ADVANCED MICRO DEVICES INC quarterly report, Q3 FY2013

Advanced Micro Devices, Inc. — Q3 2013 Form 10-Q Summary

Business context and reporting period

AMD is a global semiconductor company offering x86 microprocessors, accelerated processing units, embedded and dense-server processors, GPUs, professional graphics, and semi-custom system-on-chip products. The filing covers the 13-week quarter and 39-week nine-month period ended September 28, 2013, compared with September 29, 2012; quarterly comparisons also include the quarter ended June 29, 2013.

AMD continued its three-step plan to restructure, accelerate product execution, and shift toward higher-growth adjacent markets. The 2012 restructuring plan, which included an approximately 14% workforce reduction and facility actions, was completed during the third quarter.

Financial performance and liquidity

Metric	Q3 2013	Q3 2012	9M 2013	9M 2012
Net revenue	$1,461 million	$1,269 million	$3,710 million	$4,267 million
Gross margin	$521 million; 36%	$392 million; 31%	$1,425 million; 38%	$1,057 million; 25%
Operating income (loss)	$95 million	$(131) million	$(32) million	$(634) million
Net income (loss)	$48 million	$(157) million	$(172) million	$(710) million
Diluted EPS	$0.06	$(0.21)	$(0.23)	$(0.96)

Revenue increased 15% year over year and 26% sequentially. Graphics and Visual Solutions revenue increased 96% year over year to $671 million and 110% sequentially, primarily from semi-custom SOC shipments. Computing Solutions revenue declined 15% year over year and 6% sequentially to $790 million.
Gross margin declined sequentially from 40% to 36%, primarily because semi-custom SOC products carried lower margins. Q3 2013 gross margin included a $19 million benefit from selling previously reserved inventory.
Operating expenses were $426 million, down from $488 million in Q2 2013 and approximately 30% below the level when restructuring began. Research and development expense was $288 million, and marketing, general and administrative expense was $155 million.
Net cash used in operating activities for the first nine months was $169 million, compared with $52 million used in the prior-year period. Non-GAAP free cash flow was negative $232 million versus negative $163 million.
Cash and cash equivalents were $543 million, current marketable securities were $517 million, and long-term marketable securities were $121 million at September 28, 2013. Cash, cash equivalents, and marketable securities totaled approximately $1.1 billion on the balance sheet, or approximately $1.2 billion including amounts referenced by management.
Total debt and capital lease obligations were approximately $2.05 billion, including $2.031 billion of long-term debt excluding capital leases. Stockholders’ equity was $434 million, compared with $538 million at December 29, 2012.
Accounts receivable increased to $873 million from $630 million at year-end, while inventories increased to $922 million from $562 million, reflecting game-console ramps and preparation for new graphics product shipments.

Material changes versus comparable periods

AMD returned to quarterly profitability from a Q2 2013 operating loss of $29 million and net loss of $74 million. The improvement reflected higher semi-custom SOC revenue, cost reductions, and lower operating expenses.
Computing Solutions remained pressured by weak consumer PC demand, lower notebook and chipset shipments, and lower average selling prices. Its Q3 operating income improved to $22 million from a $114 million loss in Q3 2012.
Graphics and Visual Solutions operating income increased to $79 million from $18 million in Q3 2012, driven by semi-custom SOC revenue, although GPU shipments and game-console royalty revenue declined.
Nine-month revenue declined 13% year over year because of the Computing Solutions downturn, partially offset by 22% growth in Graphics and Visual Solutions.
Year-over-year comparisons benefited from the absence of the $703 million GLOBALFOUNDRIES exclusivity-waiver charge recorded in 2012 and the approximately $100 million 2012 inventory write-down. The 2013 results included a $50 million benefit from sales of previously reserved inventory for the nine-month period.
AMD received $238 million from property and equipment sales during the first nine months, including real estate proceeds from Austin, Singapore, and Markham. Third-quarter restructuring and special gains were $22 million, primarily from real estate transactions; the nine-month net charge was $30 million.

Guidance, outlook, commentary, and risks

Management stated that consumer PC market conditions remained challenging and expected this pressure to continue. No specific quantitative revenue or margin guidance is provided in the filing text.
AMD targeted approximately 50% of revenue from semi-custom SOC, embedded, and other faster-growth markets over the following two years. Semi-custom SOC and embedded revenue exceeded 30% of Q3 total revenue, but management expected semi-custom gross margins to remain below the company-wide margin.
Management stated that cash, cash equivalents, marketable securities, and available external financing were expected to fund operations and capital expenditures for the next twelve months, while acknowledging that financing might not be available on favorable terms or at all.
GLOBALFOUNDRIES obligations totaled $865 million through the first quarter of 2014, including approximately $615 million due in the remainder of 2013 and $250 million in the first quarter of 2014. AMD also owed a $200 million promissory note to GLOBALFOUNDRIES due by December 31, 2013. Future obligations beyond Q1 2014 could not be meaningfully estimated.
Total contractual obligations were $4.972 billion, including $2.08 billion of stated principal on outstanding notes, $824 million of estimated interest, $400 million of operating leases, $733 million of other purchase obligations, and the $865 million of GLOBALFOUNDRIES obligations.
Key risks include Intel’s competitive and pricing actions, weak PC demand, dependence on third-party foundries and GLOBALFOUNDRIES, manufacturing yield and capacity risks, inventory obsolescence, customer concentration, execution of the semi-custom strategy, substantial leverage, refinancing needs, foreign-exchange exposure, intellectual-property litigation, and cyclical semiconductor demand.
The five largest customers represented approximately 60% of Q3 revenue; five customers represented approximately 81% of Graphics and Visual Solutions revenue. International sales represented 82% of Q3 revenue.
Auction-rate securities had a $22 million par value and $15 million fair value; auctions had failed to settle since 2008. AMD intended and believed it had the ability to sell them within twelve months.
Substantially all U.S. and Canadian deferred tax assets remained subject to a valuation allowance. Gross unrecognized tax benefits were approximately $56 million, with $3 million recognized as liabilities.

Most important facts for investors to verify

Whether semi-custom SOC and embedded growth can offset continued deterioration in the PC-related Computing Solutions business.
Whether lower-margin semi-custom revenue will dilute consolidated gross margin as the business mix changes.
AMD’s ability to generate positive operating cash flow and fund the $2.05 billion debt burden, upcoming maturities, and GLOBALFOUNDRIES obligations.
Inventory quality and sell-through, given the increase to $922 million and the company’s exposure to rapidly changing PC, graphics, and game-console markets.
Customer concentration and the commercial success of products incorporating AMD semi-custom SOC technology, including next-generation game consoles.
Potential goodwill impairment in the fourth quarter of 2013 and the impact of future restructuring, product-transition, tax, or litigation charges.