Intel Corporation (10-Q) — Q2 2023
Reporting period: Fiscal quarter and six months ended July 1, 2023; comparisons are to the periods ended July 2, 2022. Unaudited financial statements prepared under US GAAP. Amounts below are in US dollars.
Business context and performance
Intel reported continued weakness in PC, data-center and networking demand, with customers reducing inventories. Management cited cost reductions and its IDM 2.0 manufacturing strategy as priorities, while continuing substantial investment in process technology and capacity.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $12.949B | $15.321B | $24.664B | $33.674B |
| Gross margin | $4.638B; 35.8% | $5.587B; 36.5% | $8.646B; 35.1% | $14.831B; 44.0% |
| Operating income (loss) | $(1.016)B | $(0.700)B | $(2.484)B | $3.641B |
| Net income (loss) attributable to Intel | $1.481B | $(0.454)B | $(1.277)B | $7.659B |
| Diluted EPS attributable to Intel | $0.35 | $(0.11) | $(0.31) | $1.86 |
| Non-GAAP gross margin / diluted EPS | 39.8% / $0.13 | 44.8% / $0.28 | Not clearly stated in the supplied filing text | Not clearly stated in the supplied filing text |
Q2 GAAP net income included a $2.289B income-tax benefit despite a pretax loss of $816M. Intel said it used the actual year-to-date tax rate because forecast income and jurisdictional mix made an annual-rate estimate unreliable. The filing therefore cautions against treating the quarter’s GAAP profit as an indication of operating profitability.
Segments and material year-over-year changes
- Client Computing (CCG): Q2 revenue $6.780B, down 12%. Notebook revenue fell with lower volume and ASPs; desktop revenue rose modestly as higher ASPs partly offset lower volume. Segment operating income increased to $1.039B from $876M, helped by lower operating expenses and period charges.
- Data Center and AI (DCAI): Q2 revenue $4.004B, down 15%, mainly due to a 34% decline in server volume amid a softer CPU data-center market; higher server ASPs partly offset the decrease. Segment operating loss widened to $161M from $80M.
- Network and Edge (NEX): Q2 revenue $1.364B, down 38%, reflecting lower demand and customer inventory reductions. Segment operating loss was $187M versus $294M of operating income.
- Mobileye: Q2 revenue was $454M, down slightly; operating income fell to $129M from $190M, primarily due to investment in leadership products. Intel sold a 5% interest in a secondary offering, receiving net proceeds of $1.6B, and retained approximately 88% ownership.
- Intel Foundry Services (IFS): Q2 revenue increased to $232M from $57M, driven by packaging revenue and mask-writer sales; operating loss was $143M versus $134M.
Six-month revenue declined 27%. Six-month results also compare with unusually favorable prior-year investment/divestiture gains, including a $4.6B McAfee-related equity gain and a $1.0B NAND divestiture gain. Prior-year results included a $1.2B benefit from the annulled EC fine, while Q2 2022 gross margin included a $559M Optane inventory impairment and a patent-settlement charge.
Cash flow, liquidity and debt
- Six-month operating cash flow: $1.023B, versus $6.700B; Intel attributed the decline primarily to an operating loss. The filing’s non-GAAP adjusted free cash flow was $(11.491)B, versus $(831)M.
- Capital spending: Cash additions to property, plant and equipment were $13.301B, versus $11.846B in the prior-year six months.
- Liquidity at July 1, 2023: Cash and cash equivalents of $8.349B and short-term investments of $15.908B; total cash and investments, including loans receivable and other, were $24.321B, compared with $28.801B at year-end 2022.
- Debt: Total debt was $49.046B, up from $42.051B at December 31, 2022. Intel issued $11.0B of senior notes during the first quarter and repaid $3.9B of commercial paper; no commercial paper or revolving-credit borrowings were outstanding at quarter-end. Two $5.0B credit facilities were available.
- Dividends and buybacks: The quarterly dividend was reduced in Q1 2023; six-month dividends paid were $2.036B. No shares were repurchased during Q2.
Outlook, strategy and risks
- Intel expects revenue to improve sequentially through 2023, with higher revenue in the second half; it provided no numerical revenue or earnings guidance in the supplied filing text.
- Management expects to benefit from government incentives for manufacturing investment; lower-than-expected incentives could increase cash needs or lead to curtailment of planned investment.
- Announced capacity plans included an agreement in principle for a $25B plant in Israel, planned investment exceeding $33B at the Magdeburg, Germany site, and up to $4.6B for an assembly-and-test facility in Poland.
- Intel expects the 2022 Restructuring Program to be substantially completed by year-end 2023, subject to change. Cumulative program cost was $1.2B at July 1.
- Effective January 2023, Intel extended the estimated useful life of certain production equipment from five to eight years. It estimated this would reduce 2023 depreciation expense by $4.2B and increase gross margin by about $2.5B, subject to estimation and inventory-absorption effects.
- Manufacturing expansion and technology investment, weak demand and customer inventory adjustments, competition and product execution, supply-chain and geopolitical conditions, debt, cybersecurity, and litigation are among the disclosed risks.
Contingencies and unusual items
- Intel had accrued approximately $2.2B for VLSI litigation. The company disputes the claims and said it could not reasonably estimate losses in excess of the amount accrued.
- The Tower Semiconductor acquisition remained subject to regulatory approvals. If the agreement is terminated under specified conditions after August 15, 2023, Intel may owe a $353M termination fee.
- The NAND divestiture’s second closing, with $1.9B of proceeds still receivable, was expected no earlier than March 2025. The related operating agreement has incentives and penalties with exposure of up to $500M annually and $1.5B in aggregate.
- The EC appealed the annulment of its 2009 decision and fine; a separate reopened EC process could result in a fine, but Intel could not estimate a potential loss.
Important facts for investors to verify
- Whether the expected second-half revenue recovery materializes, and whether PC, server and networking demand and customer inventory levels improve.
- How much of reported profitability and future margins reflects the equipment-life estimate change, tax-rate volatility, restructuring, and other nonrecurring items.
- Whether operating cash flow can fund capital expenditures, strategic investments, dividends and debt obligations without additional financing or changes to investment plans.
- Execution, funding and expected returns for manufacturing expansion, including the Arizona Fab commitment and announced overseas projects, and the availability of government incentives.
- Developments in VLSI and EC proceedings, the Tower transaction and its potential termination fee, and the timing and terms of the remaining NAND proceeds.