How Important Is Cost Of Sales To AMD’s Expenses And Overall Profitability?
Advanced Micro Devices’ (NASDAQ: AMD) total expenses have risen gradually from around $4.82 billion in 2016 to about $6.14 billion in 2018. As a percentage of revenues, expenses have dropped gradually from 112% in 2016 to 95% in 2018.
Cost of sales is the biggest expense head for the company, with it being 76.8% of revenue in 2016, before decreasing significantly to around 62.2% of revenue in 2018. This, combined with a drop in R&D and SG&A expenses, has helped the company turn profitable, with EPS going from -$0.60 in 2016 to $0.34 in 2018.
With revenue expected to increase further, cost of sales as a % of revenue is expected to drop to 58.9%, and this should help push net income margins from 5.2% in 2018 to 9% in 2020.
This steady drop in expenses, has led to a 4x increase in the company’s share price since January 2018.
In our interactive dashboard How Does AMD Spend Its Money?, we take a look at the key drivers of AMD’s expenses and net margins.
AMD’s Net Income Margins have risen sharply, from -11.5% in 2016 to 5.2% in 2018. Sharp revenue growth from $4.32 billion in 2016 to $6.47 billion in 2018 has been key to this net margin growth. Margins are expected to drop temporarily in 2019, before rising to around 8.9% in 2020.
Breakdown of AMD’s Total Expenses
- Cost of Sales has increased from $3.32 billion in 2016 to $4.03 billion in 2018, driven by a growth in revenue. As a % of Revenue, Cost of Sales has dropped from 76.8% to 62.2% over the same period, as revenue has grown at a much faster rate, owing to a growth in selling prices. This metric is expected to drop further to 58.9% in 2020 due to a steady expected growth in revenue.
- R&D Expense has grown from $1.01 billion in 2016 to $1.43 billion in 2018. This metric has grown by more than 40% over the past 2 years, and we expect this metric to further rise in 2019, as AMD is expected to launch its new 7nm chips by 2020. As a % of Revenues, R&D has dropped slightly from 23.3% in 2016 to 22.1% in 2018.
- SG & A Expense has grown steadily from $466 million in 2016 to $562 million in 2018. Expense has risen over the past 2 years, at a rate slower than the rise in revenue, and this has primarily been due to a growth in selling prices. We expect this metric to further rise to $632 million by 2020. As a % of Revenues, SG&A has dropped from 10.8% in 2016 to 8.7% in 2018.
- Restructuring, licensing gain and other charges increased from -$98 million in 2016 to -$52 million in 2017. There were no restructuring charges in 2018, and Trefis expects the same going into 2019 and 2020.
- Non-Operating Expense has increased from $76 million in 2016 to $121 million in 2018. AMD’s total debt has increased from $1.35 billion in 2016 to $2.12 billion in 2018. We expect debt to rise to around $2.8 billion by 2020, with net interest expense to rise to $228 million.
- Income Tax Expense has decreased from $49 million in 2016 to -$7 million in 2018. Going forward, we expect an effective tax rate of 5.7%, with income tax expense coming in at around $9 million in 2019 and $44 million in 2020.
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