INTEL CORP quarterly report, Q1 FY2021

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Intel Corporation — Q1 2021 Form 10-Q

Reporting period: Three months ended March 27, 2021; comparable period ended March 28, 2020. Amounts are in U.S. dollars.

Business context and results

Intel sells computing and semiconductor products across its Client Computing Group (CCG), Data Center Group (DCG), Internet of Things businesses (IOTG and Mobileye), Non-Volatile Memory Solutions Group (NSG), and Programmable Solutions Group (PSG). Intel reported revenue of $19.673 billion, down 1% year over year.

  • GAAP results: Gross margin was $10.854 billion (55.2% of revenue), versus $12.016 billion (60.6%). Operating income was $3.694 billion, down 48%, with an 18.8% operating margin versus 35.5%. Net income was $3.361 billion versus $5.661 billion; diluted EPS was $0.82 versus $1.31.
  • Non-GAAP results: Revenue excluding NAND was $18.566 billion, essentially flat year over year. Operating income was $6.096 billion versus $7.349 billion; operating margin was 32.8% versus 39.5%. Diluted EPS was $1.39 versus $1.41. These measures exclude specified items, including NAND results; non-GAAP operating income also excludes restructuring and other charges and acquisition-related adjustments.
  • Cash flow: Operating cash flow was $5.548 billion versus $6.158 billion. Free cash flow, a non-GAAP measure defined as operating cash flow less property, plant and equipment additions, was $1.576 billion versus $2.890 billion. Capital expenditures were $3.972 billion, excluding $416 million of additions to NAND assets held for sale.
  • Liquidity and debt: Cash and investments, as defined by Intel, totaled $24.183 billion, down from $27.034 billion at year-end 2020. Total debt was $35.884 billion versus $36.401 billion. Cash and cash equivalents were $5.192 billion; current assets were $45.773 billion and current liabilities $24.151 billion. Intel reported no commercial paper outstanding and no borrowings under its new $5.0 billion revolving credit facility.
  • Capital returns: Intel returned $3.7 billion to stockholders, including $1.411 billion in dividends paid and $2.301 billion in share repurchases. The company said it completed the remaining $2.4 billion of its previously announced $20 billion repurchase plan.

Material changes and segment performance

  • DCG: Revenue fell 20% to $5.564 billion; operating income fell to $1.273 billion from $3.492 billion. Cloud-provider revenue declined 29% amid customer capacity digestion, and enterprise and government revenue declined 20%. Lower platform volume and ASPs were major factors.
  • CCG: Revenue rose 8% to $10.605 billion, supported by notebook demand and 54% growth in notebook platform volume. Lower notebook ASPs, partly associated with a greater consumer and education mix, offset some growth. Operating income was $4.120 billion, down 2%.
  • IOTG and Mobileye: Combined revenue rose to $1.291 billion from $1.137 billion. Mobileye revenue increased 48% to $377 million as vehicle production recovered; IOTG revenue increased to $914 million.
  • NSG: Revenue fell 17% to $1.107 billion, mainly due to ASP declines and the transfer of Optane to DCG, partly offset by higher NAND volume. Operating income was $171 million versus a $66 million loss. Intel’s non-GAAP measures exclude the NAND business.
  • PSG: Revenue declined to $486 million from $519 million; operating income was $88 million versus $97 million.
  • Higher cost of sales, reflecting lower platform gross margin, a greater mix of 10nm products, and 7nm and 14nm-related charges, contributed to the decline in GAAP gross margin. R&D increased 11% to $3.623 billion.

Outlook, strategy, risks, and unusual items

  • Management expected DCG demand to improve in the second half of 2021 as cloud digestion subsided and enterprise and government markets recovered. It cautioned that U.S. export licensing policies relating to China could hurt demand.
  • Intel said PC demand remained strong but could be tempered by industry-wide component and substrate constraints. It also noted higher demand in IOTG and Mobileye amid recovery from COVID-19 impacts.
  • On March 23, Intel announced its “IDM 2.0” strategy: continued reliance on Intel fabs, increased use of third-party foundries, and plans for Intel Foundry Services. The company announced plans to invest $20 billion to build two fabs in Arizona. The filing provides no quantitative earnings or revenue guidance.
  • Intel accrued a $2.2 billion charge related to VLSI litigation. A February 2021 jury awarded VLSI $2.175 billion in one Texas patent trial; Intel planned post-trial challenges and an appeal. Other VLSI cases remained pending, including a trial scheduled for June 2021. The charge materially affected GAAP operating income and EPS.
  • Intel’s planned NAND business divestiture to SK hynix is for $9 billion in cash, subject to closing conditions and governmental approvals. The first closing, not expected before November 1, 2021, was to provide $7 billion; the remaining $2 billion was expected no earlier than March 2025. Intel expected about $1.8 billion of 2021 capital purchases for the business before the first closing.
  • Other litigation includes European Commission competition proceedings, product-security vulnerability claims, patent matters, and securities litigation related to 7nm delays. Intel said it could not reasonably estimate potential losses for certain cases. It also cited technology execution and product-supply risks, market and macroeconomic uncertainty, foreign exchange and interest-rate exposure, and other risks described in its filings.
  • Equity investment gains were $368 million versus a $111 million loss, including a $551 million observable price adjustment on the Unisoc investment. These investment-related results are potentially volatile.
  • Management stated that it believed available funding was sufficient for business requirements over the next 12 months, including capital expenditures and dividends. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Progress, costs, capacity plans, and timing for the Arizona fabs and Intel Foundry Services under IDM 2.0.
  • Whether DCG demand recovers as expected, and the effects of cloud-provider digestion, export restrictions, and enterprise demand.
  • Effects of component and substrate constraints on PC shipments, product mix, pricing, and margins.
  • Outcome, appeal prospects, and potential additional exposure from VLSI and other litigation, including whether the $2.2 billion accrual proves sufficient.
  • Timing, approvals, consideration, and operating and cash-flow implications of the SK hynix NAND transaction.
  • Capital expenditure requirements, liquidity relative to debt, and sustainability of dividends and repurchases amid Intel’s investment plans.
  • How reported GAAP performance compares with non-GAAP measures, especially given the exclusions for NAND, litigation and restructuring charges, and investment mark-to-market effects.