Intel Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative quarter ended April 1, 2017. Figures below are unaudited. Intel reported record first-quarter revenue and said results exceeded expectations set in January.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Revenue | $16.066B | $14.796B | Up 9%; management reported 13% growth excluding the divested Intel Security Group (ISecG). |
| Gross margin | $9.731B; 60.6% | $9.160B; 61.9% | Gross profit rose 6.2%, while the margin rate declined. |
| Operating income | $4.470B; 27.8% | $3.632B; 24.5% | Up 23%. |
| Net income | $4.454B | $2.964B | Up 50%. |
| Diluted EPS | $0.93 GAAP; $0.87 non-GAAP | $0.61 GAAP; $0.66 non-GAAP | GAAP EPS rose 53%; non-GAAP EPS rose 32%. |
| Operating cash flow | $6.284B | $3.898B | Increase mainly reflected higher net income and customer deposits/prepayments. |
| Capital expenditures | $2.910B | $1.952B | Higher investment in property, plant and equipment. |
| Cash, short-term investments and trading assets | $16.197B | $14.002B at Dec. 30, 2017 | Quarter-end liquidity measure used by Intel. |
| Total debt | $28.612B | $26.813B at Dec. 30, 2017 | Debt was 40.8% of permanent stockholders’ equity, versus 38.8% at year-end. |
Intel returned $3.314B to shareholders through $1.400B of dividends and $1.914B of share repurchases. Cash and cash equivalents ended the quarter at $3.554B. Current assets were $31.630B and current liabilities were $19.961B.
Business performance and changes
- Data-centric businesses grew 25% year over year excluding ISecG and represented 49% of revenue. Management said they were on track to exceed 50% of revenue during 2018.
- Client Computing Group revenue rose 3% to $8.220B despite a declining PC market; its operating income fell to $2.791B from $3.031B, partly reflecting 10nm-related charges and lower adjacent-product margins.
- Data Center Group revenue increased 24% to $5.234B and operating income rose to $2.602B from $1.487B. Growth included strong cloud demand and higher platform volume and average selling prices.
- Internet of Things Group revenue was $840M, up from $721M; operating income was $227M, versus $105M.
- Non-Volatile Memory Solutions Group revenue rose to $1.040B from $866M, while its operating loss narrowed to $81M from $129M. Programmable Solutions Group revenue increased to $498M from $425M.
- GAAP results included $643M of net gains on equity investments, including $606M of mark-to-market gains. Intel’s non-GAAP EPS excludes the marketable-equity mark-to-market impact.
Comparisons are affected by the Q1 2018 adoption of the new revenue recognition standard. Intel reported that the standard increased Q1 revenue by $462M versus the amount that would have been reported without adoption; it also affected cost of sales, expenses and net income. The prior-year quarter included $534M of ISecG revenue, which Intel divested in Q2 2017.
Outlook, commentary and risks
- Intel said 10nm products were shipping in low volume and moved expected 10nm volume production to 2019. It cited 10nm transition costs in the quarter.
- Intel expected the planned Wind River Systems divestiture to close by the end of Q2 2018; Wind River assets and liabilities were classified as held for sale.
- Management said it believed available financial resources were sufficient for business requirements over the next 12 months, including capital spending, working capital, dividends, repurchases, acquisitions and strategic investments.
- The effective tax rate was 11.1%, versus 22.3% a year earlier. Intel attributed the decline mainly to U.S. tax reform and noted that its tax accounting remained provisional and subject to further analysis and regulatory guidance.
- Intel reported product vulnerabilities known as Spectre and Meltdown, ongoing software and firmware updates, and changes planned for future hardware. As of April 25, 2018, it disclosed 42 customer class actions, three securities class actions and seven shareholder derivative lawsuits related to the vulnerabilities. Intel said it could not reasonably estimate potential losses.
- Other legal matters include the European Commission competition case, which was remanded for further review, and McAfee shareholder litigation remanded for further proceedings. Intel said it could not reasonably estimate potential loss in the McAfee matter. The filing warns that adverse legal outcomes could include substantial damages or conduct restrictions.
- Intel disclosed no significant off-balance-sheet arrangements and no material changes to contractual obligations from its 2017 Form 10-K.
Investor verification priorities
- Assess the effect of revenue-recognition adoption on period-to-period comparisons and the reported $462M Q1 revenue impact.
- Separate operating performance from the $643M equity-investment gain and review the tax-rate benefit, including provisional tax-reform estimates.
- Track 10nm production timing and costs, and the execution and financial effects of the Wind River divestiture.
- Monitor prepaid supply-agreement cash receipts and obligations: Intel reported $2.723B of prepaid-supply contract liabilities and $5.3B of anticipated future revenue under long-term supply agreements.
- Follow developments in Spectre/Meltdown litigation and other material legal proceedings, for which potential losses are not clearly estimable in the filing.