AMD 2014 Third-Quarter 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, and semi-custom system-on-chip products. The filing covers the 13-week quarter and 39-week year-to-date period ended September 27, 2014, with comparisons to September 28, 2013.
Effective July 1, 2014, AMD reorganized into two reportable segments: Computing and Graphics, and Enterprise, Embedded and Semi-Custom. Prior-period segment information was retrospectively adjusted. Lisa T. Su became Chief Executive Officer on October 8, 2014, after the reporting period.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net revenue | $1.429 billion | $1.461 billion | $4.267 billion | $3.710 billion |
| Gross margin | $494 million; 35% | $521 million; 36% | $1.479 billion; 35% | $1.425 billion; 38% |
| Operating income (loss) | $63 million | $95 million | $175 million | $(32) million |
| Net income (loss) | $17 million | $48 million | $(39) million | $(172) million |
| Diluted EPS | $0.02 | $0.06 | $(0.05) | $(0.23) |
| Cash flow from operations | Not separately reported for the quarter | Not separately reported for the quarter | $(214) million | $(169) million |
Third-quarter operating margin was approximately 4.4% and net margin approximately 1.2%; nine-month operating margin was approximately 4.1% and net margin approximately negative 0.9%. These percentages are calculated from reported amounts.
- Q3 revenue was relatively flat sequentially and declined 2% year over year. Revenue included $27 million of technology-licensing revenue.
- Computing and Graphics revenue was $781 million, down 16% year over year, while Enterprise, Embedded and Semi-Custom revenue was $648 million, up 21% year over year.
- Nine-month Computing and Graphics revenue declined 13% to $2.470 billion. Enterprise, Embedded and Semi-Custom revenue increased 105% to $1.797 billion, primarily from semi-custom SoC shipments.
- Q3 operating expenses were $431 million, compared with $435 million in Q2 2014 and $426 million in Q3 2013. Nine-month research and development expense declined 8% to $834 million; marketing, general and administrative expense declined 9% to $460 million.
- Cash, cash equivalents and marketable securities totaled $938 million at quarter-end, including $640 million of cash and cash equivalents and $298 million of short-term marketable securities.
- Total debt was approximately $2.20 billion, consisting primarily of $102 million of short-term debt and $2.106 billion of long-term debt. Stockholders’ equity was $535 million.
- The secured revolving credit facility had $55 million outstanding and $445 million available. AMD was in compliance with its covenants and was not in a domestic cash trigger period.
- Inventory was $897 million, accounts receivable were $973 million, and payable to GLOBALFOUNDRIES was $317 million at September 27, 2014.
Material changes versus comparable periods
- Q3 revenue decreased modestly year over year, primarily because lower Computing and Graphics shipments offset growth in semi-custom SoCs. Consumer PC market weakness affected processor, chipset and GPU demand.
- Computing and Graphics reported a $17 million operating loss versus $9 million of operating income in Q3 2013. Lower shipments were partly offset by improved average selling prices and lower expenses.
- Enterprise, Embedded and Semi-Custom operating income increased to $108 million from $92 million, supported by higher semi-custom SoC shipments, but margins were pressured by the lower-margin product mix.
- Gross margin declined year over year to 35% from 36% in Q3 and to 35% from 38% for the first nine months. Q3 margin benefited by approximately two percentage points from technology-licensing revenue.
- Other expense for the first nine months was $72 million, including a $64 million loss on debt repurchases. AMD issued $600 million of 6.75% Senior Notes due 2019 and $500 million of 7.00% Senior Notes due 2024, while repurchasing or redeeming substantially all of its 6.00% convertible notes and 8.125% notes.
- AMD issued 34.9 million shares upon the cashless exercise of a GLOBALFOUNDRIES-related warrant in March 2014. Shares outstanding increased to approximately 775 million at October 27, 2014, from approximately 725 million at December 28, 2013.
- Net cash used in operating activities increased to $214 million from $169 million for the comparable nine-month period. Working-capital uses included higher receivables and $128 million of prepayments to GLOBALFOUNDRIES.
Guidance, outlook, commentary and risks
- The filing does not provide a specific quarterly revenue or earnings guidance figure. Management stated that cash, marketable securities and the revolving credit facility were expected to fund operations and capital expenditures for the next twelve months, while noting that future external financing may not be available on favorable terms or at all.
- AMD expects consumer PC conditions to remain challenging and is pursuing diversification into semi-custom, embedded, professional graphics, dense server and other adjacent markets. The company’s stated strategic goal was to generate approximately 50% of revenue from high-growth adjacent markets by the end of 2015.
- Under the fourth amendment to the GLOBALFOUNDRIES Wafer Supply Agreement, AMD estimated approximately $1.2 billion of 2014 wafer purchase obligations. Remaining contractual obligations to GLOBALFOUNDRIES were estimated at $471 million through December 31, 2014; obligations beyond that date could not be meaningfully estimated and are expected to remain material.
- In October 2014, AMD announced a restructuring plan targeting a global headcount reduction of approximately 7%. The company estimated a $57 million restructuring and impairment charge in Q4 2014 and an additional $13 million charge in the first half of 2015, with estimated cash payments of $34 million and $20 million, respectively.
- Key risks include competition and pricing pressure from Intel and other semiconductor companies, dependence on third-party foundries and GLOBALFOUNDRIES, fixed wafer commitments, product-transition and manufacturing-yield risks, challenging PC demand, customer concentration, substantial leverage, potential refinancing needs, and the cyclical nature of the semiconductor industry.
- The five largest customers accounted for approximately 64% of Q3 revenue. International sales represented 82% of Q3 revenue.
- AMD disclosed shareholder derivative and securities class-action litigation related to historical 32-nanometer technology and Llano product disclosures, but management believed potential liability would not materially affect financial condition, cash flows or results of operations.
- An interim goodwill impairment analysis following the segment reorganization found no impairment. The company’s U.S. and Canadian deferred tax assets remained subject to substantial valuation allowances, and gross unrecognized tax benefits totaled $61 million.
Investor verification points
- Verify whether semi-custom SoC growth can offset continued weakness in Computing and Graphics and whether the lower-margin mix improves.
- Track operating cash burn, cash and marketable securities, debt maturities, interest expense and access to refinancing markets.
- Assess compliance with debt covenants and the impact of cross-default provisions, including the $55 million revolving-credit balance.
- Review GLOBALFOUNDRIES wafer commitments, pricing, manufacturing yields and obligations after December 31, 2014.
- Evaluate the timing, cash costs and expected savings from the 2014 restructuring plan and the effect of the CEO transition.
- Monitor customer concentration, consumer PC demand, game-console and semi-custom product demand, and competitive actions by Intel and other rivals.