ADVANCED MICRO DEVICES INC quarterly report, Q1 FY2013

Advanced Micro Devices, Inc. — Q1 2013 Form 10-Q Summary

Business context and reporting period

AMD is a global semiconductor company offering x86 microprocessors, accelerated processing units, embedded and server products, chipsets, and graphics products, including technology used in game consoles. The filing covers the 13-week quarter ended March 30, 2013, compared with the quarters ended December 29, 2012 and March 31, 2012. Financial statements are unaudited and prepared under U.S. GAAP.

AMD continued executing its plan to stabilize, accelerate and transform the business in response to challenging PC-market conditions. The company launched or began volume shipments of Kabini and Richland APUs, announced Radeon HD 8000M graphics, launched FirePro R5000 graphics, and highlighted Sony's planned use of a semi-custom AMD APU in PlayStation 4.

Financial performance and key metrics

Metric	Q1 2013	Q1 2012	Change
Net revenue	$1.088 billion	$1.585 billion	Down 31%
Gross margin	$445 million	$27 million	Up $418 million
Gross margin percentage	41%	2%	Improved; prior period included a $703 million GF charge
Operating loss	$98 million	$580 million	Improved by $482 million
Net loss	$146 million	$590 million	Improved by $444 million
Loss per share	$0.19 basic and diluted	$0.80 basic and diluted	Improved
Net cash from operating activities	$(155) million	$107 million	Decreased by $262 million
Capital expenditures	$20 million	$40 million	Down $20 million
Non-GAAP free cash flow	$(175) million	$67 million	Decreased by $242 million

Q1 2013 revenue decreased 6% from Q4 2012 revenue of $1.155 billion. The Q1 2013 operating loss improved from $422 million in Q4 2012, primarily because Q1 did not include the $273 million lower-of-cost-or-market inventory charge recorded in Q4.

• Computing Solutions: Revenue was $751 million, down 38% year over year and 9% sequentially. Year-over-year unit shipments fell 32% and average selling price declined 9%, reflecting weak PC demand and tablet adoption. The segment recorded a $39 million operating loss versus $124 million of operating income in Q1 2012 and a $323 million operating loss in Q4 2012.
• Graphics: Revenue was $337 million, down 12% year over year but up 3% sequentially. GPU revenue declined, partly offset by higher game-console-related revenue, including a milestone payment. Operating income was $16 million versus $34 million in Q1 2012 and $22 million in Q4 2012.
• Operating expenses: Research and development declined 15% year over year to $312 million, while marketing, general and administrative expense declined 22% to $179 million. Restructuring and other special charges were $47 million, compared with $8 million in Q1 2012 and $90 million in Q4 2012.
• Special items: Q1 2013 included a $46 million net loss from Austin and Markham sale-and-leaseback transactions, recorded in restructuring and other special charges, and a $20 million gross-margin benefit from sales of previously reserved inventory.

Liquidity, debt and balance sheet

• Cash and cash equivalents were $441 million at March 30, 2013, compared with $549 million at December 29, 2012.
• Current marketable securities were $562 million and long-term marketable securities were $180 million. Total cash, cash equivalents and marketable securities were approximately $1.183 billion, although the company also refers to approximately $1.0 billion excluding long-term securities.
• Total assets were $3.797 billion and stockholders' equity was $415 million, down from $538 million at year-end 2012.
• Debt and capital lease obligations were approximately $2.04 billion, including $580 million of 6.00% convertible notes due 2015, $500 million of 8.125% senior notes due 2017, $500 million of 7.75% senior notes due 2020, and $500 million of 7.50% senior notes due 2022.
• Contractual obligations totaled $5.084 billion, including $901 million of estimated interest, $1.371 billion of obligations to GLOBALFOUNDRIES, $388 million of operating leases, and $314 million of other purchase obligations.
• AMD used $155 million of operating cash in Q1 and paid $175 million related to its GLOBALFOUNDRIES take-or-pay obligation. The company received $178 million from property and equipment sales, primarily from the Austin and Markham sale-and-leaseback transactions.

Material changes versus comparable periods

• Revenue declined materially year over year because of weaker PC demand, tablet substitution, lower Computing Solutions shipments and lower Computing Solutions average selling prices.
• Reported gross margin improved sharply from 2% to 41%, but Q1 2012 included a $703 million charge related to a GLOBALFOUNDRIES waiver. Excluding that charge, Q1 2012 gross margin was approximately 46%, making Q1 2013 underlying gross margin lower by approximately five percentage points.
• Operating performance improved substantially from Q4 2012 because the Q4 period included a $273 million inventory LCM charge related to GLOBALFOUNDRIES commitments. Excluding restructuring, special charges and acquired-intangible amortization, AMD reported an operating loss of $46 million in Q1 2013 versus $55 million in Q4 2012.
• The 2012 restructuring plan, which included a workforce reduction of approximately 14%, asset impairments and facility consolidations, was substantially completed by quarter-end. Restructuring liabilities remaining at March 30, 2013 were $37 million.
• Inventory increased to $613 million from $562 million at year-end, primarily in preparation for upcoming product introductions.
• Q1 2013 had a $2 million income tax provision, compared with a $32 million tax benefit in Q1 2012, which included a $36 million discrete benefit associated with the SeaMicro acquisition.

Guidance, outlook, commentary and risks

• Management stated that PC market conditions were expected to remain challenging for the remainder of 2013 and cited weak consumer demand and broader macroeconomic uncertainty.
• The 2012 restructuring plan was expected to produce approximately $190 million of operating savings in 2013, primarily through lower operating expenses. Further facility consolidations were under evaluation and could result in additional material charges.
• AMD targeted more than 20% of revenue from semi-custom and embedded markets by Q4 2013, with a longer-term objective of 40% to 50% of revenue from these and other faster-growth markets.
• Management believed available cash, cash equivalents, marketable securities, restructuring actions and potential external financing would fund operations, capital expenditures and debt repayment over the next twelve months. It warned that financing might not be available on favorable terms or at all.
• Wafer purchase obligations to GLOBALFOUNDRIES were estimated at approximately $1.15 billion for 2013 and $250 million for Q1 2014. AMD had a $200 million promissory note to GLOBALFOUNDRIES due December 31, 2013.
• Key risks include Intel's competitive and pricing practices, continued PC-market weakness, dependence on GLOBALFOUNDRIES and other third-party manufacturers, fixed wafer commitments and manufacturing-yield risk, substantial leverage and refinancing requirements, customer concentration, inventory obsolescence, and the need to successfully execute new products and the semi-custom and embedded strategy.
• The top five customers represented approximately 51% of Q1 2013 revenue. International sales represented 92% of revenue.
• Auction-rate securities had a $22 million par value and $15 million estimated fair value. Auctions had failed since 2008, although AMD expected to sell the securities within twelve months.

Most important facts for an investor to verify

1. Whether revenue stabilizes as new APU, graphics, game-console and semi-custom products ramp, particularly against continued PC-market weakness.
2. Whether the expected $190 million of 2013 restructuring savings are achieved without impairing product development or customer relationships.
3. AMD's ability to generate positive operating cash flow and meet the $580 million 2015 convertible-note maturity and other debt obligations.
4. The cash impact and final terms of GLOBALFOUNDRIES wafer commitments, including the $200 million promissory note due December 31, 2013.
5. Whether gross margin can be sustained without relying on inventory-reserve benefits or other unusual items.
6. Progress toward the stated semi-custom and embedded revenue targets and the concentration of revenue among major customers.
7. Potential additional restructuring charges, facility obligations, litigation or environmental liabilities, and changes in access to external financing.