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AMD > SEC Filings for AMD > Form 10-Q on 30-Oct-2013All Recent SEC Filings

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Form 10-Q for ADVANCED MICRO DEVICES INC


30-Oct-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements in this report include forward-looking statements. 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 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 or other variations of these words and phrases or comparable terminology. The forward-looking statements relate to, among other things: demand for our products; the growth, change and competitive landscape of the markets in which we participate; our ability to obtain sufficient external financing on favorable terms, or at all; the nature and extent of our future payments to GLOBALFOUNDRIES Inc. (GF) under the wafer supply agreement (WSA) and the materiality of these payments; that consumer PC market conditions will remain challenging; the level of international sales as compared to total sales; our ability to sell our auction rate securities within the next twelve months; that our cash, cash equivalents and marketable securities balance and available external financing will be sufficient to fund our operations, including capital expenditures, over the next twelve months; our hedging strategy; our longer-term strategy to attain approximately 50% of our revenue from semi-custom System-on-Chip (SOC) products, embedded products and other faster growth markets over the next tow years; that as we transition to our semi-custom business model, royalty revenue will decline and gross margin for the semi-custom SOC products will be lower than our overall gross margin; and our dependence on a small number of customers for our computing solutions and graphics products, including our semi-custom SOC products. Material factors and assumptions that were applied in making these forward-looking statements include, without limitation, the following: the expected rate of market growth and demand for our products and technologies (and the mix thereof); GF's manufacturing yields and wafer volumes; our expected market share; our expected product costs and average selling price; our overall competitive position and the competitiveness of our current and future products; our ability to introduce new products, consistent with our current long-term strategy; our ability to continue to invest in research and development; the expected demand for computers, graphic digital devices, gaming systems and servers containing our products; and the state of credit markets and macroeconomic conditions. Material factors that could cause actual results to differ materially from current expectations include, without limitation, the following: that Intel Corporation's pricing, marketing and rebating programs, product bundling, standard setting, new product introductions or other activities may negatively impact our plans; that we will require additional funding and may be unable to raise sufficient capital on favorable terms, or at all; that customers stop buying our products or materially reduce their operations or demand for our products; that we may be unable to develop, launch and ramp new products and technologies in the volumes that are required by the market at mature yields on a timely basis; that our third-party foundry suppliers will be unable to transition our products to advanced manufacturing process technologies in a timely and effective way or to manufacture our products on a timely basis in sufficient quantities and using competitive process technologies; that we will be unable to obtain sufficient manufacturing capacity or components to meet demand for our products or will not fully utilize our projected manufacturing capacity needs at GF microprocessor manufacturing facilities; that our requirements for wafers will be less than the fixed number of wafers that we agreed to purchase from GF or GF encounters problems that significantly reduce the number of functional die we receive from each wafer; that we are unable to successfully implement our long-term business strategy; that we inaccurately estimate the quantity or type of products that our customers will want in the future or will ultimately end up purchasing, resulting in excess or obsolete inventory; that we are unable to manage the risks related to the use of our third-party distributors and add-in-board (AIB) partners or offer the appropriate incentives to focus them on the sale of our products; that we may be unable to maintain the level of investment in research and development that is required to remain competitive; that there may be unexpected variations in market growth and demand for our products and technologies in light of the product mix that we may have available at any particular time; that global business and economic conditions, including consumer PC market conditions, will not improve or will worsen; and the effect of political or economic instability, domestically or internationally, on our sales or supply chain.

For a discussion of factors that could cause actual results to differ materially from the forward-looking statements, see "Part II, Item 1A-Risk Factors" section beginning on page 36 and the "Financial Condition" section beginning on page 29 and other risks and uncertainties set forth below 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, AMD Opteron, Mobility, Radeon, and combinations thereof, ATI and the ATI logo are trademarks of Advanced Micro Devices, Inc. Microsoft is a registered trademark of Microsoft Corporation in the United States and other jurisdictions. Sony is a trademark of Sony Corporation. Other names are for informational purposes only and are used to identify companies and products and may be trademarks of their respective owners.

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 29, 2012 and December 31, 2011, and for each of the three years in the period ended December 29, 2012 as filed in our Annual Report on Form 10-K for the year ended December 29, 2012.


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Overview

We are a global semiconductor company with facilities around the world. Within the global semiconductor industry, we offer primarily:

• x86 microprocessors, as standalone devices or as incorporated as an accelerated processing unit (APU), chipsets, embedded processors and dense servers; and

• graphics processing units (GPU), including professional graphics, semi-custom SOC products and technology for game consoles.

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, including a discussion of our results of operations for the quarter and nine months ended September 28, 2013 compared to the quarter ended June 29, 2013 and the quarter and nine months ended September 29, 2012, an analysis of changes in our financial condition and a discussion of our contractual obligations. References in this report to "us," "our" or "AMD" include these consolidated operating results.

During the third quarter of 2013, we continued to execute our three-step plan to restructure, accelerate and transform our business in response to the changing dynamics of the market. We have completed restructuring activities, the first step of our plan, which were designed to reduce operating costs and improve efficiency. These efforts led to decreased operating expenses, which were $426 million in the third quarter of 2013 compared to $488 million in the second quarter of 2013. Operating expenses have decreased approximately 30% since we first implemented our restructuring plan in the fourth quarter of 2012. We returned to profitability in the third quarter of 2013 with operating income of $95 million and net income of $48 million in the third quarter of 2013 compared to an operating loss of $29 million and a net loss of $74 million in the second quarter of 2013. Operating income and net income in the third quarter of 2013 included the impact of a $19 million benefit from sales of previously reserved inventory, and operating income and net income in the second quarter of 2013 included the impact of a similar $11 million benefit.

We also continued to make progress on the second step of our plan in the third quarter of 2013, accelerating our business by executing on our product roadmap. As part of the 2013 Elite Mobility processor family, we launched our new quad-core processor, the AMD Elite Quad-Core A4-1350 APU, for small screen touch notebooks, tablets and hybrids. With respect to our graphics products, we announced our AMD Radeon™ R7 and R9 series graphics cards designed for enthusiast gamers. These graphic cards also support our "Mantle" technology, which allows game developers to more easily take advantage of the full capability of our graphic core architecture. Lastly, the third quarter of 2013 results showed progress toward the third phase of our plan, transforming our business to attain approximately 50% of revenue from high-growth adjacent markets over the next two years. In the third quarter of 2013, net revenue from sales of our semi-custom SOC products and embedded products represented more than 30% of total net revenue. As part of this growth, we extended our embedded SOC product portfolio with the launch of a new low power AMD G-Series SOC for fanless designs.

Net revenue for the third quarter of 2013 was $1.46 billion, a 15% increase from the third quarter of 2012 and a 26% increase compared to the second quarter of 2013. The quarter-over-quarter increase was the result of a 110% increase in Graphics and Visual Solutions segment net revenue, which was offset by a 6% decrease in Computing Solutions segment net revenue. The increase in Graphics and Visual Solutions segment revenue was driven by higher revenue from sales of our semi-custom SOC products. Our Computing Solutions segment results reflect the changing dynamics of the consumer PC market, including a weaker consumer notebook market and the increasing popularity of tablets as a consumer device of choice. Computing Solutions segment net revenue decreased due to lower unit shipments of our microprocessors for notebooks and chipset products, which were partially offset by higher desktop unit shipments. We continue to focus on our balance of cash, cash equivalents and marketable securities, including long-term marketable securities, which were $1.2 billion as of September 28, 2013, a slight increase from June 29, 2013. These results were positively impacted by $56 million of cash proceeds that we received in the third quarter of 2013 from certain real estate transactions occurring in Singapore and Austin, Texas.

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 (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 net revenue, inventories, asset impairments 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


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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 during the quarter and nine months ended September 28, 2013 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 year ended December 29, 2012.

During our fourth quarter of 2013, pursuant to our accounting policy, we will perform an annual goodwill impairment analysis. If there are declines in our market capitalization, business climate or operating results, we may incur impairment charges that could be material.

Results of Operations

Management, including the Chief Operating Decision Maker, who is our Chief Executive Officer, reviews and assesses our operating performance using segment net revenue and operating income (loss) before interest, other income (expense), net, and income taxes. These performance measures include the allocation of expenses to the operating segments based on management's judgment.

We use the following two reportable segments:

• the Computing Solutions segment, which includes x86 microprocessors, as standalone devices or as incorporated as an APU, chipsets, embedded processors and dense servers; and

• the Graphics and Visual Solutions segment, which includes GPUs, including professional graphics, and semi-custom SOC products, as well as revenue received in connection with development services and game console royalties.

In addition to these reportable segments, we have an All Other category, which is not a reportable segment. This category includes certain expenses and credits that are not allocated to any of the operating segments because management does not consider these expenses and credits in evaluating the performance of the operating segments. Also included in this category are amortization of acquired intangible assets, employee stock-based compensation expense, restructuring and other special charges (gains), net and a charge related to the limited waiver of exclusivity from GF.

We use a 52 or 53 week fiscal year ending on the last Saturday in December. The quarters ended September 28, 2013, June 29, 2013 and September 29, 2012 consisted of 13 weeks. The nine months ended September 28, 2013 and September 29, 2012 consisted of 39 weeks.

The following table provides a summary of net revenue and operating income
(loss) by segment and category:

                                                      Quarter Ended                                      Nine Months Ended
                                   September 28,         June 29,         September 29,         September 28,          September 29,
                                       2013                2013               2012                   2013                  2012
                                                                             (In millions)
Net revenue:
Computing Solutions               $           790       $      841       $           927       $          2,382       $         3,176
Graphics and Visual Solutions                 671              320                   342                  1,328                 1,091

Total net revenue                 $         1,461       $    1,161       $         1,269       $          3,710       $         4,267

Operating income (loss):
Computing Solutions               $            22       $        2       $          (114 )     $            (15 )     $            92
Graphics and Visual Solutions                  79               -                     18                     95                    83
All Other                                      (6 )            (31 )                 (35 )                 (112 )                (809 )

Total operating income (loss)     $            95       $      (29 )     $          (131 )     $            (32 )     $          (634 )


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Computing Solutions

Computing Solutions net revenue of $790 million in the third quarter of 2013 decreased by 15% compared to net revenue of $927 million in the third quarter of 2012 as a result of a 12% decrease in unit shipments and a 4% decrease in average selling price. The decrease in unit shipments was primarily attributable to lower unit shipments of our microprocessors for servers and notebooks, and chipset products. The decrease in the average selling price was primarily attributable to a lower average selling price of our microprocessor products for notebooks and chipset products, partially offset by a higher average selling price of our microprocessors for servers. Unit shipments and average selling price of our products decreased due to challenging consumer PC market conditions and the increasing popularity of tablets as a consumer device of choice, which resulted in decreased demand for our products.

Computing Solutions net revenue of $790 million in the third quarter of 2013 decreased by 6% compared to $841 million in the second quarter of 2013 as a result of a 3% decrease in unit shipments and a 3% decrease in average selling price. The decrease in unit shipments was primarily attributable to lower unit shipments of our microprocessors for notebooks and chipset products, partially offset by higher unit shipments for desktops. The decrease in average selling price was primarily attributable to a decrease in average selling price for our chipset products and microprocessor for notebooks, partially offset by higher average selling price for our microprocessor for servers. Unit shipments and average selling price of our products decreased due to challenging consumer PC market conditions and the increasing popularity of tablets as a consumer device of choice, which resulted in decreased demand for our products.

Computing Solutions net revenue of $2,382 million for the first nine months of 2013 decreased by 25% compared to net revenue of $3,176 million for the first nine months of 2012 as a result of a 20% decrease in unit shipments and a 6% decrease in average selling price. Unit shipments and average selling price of all categories of products decreased due to challenging consumer PC market conditions and the increasing popularity of tablets as a consumer device of choice, which resulted in decreased demand for our products.

Computing Solutions operating income was $22 million in the third quarter of 2013 compared to operating loss of $114 million in the third quarter of 2012. The improvement in operating results was primarily due to a $191 million decrease in cost of sales, a $45 million decrease in marketing, general and administrative expenses and a $39 million decrease in research and development expenses, partially offset by the decrease in net revenue referenced above. Cost of sales decreased primarily due to lower unit shipments in the third quarter of 2013 compared to the third quarter of 2012. In addition, operating loss for the third quarter of 2012 included an inventory write-down of approximately $100 million primarily consisting of first generation A-Series APUs. Operating income for the third quarter of 2013 included a $19 million benefit from sales of inventory that had been previously reserved in the third quarter of 2012. Marketing, general and administrative expenses and research and development expenses decreased for the reasons set forth under "Expenses," below.

Computing Solutions operating income was $22 million in the third quarter of 2013 compared to operating income of $2 million in the second quarter of 2013. The improvement in operating results was primarily due to a $38 million decrease in cost of sales, a $23 million decrease in marketing, general and administrative expenses and an $11 million decrease in research and development expenses, partially offset by the decrease in net revenue referenced above. Cost of sales decreased primarily due to lower unit shipments in the third quarter of 2013 compared to the second quarter of 2013. In addition, operating income for the third quarter of 2013 included a $19 million benefit from sales of inventory that had been previously reserved in the third quarter of 2012, as compared to a similar $11 million benefit in operating income for the second quarter of 2013. Marketing, general and administrative expenses and research and development expenses decreased for the reasons set forth under "Expenses," below.

Computing Solutions operating loss was $15 million in the first nine months of 2013 compared to operating income of $92 million in the first nine months of 2012. The decline in operating results was primarily due to the decrease in revenue referenced above, partially offset by a $410 million decrease in cost of sales, a $146 million decrease in research and development expenses and a $133 million decrease in marketing, general and administrative expenses. Cost of sales decreased primarily due to lower unit shipments in the first nine months of 2013 compared to the first nine months of 2012. In addition, operating income for the first nine months of 2012 included an inventory write-down of approximately $100 million primarily consisting of first generation A-Series APUs. Operating loss for the first nine months of 2013 included a $50 million benefit from sales of inventory that had been previously reserved in the third quarter of 2012. Research and development expenses and marketing, general and administrative expenses decreased for the reasons set forth under "Expenses," below.

Graphics and Visual Solutions

Graphics and Visual Solutions net revenue of $671 million in the third quarter of 2013 increased by 96% compared to net revenue of $342 million in the third quarter of 2012. The increase was primarily due to net revenue from sales of semi-custom SOC products, partially offset by a decrease in net revenue from sales of our GPU products and a decrease in game console royalties. Net revenue from sales of GPU products decreased due to lower unit shipments as well as a decrease in average selling price. GPU unit shipments decreased due to challenging consumer PC market conditions, which adversely impacted demand, and average selling price decreased due to product mix. Net revenue from game console royalties decreased as we transitioned to our semi-custom business model and began shipping a greater number of semi-custom SOC products.


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Graphics and Visual Solutions net revenue of $671 million in the third quarter of 2013 increased by 110% compared to net revenue of $320 million in the second quarter of 2013. The increase was due to an increase in net revenue received in connection with sales of our semi-custom SOC products, which we began shipping in the second quarter of 2013, driven by higher unit shipments, partially offset by a decrease in net revenue from sales of our GPU products. Net revenue from sales of GPU products decreased due to lower unit shipments as well as lower average selling price. GPU unit shipments and average selling price decreased as customers began transitioning to our new AMD Radeon™ R7 and R9 Series graphics cards in the third quarter of 2013.

Graphics and Visual Solutions net revenue of $1,328 million in the first nine months of 2013 increased by 22% compared to net revenue of $1,091 million in the first nine months of 2012. The increase was primarily due to net revenue received in connection with sales of our semi-custom SOC products, which we began shipping in the second quarter of 2013, partially offset by a decrease in net revenue from sales of our GPU products as well as a decrease in game console royalties. Net revenue from sales of GPU products decreased due to lower unit shipments partially offset by higher average selling price. GPU unit shipments decreased due to challenging consumer PC market conditions, which adversely impacted demand. GPU average selling price increased primarily due to improved product mix. Net revenue from game console royalties decreased as we transitioned to our semi-custom business model and began shipping a greater number of semi-custom SOC products.

Graphics and Visual Solutions operating income was $79 million in the third quarter of 2013 compared to operating income of $18 million in the third quarter of 2012. The improvement in operating results was primarily due to the increase in net revenue referenced above, partially offset by a $255 million increase in cost of sales and a $12 million increase in marketing, general and administrative expenses. The increase in cost of sales was primarily due to unit shipments of our semi-custom SOC products in the third quarter of 2013. Marketing, general and administrative expenses increased for the reasons set forth under "Expenses," below.

Graphics and Visual Solutions operating income was $79 million in the third quarter of 2013 compared to breakeven operating income in the second quarter of 2013. The improvement in operating results was primarily due to the increase in net revenue referenced above and an $11 million decrease in research and development expenses, partially offset by a $275 million increase in cost of sales and a $7 million increase in marketing, general and administrative expenses. The increase in cost of sales was primarily due to an increase in unit shipments of our semi-custom SOC products in the third quarter of 2013 compared to the second quarter of 2013. Research and development expenses decreased and marketing, general and administrative expenses increased for the reasons set forth under "Expenses," below.

Graphics and Visual Solutions operating income was $95 million in the first nine months of 2013 compared to operating income of $83 million in the first nine months of 2012. The improvement in operating results was primarily due to the increase in net revenue referenced above, partially offset by a $194 million increase in cost of sales, an $18 million increase in research and development expenses, and a $14 million increase in marketing, general and administrative expenses. The increase in cost of sales was primarily due to unit shipments of our semi-custom SOC products in the first nine months of 2013. Research and development expenses and marketing, general and administrative expenses increased for the reasons set forth under "Expenses" below.

As we transition to shipping a greater number of our semi-custom SOC products, we expect the proportion of net revenue from royalty payments to total net revenue to decline.

All Other

All Other operating loss of $6 million in the third quarter of 2013 included stock-based compensation expense of $23 million, net restructuring and other special gains of $22 million and $5 million related to amortization of acquired intangible assets.

All Other operating loss of $31 million in the second quarter of 2013 primarily included stock-based compensation expense of $20 million, net restructuring and other special charges of $5 million and $4 million related to amortization of acquired intangible assets.

All Other operating loss of $112 million in the first nine months of 2013 primarily included stock-based compensation expense of $67 million, net restructuring and other special charges of $30 million and $14 million related to amortization of acquired intangible assets.

International Sales

International sales as a percentage of net revenue were 82% in the third quarter of 2013, 92% in the third quarter of 2012 and 93% in the second quarter of 2013. The decrease in international sales as a percentage of net revenue in the third . . .

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