Intel Corporation — Q1 2015 Form 10-Q
Business context and period: Unaudited results for the three months ended March 28, 2015, compared with the three months ended March 29, 2014. Intel reorganized its PC Client and Mobile and Communications groups into the Client Computing Group (CCG); prior-period segment data was recast. The quarter reflects a challenging PC market, while data center, IoT and non-volatile memory businesses remained growth areas.
Key financial results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $12.781 billion | $12.764 billion |
| Gross margin / percentage | $7.730 billion / 60.5% | $7.613 billion / 59.6% |
| Operating income / margin | $2.615 billion / 20.5% | $2.510 billion / 19.7% |
| Net income / diluted EPS | $1.992 billion / $0.41 | $1.930 billion / $0.38 |
| Operating cash flow | $4.415 billion | $3.501 billion |
| Capital expenditures | $2.025 billion | $2.689 billion |
Cash flow and liquidity: Approximate free cash flow, calculated as operating cash flow less property, plant and equipment additions, was $2.390 billion. Cash and cash equivalents were $4.244 billion at quarter-end. Cash, short-term investments and trading assets totaled $14.118 billion, versus $13.233 billion of short- and long-term debt. Current assets were $26.466 billion and current liabilities were $15.035 billion. Intel reported total assets of $89.566 billion.
Capital returns: Intel paid $1.137 billion in dividends and repurchased $750 million of stock during the quarter. The Board declared a $0.24-per-share dividend payable in June 2015. The repurchase authorization had $11.6 billion remaining.
Material changes and operating trends
- Revenue was essentially flat year over year, but down 13% from Q4 2014. Management attributed weakness to lower-than-expected business desktop PC demand and challenging macroeconomic conditions, including the stronger U.S. dollar.
- CCG revenue fell 8% to $7.420 billion and operating income fell 24% to $1.410 billion. CCG platform average selling prices declined 13%, partly reflecting product mix.
- Data Center Group revenue rose 19% to $3.679 billion and operating income increased 27% to $1.701 billion, supported by cloud, high-performance computing and enterprise demand.
- IoT revenue rose 11% to $533 million, while operating income declined 24% to $87 million as Intel continued investing in the business.
- Gross margin improved year over year, primarily due to approximately $275 million lower factory start-up costs, particularly for 14-nanometer production. R&D rose 5% to $2.995 billion; marketing, general and administrative expense fell 5% to $1.953 billion.
- Operating cash flow increased $914 million year over year, reflecting working-capital changes and higher net income. Financing cash outflow was $2.274 billion, including dividends and repurchases.
Outlook, risks and unusual items
- Q2 2015 outlook: Revenue midpoint of $13.2 billion and gross margin midpoint of 62%, with revenue expected to rise about 3% from Q1.
- 2015 outlook: Revenue expected to be approximately flat with 2014, revised down from prior guidance for mid-single-digit growth. Intel projected a mid-single-digit decline in the overall PC market, with growth in Data Center, IoT and non-volatile memory expected to offset CCG weakness. Capital spending midpoint was reduced by $1.3 billion to $8.7 billion; management also said it would lower R&D and marketing/general and administrative spending, without providing revised amounts here.
- Intel said its latest 14nm processors were ramping slightly ahead of expectations. Restructuring and asset impairment charges were $105 million in Q1; cumulative charges since Q3 2013 were $640 million. The company expected the actions to be substantially complete by year-end 2015 and estimated related annual gross savings of approximately $700 million, expected to be fully realized beginning in Q3 2015.
- Net gains on equity investments were $32 million, versus $48 million. Interest and other, net declined to $26 million from $112 million, mainly because Q1 2014 included a gain on the Intel Media asset divestiture.
- Intel disclosed ongoing competition-related proceedings, including an appeal of the European Commission’s €1.06 billion fine, which Intel had paid in 2009. It could not reasonably estimate potential losses in certain class actions. In the Lehman matter, Intel said $129 million plus interest represented the upper end of the reasonably possible loss range.
- Marketable equity investments were concentrated largely in ASML Holding; Intel estimated a 30% market-price decline could reduce portfolio value by approximately $2.0 billion after hedges and offsets. Of $14.1 billion in cash, short-term investments and trading assets, $10.7 billion was held by non-U.S. subsidiaries; approximately $825 million of that amount was available for U.S. use without additional U.S. tax beyond amounts accrued.
- The three largest customers accounted for 42% of Q1 revenue. Intel also identified currency, interest-rate and equity-price exposure, and warned that actual results may differ materially from forward-looking statements.
Important facts for investors to verify
- Whether Q2 revenue and gross-margin guidance, and the revised full-year revenue and capital-spending outlook, were achieved or subsequently changed.
- Whether data-center and other growth businesses continue to offset PC-market weakness, and whether the 14nm ramp and projected restructuring savings develop as expected.
- The extent to which foreign-held liquidity is practically available for U.S. needs and how the concentrated ASML position affects portfolio risk.
- Developments and potential financial exposure in the European competition appeal, the Lehman dispute and other unresolved litigation.
- Whether reported operating cash flow remains strong after working-capital effects, alongside capital investment, dividends and share repurchases.