Business Context and Reporting Period
Advanced Micro Devices, Inc. (AMD) filed this unaudited Form 10-Q for the 13-week quarter ended March 29, 2014, compared primarily with the quarter ended March 30, 2013 and, where noted, December 28, 2013. AMD develops x86 microprocessors, accelerated processing units, embedded and server processors, GPUs, professional graphics products, and semi-custom system-on-chip products for game consoles.
Financial Performance and Condition
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net revenue | $1.397 billion | $1.088 billion | Up 28% |
| Gross margin | $487 million; 35% | $445 million; 41% | Margin down 6 percentage points |
| Operating income (loss) | $49 million | $(98) million | Improved by $147 million |
| Loss before taxes | $(18) million | $(144) million | Improved by $126 million |
| Net loss | $(20) million | $(146) million | Improved by $126 million |
| Net loss per share | $(0.03) | $(0.19) | Improved |
| Cash used in operating activities | $(204) million | $(155) million | Use increased by $49 million |
- Computing Solutions revenue was $663 million, down 12% year over year, while Graphics and Visual Solutions revenue was $734 million, up 118%. Graphics and Visual Solutions operating income increased to $91 million from $16 million.
- Operating expenses were $438 million, including $14 million of workforce-rebalancing severance charges. Research and development expense declined to $279 million from $312 million, and marketing, general and administrative expense declined to $156 million from $179 million.
- Gross margin declined primarily because of lower-margin semi-custom SOC products and a smaller benefit from sales of previously reserved inventory. The Q1 2013 inventory benefit was $20 million versus $4 million in Q1 2014.
- Cash, cash equivalents and marketable securities totaled $982 million at March 29, 2014, down from approximately $1.2 billion at December 28, 2013. Cash and cash equivalents alone were $554 million.
- Total debt and capital lease obligations were approximately $2.14 billion, including $2.078 billion of long-term debt and $60 million of short-term debt on the balance sheet. The secured revolving credit facility had $55 million outstanding and $445 million available.
- AMD issued $600 million of 6.75% senior notes due 2019 and used proceeds primarily to repurchase $423 million of 6.00% convertible notes and $48 million of 8.125% senior notes. Debt repurchases generated a $15 million loss, including $10 million on the 6.00% notes and $5 million on the 8.125% notes.
- Inventories were $869 million, accounts receivable were $840 million, and total current liabilities were $1.384 billion at quarter-end. Stockholders’ equity was $511 million.
Material Changes Versus Comparable Periods
- Revenue increased $309 million year over year, driven primarily by semi-custom SOC shipments that began in Q2 2013 and stronger GPU revenue. Sequentially, revenue declined 12% from $1.589 billion, consistent with seasonal weakness in PC and game-console-related sales.
- Computing Solutions unit shipments fell 20% year over year, primarily reflecting weak consumer PC and server markets and reduced chipset shipments as chipsets became integrated into APUs. Average selling price increased 10%.
- Graphics and Visual Solutions revenue more than doubled year over year, but declined 15% sequentially because of lower semi-custom SOC shipments and seasonal trends.
- AMD returned to operating profitability, but remained unprofitable at the net income level because of $47 million of interest expense and $21 million of other expense, including debt-repurchase losses.
- Operating cash flow remained negative and worsened year over year, primarily because of the final $200 million cash payment related to the GLOBALFOUNDRIES wafer-commitment waiver, lower payables, and other working-capital changes.
- On March 7, 2014, West Coast Hitech exercised its warrant cashlessly, resulting in the issuance of approximately 34.9 million AMD shares. The shares had already been included in the earnings-per-share denominator.
Guidance, Outlook, Risks and Unusual Items
- Management continued its transformation plan targeting approximately 50% of revenue from high-growth adjacent markets by the end of 2015. Products launched or sampled during the quarter included Kaveri APUs, the Opteron A1100 ARM-based server processor, FirePro W9100 graphics cards, and embedded Radeon products.
- The filing does not provide a clear numerical quarterly revenue or earnings guidance range. Management expects first-quarter PC sales and first-half semi-custom SOC sales to be seasonally weaker than the fourth quarter and second half, respectively.
- AMD entered a fourth amendment to its GLOBALFOUNDRIES Wafer Supply Agreement on March 30, 2014, establishing 2014 volume commitments and fixed pricing. AMD estimated approximately $1.2 billion of 2014 wafer purchase obligations and approximately $1.1 billion of remaining contractual obligations to GLOBALFOUNDRIES at March 29, 2014.
- Management stated that available cash, marketable securities and external financing are expected to fund operations and capital expenditures for the next twelve months, but cautioned that financing may not be available on favorable terms or at all.
- Key risks include weak consumer PC demand, intense competition from Intel and other semiconductor companies, dependence on GLOBALFOUNDRIES and other third-party manufacturers, manufacturing yields and capacity, seasonal demand, customer concentration, product execution, inventory obsolescence, foreign exchange exposure, and substantial debt obligations.
- The five largest customers represented approximately 54% of total Q1 2014 revenue. International sales represented 81% of revenue.
- AMD reported shareholder derivative and securities class-action litigation concerning historical 32nm technology and Llano product statements. Management believes any potential liability will not materially affect financial condition, cash flows or results of operations, but outcomes remain uncertain.
- Substantially all U.S. and Canadian deferred tax assets remained subject to a valuation allowance. Gross unrecognized tax benefits were $53 million; AMD expected that $31 million could be reduced over the following twelve months, subject to uncertain tax-audit resolutions.
Important Facts for Investors to Verify
- Whether the transformation plan can shift revenue toward targeted adjacent markets while offsetting continued weakness in the consumer PC business.
- The sustainability and margin contribution of semi-custom SOC and GPU revenue, including seasonal game-console demand.
- AMD’s ability to generate positive operating cash flow while meeting its approximately $1.1 billion of remaining 2014 GLOBALFOUNDRIES obligations.
- Debt maturities, interest expense, refinancing needs, and compliance with cross-default and secured-credit-facility covenants.
- Whether cash and available financing remain sufficient if operating losses, market weakness, manufacturing disruptions, or product delays recur.
- The status and potential financial exposure of the disclosed litigation, tax audits, warranty obligations, and other contingencies.