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; AMD’s strategy and expected benefits; the growth, change and competitive landscape of the markets in which AMD participates; the expectation that international sales will continue to be a significant portion of total sales in the foreseeable future; the expectation that AMD’s cash, cash equivalents and short-term investment balances, together with the availability under that certain revolving credit facility made available to AMD and certain of its subsidiaries, our commercial paper program, and our cash flows from operations will be sufficient to fund AMD’s operations including capital expenditures, purchase commitments and acquisitions over the next 12 months and beyond; AMD’s ability to access capital markets; AMD’s ability to obtain sufficient external financing on favorable terms, or at all; AMD’s expectation that based on management’s current knowledge, the potential liability related to AMD’s current litigation will not have a material adverse effect on its financial positions, results of operation or cash flows; anticipated ongoing and increased costs related to enhancing and implementing information security controls; AMD’s expectation that all unbilled accounts receivables are expected to be billed and collected within 12 months; that revenue allocated to remaining performance obligations that are unsatisfied which will be recognized in the next 12 months and that a small number of customers will continue to account for a substantial part of AMD’s revenue in the future; the expected implications from the development of the legal and regulatory environment relating to emerging technologies, such as AI; AMD’s ability to achieve its corporate responsibility initiatives; expected future AI trends and developments; the expected benefits of AMD’s acquisition of Silo AI Oy (Silo AI); AMD’s anticipated acquisition of ZT Group Int’l, Inc. (ZT Systems) and the anticipated timing of the transaction; AMD’s intention to seek a strategic partner to acquire ZT Systems' manufacturing business; and AMD’s expectation 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, EPYC, Radeon, Ryzen, 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 30, 2023 and December 31, 2022, and for each of the three years for the period ended December 30, 2023 as filed in our Annual Report on Form 10-K for the fiscal year ended December 30, 2023.

Overview and Recent Developments

We are a global semiconductor company primarily offering:

• server microprocessors (CPUs), graphics processing units (GPUs), accelerated processing units (APUs), data processing units (DPUs), Field Programmable Gate Arrays (FPGAs), Smart Network Interface Cards (SmartNICs), Artificial Intelligence (AI) accelerators and Adaptive System-on-Chip (SoC) products for data centers;

• CPUs, APUs and chipsets for desktop, notebook, and handheld personal computers;

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

• embedded CPUs, GPUs, APUs, FPGAs, System on Modules (SOMs), 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 nine months ended September 28, 2024 compared to the prior year period and an analysis of changes in our financial condition.

Net revenue for the three months ended September 28, 2024 was $6.8 billion, an 18% increase compared to the prior year period. The increase in net revenue was driven by an increase in Data Center segment revenue primarily driven by the strong ramp of AMD Instinct™ GPU shipments and growth in AMD EPYC™ CPU sales, and an increase in Client segment revenue primarily driven by strong demand for “Zen 5” AMD Ryzen™ processors, partially offset by a decrease in Gaming segment revenue primarily due to lower semi-custom revenue, and a decrease in Embedded segment revenue as customers continued to normalize their inventory levels.

Gross margin for the three months ended September 28, 2024 was 50% compared to gross margin of 47% for the prior year period. The increase in gross margin was primarily driven by higher Data Center segment revenue.

Operating income for the three months ended September 28, 2024 was $724 million compared to operating income of $224 million for the prior year period. Net income for the three months ended September 28, 2024 was $771 million compared to net income of $299 million for the prior year period. The increase in operating and net income was primarily driven by higher revenue and gross margin, and lower amortization of acquisition-related intangible assets, partially offset by increased operating expenses.

As of September 28, 2024, our cash, cash equivalents and short-term investments were $4.5 billion compared to $5.8 billion as of December 30, 2023. During the three and nine months ended September 28, 2024, we generated $628 million and $1.7 billion of cash, respectively, from operating activities, and we returned $250 million and $606 million, respectively, to shareholders through the repurchase of common stock under our Repurchase Program.

As part of the next step in our AI strategy, on August 9, 2024, we completed the acquisition of Silo AI, an AI lab based in Finland in an all-cash transaction of $665 million, which resulted in a net purchase consideration of $553 million. The acquisition of Silo AI expands our ability to accelerate development and deployment of AI models on AMD hardware. Silo AI financial results, which were immaterial, were included in our statement of operations from the date of acquisition primarily within the Data Center segment.

On August 17, 2024, we entered into an agreement to acquire ZT Systems, a provider of AI and general-purpose compute infrastructure for hyperscale computing companies, in a cash and stock transaction valued at approximately $4.9 billion (the Acquisition). Upon closing of the Acquisition, we will pay approximately $3.4 billion in cash and 8,335,852 shares of the Company’s common stock and to the extent certain conditions are met, we will pay an additional $300 million of cash and up to 740,963 shares of the Company’s common stock. The Acquisition is expected to close in the first half of fiscal year 2025, subject to certain regulatory approvals and other customary closing conditions. We intend to seek a strategic partner to acquire ZT Systems' manufacturing business.

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 ongoing 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 nine months ended September 28, 2024 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 30, 2023.

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												Nine Months Ended
			September 28, 2024						September 30, 2023						September 28, 2024						September 30, 2023
			(In millions)
Net revenue:
Data Center			$	3,549					$	1,598					$	8,720					$	4,214
Client			1,881						1,453						4,741						3,190
Gaming			462						1,506						2,032						4,844
Embedded			927						1,243						2,634						4,264
Total net revenue			$	6,819					$	5,800					$	18,127					$	16,512
Operating income (loss):
Data Center			$	1,041					$	306					$	2,325					$	601
Client			276						140						451						(101)
Gaming			12						208						240						747
Embedded			372						612						1,059						2,167
All Other			(977)						(1,042)						(3,046)						(3,355)
Total operating income			$	724					$	224					$	1,029					$	59

Data Center

Data Center net revenue of $3.5 billion for the three months ended September 28, 2024 increased by 122%, compared to net revenue of $1.6 billion for the prior year period. Data Center net revenue of $8.7 billion for the nine months ended September 28, 2024 increased by 107%, compared to net revenue of $4.2 billion for the prior year period. The increase in both periods was primarily driven by the strong ramp of AMD Instinct GPU shipments and growth in AMD EPYC CPU sales.

Data Center operating income was $1.0 billion for the three months ended September 28, 2024, compared to operating income of $306 million for the prior year period. Data Center operating income was $2.3 billion for the nine months ended September 28, 2024, compared to operating income of $601 million for the prior year period. The increase in operating income in both periods was primarily driven by higher revenue, partially offset by higher operating expenses.

Client

Client net revenue of $1.9 billion for the three months ended September 28, 2024 increased by 29%, compared to net revenue of $1.5 billion for the prior year period. The increase was primarily driven by a 25% increase in unit shipments and a 3% increase in average selling price of AMD Ryzen desktop and mobile processors driven by strong demand for “Zen 5” AMD Ryzen processors.

Client net revenue of $4.7 billion for the nine months ended September 28, 2024 increased by 49%, compared to net revenue of $3.2 billion for the prior year period, primarily driven by a 36% increase in unit shipments and a 9% increase in average selling price of AMD Ryzen mobile and desktop processors. The increase was driven by an improvement from weak PC market conditions and inventory corrections across the PC supply chain experienced in the first half of fiscal year 2023.

Client operating income was $276 million for the three months ended September 28, 2024, compared to operating income of $140 million for the prior year period. Client operating income was $451 million for the nine months ended September 28, 2024, compared to operating loss of $101 million for the prior year period. The increase in operating income in both periods was primarily driven by higher revenue, partially offset by higher operating expenses.

Gaming

Gaming net revenue of $462 million for the three months ended September 28, 2024 decreased by 69%, compared to net revenue of $1.5 billion for the prior year period. Gaming net revenue of $2.0 billion for the nine months ended September 28, 2024 decreased by 58%, compared to net revenue of $4.8 billion for the prior year period. The decrease in both periods was primarily due to lower semi-custom revenue.

Gaming operating income was $12 million for the three months ended September 28, 2024, compared to operating income of $208 million for the prior year period. Gaming operating income was $240 million for the nine months ended September 28, 2024, compared to operating income of $747 million for the prior year period. The decrease in operating income in both periods was primarily due to lower revenue.

Embedded

Embedded net revenue of $927 million for the three months ended September 28, 2024 decreased by 25%, compared to net revenue of $1.2 billion for the prior year period. Embedded net revenue of $2.6 billion for the nine months ended September 28, 2024 decreased by 38%, compared to net revenue of $4.3 billion for the prior year period. Net revenue decreased in both periods as customers continued to normalize their inventory levels.

Embedded operating income was $372 million for the three months ended September 28, 2024, compared to operating income of $612 million for the prior year period. Embedded operating income was $1.1 billion for the nine months ended September 28, 2024, compared to operating income of $2.2 billion for the prior year period. The decrease in operating income in both periods was primarily due to lower revenue.

All Other

All Other operating loss of $977 million for the three months ended September 28, 2024 primarily consisted of $585 million of amortization of acquisition-related intangibles and $351 million of stock-based compensation expense. All Other operating loss of $1.0 billion for the prior year period primarily consisted of $660 million of amortization of acquisition-related intangibles and $353 million of stock-based compensation expense.

All Other operating loss of $3.0 billion for the nine months ended September 28, 2024 primarily consisted of $1.8 billion of amortization of acquisition-related intangibles and $1.1 billion of stock-based compensation expense. All Other operating loss of $3.4 billion for the prior year period primarily consisted of $2.2 billion of amortization of acquisition-related intangibles and $1.0 billion of stock-based compensation expense.

International Sales

International sales as a percentage of net revenue were 72% and 68% for the three months ended September 28, 2024 and September 30, 2023, respectively. International sales as a percentage of net revenue were 65% and 67% for the nine months ended September 28, 2024 and September 30, 2023, 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												Nine Months Ended
			September 28, 2024						September 30, 2023						September 28, 2024						September 30, 2023
			In millions, except percentages
Net revenue			$	6,819					$	5,800					$	18,127					$	16,512
Cost of sales			3,167						2,843						8,590						8,236
Amortization of acquisition-related intangibles			233						210						694						727
Gross profit			3,419						2,747						8,843						7,549
Gross margin			50			%			47			%			49			%			46			%
Research and development			1,636						1,507						4,744						4,361
Marketing, general and administrative			721						576						1,991						1,708
Amortization of acquisition-related intangibles			352						450						1,116						1,449
Licensing gain			(14)						(10)						(37)						(28)
Interest expense			(23)						(26)						(73)						(79)
Other income (expense), net			36						59						144						148
Income tax (benefit)			(27)						(39)						(38)						(49)
Equity income in investee			7						3						21						10

Gross Margin

Gross margin was 50% and 47% for the three months ended September 28, 2024 and September 30, 2023, respectively. Gross margin was 49% and 46% for the nine months ended September 28, 2024 and September 30, 2023, respectively. The increase in both periods was primarily driven by higher Data Center segment revenue.

Expenses

Research and Development Expenses

Research and development expenses of $1.6 billion for the three months ended September 28, 2024 increased by $129 million, or 9%, compared to $1.5 billion for the prior year period. Research and development expenses of $4.7 billion for the nine months ended September 28, 2024 increased by $383 million, or 9%, compared to $4.4 billion for the prior year period. The increase in both periods was primarily due to higher employee-related costs from an increase in headcount in support of our continued focus on our AI strategy.

Marketing, General and Administrative Expenses

Marketing, general and administrative expenses of $721 million for the three months ended September 28, 2024 increased by $145 million, or 25%, compared to $576 million for the prior year period. Marketing, general and administrative expenses of $2.0 billion for the nine months ended September 28, 2024 increased by $283 million, or 17%, compared to $1.7 billion for the prior year period. The increase in both periods was primarily due to an increase in go-to-market activities driven by revenue growth.

Amortization of Acquisition-Related Intangibles

Amortization of acquisition-related intangibles of $585 million for the three months ended September 28, 2024 decreased by $75 million, or 11%, compared to $660 million for the prior year period. Amortization of acquisition-related intangibles of $1.8 billion for the nine months ended September 28, 2024 decreased by $366 million, or 17%, compared to $2.2 billion for the prior year period. The decrease was primarily due to certain acquisition-related intangibles that were fully amortized in the prior fiscal year.

Interest Expense

Interest expense for the three and nine months ended September 28, 2024 was $23 million and $73 million, respectively, compared to $26 million and $79 million, respectively, for the prior year period. Our 2.95% Notes with a principal amount of $750 million were repaid in June 2024.

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 (expense), net for the three and nine months ended September 28, 2024 was $36 million and $144 million, respectively. Other income (expense), net for the prior year period was $59 million and $148 million, respectively. The decrease for the three months period was primarily due to lower interest income from lower balances held in short-term investments compared to the prior period.

Income Taxes

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.

For the three and nine months ended September 28, 2024, we recorded an income tax benefit of $27 million and $38 million representing an effective tax rate of (3.6)% and (3.3)%, respectively. The difference between the U.S. federal statutory tax rate of 21% and our estimated annual effective tax rate was primarily due to the income tax benefit from foreign-derived intangible income (FDII) and research and development (R&D) tax credits, partially offset by the tax rate detriment from foreign earnings. The tax benefit for the three and nine months ended September 28, 2024 reflected discrete tax benefits of $28 million and $68 million, respectively, primarily related to tax effects of stock-based compensation partially offset by the interest and penalties accrued for uncertain tax positions.

For the three months and nine months ended September 30, 2023, we recorded an income tax benefit of $39 million and $49 million representing an effective tax rate of (15.2)% and (35.8)%, respectively. The difference between the U.S. federal statutory tax rate of 21% and our estimated annual effective tax rate was primarily due to the income tax benefit from FDII and R&D tax credits. The tax benefit for the three months ended September 30, 2023 reflected a discrete tax benefit of $17 million, primarily related to tax effects of stock-based compensation. The tax benefit for the nine months ended September 30, 2023 reflected a discrete tax benefit of $29 million, primarily related to tax effects of stock-based compensation partially offset by the interest and penalties accrued for uncertain tax positions.

FINANCIAL CONDITION

Liquidity and Capital Resources

As of September 28, 2024 and December 30, 2023, our cash, cash equivalents and short-term investments were $4.5 billion and $5.8 billion, respectively. The percentage of cash, cash equivalents and short-term investments held domestically as of September 28, 2024 and December 30, 2023 were 85% and 77%, respectively.

Our operating, investing and financing activities for the nine months ended September 28, 2024 compared to the prior year period are as described below:

			Nine Months Ended
			September 28, 2024						September 30, 2023
			(In millions)
Net cash provided by (used in):
Operating activities			$	1,742					$	1,286
Investing activities			113						(1,573)
Financing activities			(1,891)						(987)
Net (decrease) in cash and cash equivalents			$	(36)					$	(1,274)

We have $3.0 billion available under an unsecured revolving credit facility that expires on April 29, 2027. We also have $3.0 billion available under a commercial paper program.

As of September 28, 2024, our principal debt obligations were $1.8 billion. Our 2.95% Notes with a principal amount of $750 million were repaid in June 2024 and our remaining debt will mature starting in 2030.

As of September 28, 2024, we had unconditional purchase commitments of approximately $4.3 billion, of which $2.5 billion are for the remainder of fiscal year 2024. On an ongoing basis, we work with our suppliers on the timing of payments and deliveries of purchase commitments, taking into account business conditions.

During the three months ended September 28, 2024, we paid $548 million for Silo AI, net of cash acquired, using available cash.

On August 17, 2024, we agreed to acquire ZT Systems (the Acquisition). Upon closing of the Acquisition, we will pay approximately $3.4 billion in cash and 8,335,852 shares of the Company’s common stock and to the extent certain conditions are met, we will pay an additional $300 million of cash and up to 740,963 shares of the Company’s common stock. The Acquisition is expected to close in the first half of fiscal year 2025, subject to certain regulatory approvals and other customary closing conditions. We intend to seek a strategic partner to acquire ZT Systems' manufacturing business.

We believe our cash, cash equivalents, short-term investments and cash flows from operations along with our revolving credit facility and commercial paper program will be sufficient to fund operations, capital expenditures, purchase commitments and acquisitions 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 $1.7 billion in the nine months ended September 28, 2024, primarily due to our net income of $1.2 billion, adjusted for non-cash and non-operating charges of $2.6 billion and net cash outflows of $2.0 billion from changes in our operating assets and liabilities. The primary drivers of the change in operating assets and liabilities were a $1.9 billion increase in accounts receivable due to the timing of customer payments and higher revenue, a $1.1 billion increase in inventory primarily to support the continued ramp of Data Center products in advanced process technology nodes and $1.0 billion of tax payments.

Net cash provided by operating activities was $1.3 billion in the nine months ended September 30, 2023, primarily due to our net income of $187 million, adjusted for non-cash and non-operating charges of $2.9 billion and net cash outflows of $1.8 billion from changes in our operating assets and liabilities. The primary drivers of the change in operating assets and liabilities were a $929 million increase in accounts receivable driven primarily by higher revenue in the last month of the quarter ended September 30, 2023 compared to the last month of the quarter ended December 31, 2022, and a $674 million increase in inventory primarily to support the continued ramp of Data Center and Client products in advanced process technology nodes.

Investing Activities

Net cash provided by investing activities was $113 million for the nine months ended September 28, 2024 which primarily consisted of $1.9 billion of proceeds from the maturity and sale of short-term investments, partially offset by cash used in the purchases of short-term investments of $707 million, cash used in acquisition, net of cash acquired of $548 million, and purchases of property and equipment of $428 million.

Net cash used in investing activities was $1.6 billion for the nine months ended September 30, 2023 which primarily consisted of cash used in the purchases of short-term investments of $3.3 billion and purchases of property and equipment of $407 million, partially offset by $2.2 billion of proceeds from the maturity and sale of short-term investments.

Financing Activities

Net cash used in financing activities was $1.9 billion for the nine months ended September 28, 2024, which primarily consisted of repayment of the 2.95% Notes of $750 million, stock repurchases for tax withholding on employee equity plans of $686 million, and common stock repurchase of $606 million.

Net cash used in financing activities was $987 million for the nine months ended September 30, 2023, which primarily consisted of common stock repurchases of $752 million and stock repurchases for tax withholding on employee equity plans of $382 million, partially offset by a cash inflow of $148 million from issuance of common stock under our employee equity plans.