AMD 10-Q Summary: Second Quarter 2021
Business Context and Reporting Period
Advanced Micro Devices, Inc. is a global semiconductor company serving PC, gaming, data center and embedded markets with CPUs, GPUs, APUs, semi-custom SoCs, chipsets, development services and licensed intellectual property. This unaudited Form 10-Q covers the three and six months ended June 26, 2021, compared with the periods ended June 27, 2020. Each period comprised 13 weeks for the quarter and 26 weeks year to date.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Revenue | $3.850 billion | $1.932 billion | $7.295 billion | $3.718 billion |
| Gross profit | $1.830 billion | $848 million | $3.417 billion | $1.666 billion |
| Gross margin | 48% | 44% | 47% | 45% |
| Operating income | $831 million | $173 million | $1.493 billion | $350 million |
| Net income | $710 million | $157 million | $1.265 billion | $319 million |
| Diluted EPS | $0.58 | $0.13 | $1.03 | $0.27 |
| Operating cash flow | Not separately provided | Not separately provided | $1.850 billion | $178 million |
Computing and Graphics revenue increased 65% to $2.250 billion in Q2, driven by higher Ryzen processor and Radeon product sales, a 5% increase in unit shipments and a 58% increase in average selling price. Enterprise, Embedded and Semi-Custom revenue increased 183% to $1.600 billion, primarily due to higher semi-custom and EPYC server processor revenue.
Research and development expense increased 43% year over year to $659 million in Q2, while marketing, general and administrative expense increased 59% to $341 million. Q2 operating income included $10 million of Xilinx acquisition-related costs within the All Other category. The effective tax rate was 13.7% in Q2 and 13.8% year to date, compared with 2.5% and 3.0% in the respective 2020 periods.
At June 26, 2021, cash and cash equivalents were $2.623 billion, short-term investments were $1.170 billion, and total cash, cash equivalents and short-term investments were approximately $3.8 billion. Total debt principal was $313 million, including $312 million of 7.50% senior notes due in 2022. AMD had no borrowings under its $500 million revolving credit facility and had $13 million of letters of credit outstanding.
Inventory increased to $1.765 billion from $1.399 billion at year-end 2020. Net cash used in investing activities was $603 million, primarily reflecting purchases of short-term investments and $130 million of capital expenditures. Financing activities used $219 million, primarily due to $256 million of share repurchases.
Material Changes Versus the Prior Comparable Period
- Revenue nearly doubled year over year in Q2, increasing 99%; first-half revenue increased 96%.
- Gross margin expanded four percentage points in Q2 and two percentage points year to date, reflecting a richer mix of high-end Ryzen, Radeon and EPYC products.
- Operating income increased from $173 million to $831 million in Q2, while net income increased from $157 million to $710 million.
- Operating cash flow increased to $1.850 billion from $178 million, supported by higher earnings and increased accounts payable, partly offset by a $366 million inventory build.
- AMD began a $4 billion share repurchase program in May 2021 and repurchased approximately 3.2 million shares for $256 million during the quarter; $3.744 billion remained available at June 26.
- AMD amended its wafer supply agreement with GLOBALFOUNDRIES through 2024, establishing minimum capacity allocations, pricing and annual purchase targets while removing prior exclusivity commitments.
- Debt declined from $338 million at December 26, 2020 to $313 million, following conversion of $25 million principal amount of convertible notes into approximately three million shares.
Guidance, Outlook, Risks and Unusual Items
Management stated that cash, cash equivalents, short-term investments and available revolving-credit capacity should be sufficient to fund operations and capital expenditures for the next 12 months and beyond. The filing does not provide a specific quarterly or full-year revenue or earnings guidance figure.
AMD expects international sales to remain a significant portion of revenue; international sales represented 74% of Q2 revenue and 75% of first-half revenue. Revenue assigned to remaining performance obligations was $281 million, of which AMD expects to recognize $170 million within the next 12 months. Historically, revenue is generally higher in the second half of the year, although product transitions and market conditions may affect seasonality.
The pending all-stock acquisition of Xilinx was valued at approximately $35 billion at signing. Stockholders of both companies approved the transaction, and approvals were obtained from the United Kingdom Competition and Markets Authority and the European Commission after the quarter-end. Other regulatory and closing conditions remained outstanding, with closing expected by the end of calendar year 2021. AMD could owe termination fees of $1.5 billion or $1 billion in specified circumstances.
Key risks include reliance on third-party foundries and assembly providers, supply and capacity constraints, semiconductor cyclicality, intense competition from Intel and others, customer concentration, product execution and manufacturing yield risks, inventory obsolescence, export controls and U.S.-China trade restrictions, foreign currency exposure, cybersecurity and product vulnerabilities, COVID-19-related disruptions, litigation, and risks associated with completing and integrating Xilinx. AMD also has approximately $6.016 billion of unconditional purchase commitments, including wafer, substrate, software and technology commitments.
Unusual or notable items included $8 million of investment impairment, a $6 million loss on convertible-debt conversions, $25 million of year-to-date Xilinx acquisition-related costs, and $19 million of loss on sale or disposal of property and equipment. Management stated that identified legal matters were not expected to have a material adverse effect based on information currently known.
Important Facts for Investors to Verify
- Whether revenue growth and gross-margin expansion continue after the unusually strong year-over-year comparisons.
- Whether supply constraints, foundry capacity, substrate availability and the GF purchase targets affect shipments, inventory levels or margins.
- The timing and final terms of the Xilinx transaction, including remaining regulatory approvals, stock dilution, integration costs and potential termination fees.
- The amount and timing of the $312 million senior-note maturity due in 2022 and any refinancing requirements.
- Whether the $4 billion repurchase authorization is pursued while AMD funds significant inventory, research and development, contractual commitments and the Xilinx transaction.
- Customer concentration, semi-custom console demand, EPYC adoption, cryptocurrency-related GPU demand and potential demand cyclicality.
- Subsequent developments involving COVID-19, export controls, the THATIC joint venture, intellectual-property claims and other litigation.