AMD 2020 Q2 Form 10-Q Summary
Business context and reporting period
Advanced Micro Devices, Inc. is a global semiconductor company offering Ryzen and other x86 processors, Radeon and other GPUs, EPYC server and embedded processors, semi-custom SoCs, development services and selected IP licensing. The filing covers the 13 weeks ended June 27, 2020 and six months ended June 27, 2020, compared with the periods ended June 29, 2019.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenue | $1.932 billion | $1.531 billion | $3.718 billion | $2.803 billion |
| Gross profit | $848 million | $621 million | $1.666 billion | $1.142 billion |
| Gross margin | 44% | 41% | 45% | 41% |
| Operating income | $173 million | $59 million | $350 million | $97 million |
| Net income | $157 million | $35 million | $319 million | $51 million |
| Diluted EPS | $0.13 | $0.03 | $0.27 | $0.05 |
| Operating cash flow | Not separately provided | Not separately provided | $178 million | $(183) million |
- Q2 revenue increased 26%, while six-month revenue increased 33% year over year.
- Computing and Graphics revenue was $1.367 billion in Q2, up 45%, driven primarily by higher Ryzen processor sales. Unit shipments increased 33% and average selling price increased 7%.
- Enterprise, Embedded and Semi-Custom revenue was $565 million, down 4%, as lower semi-custom revenue more than offset higher EPYC server processor revenue.
- Q2 operating margin was approximately 9.0%, compared with approximately 3.9% in the prior-year quarter. Six-month operating margin was approximately 9.4%, compared with approximately 3.5%.
- Research and development expense increased 23% in Q2 to $460 million; marketing, general and administrative expense increased 14% to $215 million.
- Cash and cash equivalents were $1.775 billion at June 27, 2020, compared with $1.466 billion at December 28, 2019. Marketable securities were zero at quarter end versus $37 million at year end.
- Inventory increased to $1.324 billion from $982 million at year end, including higher work-in-process and finished goods.
- Total debt principal was $763 million, comprising $251 million of 2.125% convertible notes, $312 million of 7.50% senior notes and a $200 million revolving-facility borrowing. The $200 million borrowing was repaid on July 6, 2020.
- The company had $178 million of operating cash inflow, $109 million of investing cash outflow and $240 million of financing cash inflow during the first six months.
Material changes versus the prior comparable period
- Revenue growth and a richer mix of Ryzen and EPYC products increased gross margin by three percentage points in Q2 and four percentage points for the six-month period.
- Computing and Graphics operating income rose to $200 million from $22 million in Q2 and to $462 million from $38 million for six months.
- Enterprise, Embedded and Semi-Custom operating income declined to $33 million from $89 million in Q2 and to $7 million from $157 million for six months. The prior-year six-month period included a $60 million THATIC IP licensing gain that was not repeated.
- Interest expense declined to $14 million from $25 million in Q2 and to $27 million from $52 million for six months, primarily due to lower debt balances.
- Operating cash flow improved from an outflow of $183 million to an inflow of $178 million, although inventory purchases used $342 million of cash.
- International sales increased to 79% of Q2 revenue from 71% and to 81% of six-month revenue from 74%.
Guidance, outlook, commentary, risks and unusual items
- Management did not provide a specific numerical revenue or earnings forecast in the supplied filing text. It stated that cash and cash equivalents plus availability under the revolving facility should fund operations and capital expenditures for the next 12 months.
- AMD reported limited financial disruption from COVID-19 during Q2 but continued to experience operational and supply-chain disruptions, work-from-home conditions, customer payment delays and uncertainty regarding future demand and public-health measures.
- Management identified historical seasonality, with revenue generally higher in the second half of the year, although market conditions and product transitions may alter the pattern.
- The 2.125% convertible notes became convertible at the holders’ option from July 1 through September 30, 2020. AMD intended to deliver common stock upon conversion, creating potential dilution.
- Substantially all deferred tax assets remained subject to valuation allowances. Management stated that improving results could support release of some or all allowances, producing a material non-cash tax benefit, but no release was recorded in the period.
- Gross unrecognized tax benefits were $79 million, and tax audits could materially change the balance of uncertain tax benefits.
- AMD remains exposed to reliance on third-party foundries and assembly, test, mark and packaging suppliers; capacity, yield, pricing and supply-chain risks; competition from Intel and Nvidia; customer concentration; product-cycle and inventory risks; foreign operations and currency exposure; export controls and U.S.-China trade restrictions; cybersecurity and product-vulnerability claims; and COVID-19 effects.
- The filing discusses Hauck/Spectre consumer litigation and Quarterhill-related patent litigation. Management believes potential liabilities are not expected to materially affect financial condition, cash flows or results of operations based on currently available information.
- Remaining performance obligations were $417 million at June 27, 2020, of which $180 million was expected to be recognized as revenue within 12 months.
Most important facts for investors to verify
- Whether Ryzen and EPYC demand and product mix can sustain the improved gross margins.
- Whether the Enterprise, Embedded and Semi-Custom segment recovers from lower semi-custom revenue and the absence of the prior-year licensing gain.
- Inventory growth, supply commitments under the GLOBALFOUNDRIES wafer supply agreement and manufacturing capacity at third-party suppliers.
- The effect of conversion of the 2.125% notes on diluted shares and per-share results.
- COVID-19-related demand, customer payment, supply-chain and international operating developments.
- Potential tax-valuation-allowance releases, uncertain tax benefits and outcomes of pending litigation and patent proceedings.
- AMD’s exposure to export controls, Entity List restrictions involving THATIC-related joint ventures, tariffs and broader U.S.-China trade policy.