Intel Corporation (10-Q) — Fiscal Q2 2017
Business context and reporting period. The unaudited quarter ended July 1, 2017; comparisons are with the quarter ended July 2, 2016. Intel’s businesses include Client Computing, Data Center, IoT, non-volatile memory, and programmable solutions. The six-month comparison is affected by fiscal 2016’s extra workweek in Q1.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $14.763B | $13.533B | $29.559B | $27.235B |
| Gross margin | $9.098B; 61.6% | $7.973B; 58.9% | $18.245B; 61.7% | $16.103B; 59.1% |
| Operating income | $3.827B | $1.318B | $7.426B | $3.886B |
| Net income | $2.808B | $1.330B | $5.772B | $3.376B |
| Diluted EPS | $0.58 | $0.27 | $1.19 | $0.69 |
| Operating cash flow | $4.7B | Not stated for quarter | $8.605B | $7.900B |
- Q2 revenue increased 9%; management said growth was 14% excluding the divested Intel Security Group (ISecG). Higher platform unit sales and average selling prices, plus NSG and CCG non-platform revenue, contributed.
- Q2 R&D and marketing, general and administrative costs totaled about $5.1B, flat year over year and 34.7% of revenue versus 38.1%. Management targets spending of approximately 30% of revenue by 2020.
- Six-month capital expenditures were $4.730B. Q2 included $2.8B in capital-asset purchases, $1.3B of dividends, and $1.3B used to repurchase 36 million shares. Six-month cash dividends paid were $2.516B and stock repurchases were $2.518B.
- At July 1, cash, short-term investments, and trading assets totaled $25.929B; short- and long-term debt totaled $31.985B. Current assets were $40.617B and current liabilities $18.782B. Debt was 46.6% of permanent stockholders’ equity, up from 38.2% at year-end 2016.
Material changes and operating performance
- CCG revenue rose 12% to $8.213B, supported by notebook strength and improved product mix; segment operating income rose 58% to $3.025B.
- DCG revenue rose 9% to $4.372B, with cloud revenue up 35% and communications up 17%, partly offset by enterprise weakness (down 11%). Segment operating income fell 6% to $1.661B as operating expenses and technology-development costs increased.
- NSG revenue increased 58% to a record $874M, but the segment recorded a $110M operating loss. PSG revenue declined 5% to $440M, while operating income was $97M versus a prior-year loss.
- Q2 operating income and EPS comparisons benefited substantially from the prior-year $1.414B restructuring charge. The 2016 restructuring program, affecting approximately 15,000 employees, was substantially completed in Q2 2017.
Outlook, unusual items, risks and contingencies
- Management said the PC market was slightly ahead of expectations and the worldwide supply chain was healthy. Intel launched Core X-series processors in Q2 and Xeon Scalable processors in early Q3. No specific revenue or EPS forecast is provided in the supplied filing text.
- Intel expected its approximately $15.3B Mobileye acquisition to close in Q3 2017, subject to closing conditions, and planned to fund it with cash and proceeds from selling non-U.S. investment assets.
- The ISecG divestiture closed April 3 for $4.2B in total consideration: $924M cash, a 49% McAfee interest valued at approximately $1.1B, and $2.2B of promissory notes. Intel recorded a $387M pretax gain and an $822M tax expense; the tax expense contributed to the higher Q2 effective tax rate of 38.6% versus 20.4%.
- Q2 equity-investment results included $802M of gains on sales and $555M of impairments. The six-month effective tax rate was 31.2%, versus 19.2% a year earlier. These items make reported earnings less indicative of underlying operating trends.
- Intel issued $7.1B of senior notes in Q2 and increased its commercial-paper authorization to $10B; none was outstanding at quarter-end. $17B of the $25.9B cash, short-term investments, and trading assets was held by non-U.S. subsidiaries, and most of that amount was designated indefinitely reinvested. Management said it had sufficient resources for business needs over the next 12 months.
- Material legal matters include Intel’s appeal of a €1.1B European Commission antitrust fine, with a decision expected in September 2017, and Future Link patent litigation alleging approximately $9.9B in past damages. Intel stated it could not reasonably estimate potential losses in the Future Link and McAfee shareholder litigation matters. It warned that adverse legal outcomes could materially affect results.
- Management identified currency, interest-rate, equity-price, and commodity-price exposures. It cautioned that known and unknown risks mean past results may not predict future performance.
Investor facts to verify
- Whether Mobileye closed on schedule and how the acquisition was funded.
- Whether growth and gross-margin improvement persisted, particularly given DCG’s lower operating income and NSG’s continuing losses.
- The recurrence and cash impact of investment gains, impairments, and divestiture-related tax effects.
- Debt, overseas liquidity availability, and the company’s ability to meet acquisition and capital-spending plans.
- Developments in the European Commission appeal and significant patent or shareholder litigation.