Intel Corporation (INTC) — Q2 2019 Form 10-Q
Reporting period: Quarter ended June 29, 2019; year-to-date figures cover the six months ended June 29, 2019. Financial statements are unaudited and prepared under U.S. GAAP.
Business context
Intel reported lower revenue as data-centric businesses weakened, partly offset by modest growth in its PC-centric business. The filing attributes pressure to data-center customers absorbing capacity, weaker enterprise and government demand, softer China demand, small-core supply constraints, and lower NAND pricing.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Revenue | $16.505 billion | $16.962 billion | Down 3% |
| Gross margin | $9.878 billion; 59.8% | $10.419 billion; 61.4% | Down $541 million; margin down 1.6 percentage points |
| Operating income | $4.617 billion; 28.0% of revenue | $5.273 billion; 31.1% | Down 12% |
| Net income | $4.179 billion | $5.006 billion | Down 17% |
| Diluted GAAP EPS | $0.92 | $1.05 | Down 12% |
| Diluted non-GAAP EPS | $1.06 | $1.04 | Up 2% |
For the first six months, revenue was $32.566 billion versus $33.028 billion; operating income was $8.791 billion versus $9.743 billion; net income was $8.153 billion versus $9.460 billion; and diluted GAAP EPS was $1.79 versus $1.98. Year-to-date gross margin was 58.2%, compared with 61.0%.
Segments and material changes
- Client Computing Group (CCG): Q2 revenue rose 1% to $8.841 billion; operating income increased 16% to $3.737 billion. Commercial mix and average selling prices helped offset lower platform volumes from supply constraints.
- Data Center Group (DCG): Q2 revenue fell 10% to $4.983 billion and operating income fell 34% to $1.800 billion. Platform volume declined 12%; enterprise and government revenue was down 31% year over year.
- Internet of Things: Q2 revenue increased to $1.187 billion, with IOTG and Mobileye both growing. IOTG growth excluding the prior-year Wind River divestiture was 23% year over year.
- Non-Volatile Memory Solutions Group (NSG): Q2 revenue declined 13% to $940 million and the operating loss widened to $284 million, as lower NAND prices outweighed higher volume and cost improvements.
- Programmable Solutions Group: Q2 revenue declined 5% to $489 million; operating income declined to $52 million, reflecting softer cloud and enterprise demand.
Cash flow, debt and liquidity
- Six-month operating cash flow was $12.546 billion, down from $13.697 billion. Intel cited lower net income and working-capital effects, including inventory growth and customer use of supply-agreement prepayments.
- Capital expenditures were $6.875 billion. Investing cash outflow was $6.010 billion; financing cash outflow was $6.688 billion. Cash and cash equivalents ended the period at $2.867 billion.
- Intel returned $8.4 billion to stockholders during the first six months: $5.579 billion in share repurchases and $2.828 billion in dividends.
- Total debt was $28.815 billion, including $3.726 billion short-term debt and $25.089 billion long-term debt. Cash, short-term investments and trading assets totaled $11.944 billion; Intel also reported $3.577 billion of other long-term investments.
- Current assets were $29.239 billion and current liabilities were $19.705 billion. Intel stated it believed it had sufficient financial resources to meet business requirements for the next 12 months.
Outlook, management commentary and notable items
- The filing provides no clear numerical revenue or earnings guidance in the supplied text. Management said 14nm capacity expansion was expected to improve supply in the second half of 2019.
- Intel began shipping 10nm-based 10th-generation Core processors, code-named Ice Lake, and described continued investment in process technology and data-centric businesses.
- In July 2019, Intel signed an agreement to divest most of its smartphone modem business, expected to close in Q4 2019. Intel expects an approximately $500 million after-tax gain and will continue to meet existing 4G customer commitments.
- Intel’s sale of its interest in IM Flash Technologies to Micron was expected to close October 31, 2019. Intel expected to continue purchasing products from the facility for up to one year after closing.
- Q2 included $184 million of restructuring and other charges, primarily employee severance tied to the planned smartphone modem exit. A $340 million McAfee dividend contributed to Q2 equity-investment gains. Q2 2018 included a $494 million pre-tax gain on the Wind River divestiture, affecting year-over-year comparisons.
- Key risks include trade tensions and export restrictions, China exposure, demand uncertainty, manufacturing and product-supply constraints, NAND pricing pressure, and unresolved litigation. Intel said it could not reasonably estimate potential losses, if any, for the pending Spectre and Meltdown consumer litigation. It also disclosed ongoing European Commission competition proceedings; the related fine had been paid and remained under appeal.
Important facts for investors to verify
- Whether 14nm capacity improvements eased client-product supply constraints in the second half of 2019.
- Whether data-center demand, especially enterprise and government demand, recovered and whether NAND pricing stabilized.
- Completion terms and timing for the smartphone modem and IMFT transactions, including the anticipated divestiture gain and ongoing supply arrangements.
- Cash conversion, inventory levels, capital spending, debt and the pace of buybacks and dividends as operating results change.
- Potential financial or operational effects of trade and export restrictions, competition matters, and product-security litigation.
- How GAAP performance compares with non-GAAP results, including the adjustments for restructuring, acquired-intangible amortization, equity-security mark-to-market and prior-period divestiture gains.