Intel Corporation — Q3 2019 Form 10-Q
Business context and reporting period. The quarter ended September 28, 2019; comparisons are with the quarter ended September 29, 2018. Intel reported results across its PC-centric and data-centric businesses. Amounts below are U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Revenue | $19.190 billion | $19.163 billion | Flat, up $27 million |
| Gross margin | $11.295 billion; 58.9% | $12.360 billion; 64.5% | Down $1.065 billion; margin down 5.6 points |
| Operating income | $6.447 billion; 33.6% | $7.349 billion; 38.3% | Down 12% |
| Net income | $5.990 billion | $6.398 billion | Down 6% |
| Diluted EPS | $1.35 GAAP; $1.42 non-GAAP | $1.38 GAAP; $1.40 non-GAAP | GAAP down 2%; non-GAAP up 1% |
- Data-centric revenue grew 6% year over year, led by stronger Xeon product mix and growth across data-centric businesses. PC-centric revenue declined 5%, mainly due to lower platform volume.
- Q3 segment revenue: Client Computing Group (CCG) $9.709 billion, down 5%; Data Center Group (DCG) $6.383 billion, up 4%; Internet of Things, including Mobileye, $1.234 billion, up 11%; Non-Volatile Memory Solutions Group (NSG) $1.290 billion, up 19%; and Programmable Solutions Group (PSG) $507 million, up 2%.
- NSG recorded a $499 million operating loss, versus $160 million operating income a year earlier. Lower NAND pricing and the absence of prior-year government grants outweighed volume growth and cost improvements.
Nine months ended September 28, 2019
- Revenue was $51.756 billion, down 1% from $52.191 billion. Gross margin was $30.262 billion (58.5%), versus $32.510 billion (62.3%); operating income was $15.238 billion, down 11%; net income was $14.143 billion, down 11%; diluted EPS was $3.14 versus $3.35.
- Operating cash flow was $23.257 billion, compared with $22.532 billion. Capital expenditures were $11.547 billion; investing cash flow was negative $9.920 billion and financing cash flow was negative $12.421 billion.
- Intel returned $14.3 billion to stockholders through $10.1 billion of share repurchases and $4.2 billion of dividends.
Liquidity, debt, and balance sheet
- At September 28, 2019, cash and cash equivalents were $3.935 billion; short-term investments were $1.849 billion; and trading assets were $6.241 billion. Intel’s stated combined liquidity measure for these items was $12.025 billion.
- Total debt was $28.907 billion, including $5.200 billion short-term debt and $23.707 billion long-term debt. Debt was 38.9% of permanent stockholders’ equity, up from 35.4% at year-end 2018.
- Current assets were $29.957 billion and current liabilities were $25.064 billion. Inventories rose to $8.638 billion from $7.253 billion at year-end 2018.
- Management stated it believed financial resources were sufficient for business requirements over the next 12 months. The $10 billion commercial-paper program had $1.3 billion outstanding.
Material changes, outlook, and risks
- Management attributed lower gross margin and operating income primarily to lower platform unit sales, higher platform unit costs from product mix, and memory-product margin pressure; platform ASP strength and lower modem investment partly offset the decline.
- Intel said PC demand exceeded available supply despite capacity additions, with constraints particularly at the value end of the market. It launched the first wave of 10th-generation Core processors and began shipping 10nm Agilex FPGAs to early-access customers.
- In July, Intel agreed to divest most of its smartphone modem business, including certain employees, intellectual property, equipment, and leases. Closing was expected in Q4 2019; Intel expected an approximately $500 million after-tax gain. A restructuring program tied to the planned exit was expected to be substantially complete in Q2 2020.
- Intel expected the sale of its 49% interest in IM Flash Technologies to Micron to close October 31, 2019; Intel expected to continue purchasing products from the facility for up to one year afterward.
- Reported results included $318 million of Q3 net gains on equity investments, compared with a $75 million loss a year earlier. Investment valuations and transaction gains can make earnings less reflective of underlying operating trends.
- Intel reported pending litigation related to processor security vulnerabilities and stated it could not reasonably estimate potential losses. It also disclosed the ongoing European Commission competition matter; the previously imposed fine had been paid and remained subject to appeal proceedings. Management cautioned that unfavorable legal outcomes could include substantial damages or business restrictions.
- The filing did not provide a clear numerical forecast for future revenue or earnings. Management said previously disclosed risk factors remained materially current; it reported no significant off-balance-sheet arrangements and no material changes to significant contractual obligations.
Most important facts for investors to verify
- Whether PC supply constraints ease and whether platform volumes recover, particularly in the value segment.
- Whether NAND pricing and NSG profitability improve, given the segment’s Q3 operating loss and margin pressure.
- Completion, proceeds, and recognized gain from the smartphone-modem divestiture, along with restructuring costs and timing.
- Cash generation, inventory levels, capital spending, debt, and the sustainability of buybacks and dividends.
- Effects of equity-investment gains and other unusual items on reported earnings, and developments in material litigation and regulatory matters.