AMD 2016 Q3 Form 10-Q Summary
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, semi-custom system-on-chip products, game-console technology and intellectual-property licensing. The filing covers the 13-week quarter and 39-week nine-month period ended September 24, 2016, compared with the periods ended September 26, 2015.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net revenue | $1,307 million | $1,061 million | $3,166 million | $3,033 million |
| Gross margin | $59 million; 5% | $239 million; 23% | $647 million; 20% | $797 million; 26% |
| Operating loss | $(293) million | $(158) million | $(369) million | $(432) million |
| Net loss | $(406) million | $(197) million | $(446) million | $(558) million |
| Diluted loss per share | $(0.50) | $(0.25) | $(0.56) | $(0.72) |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $(98) million | $(285) million |
- Third-quarter revenue increased 23% year over year. Computing and Graphics revenue increased 11% to $472 million, while Enterprise, Embedded and Semi-Custom revenue increased 31% to $835 million.
- Enterprise, Embedded and Semi-Custom operating income increased to $136 million from $84 million. Computing and Graphics operating loss improved to $66 million from $181 million.
- Gross margin was heavily reduced by the $340 million charge related to the GLOBALFOUNDRIES wafer supply agreement amendment. Excluding the charge, management stated that gross margin would have increased by approximately two percentage points year over year.
- Research and development expense was $259 million in the quarter and $744 million for the nine months, compared with $241 million and $718 million, respectively, in the prior-year periods.
- Cash and cash equivalents were $1.258 billion at September 24, 2016, compared with $785 million at December 26, 2015. Total debt was approximately $1.6 billion, compared with approximately $2.2 billion at year-end.
- Inventory was $772 million, up from $678 million at December 26, 2015. Total current assets were $2.824 billion and total current liabilities were $1.473 billion.
- Net cash used in operating activities improved to $98 million for the first nine months from $285 million in the prior-year period. Investing activities provided $293 million, primarily from the ATMP joint venture transaction, and financing activities provided $278 million.
Material changes versus the prior comparable period
- Revenue growth was driven by higher notebook processor and GPU sales, Polaris GPU demand, and higher semi-custom SoC shipments associated with customer product launches.
- The Computing and Graphics operating loss narrowed substantially, while Enterprise, Embedded and Semi-Custom operating income improved. The latter included $24 million of third-quarter and $57 million of nine-month intellectual-property licensing income from the China joint ventures.
- Gross margin declined sharply because of the $340 million GLOBALFOUNDRIES charge. The prior-year quarter instead included a $65 million inventory write-down, primarily for older-generation APU products.
- AMD completed a public offering of 115 million shares for approximately $668 million of net proceeds and issued $700 million principal amount of 2.125% convertible senior notes, generating approximately $681 million of net proceeds.
- AMD used financing proceeds to repay approximately $226 million under its secured revolving credit facility and repurchase $796 million principal amount of senior notes. The remaining $208 million of 7.75% notes was redeemed on September 28, 2016, after quarter-end.
- AMD sold 85% of two assembly, test, mark and pack operations, receiving approximately $346 million of net cash proceeds and recognizing a cumulative $146 million pretax gain. AMD retained a 15% equity interest valued at approximately $60 million at quarter-end.
Guidance, outlook, management commentary, risks and unusual items
- Management expected cash and cash equivalents together with availability under the secured revolving credit facility to fund operations and capital expenditures for at least the next 12 months, but noted that external financing may be required for future obligations or strategic needs.
- Management expected approximately $257 million of purchases from GLOBALFOUNDRIES during the remainder of fiscal 2016. The amended wafer agreement establishes annual purchase targets through 2020; failure to meet targets may require payments to GLOBALFOUNDRIES.
- The amended wafer agreement provides greater sourcing flexibility for certain 14nm and 7nm products but requires a $100 million payment and quarterly payments beginning in 2017 tied to purchases from another foundry. AMD also issued a warrant for up to 75 million shares at $5.98 per share, creating potential dilution.
- The company expected the 2015 restructuring plan, involving an approximately 5% global headcount reduction and other organizational actions, to be substantially completed by the end of the fourth quarter of 2016.
- Key business risks include intense competition from Intel and other semiconductor companies, dependence on GLOBALFOUNDRIES and other third-party manufacturers, manufacturing yield and supply disruptions, semiconductor cyclicality, declining PC markets, customer concentration, product execution, access to financing, debt service requirements, currency and geopolitical exposure, cybersecurity, intellectual-property claims and litigation.
- The top two customers represented approximately 60% of third-quarter revenue and the top five represented approximately 75%. Five customers represented approximately 96% of Enterprise, Embedded and Semi-Custom revenue.
- AMD disclosed securities class-action and shareholder derivative litigation. Based on information available to management, the company believed any potential liability would not materially affect its financial condition, cash flows or results of operations, although outcomes remain uncertain.
- Substantially all U.S. and Canadian deferred tax assets remained subject to a valuation allowance. Gross unrecognized tax benefits were $41 million at September 24, 2016.
Most important facts for investors to verify
- Whether revenue growth, particularly semi-custom SoC and GPU growth, translated into sustainable improvement in gross margin and operating cash flow.
- The recurring versus nonrecurring components of the $340 million GLOBALFOUNDRIES charge and the effect of future wafer purchase commitments and sourcing payments.
- AMD’s ability to meet GLOBALFOUNDRIES purchase targets without excess inventory, higher unit costs or additional cash payments.
- The effect of the 75 million-share warrant, convertible notes and 115 million-share equity offering on future dilution and capital structure.
- Liquidity relative to $1.6 billion of debt, approximately $702 million of estimated aggregate interest obligations, and $3.2 billion of stated GLOBALFOUNDRIES obligations through 2020.
- Customer concentration, dependence on third-party manufacturing and the operational transition to the ATMP joint ventures.
- Execution of AMD’s product roadmap, including new processor and graphics products, and the company’s ability to compete effectively in PC, graphics, server and embedded markets.