational or product-performance effects from Spectre-related claims and other pending litigation.
Final tax accounting under the Tax Cuts and Jobs Act and the recoverability of deferred tax assets.