AMD 2017 First-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 products, server and embedded processors, semi-custom system-on-chip products, game-console technology and intellectual-property licensing. The unaudited quarter ended April 1, 2017 and the comparable quarter ended March 26, 2016 each comprised 13 weeks.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net revenue | $984 million | $832 million |
| Gross profit | $331 million | $269 million |
| Gross margin | 34% | 32% |
| Operating loss | $29 million | $68 million |
| Net loss | $73 million | $109 million |
| Basic and diluted loss per share | $0.08 | $0.14 |
| Net cash used in operating activities | $299 million | $42 million |
| Net cash used in investing activities | $246 million | $26 million |
Cash, cash equivalents and marketable securities totaled $943 million at April 1, 2017, consisting of $722 million in cash and cash equivalents and $221 million in marketable securities, compared with $1.264 billion in cash and cash equivalents at December 31, 2016. Total assets were $3.299 billion and stockholders’ equity was $409 million.
Long-term debt, net of discounts and issuance costs, was approximately $1.407 billion. Outstanding principal debt was $1.733 billion, including $805 million of 2.125% convertible notes due 2026, $191 million of 6.75% notes due 2019, $347 million of 7.50% notes due 2022 and $390 million of 7.00% notes due 2024. The secured revolving facility had no borrowings, $19 million of letters of credit outstanding and up to $209 million available for future borrowings.
Material changes versus the prior comparable period
- Revenue increased 18%, led by the Computing and Graphics segment, whose revenue rose 29% to $593 million. Management attributed this primarily to higher average selling prices and demand for newly launched Ryzen desktop processors and desktop GPUs.
- Enterprise, Embedded and Semi-Custom revenue increased 5% to $391 million, primarily from higher semi-custom SoC shipments, partly offset by lower non-recurring engineering revenue.
- Gross margin expanded two percentage points to 34%, primarily because of a richer Computing and Graphics product mix, including Ryzen processors.
- Operating loss narrowed to $29 million from $68 million. Computing and Graphics operating loss improved to $15 million from $70 million, while Enterprise, Embedded and Semi-Custom operating income declined to $9 million from $16 million because of higher operating expenses.
- Research and development expense rose 10% to $266 million, and marketing, general and administrative expense rose 15% to $121 million, reflecting higher data-center investment, sales and marketing activity, and stock-based compensation.
- Net loss improved to $73 million from $109 million, despite $5 million of other expense and a $5 million income tax provision. Interest expense declined to $32 million from $40 million.
- Operating cash use increased substantially, primarily because of working-capital movements, including a $183 million increase in accounts receivable and an $88 million increase in inventories. Investing cash use included $221 million of marketable-security purchases and $23 million of capital expenditures.
Guidance, outlook, commentary, risks and unusual items
AMD reported strong initial customer demand for Ryzen 7 desktop processors and stated that Ryzen sales were accretive to first-quarter gross margin. The filing does not provide clear quantified revenue or earnings guidance for the full year. Management stated that cash, cash equivalents, marketable securities and revolver availability were expected to fund operations and capital expenditures for the next 12 months, while noting that future external financing may be required and may not be available on favorable terms.
- AMD recognized a $27 million licensing gain from its THATIC intellectual-property arrangements, compared with $7 million in the prior-year quarter. No royalty income was recognized.
- The 2.125% convertible notes became convertible at holders’ option during the second quarter of 2017 after AMD’s stock-price conversion condition was met. Conversion could result in cash, stock or a combination and may dilute existing shareholders.
- AMD issued warrants to purchase 75 million shares at $5.98 per share, exercisable through February 29, 2020, subject to ownership limitations.
- AMD expects to meet its 2017 wafer-purchase target under the GLOBALFOUNDRIES agreement. Obligations to GLOBALFOUNDRIES were estimated at approximately $3.2 billion for the remainder of 2017 through 2020, and failure to meet annual targets could result in additional payments.
- Total contractual obligations were $6.426 billion, including $3.173 billion of GLOBALFOUNDRIES obligations, $584 million of estimated interest, $356 million of operating leases and $474 million of purchase obligations.
- Key risks include dependence on third-party foundries and assembly providers, competition from Intel and Nvidia, semiconductor cyclicality, customer concentration, product execution and manufacturing-yield risks, substantial leverage, liquidity and refinancing needs, foreign operations, intellectual-property claims and potential supply-chain disruptions.
- Significant litigation includes the Hatamian securities class action, stayed shareholder derivative actions and ZiiLabs patent litigation and related USITC proceedings. Management believes potential losses will not materially affect financial condition, cash flows or results of operations, but the filing does not provide a quantified exposure.
Important facts for investors to verify
- Whether Ryzen, upcoming server products and graphics products sustain revenue growth and further improve gross margin.
- Whether the sharp first-quarter operating cash outflow, receivables growth and inventory increase reverse in subsequent quarters.
- AMD’s ability to meet GLOBALFOUNDRIES purchase commitments and manage its approximately $3.2 billion of stated obligations through 2020.
- The effect of potential conversion of the $805 million convertible notes and exercise of the 75 million-share warrant on dilution and liquidity.
- Whether cash resources and the secured revolving facility remain sufficient as debt maturities and contractual obligations approach.
- Developments in the ZiiLabs USITC proceeding, securities litigation and other intellectual-property matters.
- The eventual impact of the planned adoption of the revenue-recognition standard in fiscal 2018, including possible accelerated recognition for distributor sales.