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 and cash flows from operations together with the availability under the revolving credit facility (the Revolving Credit Agreement) and commercial paper program will be sufficient to fund AMD’s operations including capital expenditures and purchase commitments over the next 12 months and beyond; AMD’s ability to access capital markets should it require additional funds; 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; a small number of customers will continue to account for a substantial part of AMD’s revenue in the future; the legal and regulatory environment relating to emerging technologies; and AMD expects to fund stock repurchases through cash generated from operations. 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 in “Part I, Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations,” or MD&A, and such other risks and uncertainties as 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.

References in this Quarterly Report on Form 10-Q to “AMD,” “we,” “us,” “management,” “our” or the “Company” mean Advanced Micro Devices, Inc. and our consolidated subsidiaries.

AMD, the AMD Arrow logo, Athlon, EPYC, Radeon, Ryzen, Versal, Xilinx and combinations thereof are trademarks of Advanced Micro Devices, Inc. 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 codename 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 31, 2022 and December 25, 2021, and for each of the three years for the period ended December 31, 2022 as filed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Overview and Recent Developments

We are a global semiconductor company primarily offering:

• server microprocessors (CPUs) and graphics processing units (GPUs), data processing units (DPUs), Field Programmable Gate Arrays (FPGAs) and Adaptive System-on-Chip (SoC) products for data centers;

• CPUs, accelerated processing units (APUs) that integrate CPUs and GPUs, and chipsets for desktop and notebook personal computers;

• discrete GPUs, semi-custom SoC products and development services; and

• embedded CPUs, GPUs, APUs, FPGAs, and Adaptive SoC products.

From time to time, we may also sell or license portions of our intellectual property (IP) 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 six months ended July 1, 2023 compared to the prior year period and an analysis of changes in our financial condition.

Net revenue for the three months ended July 1, 2023 was $5.4 billion, an 18% decrease compared to the prior year period. The decrease in net revenue was driven mainly by a 54% decrease in Client segment revenue primarily due to lower processor shipments resulting from a weaker PC market and a significant inventory correction across the PC supply chain, partially offset by a 16% increase in Embedded segment revenue primarily due to higher revenue across multiple end markets.

Gross margin for the three months ended July 1, 2023 remained flat at 46% compared to the prior year period. Lower Client segment performance was offset by higher Embedded segment performance and by lower amortization of acquisition-related intangible assets.

Operating loss for the three months ended July 1, 2023 was $20 million compared to operating income of $526 million for the prior year period. Net income for the three months ended July 1, 2023 was $27 million compared to net income of $447 million for the prior year period. The decrease in operating and net income was primarily due to lower Client segment performance.

We introduced a number of new products during the second quarter of 2023, including the 4th Gen EPYC™ 97X4 processors for cloud native computing and 4th Gen EPYC processors with AMD 3D V-Cache™ technology for technical computing. We expanded our commercial portfolio with AMD Ryzen™ PRO 7040 Series Mobile processors to bring advanced and power efficient x86 processors to business notebooks and mobile workstations. We also announced the availability of AMD Ryzen and Athlon™ 7020 C-Series processors for personal and professional Chromebooks. We introduced the AMD Radeon™ PRO W7000 Series graphic cards for workstations based on our advanced chiplet design, and our AMD Radeon RX 7600 graphics card, optimized to provide next-generation, high performance 1080p gaming, streaming and content creation. For handheld PC gaming consoles, we introduced the AMD Ryzen Z1 Series processors, and we bolstered our embedded portfolio with the AMD Ryzen™ Embedded 5000 Series processors for networking solutions designed for enterprise reliability needed by security and networking customers. We announced the AMD Versal™ Premium VP1902 adaptive SoC designed to help chipmakers streamline the verification of application-specific integrated circuits (ASICs) and SoC designs.

As of July 1, 2023 our cash, cash equivalents and short-term investments were $6.3 billion compared to $5.9 billion as of December 31, 2022. The increase in cash, cash equivalents and short-term investments was primarily driven by cash generated from operating activities.

During the six months ended July 1, 2023, we generated $865 million of cash from operating activities, and returned $241 million to shareholders. We have an approved stock repurchase program authorizing repurchases of up to $12 billion of our common stock (Repurchase Program). As of July 1, 2023, $6.3 billion remains available for future stock repurchases under our Repurchase Program.

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.

Critical Accounting Policies and 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 consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our revenue, inventories, goodwill, long-lived and intangible assets, 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 six months ended July 1, 2023 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 31, 2022.

Results of Operations

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												Six Months Ended
			July 1, 2023						June 25, 2022						July 1, 2023						June 25, 2022
			(In millions)
Net revenue:
Data Center			$	1,321					$	1,486					$	2,616					$	2,779
Client			998						2,152						1,737						4,276
Gaming			1,581						1,655						3,338						3,530
Embedded			1,459						1,257						3,021						1,852
Total net revenue			$	5,359					$	6,550					$	10,712					$	12,437
Operating income (loss):
Data Center			$	147					$	472					$	295					$	899
Client			(69)						676						(241)						1,368
Gaming			225						187						539						545
Embedded			757						641						1,555						918
All Other			(1,080)						(1,450)						(2,313)						(2,253)
Total operating income (loss)			$	(20)					$	526					$	(165)					$	1,477

Data Center

Data Center net revenue of $1.3 billion for the three months ended July 1, 2023 decreased by 11%, compared to net revenue of $1.5 billion for the prior year period primarily due to lower sales of EPYC server processors resulting from lower enterprise demand.

Data Center net revenue of $2.6 billion for the six months ended July 1, 2023 decreased by 6%, compared to net revenue of $2.8 billion for the prior year period primarily due to lower enterprise server processor sales, partially offset by higher sales of EPYC processors to cloud customers.

Data Center operating income was $147 million for the three months ended July 1, 2023, compared to operating income of $472 million for the prior year period. Data Center operating income was $295 million for the six months ended July 1, 2023, compared to operating income of $899 million for the prior year period. The decrease in operating income in both periods was primarily due to lower revenue and increased R&D investment.

Client

Client net revenue of $998 million for the three months ended July 1, 2023 decreased by 54%, compared to net revenue of $2.2 billion for the prior year period, primarily due to lower Client processor sales driven by a 22% decrease in average selling price and a 42% decrease in unit shipments. Client net revenue of $1.7 billion for the six months ended July 1, 2023 decreased by 59%, compared to net revenue of $4.3 billion for the prior year period, primarily due to lower Client processor sales driven by a 24% decrease in average selling price and a 49% decrease in unit shipments. The decrease in shipments and average selling price in both periods resulted from a weaker PC market and inventory correction across the PC supply chain.

Client operating loss was $69 million for the three months ended July 1, 2023, compared to operating income of $676 million for the prior year period. Client operating loss was $241 million for the six months ended July 1, 2023, compared to operating income of $1.4 billion for the prior year period. The decrease in operating income in both periods was primarily due to lower revenue.

Gaming

Gaming net revenue of $1.6 billion for the three months ended July 1, 2023 decreased by 4%, compared to net revenue of $1.7 billion for the prior year period. Gaming net revenue of $3.3 billion for the six months ended July 1, 2023 decreased by 5%, compared to net revenue of $3.5 billion for the prior year period. The decrease in net revenue for both periods was due to lower gaming graphics revenue, partially offset by higher semi-custom revenue.

Gaming operating income was $225 million for the three months ended July 1, 2023, compared to operating income of $187 million for the prior year period. The increase in operating income was primarily driven by higher semi-custom revenue.

Gaming operating income was $539 million for the six months ended July 1, 2023, compared to operating income of $545 million for the prior year period. The decrease in operating income was primarily due to higher operating expenses.

Embedded

Embedded net revenue of $1.5 billion for the three months ended July 1, 2023 increased by 16%, compared to net revenue of $1.3 billion. The increase in net revenue was primarily driven by higher product revenue across multiple end markets.

Embedded net revenue of $3.0 billion for the six months ended July 1, 2023 increased by 63%, compared to net revenue of $1.9 billion for the prior year period. The increase in net revenue was primarily driven by the inclusion of embedded product revenue from Xilinx, Inc. (Xilinx) for the full six months period in 2023 as compared to a partial period from February 14, 2022 (the Xilinx Acquisition Date) in the prior year period.

Embedded operating income was $757 million for the three months ended July 1, 2023, compared to operating income of $641 million for the prior year period, primarily driven by higher revenue.

Embedded operating income was $1.6 billion for the six months ended July 1, 2023, compared to operating income of $918 million for the prior year period. The increase in operating income was primarily driven by the inclusion of Xilinx for the full six months period as compared to a partial period from the Xilinx Acquisition Date in the prior year period.

All Other

All Other operating loss of $1.1 billion for the three months ended July 1, 2023 primarily consisted of $693 million of amortization of acquisition-related intangibles, $348 million of stock-based compensation expense, and $34 million of acquisition-related costs. All Other operating loss of $1.5 billion for the prior year period primarily consisted of $1 billion of amortization of acquisition-related intangibles, $292 million of stock-based compensation expense, and $141 million of acquisition-related costs.

All Other operating loss of $2.3 billion for the six months ended July 1, 2023 primarily consisted of $1.5 billion of amortization of acquisition-related intangibles, $657 million of stock-based compensation expense, and $145 million of acquisition-related costs. All Other operating loss of $2.3 billion for the prior year period primarily consisted of $1.5 billion of amortization of acquisition-related intangibles, $491 million of stock-based compensation expense, $349 million of acquisition-related costs, and $89 million of licensing gain.

Acquisition-related costs primarily include transaction costs, depreciation related to the Xilinx fixed assets fair value step-up adjustment, certain compensation charges, and contract termination costs.

International Sales

International sales as a percentage of net revenue were 66% and 70% for the three months ended July 1, 2023 and June 25, 2022, respectively. International sales as a percentage of net revenue were 67% and 70% for the six months ended July 1, 2023 and June 25, 2022, 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 Income (Expense) and Income Taxes

The following is a summary of certain condensed consolidated statement of operations data for the periods indicated:

			Three Months Ended												Six Months Ended
			July 1, 2023						June 25, 2022						July 1, 2023						June 25, 2022
Net revenue			$	5,359					$	6,550					$	10,712					$	12,437
Cost of sales			2,704						3,115						5,393						5,998
Amortization of acquisition-related intangibles			212						407						517						593
Gross profit			2,443						3,028						4,802						5,846
Gross margin			46		%				46		%				45		%				47		%
Research and development			1,443						1,300						2,854						2,360
Marketing, general and administrative			547						592						1,132						1,189
Amortization of acquisition-related intangibles			481						616						999						909
Licensing gain			(8)						(6)						(18)						(89)
Interest expense			(28)						(25)						(53)						(38)
Other income (expense), net			46						(4)						89						(46)
Income tax provision (benefit)			(23)						54						(10)						167
Equity income in investee			6						4						7						7

Gross Margin

Gross margin remained at 46% for the three months ended July 1, 2023 and June 25, 2022 due to lower Client segment performance which was primarily offset by higher Embedded segment performance and lower amortization of acquisition-related intangible assets.

Gross margin was 45% and 47% for the six months ended July 1, 2023 and June 25, 2022, respectively. The decrease in gross margin was primarily due to lower Client segment performance, partially offset by higher Embedded segment performance.

Expenses

Research and Development Expenses

Research and development expenses of $1.4 billion for the three months ended July 1, 2023 increased by $143 million, or 11%, compared to $1.3 billion for the prior year period. Research and development expenses of $2.9 billion for the six months ended July 1, 2023 increased by $494 million, or 21%, compared to $2.4 billion for the prior year period. The increase in both periods was primarily driven by an increase in headcount.

Marketing, General and Administrative Expenses

Marketing, general and administrative expenses of $547 million for the three months ended July 1, 2023 decreased by $45 million, or 8%, compared to $592 million for the prior year period. Marketing, general and administrative expenses of $1.1 billion for the six months ended July 1, 2023 decreased by $57 million, or 5%, compared to $1.2 billion for the prior year period. The decrease in both periods was primarily due to a decrease in acquisition-related costs.

Amortization of Acquisition-Related Intangibles

Amortization of acquisition-related intangibles of $693 million for the three months ended July 1, 2023 decreased by $330 million, or 32%, compared to $1.0 billion for the prior year period. The decrease was primarily due to certain acquisition-related intangibles being fully amortized in the first half of the current fiscal year.

Amortization of acquisition-related intangibles of $1.5 billion for the six months ended July 1, 2023 remained flat compared to amortization for the prior year period.

Licensing Gain

During the three and six months ended July 1, 2023, we recognized $8 million and $18 million of licensing gain from royalty income associated with certain intellectual property licensed to two joint ventures in which we have an equity interest in with Higon Information Technology Co., Ltd., a third-party Chinese entity (Licensed IP). During the three and six months ended June 25, 2022, we recognized $6 million of licensing gain from royalty income and $89 million of licensing gain from a milestone achievement and royalty income associated with the Licensed IP.

Interest Expense

Interest expense for the three and six months ended July 1, 2023 was $28 million and $53 million, respectively, compared to $25 million and $38 million, respectively, for the prior year period. The increase was primarily due to interest expense from the 3.924% Senior Notes Due 2032 (3.924% Notes) and the 4.393% Senior Notes Due 2052 (4.393% Notes) that were issued in June 2022.

Other Income (Expense), Net

Other income (expense), net is primarily comprised of interest income from short-term investments, changes in valuation of equity investments, and foreign currency transaction gains and losses.

Other income, net for the three and six months ended July 1, 2023 was $46 million and $89 million, respectively, primarily due to interest income driven by rising interest rates. Other expense, net for the prior year period was $4 million and $46 million, respectively, primarily due to a decrease in the fair value of equity investments.

Income Tax Provision (Benefit)

We determine income taxes for interim reporting periods by applying our estimated annual effective tax rate to the year-to-date results and adjusted for tax items discrete to each period.

We recorded an income tax benefit of $23 million and $10 million for the three and six months ended July 1, 2023, respectively, representing effective tax rates of (511.4)% and 8.0%, respectively. We recorded the tax effects of stock-based compensation, uncertain tax positions, and other items discrete to the period resulting in income tax benefit of $34 million and $12 million for the three and six months ended July 1, 2023, respectively. These discrete items had a disproportionate impact on our effective tax rate for the three months ended July 1, 2023 because our pre-tax income was close to break-even for the period. For the six months ended July 1, 2023, the impact of tax items discrete to the period was not material to the total tax expense or the effective tax rate.

We recorded an income tax provision of $54 million and $167 million for the three and six months ended June 25, 2022, representing effective tax rates of 10.8% and 11.9%, respectively. For the three and six months ended June 25, 2022, the impact of tax items discrete to the periods was not material to the total tax expense or the effective tax rate.

The difference between the U.S. federal statutory tax rate of 21% and our effective tax rate for the three and six months ended July 1, 2023 and June 25, 2022 was primarily due to the income tax benefit from foreign-derived intangible income (FDII) and research and development tax credits.

FINANCIAL CONDITION

Liquidity and Capital Resources

As of July 1, 2023 and December 31, 2022, our cash, cash equivalents and short-term investments were $6.3 billion. The percentage of cash, cash equivalents and short-term investments held domestically as of July 1, 2023 and December 31, 2022 were 79% and 81%, respectively.

Our operating, investing and financing activities for the six months ended July 1, 2023 compared to the prior year period are as described below:

			Six Months Ended
			July 1, 2023						June 25, 2022
			(In millions)
Net cash provided by (used in):
Operating activities			$	865					$	2,033
Investing activities			(1,675)						2,230
Financing activities			(184)						(1,834)
Net (decrease) increase in cash and cash equivalents			$	(994)					$	2,429

We have $3.0 billion available under an unsecured revolving credit agreement (Revolving Credit Agreement) that expires on April 29, 2027. No funds were drawn from this credit facility during the six months ended July 1, 2023.

We also have a commercial paper program where we may issue unsecured commercial paper notes up to a maximum principal amount outstanding, at any time, of $3.0 billion, with a maturity of up to 397 days from the date of issue. We did not issue any commercial paper during the six months ended July 1, 2023.

As of July 1, 2023, our principal debt obligations were $2.5 billion, which primarily included $1.5 billion of the Assumed Xilinx Notes and $1.0 billion of 3.924% Notes and 4.393% Notes. Our 2.95% Assumed Xilinx Notes with a principal amount of $750 million are due in June 2024.

As of July 1, 2023, we had unconditional purchase commitments of approximately $6.3 billion, of which $3.9 billion are for the remainder of fiscal year 2023. On an ongoing basis, we work with our suppliers on the timing of payments and deliveries of purchase commitments, taking into account business conditions.

We believe our cash, cash equivalents, short-term investments and cash flows from operations along with our Revolving Credit Agreement and commercial paper program will be sufficient to fund operations, including capital expenditures and purchase commitments, 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 $865 million in the six months ended July 1, 2023, primarily due to our net loss of $112 million, adjusted for non-cash and non-operating charges of $1.9 billion and net cash outflows of $1.0 billion from changes in our operating assets and liabilities. The primary driver of the change in operating assets and liabilities was a $796 million increase in inventory primarily to support the continued ramp of Data Center and Client products in advanced process technology nodes, and a $237 million increase in prepaid expenses and other assets primarily driven by the purchase of technology licenses, partially offset by a $309 million increase in accounts payable due to the timing of payments.

Net cash provided by operating activities was $2.0 billion in the six months ended June 25, 2022, primarily due to our net income of $1.2 billion, adjusted for non-cash and non-operating charges of $2.0 billion and net cash outflows of $1.2 billion from changes in our operating assets and liabilities. The primary drivers of the changes in operating assets and liabilities included a $1.0 billion increase in accounts receivable driven primarily by higher revenue in the first half of 2022, a $274 million increase in inventory driven by an increase in product build in support of customer demand, partially offset by a $277 million increase in payables to related parties driven primarily by an increase in purchases and timing of payments.

Investing Activities

Net cash used in investing activities was $1.7 billion for the six months ended July 1, 2023 which primarily consisted of cash used in the purchases of short-term investments of $2.8 billion and purchases of property and equipment of $283 million, partially offset by $1.4 billion of proceeds from the maturity and sale of short-term investments.

Net cash provided by investing activities was $2.2 billion for the six months ended June 25, 2022 which primarily consisted of $2.4 billion of cash received from Xilinx and $2.2 billion of proceeds from the maturity of short-term investments, partially offset by cash used in the acquisition of Pensando Systems, Inc. of $1.6 billion, purchases of short-term investments of $620 million and purchases of property and equipment of $203 million.

Financing Activities

Net cash used in financing activities was $184 million for the six months ended July 1, 2023, which primarily consisted of common stock repurchases of $241 million and repurchases for tax withholding on employee equity plans of $87 million, partially offset by a cash inflow of $144 million from issuance of common stock under our employee equity plans.

Net cash used in financing activities was $1.8 billion for the six months ended June 25, 2022, which primarily consisted of common stock repurchases of $2.8 billion and repurchases for tax withholding on employee equity plans of $66 million, partially offset by proceeds from the issuance of debt of $991 million and a cash inflow of $78 million from issuance of common stock under our employee equity plans.