Intel Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter ended June 30, 2018; comparisons are with the quarter ended July 1, 2017. Six-month figures compare the first half of 2018 with the first half of 2017. Amounts are U.S. dollars.
Business context and results
Intel said it was continuing its shift from a PC-centric to a data-centric business. Data-centric businesses collectively grew 26% in Q2 and approached half of company revenue; PC-centric revenue also increased. Management described Q2 revenue as a record and said it was positioned for a third consecutive record year.
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $16.962B | $14.763B | $33.028B | $29.559B |
| Gross margin | $10.419B; 61.4% | $9.096B; 61.6% | $20.150B; 61.0% | $18.256B; 61.8% |
| Operating income | $5.273B; 31.1% of revenue | $3.842B; 26.0% | $9.743B; 29.5% | $7.474B; 25.3% |
| Net income | $5.006B | $2.808B | $9.460B | $5.772B |
| Diluted GAAP EPS | $1.05 | $0.58 | $1.98 | $1.19 |
| Operating cash flow | Not separately stated here | Not separately stated here | $13.697B | $8.605B |
Q2 non-GAAP diluted EPS was $1.04 versus $0.72 a year earlier. Non-GAAP measures exclude specified items and should be considered alongside GAAP results.
Material changes and operating trends
- Q2 revenue rose 15% year over year. First-half revenue rose 12%.
- Data Center Group revenue increased 27% in Q2 to $5.549B; Client Computing Group revenue increased 6% to $8.728B. Internet of Things Group revenue was $880M, Non-Volatile Memory Solutions Group revenue was $1.079B, and Programmable Solutions Group revenue was $517M.
- Higher platform revenue supported gross profit, but gross margin percentage edged down year over year. Intel cited higher platform unit costs, product mix, and costs associated with 10nm engineering samples and initial production. It also cited lower factory start-up costs as a benefit in the quarter.
- The effective tax rate was 9.5% in Q2 versus 38.6% a year earlier, and 10.2% for the first half versus 31.2%. The lower rates reflect U.S. tax reform and comparison-period items, including an $822M tax expense associated with the 2017 ISecG divestiture.
Cash, debt, and liquidity
- First-half operating cash flow was $13.697B. Investing activities used $5.984B, including $7.440B of capital expenditure; financing activities used $8.532B.
- Intel returned about $8.6B to shareholders in the first half: $5.807B of share repurchases and $2.800B of dividends. Cash and cash equivalents ended the period at $2.614B.
- At June 30, cash, short-term investments, and trading assets totaled $12.225B. Total debt was $28.142B, up from $26.813B at year-end 2017; debt was 40.2% of permanent stockholders’ equity. Current assets were $27.603B and current liabilities $17.571B.
- Intel said it believed it had sufficient resources for business requirements over the next 12 months. Its commercial-paper program authorized borrowing up to $10B, with $2B outstanding at quarter-end.
Outlook, commentary, and notable risks
- Management expected modest growth in the PC total addressable market in 2018, which it said would be the first such growth since 2011. The filing does not provide a clear numerical full-year financial guidance range in the supplied text.
- Intel said Tax Reform accounting remained incomplete and that further analysis and regulatory guidance could affect its tax estimates and effective tax rate.
- Intel and Micron agreed to complete joint development of the second generation of 3D XPoint, then pursue later technology development independently. The Lehi facility was to continue manufacturing 3D XPoint-based memory.
- Intel recorded a $494M pre-tax gain on the Q2 divestiture of Wind River. Equity investment results were volatile: Q2 included a $203M net loss, including market-value losses, while first-half results showed a $440M net gain.
- Intel disclosed lawsuits and claims related to Spectre and Meltdown security vulnerabilities, including consumer and securities class actions and shareholder derivative actions. It could not reasonably estimate potential losses. The filing also describes ongoing European Commission competition litigation and a remanded McAfee shareholder case; potential loss in the McAfee matter could not be reasonably estimated.
- Other risks include cybersecurity and product-vulnerability exposure, possible effects of mitigation measures, market and investment-price changes, and manufacturing and product-cost pressures. Intel reported no significant off-balance-sheet arrangements and no material changes to significant contractual obligations.
Important facts for investors to verify
- Whether data-centric growth and the reported segment trends persist, and how much growth depends on demand, pricing, product mix, or acquired businesses.
- How 10nm production costs and other unit-cost pressures affect gross margin and operating income in subsequent periods.
- How the new revenue-recognition standard affects period-to-period comparability: reported first-half 2018 revenue was $384M lower than it would have been without the standard; Q2 was $78M higher.
- How Tax Reform estimates develop, including whether further regulatory guidance changes the effective tax rate.
- Developments and possible financial or operating impacts from security-vulnerability litigation, the European Commission case, and the McAfee litigation, for which Intel did not quantify potential losses.
- Changes in debt, capital spending, repurchases, dividends, and liquidity after quarter-end.