Intel Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 29, 2014; unaudited. Comparisons are primarily with the three months ended March 30, 2013. Amounts are in U.S. dollars.
Business context and performance
Intel reported signs of stabilization in the PC market: PC unit sales grew year over year for the second consecutive quarter, with stronger enterprise demand partly offset by consumer softness. Data Center growth benefited from cloud, networking, and improving enterprise demand. Mobile and Communications remained a significant drag.
Key financial metrics
| Metric | Q1 2014 | Comparable / change |
|---|---|---|
| Revenue | $12.764 billion | Up 1% year over year; down 8% sequentially |
| Gross margin | $7.613 billion; 59.6% | Up $547 million and 3.4 percentage points year over year |
| Operating income | $2.510 billion; 19.7% of revenue | Down $9 million year over year |
| Net income | $1.930 billion | Down $115 million year over year |
| Diluted EPS | $0.38 | Compared with $0.40 |
| Operating cash flow | $3.501 billion | Compared with $4.285 billion |
| Capital expenditures | $2.689 billion | Compared with $2.174 billion |
| Debt | $13.208 billion | $36 million short-term; $13.172 billion long-term |
Gross margin improved year over year largely on lower platform unit costs and excess-capacity charges, partly offset by higher factory start-up costs. R&D rose 13% to $2.846 billion, primarily reflecting 10nm development and compensation; marketing, general and administrative expense rose 5% to $2.047 billion. The effective tax rate increased to 27.7% from 16.3%, principally because the U.S. R&D tax credit recognized in Q1 2013 had not been reenacted for 2014.
Cash and cash equivalents, short-term investments, and trading assets totaled $19.046 billion at quarter-end, versus $20.087 billion at year-end. The company also reported $2.197 billion in other long-term investments and qualifying reverse repurchase agreements. Operating cash flow less capital expenditures was approximately $812 million. The company paid $1.119 billion in dividends and repurchased $545 million of shares under its buyback program; $2.6 billion remained authorized. Cash and investments exceeded reported gross debt.
Material changes and segment results
- PC Client Group: Revenue was $7.941 billion, down 1%; operating income increased 13% to $2.802 billion. Platform unit sales rose 1%, while average selling prices fell 3%.
- Data Center Group: Revenue increased 11% to $3.087 billion and operating income rose 15% to $1.317 billion.
- Internet of Things Group: Revenue rose 32% to $482 million; operating income was $123 million.
- Mobile and Communications Group: Revenue fell 61% to $156 million and operating loss widened to $929 million, mainly due to lower phone-component sales and customer consideration supporting tablet adoption.
- Intel recorded $137 million of restructuring charges, including severance affecting approximately 2,200 employees. Since Q3 2013, restructuring charges totaled $377 million; management estimated approximately $500 million in gross annual savings, expected to be fully realized beginning in Q2 2015.
Outlook, commentary, and risks
- Q2 2014 revenue guidance: $13.0 billion, plus or minus $500 million. Gross margin percentage was expected to improve by approximately three percentage points from Q1.
- Full-year 2014 revenue was expected to be approximately flat with 2013; management expected mid-single-digit PCCG revenue decline and low-double-digit DCG growth.
- Intel began production on its 14nm process and remained on track to launch its fifth-generation Core processor family in the second half of 2014. Management cited higher tablet volumes and related customer support costs as factors affecting margins.
- Legal matters included ongoing competition proceedings, employee antitrust litigation with a tentative settlement reached in April 2014 subject to written agreement and court approval, and a Lehman-related claim that could seek up to $312 million plus interest. Intel said it could not reasonably estimate potential losses for several matters. Management stated that the ultimate outcomes of proceedings were not expected to materially harm the company, while acknowledging that unfavorable outcomes could have a material adverse effect.
- Intel entered an Oregon environmental agreement requiring permitting and periodic emissions testing; the stated fine was not material to financial results. The company also disclosed that 95% of its $6.1 billion marketable equity portfolio was in ASML, creating concentration exposure.
Most important facts for investors to verify
- Whether PC stabilization and Data Center growth persist, and whether full-year revenue and segment outlooks are achieved.
- Whether the 14nm product ramp delivers the forecast margin improvement and proceeds on schedule.
- Whether Mobile and Communications losses narrow as tablet and phone products scale, including the cost of customer incentives.
- How restructuring savings compare with the approximately $500 million annual estimate, and whether additional charges arise.
- Developments in significant litigation, including the employee antitrust settlement and competition cases, and any resulting payments or restrictions.
- Exposure to the concentrated ASML investment, non-U.S. cash repatriation taxes, and customer concentration: the three largest customers represented 42% of Q1 revenue.