Q1-22 Financial Results and Analyst Call

April 28, 2022

Press Release Commentary and Investor Presentation

Below are the points from the press release and investor presentation, outside the financial statements, that I found notable:

Press Release

• Non-GAAP EPS of $0.87 exceeded guidance by $0.07. Gross margin was also above guidance by 110 bps, at 53.1%.
• Intel reaffirmed their full-year 2022 revenue guidance of $76B
• From CEO Gelsinger, “We executed well against that strategy in Q1, delivering key product and technology milestones and announcing plans to expand our manufacturing capacity in both the US and Europe to meet the continued demand for semiconductors and drive a more balanced, resilient global supply chain.”
• From CFO Zinsner, “We remain committed to the financial framework we laid out at Intel’s Investor Meeting, including diligently managing the business to drive both growth and profitability and create shareholder value.”

Investor Presentation

• The company announced new R&D and fab investments in Europe and unveiled their latest leading-edge factory in Oregon
• On their plan to deliver 5 nodes in 4 years; Alder Lake is ramping on Intel 7, Meteor Lake working chips on Intel 4, Sierra Forest pre-production wafers will run on Intel 3 in 2022
• Client and Computing revenue declined 13% from Q1 a year ago on Apple ramping down CPU and modem business, lower entry level PC demand, and OEMs working down inventory
• Operating income was 34% lower than a year ago because of ramp of Intel 10, Intel 7, and investments in future technology
• Strong demand from hyperscale and enterprise customers increased revenue in the Data Center and AI Group (DCAI) by 22% from a year ago. Operating income for the group was flat because of the cost of ramping the 10nm node.
• Network and Edge Group (NEX) saw revenue up 23% from a year ago on strength in cloud networking demand and “post-COVID transformation of the edge.” These are statements general enough to convey almost no meaning.
• The Accelerated Computing Systems and Graphics Group (AXG) saw 21% higher revenue than a year ago from ramps of Alchemist and Super Compute products, but operating income swung strongly negative, to ($390M) from $219M, on pre-production and ramp charges and roadmap investments
• Mobileye had record quarterly revenue, up 5% from a year ago, to $394M. But operating income was down 13% on increased investment in next generation products.
• Intel Foundry Services (IFS) saw quarterly revenue of $283M, up 175% from Q1 last year. They called out automotive revenue here, which isn’t surprising as the auto industry is the most desperate business space in the world for semiconductors. I was surprised that IFS even had revenue a year ago, then I looked back at last quarter and saw early IFS revenue is from their advanced packaging services, which are much quicker to design in and qualify than front end fab products. Operating loss of $31M was flat from a year ago.
• FY 2022 outlook: revenue of $76B, gross margin of 52%, EPS of $3.60. Revenue and GM are flat to the guidance given at Investor Day in February while they raised their EPS guide by $0.10
• Q2 2022 outlook: revenue of $18B, gross margin of 50%, EPS of $0.70

Financial Statement

Income Statement

Net revenue in the quarter was $18.4B, down 6.7% from the same quarter in 2021 and a drop of more than 10% sequentially. Lower notebook and desktop volumes, including the end of their desktop and modem business with Apple, were behind the decline in revenue. They did see higher revenue in their data center business, but this was partially offset by lower average selling price. This could be mix, but it is likely Intel needing to cut prices to defend their 90+% market share in DC from competition. Gross margin was 50.4% for the quarter, a decline of 320 bps from the previous quarter, following a 330 bps drop between Q3-21 and Q4-21. Gross margin was 55.2% in the first quarter a year ago. R&D and MG&A were both up substantially from a year ago, to a total of $6.1B. This was $4.9B a year ago. This is expected with all the spending needed to develop new technology and market emerging products. There were also $1.2B worth of gains in “Restructuring and other charges” that are from the reversal of a penalty paid to the EC back in 2009. Taking this credit back out leaves $3.69B in operating income for the quarter, an operating margin of 20.1%. Equity investment gains were bigger than income from Intel’s operations, and they brought in almost a billion dollars in “Interest and other, net”. This “other” category includes a $1.1B gain from the first payment on the sale of their NAND business to Hynix. Including these non-operational gains, net income in the quarter was $8.11B, or $1.98 per diluted share. Non-GAAP EPS of $0.87 gives a true picture of Intel’s performance in the quarter. This compares to $1.34 in non-GAAP EPS a year ago.

Statement of Cash Flows

Net cash provided by operating activities in the quarter was $5.89B. To get to my version of owner’s cash flow I take out share-based compensation and changes to working capital. Other notable items that were already taken out in the quarter are the gains on equity investments and the cash brought in from selling the NAND business. These changes leave $4.075B of cash from operations. Intel spent $4.604B on capital expenditures in the first quarter, leading to a negative owner’s cash flow yield. Turnarounds and new businesses are expensive. Intel is doing both. The company put net $8.5B into short-term investments during the quarter. This was more than offset by the $11.2B in cash brought in from selling equity investments and from divestitures, which included $4.6B from selling ownership in McAfee. Excluding the large capex bill, Intel added almost $2B in cash from investing activities. The company didn’t buy back any shares during the period. Dividends used up $1.49B of cash. The dividend plus other miscellaneous financing activities in the quarter added up to a total of $1.9B of cash consumed. Intel’s income from investments and from selling off parts of their business is helping to fund their turnaround and expansion into foundry and other products. Even with the massive capex bill and lower margins in the quarter, the company still managed to increase their cash position by almost $1.4B. They now have $6.2B worth of cash and equivalents.

Balance Sheet

Intel is in the middle of a massive turnaround AND an investment in a new and highly capital-intensive business. You wouldn’t know it from their balance sheet because it is a giant company that generates billions in cash flow every quarter. Their cash balance grew to $6.2B from $4.8B. This bounces around quarter to quarter. It is funny that several billion worth of cash is, for Intel, just a shock-absorber, similar to the extra cash you or I leave in our checking account. Their short-term investments balance is over $32B, balanced out by $32.8B in long-term debt the company is carrying. They took down accounts receivable by $2.4B but accounts payable rose $1.5B. With the first closing of the sale of the NAND business to Hynix, assets held for sale dropped from $6.9B to $200M. With the high capex investments, the company is making to catch up on process technology and build their foundry business, PP&E increased by $3.5B. This will continue to rise for the next several years. All in, assets rose by $8B. Not much action on the liabilities side, so book value rose to $103B from $95B. That is $25.11 per share, more than half the current price of the stock.


The Client Computing Group declined more than 10% from a year ago. They lost Apple’s desktop business and are seeing slowing in consumer computers. Because of the operating leverage in this business, operating income dropped by a full third with only a 10% decline in revenue. Part of the reason for this is the higher level of investment in catching up on process technology (four nodes in five years) and the higher associated development costs. Data Center and AI had strong revenue growth from a year ago, but operating income shrunk by a little bit, $20M on $1.7B of income. They cited costs of ramping a new node in this as well as roadmap investments. I’m sure some of this decline is price reductions they have to make in response to competition. The Network and Edge business grew both revenue and operating income from a year ago. It is new to see a division of Intel not in client or DC compute, or Mobileye, performing well. Accelerated Computing Systems and Graphics grew revenue some but doubled their operating loss. In what will be a common refrain from Intel for the next three years or so, they said expenses were higher for new technology and product development. These costs are real, but they can also be used to cover up underperformance. Mobileye revenue grew a little and their operating income shrank a little. Intel Foundry Services is on the steep part of the start-up curve for revenue, which tripled from a year ago. The operating loss was small and flat. I’m not reading much into that given the nascent phase of life IFS is in. “All other” shrank to almost nothing as they sold off their NAND business to Hynix. With the new way they have divided up their business and the reset in leadership Gelsinger has made, it is now time to expect to see improving results from non-computer-processor businesses. Previously, Intel would make all their income from Client and Data Center, then lose some of it in the rest of their divisions. As investors, our expectation now should be to see these other businesses become healthy and meaningful contributors to Intel, especially IFS.

Earnings Call Notes

Comments are all in reference to the non-GAAP financial figures

Pat Gelsinger (CEO) prepared remarks

• Some softening in low-end consumer businesses is being seen
• There are still some mismatches for lack of components affecting Intel products. Pat mentioned networking specifically. Supply chain constraints are expected to be a headwind “throughout the year.”
• They announced expansions in Europe this quarter, including a fab cluster in Germany
• Intel is on or ahead of schedule to deliver their key goal of bring 5 nodes to production in 4 years
• This earnings call is the first where Intel is reporting under their new business structure
• Tower shareholders approved Intel’s acquisition of the company. Two jurisdictions outside of the US have also approved the deal. Intel hopes to close the purchase “as soon as possible.”

David Zinsner (CFO) prepared remarks

• Gross margin exceeded guidance because of higher yields and lower manufacturing costs
• $4.6B of cash came in from the McAfee sale during the quarter
• IFS saw initial revenue from Amazon and Cisco during the quarter
• FY 2022 outlook: revenue of $76B, GM of 52%, EPS of $3.60 (up $0.10 from prior outlook). PC forecast for the year is weaker than previous, offset by strength in graphics and data center. Within the PC market, enterprise demand is good but consumer and low-end are weak.
• Supply chain constraints continue, and risk is higher from COVID lockdowns in China
• The second half of 2022 is expected to be stronger in both Client Compute and Data Center segments
• Q2-22 guidance: revenue of $18B, GM of 51.0%, EPS of $0.70, and a tax rate of 15%. Note Q1 was a 14-week quarter. 10nm and Intel 7 costs are lowering gross margin in the quarter. They expect the second half of the year to have higher gross margins.

Question and Answer

• Stacy Rasgon, my favorite analyst because of his pointed questions, asked why investors should have confidence that the second half of 2022 will be as good as Intel is forecasting. Answer is a combination of normal seasonality and stronger products being introduced.
• Intel 7 is ramping more quickly than they expected. Gelsinger’s comment overall is that manufacturing and process development are performing well, relative to the five nodes in four years goal.
• Client processor ASPs are up 25% year-over-year, because of mix to enterprise and away from education and consumer
• Equipment will go into the Ireland expansion soon, followed closely by the expansion in Israel. They will break ground in Ohio later in 2022. Early indications are that they may do better than expected on capex offsets (grants).
• Sapphire Rapids will introduce a new memory interface, DDR5, and will “cement” Intel’s leadership in the Data Center Segment


Watching and waiting for the Intel turnaround story makes comparing financials from quarter to quarter less useful than a steady state business. The biggest question over Intel in 2022 are whether or not the second half revenue and margin increases that need to be hit to meet full year guidance will happen, in the face of rising interest rates and geopolitical uncertainty. Within 2022 is also the prospect of further weakness in the PC markets. The company cited softening in consumer and low end in Q1. Will Client see normal seasonality in the form of a stronger second half of the year? Also, Intel’s data center business is under attack from AMD as well as hyperscalers deploying their own chips. One aspect of the latter to remember is, once the hyperscalers have designed their own processors for use in their data centers, they have effectively committed to a huge unit volume of those processors, because the development costs are so high. I’ll write something like this every quarter, that Intel the turnaround is a “trust me” story, an investment in Gelsinger, his new leadership team, and the vast amount of technology and know-how Intel already has. The strategy is the correct one, specifically developing a foundry business and catching up on process technology. I don’t think it is possible to track accurately the performance to plan against these two goals. Investors have to trust or not the updates the executives provide. I’m not able to build an accurate enough model to track capex and revenue to check their performance. It is not a digital outcome for Intel – they can succeed as a company in their turnaround without catching all the way up with TSMC and Samsung, either in technology or foundry market share. I think even if Intel is 75% successful in their turnaround and expansion into foundry that the stock will beat the market over the next four years. It will be bumpy along the way. Personally, I’m hoping one of my other investments plays out successfully so I can put some of that money into Intel before the turnaround is successful enough to be reflected in the share price.

-S. Hughes (no INTC position)