New York, October 28, 2020 -- Moody's Investors Service ("Moody's") placed the senior unsecured rating
of Advanced Micro Devices, Inc.'s ("AMD") on review for upgrade
following the company's announcement that it agreed to acquire Xilinx,
Inc. in an all-stock transaction for approximately $35
billion. Both boards of directors have approved the transaction,
and subject to regulatory approval, the acquisition is expected
to close by the end of 2021.
The review for upgrade reflects the credit positive nature of the proposed
acquisition because, aside from all equity funding, it would
diversify AMD's revenue and earnings sources, and broaden
its portfolio outside of its core personal computer, server,
and gaming end markets. Xilinx's core markets of automotive,
industrial, aerospace and defense as well as test, measurement
and emulation (together 44% of revenue) have broadly returned to
pre-COVID revenue levels. These markets provide a resilient
foundation for Xilinx and we expect low single digit revenue growth in
this area over the next year. Importantly the deal would give AMD
greater opportunity to provide accelerated computing solutions in the
increasingly important data center market, although widespread adoption
of field programmable gate arrays in the datacenter is yet to be realized.
The review will focus on the strategic rationale of the transaction (which
we preliminarily believe is sound), expected cost synergies (the
company currently anticipates $300 million of cost synergies within
18 months of closing) and costs to achieve those, and the capital
structure and capital allocation plans over the next few years following
closing.
Xilinx is the leader in the $6 billion programmable logic device
(PLD) market where it has over 55% market share and competes mostly
with just one other company (Altera, owned by Intel). PLD's
provide end users product design flexibility and time to market advantages
over other semiconductor devices and there are high barriers to entry
for new competitors. Xilinx benefits from broad geographic,
customer and end market diversification and has generated positive free
cash flow each year for more than a decade. Long product design
and lifecycles and stable pricing contribute to strong profitability (mid-30%
EBITDA margins) and stable operating performance through business cycles.
Moody's expects ongoing strong performance even in the currently
challenging macro environment, with revenue of about $3.1
billion and nearly $1 billion of EBITDA in its fiscal year ending
March 2021.
On Review for Upgrade:
...Issuer: Advanced Micro Devices, Inc.
.....$312 million (outstanding)
Senior Unsecured Notes due 2022; currently Baa3
Outlook Actions:
..Issuer: Advanced Micro Devices, Inc.
....Outlook, Changed To Rating Under
Review From Stable
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE
OF THE RATING
AMD's credit profile reflects the company's strong performance and
outlook, driven by continued design wins, market share gains,
and an expanded set of product offerings and customers. With recent
new product launches, we expect strong revenue growth in 2020 driven
by new desktop, mobile, server, and graphics chips,
and the launch of semi-custom revenue related to game consoles
in the second half of 2020. Additionally, already low leverage
will continue to decline while the company's liquidity profile remains
excellent. We project over 40% growth in 2020 to drive full
year revenue of $9.5 billion, with over 20%
plus growth projected in 2021. The 2020 annual revenue is 7%
or $600 million higher than what we projected in early September.
With higher average selling prices and compelling chip performance,
gross margins should expand to around 45% this year while EBITDA
margins improve towards 19% and over 20% in 2021.
Despite staging working capital to support this strong growth, we
expect over $700 million of free cash flow in 2020 and around $1.5
billion in 2021. Very low debt levels and improved performance
will drive a further decline in already low leverage, with adjusted
gross debt to EBITDA around 0.4x in 2020 (0.8x at December
2019) and free cash flow to gross adjusted debt over 100%.
While the ability to consistently execute product and technology transitions
and withstand competition from strong competitors such as Intel and Nvidia
remain key challenges, AMD has demonstrated steady and successful
execution for several years.
Over the last five years, AMD's product roadmap execution has improved
considerably with the company successfully launching multiple generations
of commercial and consumer desktop processors, mobile processors,
a new graphics lineup, and two generations of EPYC server processors.
A decision in 2018 by one of AMD's foundry partner (GlobalFoundries Inc.)
to not pursue 7 nanometer technology means AMD will continue to increase
its use of its other foundry partner, Taiwan Semiconductor Manufacturing
Co Ltd (TSMC) for leading edge chip making. GlobalFoundries Inc.
had historically manufactured most AMD's CPUs.
The increased use of TSMC for leading edge microprocessor production provides
additional manufacturing roadmap certainty for AMD and its customers,
which is a credit positive. AMD is currently in the market with
leading edge 7-nanometer server processors and datacenter chips
and gaining share with expanding profitability. With this product
and manufacturing positioning, combined with Intel's current
challenges at 10 nanometers and new delays at 7 nanometers that are expected
to last into 2022, AMD is well positioned to increase its share
of the profitable and growing server CPU market from its current level
of about 10%, with the potential to reach 20% over
the next couple of years. Despite AMD's solid operating prospects
and Intel's current challenges, Moody's expects the company
will continue to face stiff competition from strong and higher rated companies
such as Intel as well as NIVIDIA Corporation.
AMD has an excellent liquidity profile that allows the company to internally
fund investment needs and react to marketplace dynamics and competitive
challenges. AMD reported $1.8 billion of cash and
cash equivalents as of September 2020. AMD also maintains access
to an unused $500 million and now unsecured revolving credit facility
that matures June 2024. With cash balances, access to the
credit facility, Moody's projection of at least $700
million of free cash flow in 2020 and over $1.5 billion
in 2021, and no debt maturities until $312 million is due
in August 2022, AMD has excellent liquidity.
The principal methodology used in this rating was Semiconductor Industry
published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130733.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Advanced Micro Devices, Inc. (AMD) is a fabless semiconductor
company that specializes in microprocessors, graphics processing
units and semi-custom and embedded processors. AMD reported
revenue of $8.6 billion for the twelve months ended September
2020.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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support provider and in relation to each particular credit rating action
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provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
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and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
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Richard J. Lane
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 1 212 553 0376
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