Intel Corporation — Q1 2010 Form 10-Q
Business context and period. Unaudited results for the three months ended March 27, 2010, compared with the three months ended March 28, 2009, unless otherwise stated. Intel reported record first-quarter revenue and operating income, led by higher microprocessor and chipset sales, particularly in its PC Client and Data Center businesses. The balance sheet is as of March 27, 2010, compared with December 26, 2009.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Revenue | $10.299 billion | $7.145 billion | +44% |
| Gross margin | $6.529 billion; 63.4% | $3.238 billion; 45.3% | Margin +18.1 percentage points |
| Operating income | $3.448 billion; 33.5% margin | $647 million; 9.1% margin | More than fivefold |
| Net income | $2.442 billion | $629 million | Nearly fourfold |
| Diluted EPS | $0.43 | $0.11 | Up $0.32 |
| Cash from operations | $4.079 billion | $378 million | Up $3.701 billion |
- Revenue was $10.299 billion versus $10.569 billion in Q4 2009; gross margin was $6.529 billion versus $6.840 billion, while operating income and net income increased from $2.497 billion and $2.282 billion, respectively.
- PC Client Group revenue was $7.674 billion, up 43% year over year; operating income was $3.143 billion versus $701 million. Data Center Group revenue was $1.871 billion, up 48%; operating income was $835 million versus $266 million.
- R&D expense rose 19% to $1.564 billion and marketing, general and administrative expense rose 26% to $1.514 billion. Together, these expenses were 30% of revenue, compared with 35% a year earlier. No restructuring charges were recorded, versus $74 million in Q1 2009.
- The effective tax rate was 29.1%, versus zero in Q1 2009; prior-year settlements and the geographic mix of profits significantly reduced the earlier rate.
- Cash and cash equivalents were $4.988 billion. Cash, trading assets and short-term investments totaled $16.342 billion, up from $13.920 billion at year-end. Short- and long-term debt totaled $2.382 billion; debt was 5.6% of stockholders’ equity. Total equity was $42.900 billion.
- Operating cash flow was $4.079 billion; investing activities used $2.672 billion and financing activities used $406 million. Capital expenditures were $928 million. Dividends paid were $870 million; declared dividends were $0.315 per share for the quarter.
Material changes and unusual items
- The year-over-year recovery reflected higher microprocessor and chipset unit sales, including higher notebook sales; Data Center revenue also benefited from higher unit sales and average selling prices. Q1 2009 included approximately $620 million of factory underutilization charges, primarily in PC Client.
- Management said stronger-than-expected demand for new 32nm mobile products limited its ability to build desired internal buffer inventory. Early 32nm products initially carried higher unit costs, partly offset by higher average selling prices.
- Q1 2010 included a $67 million gain on sale of a Micron investment, alongside $46 million of non-marketable equity investment impairments. Net gains on other equity investments were $8 million, compared with a $41 million loss a year earlier.
- Intel signed an agreement for Micron to acquire Numonyx in an all-stock transaction. Intel expected approximately 67 million Micron shares and a $72 million short-term payable; closing was expected in Q2 2010, subject to customary conditions. Intel had guaranteed up to $275 million, plus related amounts, under Numonyx’s credit facility; the recorded guarantee liability was $79 million. The facility was expected to be repaid after closing.
- Intel paid the European Commission’s €1.06 billion antitrust fine in 2009 and is appealing the decision. The filing also describes pending competition matters, including an FTC administrative case, a New York Attorney General action and numerous consumer class actions. Management said outcomes were uncertain and not generally reasonably estimable; unfavorable outcomes could materially harm the company.
Outlook and management commentary
- Q2 2010: Revenue of $10.2 billion, plus or minus $400 million; gross margin of 64%, plus or minus a couple of percentage points; depreciation of approximately $1.1 billion; and R&D plus marketing, general and administrative expense of approximately $3.1 billion. Equity-method results, other equity gains or losses, and interest and other were expected to be approximately zero.
- Full-year 2010: Gross margin of 64%, plus or minus a couple of percentage points; depreciation of approximately $4.4 billion, plus or minus $100 million; R&D plus marketing, general and administrative expense of $12.4 billion, plus or minus $100 million; R&D spending of approximately $6.4 billion; and capital spending of $4.8 billion, plus or minus $100 million. The estimated tax rate for Q2–Q4 was approximately 31%.
- The outlook excluded any gain expected from the Numonyx transaction. Management expected Q2 gross margin to improve as 32nm production ramped and unit costs declined. It said existing inventory covered current demand projections but the Q1 demand strength constrained planned inventory building.
- Intel stated that existing financial resources should meet business requirements for the next 12 months. Its $3 billion commercial-paper authorization had no commercial paper outstanding at quarter-end. Major risks include variable demand and pricing, product mix and manufacturing yields, competition and technology execution, litigation, investment impairments, tax-rate changes, and global operational and supply-chain disruptions.
Important facts for investors to verify
- Whether Q2 revenue and gross-margin guidance was achieved, particularly as 32nm ramp costs changed and buffer inventory remained constrained.
- How much of the sharp earnings and cash-flow improvement reflected sustainable demand and operations versus the unusually weak Q1 2009 comparison and its factory underutilization charges.
- Completion and final economics of the Numonyx acquisition, including receipt and valuation of Micron shares, the $72 million payable, and release of Intel’s guarantee.
- Developments, potential financial exposure and business restrictions from the EC appeal, FTC proceeding, New York action and consumer antitrust class actions.
- Valuation and impairment sensitivity of private and equity-method investments, especially IMFT/IMFS and other flash-memory exposures, and the concentration of revenue with two customers, which together represented 36% of Q1 2010 revenue.