Intel Corporation — Q1 2023 Form 10-Q
Business context and period. The unaudited quarter ended April 1, 2023. Intel designs and manufactures semiconductors and manages its business across Client Computing (CCG), Data Center and AI (DCAI), Network and Edge (NEX), Mobileye, and Intel Foundry Services (IFS). The prior-year comparison is affected by fiscal 2022’s extra week, which fell in its first quarter.
Financial performance and liquidity
| Metric | Q1 2023 | Prior comparable period |
|---|---|---|
| Revenue | $11.715 billion | $18.353 billion |
| GAAP gross margin | $4.008 billion; 34.2% | $9.244 billion; 50.4% |
| Non-GAAP gross margin | 38.4% | 53.1% |
| Operating income (loss) | $(1.468) billion | $4.341 billion |
| Net income (loss) attributable to Intel | $(2.758) billion | $8.113 billion |
| Diluted EPS, GAAP / non-GAAP | $(0.66) / $(0.04) | $1.98 / $0.87 |
| Operating cash flow | $(1.785) billion | $5.891 billion |
| Adjusted free cash flow | $(8.764) billion | $5.550 billion |
Revenue fell 36% year over year. CCG revenue was $5.767 billion (down 38%), DCAI $3.718 billion (down 39%), and NEX $1.489 billion (down 30%); Mobileye grew to $458 million from $394 million. CCG operating income dropped to $520 million from $2.722 billion; DCAI and NEX reported operating losses of $518 million and $300 million, respectively. Mobileye operating income was $123 million; IFS reported a $140 million operating loss.
GAAP gross margin contracted 16.2 percentage points. Lower product revenue and margins, higher unit costs and excess-capacity charges drove the decline, partly offset by lower product-ramp costs. Net loss included a $1.610 billion tax provision despite a pretax loss; the filing attributes the tax outcome partly to the geographic mix of income and its estimated annual tax rate.
At April 1, cash and cash equivalents were $8.232 billion and short-term investments were $19.302 billion; total cash and investments, including loans receivable and other, were $27.598 billion. Total debt was $50.273 billion, compared with $42.051 billion at year-end 2022. Current assets were $48.314 billion and current liabilities $27.393 billion. Capital expenditures were $7.413 billion in cash additions to property, plant and equipment. Intel issued $11.0 billion of senior notes, repaid $2.9 billion of commercial paper, and had $1.0 billion of commercial paper outstanding. No shares were repurchased during the quarter; cash dividends paid were $1.512 billion.
Material changes and unusual items
- Management linked weaker results to slowing consumer and enterprise demand, persistent inflation, higher interest rates, a softening data-center market, and customers reducing inventories. Notebook and desktop volumes fell 37% and 32%; server volume fell 50%.
- Q1 2022 comparisons included substantial nonrecurring benefits: a $4.6 billion gain on the McAfee equity sale, a $1.0 billion NAND divestiture gain, and a $1.2 billion benefit from annulment of an EC fine. These contributed to the sharp year-over-year decline in reported earnings.
- Beginning in January 2023, Intel extended the estimated useful life of certain production equipment from five to eight years. The change increased Q1 gross margin by an estimated $360 million and reduced R&D expense by about $100 million. Intel expects 2023 depreciation expense to be $4.1 billion lower than under the previous estimates, including an estimated $2.3 billion gross-margin benefit.
- Intel reorganized segment reporting, integrating AXG into CCG and DCAI; prior-period segment data was retrospectively adjusted.
Outlook, risks and contingencies
- Management said challenging market conditions and macroeconomic uncertainty were expected to continue during 2023. Q1 customer incentives contributed approximately $900 million to revenue; their effects were considered in Q2 2023 guidance referenced in an April 27, 2023 Form 8-K. Specific guidance figures are not provided in this 10-Q text.
- Intel said it believed liquidity sources were sufficient for business requirements over the next 12 months and longer term. Funding needs include manufacturing and process-roadmap investments, working capital, dividends, and potential acquisitions. Intel reduced its quarterly dividend, describing the change as supporting strategic investment.
- The 2022 Restructuring Program was expected to be substantially completed by the end of 2023, subject to change. Intel expects restructuring and other cost measures to reduce its cost structure.
- Intel disclosed an unrecognized commitment to fund its share of Arizona Fab construction costs of $29.0 billion. The planned Tower Semiconductor acquisition represents a $5.4 billion commitment; if approvals are not received by August 15, 2023 and the agreement is terminated, Intel may owe a $353 million termination fee.
- Intel had accrued approximately $2.2 billion for VLSI litigation. Further exposure remains uncertain; separate VLSI verdicts and proceedings are being appealed or remain pending. Other legal matters include the EC competition case, where a fine may be reassessed, and security-vulnerability and securities litigation for which potential losses could not be reasonably estimated.
- Key risks include weak demand and inventory correction, manufacturing costs and capacity utilization, intense competition and rapid technology change, execution of large process and capacity investments, supply-chain and geopolitical uncertainty, debt obligations, and litigation and regulatory outcomes.
Important facts for investors to verify
- Whether demand and customer inventory levels recover, and whether Q2 guidance assumptions—including the effect of approximately $900 million of Q1 incentives—are achieved.
- How gross margins and cash generation develop as revenue, manufacturing utilization, unit costs, and excess-capacity charges change.
- The pace and funding of capital spending and the impact of the equipment useful-life estimate change on reported depreciation and margins.
- Liquidity and leverage after the debt issuance, including the Tower acquisition commitment, Arizona Fab funding, and dividend policy.
- Developments in VLSI and EC proceedings, Tower regulatory approvals, and NAND transaction obligations and remaining proceeds.