Intel Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 29, 2018; comparisons are with the periods ended September 30, 2017. Amounts are in U.S. dollars unless noted.
Business context and results
Intel reported record quarterly revenue, operating income and net income. Management attributed results to strong demand for performance products across the business; CCG, DCG, IOTG, NSG and Mobileye each reached record revenue. Intel described its strategic focus as expanding data-centric businesses alongside its PC-centric business.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | First 9 months 2018 | First 9 months 2017 |
|---|---|---|---|---|
| Revenue | $19.163B | $16.149B | $52.191B | $45.708B |
| Gross margin | $12.360B; 64.5% | $10.064B; 62.3% | $32.510B; 62.3% | $28.320B; 62.0% |
| Operating income | $7.349B; 38.3% of revenue | $5.141B; 31.8% | $17.092B; 32.7% | $12.615B; 27.6% |
| Net income | $6.398B | $4.516B | $15.858B | $10.288B |
| Diluted EPS | $1.38 | $0.94 | $3.35 | $2.12 |
| Operating cash flow | Not separately provided | Not separately provided | $22.532B | $14.869B |
Q3 revenue increased 19% year over year; operating income rose 43% and diluted EPS rose 47%. For the first nine months, revenue increased 14%. Q3 non-GAAP operating income was $7.603B and non-GAAP diluted EPS was $1.40, compared with $5.577B and $1.01, respectively, in Q3 2017.
For the first nine months, capital expenditures were $11.291B. Cash and cash equivalents were $3.407B at quarter-end. Intel reported $13.186B in cash, short-term investments and trading assets, and total debt of $27.874B, versus $26.813B at year-end 2017. Current assets were $29.590B and current liabilities $19.574B. The filing states Intel believed it had sufficient resources for business requirements over the next 12 months. It reported $22.5B of operating cash flow and $12.6B returned to shareholders in the first nine months, comprising $4.2B in dividends and $8.5B in share repurchases.
Material changes and segment trends
- CCG: Q3 revenue was $10.234B, up 16%; demand was strong in commercial and gaming and for high-performance processors. Adjacent-product revenue rose 66%.
- DCG: Q3 revenue was $6.139B, up 26%, with strength in cloud and communications service providers. Cloud service provider revenue rose 50% and communication service provider revenue 30%; enterprise and government revenue rose 1%.
- IOTG: Q3 revenue was $919M, up $70M; operating income increased to $321M from $146M.
- NSG: Q3 revenue was $1.081B, up $190M, while operating income was $160M. Higher unit sales and lower unit costs helped offset lower average selling prices; $160M of government grants benefited Q3 operating income. Intel expected NSG to be approximately break-even for full-year 2018.
- PSG: Q3 revenue was $496M, up $27M; operating income was $106M, down $7M.
Gross margin improved year over year in Q3, reflecting higher platform and adjacent-product contributions and operating leverage. For the nine-month period, gross margin percentage was slightly higher; growth in lower-margin adjacent businesses weighed on the percentage while adding gross margin dollars. The effective tax rate fell to 10.4% in Q3 from 23.8%, and to 10.3% year to date from 28.1%, principally reflecting U.S. Tax Reform and related items. Equity-investment results were volatile: Q3 recorded a net loss of $75M versus a gain of $846M a year earlier; year-to-date gains were $365M versus $1.440B.
Outlook, commentary and risks
- Management expected modest PC total addressable market growth in 2018 and continued modem share gains. It did not provide a clear consolidated numerical revenue or earnings forecast in the supplied filing text.
- Management said returning PC market growth was putting pressure on factory capacity. Intel was prioritizing server and high-performance PC production, increasing capital expenditure to expand supply, aligning customer demand with available supply, and working to improve 10nm yields.
- Intel said data-centric businesses grew 22% in Q3 and described its estimated addressable market opportunity as more than $300B. It reported beginning shipments of Optane data-center persistent memory and launched 9th Gen Core processors.
- Intel and Micron agreed to complete joint development of second-generation 3D XPoint, expected in the first half of 2019; development beyond that generation would be independent. Micron announced on October 18, 2018 its intent to exercise its right to call Intel’s interest in IMFT. Intel recorded a $290M Q3 impairment and said closing was expected six to twelve months after exercise, with supply continuing for one year after closing.
- Tax accounting remained incomplete for certain Tax Reform estimates; additional data or regulatory guidance could affect provisional estimates. Intel also recorded a $211M loss related to conversions of 2039 convertible debentures and a $494M gain from the Wind River divestiture in Q2.
- Legal exposures include litigation related to Spectre, Meltdown and Foreshadow security vulnerabilities, the European Commission competition matter, and McAfee shareholder litigation. Intel said it could not reasonably estimate potential losses for the security-vulnerability matters or the McAfee matter. The EC antitrust fine of €1.1B had been paid and was subject to ongoing appeal proceedings.
- The filing identifies currency, interest-rate, equity-price and commodity-price exposure. Intel reported no significant off-balance-sheet arrangements and no material change in contractual obligations from its 2017 Form 10-K.
Important facts for investors to verify
- Whether production constraints, customer allocation and 10nm yield progress affect shipments, costs and future margins.
- How much reported earnings growth depends on lower tax rates, investment gains or losses, divestitures, grants and other non-recurring items.
- The timing and terms of Micron’s potential IMFT call, related impairment or proceeds, and post-transaction supply arrangements.
- Developments and potential financial consequences of the security-vulnerability, McAfee and European Commission legal matters.
- Cash conversion and capital-allocation sustainability given higher capital spending, debt, dividends and repurchases.