ADVANCED MICRO DEVICES INC quarterly report, Q2 FY2013

AMD 2013 Q2 Form 10-Q Summary

Business context and reporting period

Advanced Micro Devices, Inc. is a global semiconductor company offering x86 microprocessors, APUs, chipsets, embedded and dense-server processors, GPUs, professional graphics and semi-custom products. The filing covers the 13-week quarter and 26-week six-month period ended June 29, 2013, compared primarily with June 30, 2012 and March 30, 2013.

AMD reported two segments: Computing Solutions and Graphics and Visual Solutions, the renamed Graphics segment. Management continued executing its plan to restructure the cost base, accelerate the product roadmap and shift toward semi-custom, embedded, gaming and other faster-growth markets.

Financial performance and key metrics

Metric	Q2 2013	Q2 2012	Six months 2013	Six months 2012
Net revenue	$1,161 million	$1,413 million	$2,249 million	$2,998 million
Gross margin	$459 million; 40%	$638 million; 45%	$904 million; 40%	$665 million; 22%
Operating income (loss)	$(29) million	$77 million	$(127) million	$(503) million
Net income (loss)	$(74) million	$37 million	$(220) million	$(553) million
Diluted EPS	$(0.10)	$0.05	$(0.29)	$(0.75)

Q2 revenue declined 18% year over year but increased 7% sequentially from $1,088 million in Q1 2013.
Q2 gross margin declined to 40% from 45% in the prior-year quarter and 41% in Q1 2013. Q2 included an $11 million benefit from selling previously reserved inventory.
Operating expenses declined to $488 million in Q2 from $543 million in Q1. Excluding $5 million of restructuring and special charges and $4 million of acquired-intangible amortization, the Q2 operating loss was $20 million.
Research and development expense was $308 million in Q2, down 11% year over year. Marketing, general and administrative expense was $171 million, down 19% year over year.
Computing Solutions revenue was $841 million, down 20% year over year and up 12% sequentially. Graphics and Visual Solutions revenue was $320 million, down 13% year over year and 5% sequentially.
International sales represented 93% of Q2 revenue.

Cash flow, liquidity, debt and balance sheet

Six-month net cash used in operating activities was $190 million, compared with $188 million provided in the prior-year period. Non-GAAP free cash flow was negative $238 million versus positive $109 million.
Capital expenditures were $48 million, compared with $79 million in the first six months of 2012.
Cash and cash equivalents were $334 million at June 29, 2013. Current marketable securities were $634 million and long-term marketable securities were $149 million, for total cash, cash equivalents and marketable securities of approximately $1.117 billion.
Total assets were $3.897 billion and stockholders’ equity was $359 million. Inventories increased to $711 million from $562 million at year-end 2012, primarily due to semi-custom and new-product builds.
Debt and capital lease obligations were approximately $2.05 billion, including $580 million of 6.00% convertible notes due 2015, $500 million of 8.125% notes due 2017, $500 million of 7.75% notes due 2020 and $500 million of 7.50% notes due 2022.
Contractual obligations totaled $5.395 billion, including $1.083 billion owed to GLOBALFOUNDRIES through the first quarter of 2014 and $938 million of other purchase obligations.
Management stated that available cash, marketable securities and anticipated external financing were expected to fund operations and capital expenditures for the next twelve months, but acknowledged that financing may not be available on favorable terms or at all.

Material changes versus comparable periods

Revenue deteriorated materially year over year because of weak PC demand, tablet adoption, lower computing unit shipments and lower average selling prices. Q2 results improved sequentially because of stronger Computing Solutions shipments, including Kabini and Temash APUs and Opteron products.
Computing Solutions operating income fell to $2 million from $82 million year over year, while Graphics and Visual Solutions declined to breakeven from $31 million.
Six-month 2013 gross margin was 40%, compared with 22% in 2012. The prior-year period included a $703 million charge related to the limited waiver of exclusivity from GLOBALFOUNDRIES, making the comparison non-recurring.
Six-month 2013 included $52 million of restructuring and special charges, including the net $46 million loss on Austin and Markham sale-and-leaseback transactions. The 2012 period included $8 million of restructuring charges and a $36 million discrete tax benefit from the SeaMicro acquisition.
The 2012 restructuring plan, which included an approximately 14% workforce reduction and facility actions, was substantially completed by the end of Q2 2013. Remaining restructuring liabilities were $14 million.
Cash declined by $215 million during the first six months, primarily reflecting operating cash use and payments related to GLOBALFOUNDRIES obligations, partly offset by $181 million of proceeds from property sales.

Guidance, outlook, management commentary and risks

AMD expected more than 20% of Q4 2013 revenue to come from semi-custom and embedded markets and targeted 40% to 50% of revenue from these and other faster-growth markets over the longer term.
Management expected semi-custom revenue to increase, but anticipated lower royalty revenue and lower semi-custom gross margins than the company-wide gross margin.
Inventory was expected to increase to approximately $800 million in Q3 2013 and remain near that level in subsequent quarters, primarily to support semi-custom product builds.
Management believed PC market conditions would remain challenging for at least the next 12 to 18 months. Key execution risks included product launches, competitive pricing, demand forecasting, inventory obsolescence, manufacturing yields and supply availability.
AMD had fixed wafer purchase commitments with GLOBALFOUNDRIES of approximately $1.15 billion for 2013 and $250 million for Q1 2014. Requirements beyond Q1 2014 could not be meaningfully estimated, although future purchases were expected to remain material.
AMD relied heavily on GLOBALFOUNDRIES and other third-party manufacturers. Lower yields, capacity constraints or unmet demand could raise unit costs, reduce supply and pressure margins.
The five largest customers represented approximately 53% of Q2 revenue. Dependence on Sony, Microsoft and other customers for semi-custom products created concentration and product-success risk.
Auction-rate securities had a $22 million par value and $15 million estimated fair value; auctions had failed to settle since 2008, although AMD had received required interest payments.
Substantially all U.S. and Canadian deferred tax assets remained subject to valuation allowances. Gross unrecognized tax benefits were approximately $54 million.
AMD disclosed substantial leverage, cross-default provisions, debt refinancing risk, competition from Intel and NVIDIA, global economic and PC-market weakness, foreign-exchange exposure, intellectual-property and litigation risks, environmental liabilities and cybersecurity risks.

Important facts for investors to verify

Whether semi-custom and embedded products achieve the stated Q4 2013 revenue contribution and longer-term mix targets.
Whether inventory reaches approximately $800 million without material write-downs or gross-margin pressure.
AMD’s ability to generate positive operating cash flow and refinance or repay the $580 million of convertible notes due in 2015.
Compliance with GLOBALFOUNDRIES wafer purchase commitments and the effect of fixed wafer volumes, yields and pricing on margins.
Progress in restoring Computing Solutions and Graphics and Visual Solutions profitability amid weak PC demand and aggressive competition.
Customer concentration, particularly exposure to Sony, Microsoft and other semi-custom customers, and the sustainability of related product demand.
The liquidity and valuation of auction-rate securities, availability of external financing and any changes in credit ratings.