AMD

Business Context and Reporting Period

Company: Advanced Micro Devices, Inc. (AMD)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 26, 2009
Business Overview: AMD is a global semiconductor company designing and selling x86 microprocessors, chipsets, and graphics processors. The fiscal year was transformational, marked by the formation of the GLOBALFOUNDRIES (GF) manufacturing joint venture in March 2009, which allowed AMD to transition to a fabless business model. The company also settled long-standing antitrust litigation with Intel Corporation in November 2009.

Key Financial Metrics

Note: 2009 results include the consolidation of GLOBALFOUNDRIES from March 2, 2009. Beginning in 2010, AMD will deconsolidate GF and account for it under the equity method.

Material Changes vs. Prior Period

• Profitability Turnaround: AMD returned to profitability in 2009 with $304 million in net income, compared to a $3.1 billion loss in 2008. This reversal was primarily driven by a $1.242 billion gain from the settlement of litigation with Intel.
• Revenue Decline: Net revenue decreased 7% year-over-year to $5.4 billion. Excluding a one-time $191 million process technology license revenue in 2008, the decline was approximately 4%, driven by lower average selling prices in the Computing Solutions segment.
• Debt Reduction: Excluding GF obligations, AMD reduced its debt by approximately $1.2 billion in 2009 through the repurchase of convertible notes and redemption of senior notes.
• Cost Reduction: Operating expenses decreased significantly due to restructuring initiatives, headcount reductions, and the suspension of certain employee benefits implemented in early 2009.

Guidance, Outlook, and Risks

Management Commentary & Outlook: Management expects 2010 to be a year of continued improvement with a new business model focused on semiconductor design. Key strategic shifts include the deconsolidation of GF, which will result in higher reported cost of sales (due to wafer purchases from GF) but lower operating expenses and interest expense. The company is focusing on the "Fusion" accelerated processing unit (APU) roadmap, with the first product ("Llano") expected in 2011.

Key Risks & Contingencies:

• Intel Dominance: Intel's market power and aggressive pricing practices remain a significant competitive threat, potentially limiting AMD's market share and margins.
• GF Dependency: AMD relies on GF for substantially all microprocessor wafer fabrication. Risks include GF's ability to meet capacity requirements, maintain yields, and manage costs under the "cost-plus" Wafer Supply Agreement.
• Liquidity & Credit Markets: While cash balances improved, the company faces risks related to the illiquidity of auction rate securities (ARS) and the potential need for external financing if market conditions deteriorate.
• Customer Concentration: Five customers accounted for approximately 56% of Computing Solutions revenue and 52% of Graphics revenue in 2009. The loss of a major customer could materially impact results.

Investor Verification Checklist

• Intel Settlement Impact: Verify the sustainability of earnings without the $1.25 billion one-time gain from the Intel settlement.
• GF Deconsolidation Effects: Monitor Q1 2010 financials to understand the impact of deconsolidating GF on gross margins, operating expenses, and interest expense.
• Wafer Supply Agreement: Review the terms of the cost-plus arrangement with GF and its potential impact on future gross margins compared to in-house manufacturing.
• Product Roadmap Execution: Assess the timeline and market reception of the "Llano" APU product scheduled for 2011.
• Debt Covenants: Confirm compliance with financial covenants in the 8.125% Senior Notes and Fab 36 Term Loan, particularly regarding tangible net worth and EBITDA.