ADVANCED MICRO DEVICES INC quarterly report, Q2 FY2016

AMD 2Q16 Form 10-Q Summary

Business context and reporting period

Advanced Micro Devices, Inc. is a global semiconductor company offering x86 microprocessors, accelerated processing units, chipsets, discrete and professional graphics, server and embedded processors, semi-custom system-on-chip products, game-console technology and intellectual-property licensing. The filing covers the 13-week quarter and 26-week six-month period ended June 25, 2016, compared with periods ended June 27, 2015.

Financial performance and key metrics

Metric	Three months ended June 25, 2016	Three months ended June 27, 2015	Six months ended June 25, 2016	Six months ended June 27, 2015
Revenue	$1.027 billion	$942 million	$1.859 billion	$1.972 billion
Gross profit	$319 million	$232 million	$588 million	$558 million
Gross margin	31%	25%	32%	28%
Operating loss	$8 million	$137 million	$76 million	$274 million
Net income (loss)	$69 million	$(181) million	$(40) million	$(361) million
Diluted EPS	$0.08	$(0.23)	$(0.05)	$(0.46)

Second-quarter revenue increased 9% year over year. Computing and Graphics revenue rose 15% to $435 million, while Enterprise, Embedded and Semi-Custom revenue rose 5% to $592 million.
Six-month revenue declined 6% year over year, reflecting lower Computing and Graphics revenue of $895 million and Enterprise, Embedded and Semi-Custom revenue of $964 million.
Second-quarter gross margin improved to 31% from 25%; the prior-year quarter included a $33 million technology-node transition charge.
Research and development expense increased 3% year over year in the quarter to $243 million and 2% in the six-month period to $485 million. Marketing, general and administrative expense declined 13% in the quarter and 16% year to date.
Second-quarter results included a $150 million pretax gain from selling 85% of two assembly, test, mark and pack businesses to form the ATMP joint venture, and $26 million of operating income from China joint-venture intellectual-property licensing. These items materially benefited reported earnings.
Net cash used in operating activities was $127 million for the first six months, an improvement from $229 million used in the prior-year period. Investing activities provided $303 million, including $351 million of ATMP transaction proceeds. Capital expenditures were $47 million.
Cash and cash equivalents were $957 million at June 25, 2016, compared with $785 million at December 26, 2015. The company reported $226 million of short-term debt and $2.012 billion of long-term debt on the balance sheet; management described total debt as approximately $2.2 billion net of issuance costs.
The secured revolving facility had $226 million outstanding, $21 million of letters of credit and up to $163 million available for future borrowings. AMD stated that it was in compliance with its covenants and believed cash and available credit would fund operations and capital expenditures for the next 12 months.
Stockholders’ deficit was $413 million at quarter-end. Inventories increased to $743 million from $678 million at year-end 2015, and accounts receivable increased to $671 million from $533 million.

Material changes versus the prior comparable period

Revenue and operating performance improved substantially in the second quarter, driven by higher notebook processor and GPU sales, higher semi-custom SoC shipments, increased non-recurring engineering revenue, lower expenses and the absence of the prior-year technology-node transition charge.
Computing and Graphics remained loss-making, with an $81 million quarterly operating loss, but improved from $147 million. Enterprise, Embedded and Semi-Custom generated $84 million of operating income versus $27 million.
The six-month operating loss narrowed to $76 million from $274 million, partly because the prior-year period included $87 million of restructuring and special charges, including the $76 million exit charge for the dense server systems business.
AMD completed the ATMP transaction, retained a 15% equity interest valued at approximately $62 million and expects final net cash proceeds of approximately $320 million after taxes, expenses and final purchase-price adjustments.
AMD recognized $33 million of China-joint-venture licensing income in the first six months. Total license fees of approximately $293 million are payable over several years, contingent on milestones, and future royalties are not assured.
The 2015 restructuring plan, involving an approximately 5% global headcount reduction and certain outsourcing actions, was expected to be substantially completed by the end of the third quarter of 2016.

Guidance, outlook, commentary and risks

The filing does not provide a formal numerical revenue or earnings forecast. Management highlighted continued product execution, including Polaris-based Radeon RX graphics cards, seventh-generation A-Series notebook processors and new professional graphics products. Management also expects semi-custom sales to follow seasonal consumer trends, with stronger activity generally in the second half of the year.

Known fiscal 2016 purchase obligations to GLOBALFOUNDRIES were approximately $434 million. AMD was negotiating a sixth amendment to its wafer supply agreement and could not meaningfully estimate obligations beyond that amount.
AMD relies heavily on third-party manufacturing, particularly GLOBALFOUNDRIES and the newly formed ATMP joint ventures. Supply interruptions, manufacturing yields, capacity constraints or transition issues could affect product launches, costs and customer demand.
Competition from Intel and NVIDIA, pricing pressure, declining PC markets, product-transition execution and dependence on semi-custom customer products remain significant risks.
Customer concentration is high: the top two customers represented approximately 54% of second-quarter revenue and the top five represented approximately 74%.
AMD had substantial leverage, including approximately $2.03 billion of notes and $226 million drawn on the revolving facility. Debt agreements include restrictive covenants and cross-default provisions.
AMD’s U.S. and Canadian deferred tax assets remained substantially subject to valuation allowances. Gross unrecognized tax benefits were $41 million, and tax audit outcomes remain uncertain.
The Hatamian securities class action had been certified as a class action and remained in discovery; related derivative suits were stayed. Management did not believe the potential liability would materially affect financial condition, cash flows or results of operations based on information then known.

Important facts for investors to verify

Whether reported profitability can be sustained without the $150 million ATMP divestiture gain and China licensing income.
Progress and final terms of the sixth GLOBALFOUNDRIES wafer supply agreement, including future purchase commitments and pricing.
Cash burn, working-capital trends and the company’s ability to refinance or repay debt as maturities approach.
Execution of the product roadmap, including competitive adoption of new CPU, GPU, server and semi-custom products.
Whether ATMP joint-venture operations provide reliable capacity and quality during the transition from AMD-owned facilities.
Customer concentration, PC-market demand, semi-custom console demand and the impact of pricing pressure on margins.
Final valuation and accounting adjustments for the ATMP joint venture, as opening balances were still under valuation analysis.
Developments in securities litigation, tax audits, restructuring completion and the realization of future China-joint-venture milestone and royalty payments.