Intel Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter ended July 2, 2022; year-to-date (YTD) figures cover the six months ended July 2, 2022. Results are unaudited and presented under U.S. GAAP unless noted otherwise.
Business context and results
Intel designs and manufactures semiconductor products. Its reportable segments are Client Computing (CCG), Datacenter and AI (DCAI), and Network and Edge (NEX); the filing also presents AXG, Mobileye, and Intel Foundry Services (IFS). The quarter was affected by a weakening macroeconomic environment, lower-than-expected demand following COVID-era highs, customer inventory reductions, and supply-chain disruptions, including China port shutdowns.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 |
|---|---|---|---|---|
| Revenue | $15.321B | $19.631B | $33.674B | $39.304B |
| Gross margin | $5.587B; 36.5% | $11.206B; 57.1% | $14.831B; 44.0% | $22.060B; 56.1% |
| Operating income (loss) | $(0.700)B | $5.546B | $3.641B | $9.240B |
| Net income (loss) | $(0.454)B | $5.061B | $7.659B | $8.422B |
| Diluted EPS | $(0.11) | $1.24 | $1.86 | $2.06 |
| Operating cash flow | Not stated for quarter alone | Not stated for quarter alone | $6.700B | $14.149B |
| Adjusted free cash flow | Not stated for quarter alone | Not stated for quarter alone | $(0.831)B | $6.668B |
Non-GAAP Q2 gross margin was 44.8% versus 59.8% a year earlier; non-GAAP diluted EPS was $0.29 versus $1.36. These measures exclude specified items and should be considered alongside GAAP results. YTD capital expenditures were $11.846B, including $11.793B of net additions to property, plant and equipment used in the adjusted free cash flow reconciliation.
At July 2, 2022, cash and cash equivalents were $4.390B and short-term investments were $22.654B. Total cash and investments, Intel’s non-GAAP liquidity measure, were $27.542B. Total debt was $35.430B, including $2.882B short-term debt and $32.548B long-term debt. Current assets were $50.588B and current liabilities were $27.218B. Intel reported $101.218B of stockholders’ equity.
Intel paid $2.986B in dividends YTD, or $0.73 per share declared. It made no share repurchases during the quarter and said it had curtailed repurchases.
Material changes versus comparable periods
- Q2 revenue fell 22% year over year. CCG revenue declined 25%, primarily on lower notebook and desktop volumes; DCAI declined 16% on lower server volume and ASPs. NEX revenue grew 11%, led by Ethernet and 5G products. Mobileye revenue rose to $460M from $327M.
- Q2 gross margin fell 20.6 percentage points, and operating results shifted from $5.546B of income to a $700M loss. Intel cited lower revenue, higher unit costs, inventory reserves, Intel 4 ramp-up costs, a $559M Optane inventory impairment, and patent-settlement charges.
- Q2 R&D and marketing, general and administrative expenses totaled $6.2B, up 17% year over year, reflecting investment in process technology and products.
- YTD operating cash flow decreased by $7.449B. Intel attributed the decline to lower income after adjustments for noncash items, including gains on McAfee and the NAND divestiture, and unfavorable working-capital movements.
- YTD GAAP net income included substantial investment-sale and divestiture gains: Intel recorded $4.6B of gains on the McAfee sale and a $1.0B pre-tax gain related to the first closing of the NAND business divestiture. The YTD restructuring line included a $1.2B benefit from annulment of the European Commission fine.
Outlook, management commentary, risks, and unusual items
- Intel announced cost-control measures, including a slower pace of hiring, and expected total R&D and MG&A expenses to remain roughly flat in the second half of 2022. It said revenue trends for the remainder of 2022 could be flatter than historically typical amid macroeconomic uncertainty, recession risk, and possible COVID-related disruptions.
- The filing refers to Q3 and full-year 2022 financial guidance in Intel’s July 28, 2022 Form 8-K, but the guidance figures are not provided in this filing text. Intel noted that approximately $1.0B of Q2 revenue came from customer incentives to accelerate purchases.
- Intel said Sapphire Rapids was expected to ramp later in the year than previously forecast. It also announced a MediaTek manufacturing partnership and launched 12th Gen Intel Core HX processors.
- Intel initiated a wind-down of its Optane memory business and recorded a $559M inventory impairment. It said it expects to meet existing customer commitments.
- The pending Tower Semiconductor acquisition was valued at approximately $5.4B and remained subject to regulatory approvals and customary closing conditions. A $353M termination fee may be payable in specified circumstances if required approvals are not obtained.
- In the NAND divestiture, the remaining $2.0B consideration was expected no earlier than March 2025. Intel disclosed up to $500M of annual and $1.5B aggregate exposure under certain operating incentives and penalties, and said it was negotiating an updated operating plan with SK hynix.
- Legal contingencies include the VLSI litigation. A Texas judgment awarded VLSI $2.175B plus interest; Intel appealed and reported a prior $2.2B accrual, stating expected losses, if any, above that amount would be immaterial. The EC appealed the annulment of its fine, and Intel said it could not reasonably estimate potential loss in that matter. Intel also disclosed other patent and securities litigation with uncertain outcomes.
- Other risks highlighted include demand and product-mix changes, competition, manufacturing and process-roadmap execution, supply-chain constraints, geopolitical developments including the war in Ukraine, and global operating and regulatory risks. Intel had suspended business operations in Russia.
Important facts for investors to verify
- Review the July 28, 2022 Form 8-K for the actual Q3 and full-year 2022 guidance and assumptions.
- Track whether demand, customer inventory reductions, and supply-chain conditions stabilize, particularly in CCG and DCAI.
- Assess the drivers of falling gross margin, including inventory reserves, Intel 4 ramp costs, unit costs, and the Optane wind-down.
- Monitor manufacturing investment and capital spending against operating cash generation and liquidity, including progress on expected government incentives.
- Follow the Sapphire Rapids schedule, the Tower acquisition approvals, and the NAND transaction’s remaining consideration and contingent exposures.
- Monitor VLSI and other material legal proceedings, including the appeal of the Texas judgment and the EC appeal.