Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, and our cash flows from operations 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; all unbilled accounts receivables are expected to be billed and collected within 12 months; revenue allocated to remaining performance obligations that are unsatisfied which will be recognized over the next 12 months; a small number of customers will continue to account for a substantial part of AMD’s revenue in the future; 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, AMD Instinct 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 and nine months ended September 25, 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 September 25, 2021 was $4.3 billion, a 54% increase compared to the prior year period. The increase was due to a 44% increase in Computing and Graphics net revenue and a 69% increase in Enterprise, Embedded and Semi-Custom net revenue. The increase in Computing and Graphics segment net revenue was primarily due to higher sales of our client and graphics processors. The increase in

Enterprise, Embedded and Semi-Custom net revenue was primarily due to higher sales volume of our server processors and semi-custom products.

Gross margin in the third quarter of 2021 improved compared to the third quarter of 2020. Gross margin for the three months ended September 25, 2021 was 48% compared to gross margin of 44% for the prior year period. The increase in gross margin was primarily driven by a richer mix of EPYC™, Ryzen™ and Radeon™ processor sales.

Our operating income for the three months ended September 25, 2021 was $948 million compared to operating income of $449 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.

Our net income for the three months ended September 25, 2021 was $923 million compared to net income of $390 million for the prior year period. 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 September 25, 2021 were $3.6 billion, compared to $2.3 billion as of December 26, 2020. The principal amount of our outstanding debt obligations was $313 million and $338 million as of September 25, 2021 and December 26, 2020, respectively. During the three months ended September 25, 2021, we repurchased 7.2 million shares of our common stock under our share repurchase program for $750 million.

We saw strong demand across our business in the third quarter of 2021 and we are making strategic investments in our long-term supply chain capacity to support future revenue growth.

We continued to further our roadmap by introducing new products during the third quarter of 2021. In July 2021, we announced the AMD Radeon RX 6600 XT graphics card, designed to deliver high-framerate, high-fidelity and highly responsive 1080p gaming experience. In August 2021, we introduced the AMD Radeon Pro W6000X series GPUs for the Mac Pro, designed to power a wide variety of demanding professional applications and workloads, including 3D rendering, 8K video compositing, and color correction.

Although the current COVID-19 pandemic continues to impact our business operations and practices, we experienced limited financial disruption during the third quarter of 2021. We continue to focus on the health and safety of our employees during the COVID-19 pandemic. We monitor and take safety measures to protect our employees who are in the office and support those employees who work from home so that they can be productive. COVID-19 also continues to impact the global supply chain causing disruptions to service providers, logistics and the flow and availability of supplies and products.

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. 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 this trend.

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

			Three Months Ended												Nine Months Ended
			September 25, 2021						September 26, 2020						September 25, 2021						September 26, 2020
			(In millions)
Net revenue:
Computing and Graphics			$	2,398					$	1,667					$	6,748					$	4,472
Enterprise, Embedded and Semi-Custom			1,915						1,134						4,860						2,047
Total net revenue			$	4,313					$	2,801					$	11,608					$	6,519
Operating income (loss):
Computing and Graphics			$	513					$	384					$	1,524					$	846
Enterprise, Embedded and Semi-Custom			542						141						1,217						148
All Other			(107)						(76)						(300)						(195)
Total operating income			$	948					$	449					$	2,441					$	799

Computing and Graphics

Computing and Graphics net revenue of $2.4 billion for the three months ended September 25, 2021 increased by 44%, compared to net revenue of $1.7 billion for the prior year period, primarily as a result of an 83% increase in average selling price, partially offset by a decrease in unit shipments of 23%. Computing and Graphics net revenue of $6.7 billion for the nine months ended September 25, 2021 increased by 51%, compared to net revenue of $4.5 billion for the prior year period, primarily as a result of a 56% increase in average selling price, partially offset by a decrease in unit shipments of 3%. The increase in average selling price for both periods was primarily driven by a richer mix of Ryzen, Radeon and AMD Instinct™ products. The decrease in unit shipments for both periods was primarily driven by a strategic focus on premium and higher end products in a tight supply environment.

Computing and Graphics operating income was $513 million for the three months ended September 25, 2021, compared to operating income of $384 million for the prior year period. Computing and Graphics operating income was $1.5 billion for the nine months ended September 25, 2021, compared to operating income of $846 million for the prior year period. The increase in operating income for both periods was primarily due to higher revenue 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 $1.9 billion for the three months ended September 25, 2021 increased by 69%, compared to net revenue of $1.1 billion for the prior year period. Enterprise, Embedded and Semi-Custom net revenue of $4.9 billion for the nine months ended September 25, 2021 increased by 137%, compared to net revenue of $2.0 billion for the prior year period. The increase for both periods was primarily driven by higher sales of our EPYC server processors and semi-custom products.

Enterprise, Embedded and Semi-Custom operating income was $542 million for the three months ended September 25, 2021 compared to operating income of $141 million for the prior year period. Enterprise, Embedded and Semi-Custom operating income was $1.2 billion for the nine months ended September 25, 2021 compared to operating income of $148 million for the prior year period. The increase in operating income for both periods was driven by higher revenue and richer product mix, partially offset by higher operating expenses. Operating expenses increased for the reasons outlined under “Expenses” below.

All Other

All Other operating loss of $107 million for the three months ended September 25, 2021 consisted of $99 million of stock-based compensation expense and $8 million of acquisition-related costs. All Other operating loss of $76 million for the prior year period consisted of stock-based compensation expense.

All Other operating loss of $300 million for the nine months ended September 25, 2021 consisted of $267 million of stock-based compensation expense and $33 million of acquisition-related costs. All Other operating loss of $195 million for the prior year period consisted of stock-based compensation expense.

International Sales

International sales as a percentage of net revenue were 67% and 72% for the three months ended September 25, 2021 and September 26, 2020, respectively. International sales as a percentage of net revenue were 72% and 77% for the nine months ended September 25, 2021 and September 26, 2020, respectively. 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.

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												Nine Months Ended
			September 25, 2021						September 26, 2020						September 25, 2021						September 26, 2020
			(In millions except for percentages)
Net revenue			$	4,313					$	2,801					$	11,608					$	6,519
Cost of sales			2,227						1,571						6,105						3,623
Gross profit			2,086						1,230						5,503						2,896
Gross margin			48		%				44		%				47		%				44		%
Research and development			765						508						2,034						1,410
Marketing, general and administrative			376						273						1,036						687
Licensing gain			(3)						—						(8)						—
Interest expense			(7)						(11)						(26)						(38)
Other income (expense), net			62						(37)						51						(32)
Income tax provision			82						12						284						22
Equity income in investee			2						1						6						2

Gross Margin

Gross margin was 48% and 44% for the three months ended September 25, 2021 and September 26, 2020, respectively. Gross margin was 47% and 44% for the nine months ended September 25, 2021 and September 26, 2020, respectively. The increase for both periods was primarily driven by a richer mix of EPYC, Ryzen and Radeon processor sales.

Expenses

Research and Development Expenses

Research and development expenses of $765 million for the three months ended September 25, 2021 increased by $257 million, or 51%, compared to $508 million for the prior year period. Research and development expenses of $2.0 billion for the nine months ended June 26, 2021 increased by $624 million, or 44%, compared to $1.4 billion for the prior year period. The increase for both periods 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 as a result of our improved financial performance.

Marketing, General and Administrative Expenses

Marketing, general and administrative expenses of $376 million for the three months ended September 25, 2021 increased by $103 million, or 38%, compared to $273 million for the prior year period. Marketing, general and administrative expenses of $1.0 billion for the nine months ended September 25, 2021 increased by $349 million, or 51%, compared to $687 million for the prior year period. The increase for both periods was primarily due to an increase in go-to-market activities in both the Computing and Graphics and Enterprise, Embedded and Semi-Custom segments, and an increase in headcount and higher annual employee incentives driven by our improved financial performance. In addition, in connection with our pending acquisition of Xilinx, Inc., we incurred $8 million and $33 million of acquisition-related costs for the three and nine months ended September 25, 2021, respectively.

Licensing Gain

During the three and nine months ended September 25, 2021, we recognized $3 million and $8 million, respectively, of royalty income associated with the licensed IP to the THATIC JV, our two joint ventures with Higon Information Technology Co., Ltd., a third-party Chinese entity.

Interest Expense

Interest expense for the three months ended September 25, 2021 was $7 million compared to $11 million for the prior year period. Interest expense for the nine months ended September 25, 2021 was $26 million compared to $38 million for the prior year period. The decrease for both periods was due to lower debt balances as a result of conversions by the holders of our 2.125% Convertible Senior Notes due 2026.

Other Income (Expense), Net

Other income, net for the three months ended September 25, 2021, was $62 million compared to $37 million of Other expense, net for the prior year period. The change was primarily due to a $60 million gain from an increase in the fair value of an equity investment.

Other income, net was $51 million for the nine months ended September 25, 2021, compared to $32 million of Other expense, net for the prior year period. The change was primarily due to a $60 million gain from an increase in fair value of an equity investment and lower losses from conversion of our convertible debt of $31 million, partially offset by an impairment charge of $8 million associated with an equity investment in the first quarter of 2021.

Income Tax Provision

We recorded an income tax provision of $82 million and $12 million for the three months ended September 25, 2021 and September 26, 2020, representing effective tax rates of 8.2% and 3.0%, respectively. We recorded an income tax provision of $284 million and $22 million for the nine months ended September 25, 2021 and September 26, 2020, representing effective tax rates of 11.5% and 3.0%, 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 against deferred tax assets in the United States during 2020, a significant portion of which was released by us in the fourth quarter of 2020.

As of September 25, 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. Certain state and foreign valuation allowance maintained is due to lack of sufficient sources of taxable income.

FINANCIAL CONDITION

Liquidity and Capital Resources

As of September 25, 2021, our cash, cash equivalents and short-term investments were $3.6 billion, compared to $2.3 billion as of December 26, 2020. The percentage of cash, cash equivalents and short-term investments held domestically were 92% and 94% as of September 25, 2021 and December 26, 2020, respectively.

Our operating, investing and financing activities for the nine months ended September 25, 2021 compared to the prior year period are as described below:

			Nine Months Ended
			September 25, 2021						September 26, 2020
			(In millions)
Net cash provided by (used in):
Operating activities			$	2,699					$	517
Investing activities			(686)						(658)
Financing activities			(1,168)						(29)
Net increase (decrease) in cash, cash equivalents, and restricted cash			$	845					$	(170)

Our principal debt obligations were $313 million and $338 million as of September 25, 2021 and December 26, 2020, respectively.

We believe our cash, cash equivalents and short-term investments along with our Revolving Credit Facility and cash flows from operations 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 $2.7 billion in the nine months ended September 25, 2021, primarily due to our net income of $2.2 billion, adjusted for non-cash and non-operating charges of $769 million and net cash outflows of $258 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a $504 million increase in inventories driven by an increase in product build in support of customer demand and a $284 million increase in prepaid expenses and other assets driven primarily by prepayments of long-term supply agreements, partially offset by a $526 million increase in accounts payable due to an increase in inventory purchases.

Net cash provided by operating activities was $517 million in the nine months ended September 26, 2020, primarily due to our net income of $709 million, adjusted for non-cash and non-operating charges of $538 million and net cash outflows of $730 million from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a $287 million increase in accounts receivable driven primarily by higher revenue in the third quarter of 2020 compared to the fourth quarter of 2019, partially offset by higher collections due to better revenue linearity in the third quarter of 2020 compared to the fourth quarter of 2019, a $310 million increase in inventories driven by an increase in product build, and a $172 million increase in prepaid expenses and other assets primarily due to an increase in vendor credits.

Investing Activities

Net cash used in investing activities was $686 million for the nine months ended September 25, 2021 which primarily consisted of $1.9 billion for purchases of short-term investments and $215 million for purchases of property and equipment, partially offset by $1.4 billion for maturities of short-term investments.

Net cash used in investing activities was $658 million for the nine months ended September 26, 2020, which primarily consisted of $530 million for purchases of short-term investments and $220 million for purchases of property and equipment, partially offset by $92 million for maturities of short-term investments.

Financing Activities

Net cash used in financing activities was $1.2 billion for the nine months ended September 25, 2021, which primarily consisted of common stock repurchases of $1.0 billion and repurchases for tax withholding on employee equity plans of $219 million, partially offset by a cash inflow of $55 million from issuance of common stock under our employee equity plans.

Net cash used in financing activities was $29 million for the nine months ended September 26, 2020, which primarily consisted of common stock repurchased for tax withholding on employee equity plans of $73 million, partially offset by proceeds from the issuance of common stock under our employee equity plans of $45 million. We borrowed $200 million short-term debt and paid off the balance during the nine months ended September 26, 2020.

Contractual Obligations

Other than the unconditional purchase commitments disclosed in Note 12—Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements, 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 and nine months ended September 25, 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.