AMD 2020 Q1 Form 10-Q Summary
Business Context and Reporting Period
Advanced Micro Devices, Inc. reported results for the 13 weeks ended March 28, 2020, compared with the 13 weeks ended March 30, 2019. AMD develops x86 processors, GPUs, server and embedded processors, semi-custom SoCs, development services, and licenses portions of its intellectual property. Reportable segments are Computing and Graphics and Enterprise, Embedded and Semi-Custom.
Financial Performance and Position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net revenue | $1.786 billion | $1.272 billion | +40% |
| Gross profit | $818 million | $521 million | +57% |
| Gross margin | 46% | 41% | +5 percentage points |
| Operating income | $177 million | $38 million | +366% |
| Net income | $162 million | $16 million | +913% |
| Diluted EPS | $0.14 | $0.01 | Higher |
| Net cash used in operating activities | $(65) million | $(213) million | Improved |
Implied operating margin was approximately 9.9%, compared with approximately 3.0% in the prior-year quarter; implied net margin was approximately 9.1%, compared with approximately 1.3%.
- Computing and Graphics revenue was $1.438 billion, up 73%, driven by higher Ryzen processor and Radeon channel sales. Unit shipments increased 38% and average selling price increased 19%.
- Enterprise, Embedded and Semi-Custom revenue was $348 million, down 21%, primarily due to lower semi-custom revenue, partly offset by higher EPYC server processor revenue.
- Computing and Graphics operating income was $262 million, compared with $16 million. Enterprise, Embedded and Semi-Custom reported an operating loss of $26 million, compared with income of $68 million.
- Research and development expense increased 18% to $442 million. Marketing, general and administrative expense increased 17% to $199 million.
- Q1 2019 included a $60 million licensing gain from the THATIC joint venture; no comparable gain was recognized in Q1 2020.
- Cash, cash equivalents and marketable securities totaled approximately $1.4 billion at March 28, 2020, compared with approximately $1.5 billion at December 28, 2019. Cash and cash equivalents were $1.330 billion and marketable securities were $55 million.
- Total assets were $5.864 billion and stockholders’ equity was $3.037 billion at March 28, 2020.
- Principal debt outstanding was $563 million. Long-term debt, net, was $488 million, and the estimated fair value of long-term debt was $1.810 billion.
- The $500 million secured revolving facility was undrawn at quarter-end, with $14 million of letters of credit outstanding. AMD subsequently borrowed $200 million on April 6, 2020, at an annual interest rate of 2.37% through July 6, 2020.
- Capital expenditures were $55 million. Net cash used in investing activities was $73 million, while financing activities provided $2 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by Ryzen and Radeon products, while semi-custom revenue declined.
- Gross margin expanded from 41% to 46% due primarily to a greater mix of Ryzen and EPYC processors.
- Operating income and net income increased substantially despite higher research, development, marketing and general and administrative costs.
- Interest expense declined to $13 million from $27 million due to lower debt balances. Q1 2019 also included an $8 million loss on debt extinguishment.
- Operating cash use improved by $148 million year over year, principally because of higher net income and working-capital changes, but operating cash flow remained negative.
- Inventory increased to $1.056 billion from $982 million at December 28, 2019, while accounts receivable declined to $1.691 billion from $1.859 billion.
- International sales represented 82% of revenue, compared with 77% in the prior-year quarter.
- The 2.125% convertible notes became convertible during the second quarter of 2020. If converted, the notes could dilute existing stockholders; 31 million incremental shares were included in Q1 diluted share calculations.
Guidance, Outlook, Commentary and Risks
The filing does not provide a clear quantitative revenue or earnings forecast for subsequent quarters. Management stated that cash, cash equivalents, marketable securities and the revolving facility should be sufficient to fund operations and capital expenditures for the next 12 months, while noting that additional financing may not be available on favorable terms.
- COVID-19 caused limited financial disruption during Q1, but AMD experienced supply-chain disruptions, weaker offline PC channel sales in China, and some customer payment delays. Management expected the pandemic to continue affecting operations and demand.
- AMD relies heavily on third-party wafer foundries, assembly and testing providers, including GLOBALFOUNDRIES, TSMC and its ATMP joint ventures. Supply constraints, manufacturing yields, capacity allocation and minimum wafer purchase commitments could affect revenue and margins.
- Key competitive risks include Intel’s market position and pricing activity, Nvidia and other GPU competitors, rapid product cycles, product execution, and the need to deliver planned 7nm and future products on schedule.
- U.S.-China trade restrictions and the Entity List designation involving THATIC and related entities could affect licensing, joint ventures, exports and future royalty or milestone receipts.
- Substantially all U.S. and foreign deferred tax assets remained subject to valuation allowances. A future release could produce a material non-cash tax benefit, but the timing and amount are uncertain.
- AMD reported $484 million of remaining performance obligations, of which $211 million was expected to be recognized as revenue within 12 months.
- Pending and settled legal matters included shareholder derivative litigation, the settled Bulldozer-related consumer class action, and Monterey Research patent litigation. Management did not expect known matters to have a material adverse effect.
- Other material risks include customer concentration, demand volatility, inventory obsolescence, cybersecurity and product vulnerabilities, foreign exchange exposure, litigation and intellectual-property claims, debt covenants, and seasonal sales patterns.
Important Facts for Investors to Verify
- Whether COVID-19-related supply, demand and payment disruptions materially worsen after the reporting date.
- The amount and timing of the $200 million revolving-facility borrowing and its effect on interest expense and liquidity.
- Continuing growth and margins for Ryzen, Radeon and EPYC products, and the trajectory of semi-custom revenue.
- Whether negative operating cash flow reverses as profitability grows and working capital normalizes.
- Potential dilution from conversion of the 2.125% convertible notes and the impact of the notes’ substantially higher estimated fair value than carrying value.
- Progress and risks related to 7nm product execution, third-party manufacturing capacity, wafer commitments and ATMP joint ventures.
- Developments in THATIC-related licensing, royalties and U.S.-China export restrictions.
- Changes in deferred tax asset valuation allowances, tax audits and unrecognized tax benefits.