Intel Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 30, 2019; comparison is with the three months ended March 31, 2018. Amounts are in U.S. dollars.
Business context and results
Revenue was essentially flat at $16.061 billion. PC-centric revenue increased 4%, while data-centric businesses declined 5%. Intel cited a slowdown in data-center demand and continued NAND pricing pressure; PC growth reflected a richer mix of higher-performance products and strength in gaming and large commercial markets.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $16.061B | $16.066B | Flat |
| Gross margin | $9.089B; 56.6% | $9.731B; 60.6% | Down $642M; 4.0 percentage points |
| Operating income | $4.174B; 26.0% of revenue | $4.470B; 27.8% | Down 7% |
| Net income | $3.974B | $4.454B | Down 11% |
| Diluted EPS | $0.87 GAAP; $0.89 non-GAAP | $0.93 GAAP; $0.87 non-GAAP | GAAP down 6%; non-GAAP up 2% |
| Operating cash flow | $4.959B | $6.284B | Down $1.325B |
| Capital expenditures | $3.321B | $2.910B | Up $411M |
Gross margin pressure reflected the 10-nanometer (nm) ramp, higher platform costs and sustained NAND pricing pressure. Lower operating expenses partly offset the decline: R&D and marketing, general and administrative expenses together were down 7% year over year.
Segments and material changes
- Client Computing Group: Revenue was $8.586B, up 4%; operating income was $3.072B, up 10%. Platform volumes declined, while higher average selling prices and favorable product mix supported revenue.
- Data Center Group: Revenue was $4.902B, down 6%; operating income was $1.841B, down 29%. Cloud revenue grew 5%, but enterprise and government revenue fell 21%; management also cited inventory digestion and weaker China demand.
- Internet of Things Group: Revenue was $910M, up 8%. Excluding the prior-year comparison effect of the Wind River divestiture, revenue grew 19%.
- Mobileye: Revenue was $209M, up $58M, with record quarterly revenue and higher operating income.
- Non-Volatile Memory Solutions Group: Revenue was $915M, down 12%, and the operating loss widened to $297M from $81M. Higher unit volume did not offset lower NAND average selling prices and inventory charges.
- Programmable Solutions Group: Revenue was $486M, down 2%; operating income was $89M, down $8M.
Cash, debt and liquidity
Intel generated $4.959B of operating cash flow and used $2.722B in investing activities and $2.102B in financing activities. Cash and cash equivalents ended the quarter at $3.154B. The company returned $3.944B to stockholders through $1.414B of dividends and $2.530B of share repurchases. It repurchased 49.5 million shares; $14.9B remained available under its repurchase authorization.
Cash, short-term investments and trading assets totaled $12.033B. Total debt was reported as $28.487B, up from $26.359B at December 29, 2018; debt was 38.7% of permanent stockholders’ equity, versus 35.4% at year-end. Intel said it believed available resources were sufficient for business needs over the next 12 months and reported $2.2B of commercial paper outstanding under a $10B program.
Outlook, management commentary and risks
- Intel said it was on track with 10nm and continued to expect products on shelves for the 2019 holiday season. It also reported capacity expansion for 14nm, with supply expected to improve in the second half of 2019; product mix was expected to remain challenging in the third quarter.
- Intel planned to exit the 5G smartphone modem business while continuing existing 4G customer commitments. It stated that 5G network infrastructure remained a strategic investment priority and that it was assessing modem opportunities in PCs, IoT and other data-centric devices.
- Management attributed lower operating cash flow primarily to working-capital changes and the prior-year receipt of customer supply-agreement prepayments that were being used by customers in 2019.
- Equity-investment gains were $434M, down from $643M. Q1 2019 included $253M of mark-to-market gains and $154M of McAfee dividends; Intel had fully sold its ASML equity investment. These items affect comparability with operating performance.
- Intel disclosed ongoing litigation, including claims related to Spectre and Meltdown security vulnerabilities. It said it could not reasonably estimate potential losses, if any, in those matters. The European Commission competition case remained pending on appeal; a separate McAfee shareholder case had a settlement agreement calling for an aggregate $11.7M payment, with Intel’s contribution expected to be immaterial.
- The filing states that the risk factors in Intel’s 2018 Form 10-K remained current in all material respects. Forward-looking statements are subject to risks and actual results may differ.
Important facts for investors to verify
- Whether 10nm product availability and the expected 14nm supply improvement were achieved, and how manufacturing costs affected margins.
- Whether data-center demand recovered after customer inventory digestion, particularly in enterprise, government and China markets.
- Whether NAND pricing pressure and NSG operating losses continued, and how Intel’s planned IM Flash Technologies transaction affected memory supply and costs.
- Whether cash generation, debt levels, capital spending, dividends and buybacks remained consistent with Intel’s liquidity expectations.
- Developments in security-vulnerability litigation, the European Commission case and other contingencies for which potential losses were not estimable.