Intel Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended April 1, 2017. The quarter had 13 weeks; the comparable Q1 2016 had 14 weeks. Financial statements are unaudited.
Financial performance and position
| Metric | Q1 2017 | Comparable period / change |
|---|---|---|
| Revenue | $14.796 billion | $13.702 billion; up 8% |
| Gross margin | $9.147 billion; 61.8% | $8.130 billion; 59.3% |
| Operating income | $3.599 billion; 24.3% of revenue | $2.568 billion; 18.7% |
| Net income | $2.964 billion | $2.046 billion; up 45% |
| Diluted EPS | $0.61 | $0.42 |
| Operating cash flow | $3.898 billion | $4.055 billion |
| Capital expenditures | $1.952 billion | $1.346 billion |
| Cash and cash equivalents | $4.934 billion at quarter-end | $5.560 billion at December 31, 2016 |
| Short- and long-term debt | $25.751 billion | $25.283 billion at December 31, 2016 |
| Declared dividend per share | $0.5325 | $0.5200 |
Cash, short-term investments and trading assets totaled $17.295 billion. Intel reported $3.898 billion of operating cash flow, $2.778 billion of net investing cash outflow, and $1.746 billion of net financing cash outflow. It repurchased 35.1 million shares for approximately $1.242 billion and paid $1.229 billion in dividends. The tax rate was 22.3%, compared with 18.4%.
Business trends and material changes
- Client Computing Group revenue was $7.976 billion, up 6%; platform unit sales fell 4%, while platform average selling prices rose 7%. Operating income increased to $3.031 billion from $1.885 billion.
- Data Center Group revenue rose 6% to $4.232 billion, but operating income fell 16% to $1.487 billion. Cloud and communications demand grew; enterprise revenue declined 3%.
- Non-Volatile Memory Solutions revenue increased 55% to $866 million, while its operating loss widened to $129 million, reflecting 3D XPoint costs and the Dalian facility ramp.
- Internet of Things revenue grew 11% to $721 million; operating income declined 15% to $105 million. Programmable Solutions revenue grew 18% to $425 million and returned to operating income of $92 million, partly because Q1 2016 included acquisition-related charges.
- Gross margin improved with higher platform selling prices, lower 14nm unit costs and lower Altera-related charges versus the prior-year quarter. Higher 10nm factory start-up costs and lower platform volumes partly offset those benefits. The prior-year quarter’s extra work week affects comparability.
- R&D and marketing, general and administrative expenses together were $5.430 billion, down 1%; combined spending fell to 36.7% of revenue from 39.9%.
Outlook, transactions, risks and unusual items
- Management said revenue of $14.8 billion was in line with expectations. The filing gives no further quantified full-year revenue or earnings guidance.
- Intel expected a mid-summer launch of its next-generation Xeon processor, code-named Skylake, and reported initial shipments of Optane SSDs and PC memory.
- Intel agreed to acquire Mobileye for $63.54 per share in cash, at an approximate fully diluted equity value of $15.3 billion. The offer commenced April 5, after quarter-end; closing was expected within nine months and remained subject to regulatory approval and customary conditions. Intel planned to fund it with non-U.S. cash and investments.
- The Intel Security Group divestiture closed April 3, after quarter-end. The transaction was valued at $4.2 billion, including $3.1 billion consideration and a 49% interest in McAfee. Intel expected to record a second-quarter pretax gain of approximately $375 million and a tax provision of approximately $850 million.
- Q1 included $80 million of restructuring and other charges, primarily ISecG separation costs. The 2016 restructuring program was expected to be substantially complete by Q2 2017 and was expected to affect approximately 15,000 employees.
- Of $17.3 billion in cash, short-term investments and trading assets, $14.2 billion was held by non-U.S. subsidiaries; approximately $2.2 billion of that amount was available for U.S. use without additional U.S. income taxes beyond amounts already accrued. Most of the balance was designated indefinitely reinvested abroad.
- Intel disclosed ongoing legal matters, including the European Commission competition case and McAfee shareholder litigation. The company said it could not reasonably estimate potential loss, if any, in the McAfee matter; unfavorable outcomes in legal matters could have material effects.
- Management assessed disclosure controls as effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the 14-week Q1 2016 comparison affects reported growth, margins and operating trends.
- Whether improved CCG profitability and Data Center revenue growth persist, and whether Data Center operating income recovers.
- Progress and costs of the 10nm ramp, 3D XPoint development and the Dalian facility ramp.
- Mobileye closing, funding and integration; and the realized accounting and tax effects of the ISecG divestiture.
- Cash available for U.S. needs, debt levels, and the effects of dividends and share repurchases on liquidity.
- Developments in material legal proceedings and the potential for losses or business restrictions.