AMD 10-Q Summary: First Quarter 2015
Business context and reporting period
Advanced Micro Devices, Inc. is a global semiconductor company offering x86 microprocessors, accelerated processing units, chipsets, discrete and professional graphics, server and embedded processors, and semi-custom system-on-chip products. The quarter ended March 28, 2015 comprised 13 weeks and is compared with the quarter ended March 29, 2014 and, where provided, December 27, 2014.
AMD reported two segments: Computing and Graphics, and Enterprise, Embedded and Semi-Custom. Management cited weaker-than-expected PC market conditions as a major factor affecting first-quarter results.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net revenue | $1.030 billion | $1.397 billion | Down 26% |
| Gross margin | $326 million; 32% | $487 million; 35% | Margin down 3 points |
| Operating income (loss) | $(137) million | $49 million | Declined $186 million |
| Net loss | $(180) million | $(20) million | Loss increased $160 million |
| Net loss per share | $(0.23) | $(0.03) | Loss increased $0.20 |
| Net cash used in operations | $(173) million | $(204) million | Outflow improved $31 million |
- Computing and Graphics revenue was $532 million, down 38% year over year, primarily due to a 36% decline in unit shipments. The segment recorded a $75 million operating loss versus $3 million of operating income in Q1 2014.
- Enterprise, Embedded and Semi-Custom revenue was $498 million, down 7% year over year. Segment operating income was $45 million versus $85 million in Q1 2014.
- Operating expenses were $463 million, including $87 million of restructuring and other special charges. Research and development expense was $242 million and marketing, general and administrative expense was $131 million.
- Cash and cash equivalents plus marketable securities totaled $906 million at March 28, 2015, down from approximately $1.0 billion at December 27, 2014. Cash and cash equivalents were $677 million and marketable securities were $229 million.
- Total debt and capital lease obligations were approximately $2.3 billion, compared with approximately $2.2 billion at year-end 2014. Balance-sheet debt included $235 million of short-term debt and $2.033 billion of long-term debt.
- Stockholders’ equity declined to $17 million from $187 million at December 27, 2014, principally reflecting the quarterly net loss.
- Capital expenditures were $22 million. Net cash used in investing activities was $15 million, while financing activities provided $60 million, primarily from $58 million of net revolving-credit borrowings.
Material changes versus comparable periods
- Revenue declined 17% from Q4 2014 and 26% from Q1 2014. Management attributed the sequential decline to seasonality and weak PC market conditions.
- Gross margin improved sequentially from 29% to 32%, partly because Q4 2014 included a $58 million lower-of-cost-or-market inventory charge. Year over year, margin declined from 35% to 32% because of product-mix changes, a higher proportion of lower-margin Enterprise, Embedded and Semi-Custom products, and lower game-console royalties.
- Q1 2015 included $87 million of restructuring and special charges: $75 million related to exiting the dense server systems business formerly known as SeaMicro and $12 million under the 2014 restructuring plan. Q1 2014 included $14 million of workforce-rebalancing severance charges but no restructuring charge.
- AMD recorded no goodwill impairment in Q1 2015; Q4 2014 included a $233 million goodwill impairment charge and a $58 million inventory adjustment.
- Interest expense decreased to $40 million from $47 million in Q1 2014. Other expense was zero in Q1 2015 versus $21 million of expense in Q1 2014, which included a $15 million loss on debt repurchases.
- Net cash used in operations improved from $204 million to $173 million, although AMD continued to consume operating cash.
Guidance, outlook, commentary, risks and unusual items
- The filing does not provide a clear numerical revenue or earnings guidance figure for the remainder of 2015. Management expected cash, restructuring savings and the secured revolving credit facility to fund operations and capital expenditures for the next 12 months.
- AMD planned to continue diversifying beyond its core PC market. Management referenced 2015 Carrizo and Carrizo-L mobile APUs and the LiquidVR initiative. The company’s stated strategy targeted approximately 50% of revenue from high-growth adjacent markets by the end of 2015.
- The 2014 restructuring plan reduced global headcount by approximately 6% and was expected to be largely completed by the end of Q3 2015. The dense server systems exit was expected to be completed within 12 months.
- AMD entered a fifth amendment to its GLOBALFOUNDRIES wafer supply agreement on April 16, 2015. The company estimated approximately $1.1 billion of fiscal 2015 purchases from GLOBALFOUNDRIES and at least $70 million in the first quarter of fiscal 2016. GLOBALFOUNDRIES remained a related party.
- At March 28, 2015, the secured revolving line had $188 million outstanding at 4.25%, $6 million of letters of credit, and up to $306 million available. AMD stated that it was in compliance with required covenants. An amended and restated facility was entered into on April 14, 2015, extending maturity to April 14, 2020.
- AMD had $42 million of 6.00% convertible senior notes classified as short-term debt and due May 1, 2015. The filing identifies substantial debt-service, refinancing, covenant and cross-default risks.
- Moody’s downgraded AMD’s corporate credit rating to B3 from B2 and senior unsecured debt rating to Caa1 from B2. Standard & Poor’s downgraded both ratings to B- from B.
- Top five customers represented approximately 69% of Q1 2015 revenue. International sales represented 75% of revenue.
- A securities class action concerning AMD’s 32nm technology and Llano products survived a motion to dismiss on March 31, 2015. Management stated that potential liability was not expected to materially affect financial condition, cash flows or results of operations. A related shareholder derivative action remained stayed.
- Substantially all U.S. and Canadian deferred tax assets remained subject to a valuation allowance. Gross unrecognized tax benefits totaled $28 million, and AMD expected a possible reduction of approximately $7 million over the following 12 months, subject to uncertain audit settlements.
Most important facts for investors to verify
- Whether PC-market weakness and lower Computing and Graphics shipments persist, and whether the segment can return to profitability.
- Progress toward the diversification strategy, including adoption of Carrizo, ARM-based products, semi-custom products and other high-growth-market offerings.
- Completion, cash costs and realized savings from the 2014 restructuring plan and the dense server systems exit.
- AMD’s ability to fund continuing operating cash burn, upcoming debt maturities and approximately $1.1 billion of estimated fiscal 2015 GLOBALFOUNDRIES commitments.
- Availability and covenant capacity under the amended revolving credit facility, including the effects of secured borrowing and cross-default provisions.
- Customer concentration, game-console demand and the sustainability of semi-custom royalties.
- Potential effects of credit-rating downgrades on refinancing costs, supplier terms and access to capital markets.
- Developments in the securities litigation, tax audits, manufacturing yields, inventory levels and possible future goodwill or asset impairments.