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OFFON

ADVANCED MICRO DEVICES, INC.

(AMD)
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ADVANCED MICRO DEVICES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

04/28/2021 | 04:42pm EDT
The statements in this report include forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on current expectations and beliefs and
involve numerous risks and uncertainties that could cause actual results to
differ materially from expectations. These forward-looking statements speak only
as of the date hereof or as of the dates indicated in the statements and should
not be relied upon as predictions of future events, as we cannot assure you that
the events or circumstances reflected in these statements will be achieved or
will occur. You can identify forward-looking statements by the use of
forward-looking terminology including "believes," "expects," "may," "will,"
"should," "seeks," "intends," "plans," "pro forma," "estimates," "anticipates,"
or the negative of these words and phrases, other variations of these words and
phrases or comparable terminology. The forward-looking statements relate to,
among other things: possible impact of future accounting rules on AMD's
condensed consolidated financial statements; demand for AMD's products; the
growth, change and competitive landscape of the markets in which AMD
participates; international sales will continue to be a significant portion of
total sales in the foreseeable future; that AMD's cash, cash equivalents and
short-term investment balances together with the availability under that certain
revolving credit facility (the Revolving Credit Facility) made available to AMD
and certain of its subsidiaries under the Credit Agreement, will be sufficient
to fund AMD's operations including capital expenditures over the next 12 months;
AMD's ability to obtain sufficient external financing on favorable terms, or at
all; AMD's expectation that based on the information presently known to
management, the potential liability related to AMD's current litigation will not
have a material adverse effect on its financial condition, cash flows or results
of operations; anticipated ongoing and increased costs related to enhancing and
implementing information security controls; revenue allocated to remaining
performance obligations that are unsatisfied which will be recognized over the
next 12 months; all unbilled accounts receivables are expected to be billed and
collected within 12 months; a small number of customers will continue to account
for a substantial part of AMD's revenue in the future; that AMD may have tax
audits close in the next 12 months that could materially change the balance of
the uncertain tax benefits; and the acquisition of Xilinx, Inc. is currently
expected to close by the end of calendar year 2021. For a discussion of the
factors that could cause actual results to differ materially from the
forward-looking statements, see "Part II, Item 1A-Risk Factors" and the
"Financial Condition" section set forth below, and such other risks and
uncertainties as set forth in this report or detailed in our other Securities
and Exchange Commission (SEC) reports and filings. We assume no obligation to
update forward-looking statements.
AMD, the AMD Arrow logo, ATI, and the ATI logo, Athlon, EPYC, Radeon, Ryzen,
Threadripper and combinations thereof, are trademarks of Advanced Micro Devices,
Inc. Microsoft and Xbox One are trademarks or registered trademarks of Microsoft
Corporation in the United States and other jurisdictions. Other names are for
informational purposes only and are used to identify companies and products and
may be trademarks of their respective owners. "Zen" is a code name for an AMD
architecture, and is not a product name.
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and related notes included in this
report and our audited consolidated financial statements and related notes as of
December 26, 2020 and December 28, 2019, and for each of the three years for the
period ended December 26, 2020 as filed in our Annual Report on Form 10-K for
the fiscal year ended December 26, 2020.
Overview
We are a global semiconductor company. Our products include x86 microprocessors
(CPUs), accelerated processing units which integrate microprocessors and
graphics (APUs), discrete graphics processing units (GPUs), semi-custom
System-on-Chip (SOC) products and chipsets for the PC, gaming, datacenter and
embedded markets. In addition, we provide development services and sell or
license portions of our intellectual property portfolio.
In this section, we will describe the general financial condition and the
results of operations of Advanced Micro Devices, Inc. and its wholly-owned
subsidiaries (collectively, "us," "our" or "AMD"), including a discussion of our
results of operations for the three months ended March 27, 2021 compared to the
prior year period, an analysis of changes in our financial condition and a
discussion of our contractual obligations.
Net revenue for the three months ended March 27, 2021 was $3.4 billion, a 93%
increase compared to the prior year period. The increase was due to a 46%
increase in Computing and Graphics net revenue and a 286% increase in
Enterprise, Embedded and Semi-Custom net revenue. The increase in Computing and
Graphics segment net
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revenue was primarily due to higher sales of our Ryzen™ processors and Radeon™
products. The increase in Enterprise, Embedded and Semi-Custom net revenue was
primarily due to higher semi-custom revenue and EPYC™ server processor revenue.
Our operating income for the three months ended March 27, 2021 was $662 million
compared to operating income of $177 million for the prior year period. Our net
income for the three months ended March 27, 2021 was $555 million compared to
net income of $162 million for the prior year period. The increase in operating
income was primarily driven by strong revenue growth which more than offset
higher operating expenses. The increase in net income was primarily driven by
higher operating income, partially offset by a higher income tax provision.
Cash, cash equivalents and short-term investments as of March 27, 2021 were $3.1
billion, compared to $2.3 billion as of December 26, 2020. The aggregate
principal amount of our outstanding debt obligations was $314 million and
$338 million as of March 27, 2021 and December 26, 2020, respectively.
During the first quarter of 2021, we expanded our mobile processor and graphics
product families. In January 2021, we announced the AMD Ryzen 5000 Series Mobile
Processors for the laptop market with Zen 3 core architecture designed for
gamers, creators and professionals. In March 2021, we introduced the AMD Radeon
RX 6700 XT graphics card built on 7 nm process technology and AMD RDNA 2 gaming
architecture to deliver performance and power efficiency. We also announced our
new AMD EPYC 7003 Series CPUs for high-performance computing, cloud and
enterprise customers. The EPYC 7003 series processors have up to 64 Zen 3 cores
per processor and per-core cache memory and also include security features
through AMD Infinity Guard to help drive faster times to results and improve
business outcomes. In March 2021, we also announced, as part of our AMD Ryzen
mobile processor family, the AMD Ryzen PRO 5000 Series Mobile Processors with
Zen 3 core architecture for business laptops. AMD Ryzen PRO Series Mobile
Processors are built to provide powerful computing experiences with security
features for demanding business environments like remote working.
Amid the COVID-19 pandemic, our main priority remains the health and safety of
our employees. We continue to monitor and take safety measures to protect our
employees and support those employees who work from home so that they can be
productive. Our offices remain open to enable critical on-site business
functions in accordance with local government guidelines and the majority of our
employees in China and Singapore now work on site subject to local government
health measures. However, in most other geographies, the majority of our
employees continued to work from home during the first quarter of 2021. The
current COVID-19 pandemic continues to impact our business operations and
practices, and while we expect that it may continue to impact our business, we
experienced limited financial disruption during the first quarter of 2021. We
continue to monitor demand signals as we adjust our supply chain requirements
based on changing customer needs and demands.
As part of our strategy to establish AMD as the industry's high performance
computing leader, we announced in October 2020 that we entered into a definitive
agreement to acquire Xilinx, Inc. in an all-stock transaction. On April 7, 2021,
our stockholders and Xilinx's stockholders voted to approve their respective
proposals relating to the pending acquisition of Xilinx by AMD. The closing of
the Merger is subject to customary conditions, including regulatory approval,
and is currently expected to occur by the end of calendar year 2021.
We intend the discussion of our financial condition and results of operations
that follows to provide information that will assist in understanding our
financial statements, the changes in certain key items in those financial
statements from period to period, the primary factors that resulted in those
changes, and how certain accounting principles, policies and estimates affect
our financial statements.
Results of Operations
We report our financial performance based on the following two reportable
segments: the Computing and Graphics segment and the Enterprise, Embedded and
Semi-Custom segment.
Additional information on our reportable segments is contained in Note
11-Segment Reporting of the notes to condensed consolidated financial statements
(Part I, Financial Information of this Form 10-Q).
Our operating results tend to vary seasonally. Historically, our net revenue has
been generally higher in the second half of the year than in the first half of
the year, although market conditions and product transitions could impact these
trends.
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The following table provides a summary of net revenue and operating income
(loss) by segment:
                                                  Three Months Ended
                                                               March 27,       March 28,
                                                                  2021            2020
                                                                     (In millions)
Net revenue:
Computing and Graphics                                        $    2,100      $    1,438
Enterprise, Embedded and Semi-Custom                               1,345             348

Total net revenue                                             $    3,445      $    1,786
Operating income (loss):
Computing and Graphics                                        $      485      $      262
Enterprise, Embedded and Semi-Custom                                 277             (26)
All Other                                                           (100)            (59)
Total operating income                                        $      662      $      177


Computing and Graphics
Computing and Graphics net revenue of $2.1 billion for the three months ended
March 27, 2021 increased by 46%, compared to net revenue of $1.4 billion for the
prior year period, primarily as a result of a 12% increase in unit shipments and
a 32% increase in average selling price. The increase in unit shipments was
primarily due to higher demand for our Ryzen processors. The increase in average
selling price was primarily driven by a richer mix of Ryzen and Radeon
processors.
Computing and Graphics operating income was $485 million for the three months
ended March 27, 2021, compared to operating income of $262 million for the prior
year period. The increase in operating income was primarily driven by the margin
contribution from higher sales which more than offset higher operating expenses.
Operating expenses increased for the reasons outlined under "Expenses" below.
Enterprise, Embedded and Semi-Custom
Enterprise, Embedded and Semi-Custom net revenue of $1.3 billion for the three
months ended March 27, 2021 increased by 286%, compared to net revenue of
$348 million for the prior year period, primarily driven by higher semi-custom
revenue and higher sales of our EPYC server processors.
Enterprise, Embedded and Semi-Custom operating income was $277 million for the
three months ended March 27, 2021 compared to operating loss of $26 million for
the prior year period. The increase in operating income was due to the higher
revenue which more than offset higher operating expenses. Operating expenses
increased for the reasons outlined under "Expenses" below.
All Other
All Other operating loss of $100 million for the three months ended March 27,
2021 consisted of $85 million of stock-based compensation expense and $15
million of acquisition-related costs. All Other operating loss of $59 million
for the prior year period consisted of stock-based compensation expense.
International Sales
International sales as a percentage of net revenue were 76% for the three months
ended March 27, 2021 and 82% for the prior year period. We expect that
international sales will continue to be a significant portion of total sales in
the foreseeable future. Substantially all of our sales transactions were
denominated in U.S. dollars.
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Comparison of Gross Margin, Expenses, Licensing Gain, Interest Expense, Other
Expense and Income Taxes
The following is a summary of certain condensed consolidated statement of
operations data for the periods indicated:
                                                                              Three Months Ended
                                                                                     March 27,                March 28,
                                                                                        2021                    2020
                                                                                   (In millions except for percentages)
Net revenue                                                                     $          3,445           $      1,786
Cost of sales                                                                              1,858                    968
Gross profit                                                                               1,587                    818
Gross margin                                                                                  46   %                 46  %
Research and development                                                                     610                    442
Marketing, general and administrative                                                        319                    199

Licensing gain                                                                                (4)                     -
Interest expense                                                                              (9)                   (13)
Other income (expense), net                                                                  (11)                     4
Income tax provision                                                                          89                      6
Equity income in investee                                                                      2                      -


Gross Margin
Gross margin was 46% for the three months ended March 27, 2021 and March 28,
2020. During the three months ended March 27, 2021, the higher gross margin from
the richer mix of our Ryzen, Radeon and EPYC processors sales was offset by a
higher proportion of sales of our semi-custom products, which have a lower gross
margin than the Company's average.
Expenses
Research and Development Expenses
Research and development expenses of $610 million for the three months ended
March 27, 2021 increased by $168 million, or 38%, compared to $442 million for
the prior year period. The increase was primarily driven by an increase in
product development costs in both the Computing and Graphics and Enterprise,
Embedded and Semi-Custom segments due to an increase in headcount and higher
annual employee incentives driven by improved financial performance.
Marketing, General and Administrative Expenses
Marketing, general and administrative expenses of $319 million for the three
months ended March 27, 2021 increased by $120 million, or 60%, compared to
$199 million for the prior year period. The increase was primarily due to an
increase in go-to-market activities in both the Computing and Graphics and
Enterprise, Embedded and Semi-Custom segments, an increase in headcount and
higher annual employee incentives driven by improved financial performance. In
addition, we incurred $15 million of acquisition-related costs for the three
months ended March 27, 2021 in connection with our pending acquisition of
Xilinx, Inc.
Licensing Gain
During the three months ended March 27, 2021, we recognized $4 million of
royalty income associated with the licensed IP to THATIC JV.
Interest Expense
Interest expense for the three months ended March 27, 2021 was $9 million
compared to $13 million for the prior year period. The decrease was due to lower
debt balances as a result of conversions by the holders of our 2.125%
Convertible Senior Notes due 2026.
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Other Income (Expense), Net
Other expense, net was $11 million for the three months ended March 27, 2021,
compared to $4 million of Other income, net for the prior year period. The
change was primarily due to an impairment charge of $8 million associated with
an equity investment and a loss on conversion of our convertible debt
instruments of $6 million in the current period.
Income Tax Provision
We recorded an income tax provision of $89 million and $6 million for the three
months ended March 27, 2021 and March 28, 2020, respectively, representing
effective tax rates of 13.8% and 3.3%, respectively.
The increase in income tax expense and effective tax rate in the current year
period was due to significantly higher income in the United States, partially
offset by the foreign derived intangible income benefit, research and
development tax credits, and excess tax benefit for stock-based compensation.
The lower income tax expense and effective tax rate for the prior year period
was due to a full valuation allowance in the United States during 2020, a
significant portion of which was released by us in the fourth quarter of 2020.
As of March 27, 2021, we continue to maintain a valuation allowance for certain
federal, state, and foreign tax attributes. The federal valuation allowance
maintained is due to limitations under Internal Revenue Code Section 382 or 383,
separate return loss year rules, or dual consolidated loss rules. The state and
foreign valuation allowance maintained is due to lack of sufficient sources of
taxable income.
FINANCIAL CONDITION
Liquidity and Capital Resources
As of March 27, 2021, our cash, cash equivalents and short-term investments were
$3.1 billion, compared to $2.3 billion as of December 26, 2020. The percentage
of cash, cash equivalents and short-term investments held domestically were 93%
and 94% as of March 27, 2021 and December 26, 2020, respectively.
Our operating, investing and financing activities for the three months ended
March 27, 2021 compared to the prior year period are as described below:
                                                                           Three Months Ended
                                                                     March 27,             March 28,
                                                                       2021                  2020
                                                                              (In millions)
Net cash provided by (used in):
Operating activities                                              $        898          $        (65)
Investing activities                                                      (722)                  (73)
Financing activities                                                        (8)                    2

Net increase (decrease) in cash, cash equivalents, and restricted $ 168 $ (136) cash



Our aggregate principal debt obligations were $314 million and $338 million as
of March 27, 2021 and December 26, 2020, respectively.
We believe our cash, cash equivalents and short-term investments along with our
Revolving Credit Facility will be sufficient to fund current and long-term
operations, including capital expenditures, over the next 12 months and beyond.
We believe we will be able to access the capital markets should we require
additional funds. However, we cannot assure that such funds will be available on
favorable terms, or at all.
Operating Activities
Our working capital cash inflows and outflows from operations are primarily cash
collections from our customers, payments for inventory purchases and payments
for employee-related expenditures.
Net cash provided by operating activities was $898 million in the three months
ended March 27, 2021, primarily due to our net income of $555 million, adjusted
for non-cash and non-operating charges of $286 million and net cash inflows of
$57 million from changes in our operating assets and liabilities. The primary
drivers of the changes in operating assets and liabilities included a $466
million increase in accounts payable due to timing of payments to
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our suppliers, partially offset by a $112 million increase in accounts
receivable driven primarily by higher revenue in the first quarter of 2021
compared to the fourth quarter of 2020, and a $254 million increase in
inventories driven by an increase in product build in support of customer
demand.
Net cash used in operating activities was $65 million for the three months ended
March 28, 2020, primarily due to our net income of $162 million, adjusted for
non-cash and non-operating charges of $162 million and net cash outflows of $389
million from changes in our operating assets and liabilities. The primary
drivers of the changes in operating assets and liabilities included a $369
million decrease in accounts payable due to timing of payments to our suppliers
and a $74 million increase in inventories primarily driven by an increase in
product build in support of customer demand, partially offset by a $168 million
decrease in accounts receivable driven primarily by lower revenue in the first
quarter of 2020 compared to the fourth quarter of 2019.
Investing Activities
Net cash used in investing activities was $722 million for the three months
ended March 27, 2021 which primarily consisted of $858 million for purchases of
short-term investments and $66 million for purchases of property and equipment,
partially offset by $200 million for maturities of short-term investments.
Net cash used in investing activities was $73 million for the three months ended
March 28, 2020 which primarily consisted of $55 million for purchases of
short-term investments and $55 million for purchases of property and equipment,
partially offset by $37 million for maturities of available-for-sale debt
securities.
Financing Activities
Net cash used in financing activities was $8 million for the three months ended
March 27, 2021, which primarily consisted of common stock repurchases for tax
withholding on employee equity plans of $10 million, partially offset by a cash
inflow of $2 million from exercises of stock options under our employee equity
plans.
Net cash provided by financing activities was $2 million for the three months
ended March 28, 2020, which primarily consisted of a cash inflow of $3 million
from exercises of stock options under our employee equity plans.
Contractual Obligations
There were no significant changes outside the ordinary course of business in our
contractual obligations from those disclosed in Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" of our Annual Report on Form 10-K for the fiscal year
ended December 26, 2020.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles (U.S.
GAAP). The preparation of our financial statements requires us to make estimates
and judgments that affect the reported amounts in our condensed consolidated
financial statements. We evaluate our estimates on an on-going basis, including
those related to our revenue, inventories, goodwill and income taxes. We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
Although actual results have historically been reasonably consistent with
management's expectations, the actual results may differ from these estimates or
our estimates may be affected by different assumptions or conditions.
Management believes there have been no significant changes for the three months
ended March 27, 2021 to the items that we disclosed as our critical accounting
estimates in the Management's Discussion and Analysis of Financial Condition and
Results of Operations section of our Annual Report on Form 10-K for the fiscal
year ended December 26, 2020.
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