AMD 2018 Q1 Form 10-Q Summary
Business context and reporting period
Advanced Micro Devices, Inc. is a global semiconductor company providing x86 processors, GPUs, professional graphics, server and embedded processors, semi-custom SoCs, game-console technology and intellectual-property licensing. This unaudited Form 10-Q covers the 13 weeks ended March 31, 2018, compared with the 13 weeks ended April 1, 2017.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $1.647 billion | $1.178 billion | +40% |
| Gross margin | $597 million; 36% | $378 million; 32% | Margin +4 percentage points |
| Operating income | $120 million | $11 million | + $109 million |
| Net income (loss) | $81 million | $(33) million | Improved by $114 million |
| Diluted EPS | $0.08 | $(0.04) | Improved by $0.12 |
| Operating cash flow | $(86) million | $(299) million | Cash use reduced by $213 million |
| Capital expenditures | $46 million | $23 million | + $23 million |
- Computing and Graphics revenue was $1.115 billion, up 95%, driven primarily by higher Ryzen and Radeon sales, a 66% increase in average selling price and a 20% increase in unit shipments. Segment operating income was $138 million versus a $21 million loss.
- Enterprise, Embedded and Semi-Custom revenue was $532 million, down 12%, primarily because of lower semi-custom revenue, partly offset by higher server and embedded sales. Segment operating income declined to $14 million from $55 million.
- Gross margin improved to 36% from 32%, primarily due to a greater revenue mix from Ryzen, Radeon and EPYC products. Operating margin was approximately 7.3% and net margin was approximately 4.9%.
- Research and development expense increased 27% to $343 million; marketing, general and administrative expense increased 9% to $134 million. Stock-based compensation expense rose to $32 million from $23 million.
- Cash and cash equivalents were $1.045 billion at March 31, 2018, down from $1.185 billion at December 30, 2017. Cash, cash equivalents and restricted cash totaled $1.051 billion.
- Total debt, net of applicable discounts and issuance costs, was approximately $1.39 billion, including $223 million of short-term debt and $1.165 billion of long-term debt. The company repurchased $14 million of its 6.75% notes during the quarter.
- The secured revolving credit facility had $70 million outstanding, $31 million of letters of credit and up to $149 million available for borrowing. AMD stated that it was in compliance with required covenants.
- Accounts receivable increased to $738 million from $454 million, including $207 million of unbilled receivables. Inventories increased to $715 million from $694 million.
Material changes versus the prior comparable period
- Revenue growth was led by Computing and Graphics, while Enterprise, Embedded and Semi-Custom revenue declined because of lower semi-custom sales.
- AMD moved from a $33 million net loss to $81 million of net income, despite higher research, development and marketing spending.
- Operating cash use improved substantially, but the company continued to consume cash from operations, primarily reflecting working-capital requirements and higher wafer purchases.
- AMD adopted ASC 606 using the full retrospective method. The standard accelerated recognition for certain custom products, distributor shipments and licensing arrangements. The reported Q1 2017 revenue was revised from $984 million to $1.178 billion, and the prior-period net loss was revised from $73 million to $33 million.
- AMD also adopted new guidance affecting restricted cash, equity investments, intra-entity transfers and stock-compensation modifications. These changes had no material effect other than presentation and a $2 million cumulative-effect adjustment related to certain equity securities.
- The 2.125% convertible notes became convertible at holders’ option from April 1 through June 30, 2018. AMD stated that its current intent was to deliver common stock upon conversion, creating potential dilution.
Guidance, outlook, commentary and risks
- Management highlighted customer adoption of new high-performance products, including Ryzen, Radeon, EPYC and embedded offerings. AMD introduced the Ryzen 5 2400G, began shipping second-generation Ryzen desktop processors and introduced EPYC Embedded 3000 and Ryzen Embedded V1000 products.
- No specific quantitative full-year revenue or earnings guidance is provided in the filing text. Management stated that cash and cash equivalents plus availability under the revolving credit facility should fund operations and capital expenditures for the next 12 months.
- AMD expects ASC 606 to alter seasonality by shifting some semi-custom revenue from the second half to the first half of the year and producing a more even distribution.
- AMD expects to meet its 2018 wafer purchase target under its GLOBALFOUNDRIES agreement. Contractual obligations to GLOBALFOUNDRIES totaled $2.733 billion, including expected 2018 purchases and minimum obligations through 2020.
- Key risks include intense competition from Intel and Nvidia, dependence on third-party foundries and assembly providers, manufacturing yields and capacity, semiconductor cyclicality, customer concentration, inventory and pricing risk, and dependence on semi-custom customer products.
- Security vulnerabilities, including Spectre-related claims and potential performance effects from mitigations, could damage AMD’s reputation, customer relationships and financial results. Several related securities, consumer and derivative lawsuits were pending; management believed potential losses would not materially affect the company, but no loss range was provided.
- Tax accounting for the 2017 Tax Reform Act remained provisional. AMD was still evaluating GILTI, and substantially all U.S. and Canadian deferred tax assets remained subject to valuation allowances.
- AMD had $1.6 billion of principal debt outstanding under its notes, including $153 million of 6.75% notes due in 2019, and faces significant contractual obligations, including debt, interest, leases, purchase commitments and GLOBALFOUNDRIES obligations.
Important facts for investors to verify
- Whether Ryzen, Radeon, EPYC and embedded product momentum can offset continued weakness in semi-custom revenue.
- Whether positive operating cash flow can be sustained as revenue grows and receivables, inventory and wafer purchases remain elevated.
- The timing and funding source for the $153 million of 6.75% notes due in 2019 and AMD’s broader debt-refinancing requirements.
- The number of convertible notes ultimately converted into shares and the resulting dilution, together with the potential exercise of warrants for 75 million shares.
- The final tax effects of the Tax Reform Act and GILTI, including any changes to valuation allowances and unrecognized tax benefits.
- Compliance with GLOBALFOUNDRIES purchase targets and the effect of wafer pricing, manufacturing capacity and yields on future gross margins.
- The development and potential financial impact of pending Spectre-related litigation and other legal proceedings.