Semiconductor titan Intel (INTC +4.96%) reported fourth-quarter results after the closing bell on Thursday. The traditional PC market continued its long, slow decline while other operations picked up the pace, resulting in 4% year-over-year sales growth in total. Meanwhile, a game-changing tax bill destroyed Intel's bottom-line profits in the fourth quarter -- but also set the stage for stronger profit in the years ahead.
Intel's fourth quarter by the numbers
|
Metric |
Q4 2017 |
Q4 2016 |
Year-Over-Year Change |
|---|---|---|---|
|
Revenue |
$17.1 billion |
$16.4 billion |
4.1% |
|
Net income |
($0.69 billion) |
$3.56 billion |
N/A |
|
GAAP earnings per share (diluted) |
($0.15) |
$0.73 |
N/A |
Data source: Intel.
Beyond the headline metrics above, Intel's free cash flows decreased by 33% year over year in the fourth quarter to stop at $3.1 billion. That's a faster drop than the 16% lower free cash flows in 2017 as a whole, driven by lower GAAP earnings and a modest boost to Intel's capital expense budgets at the end of the year.
What Intel calls "data-centric" operations saw sales rising 21% year over year while the PC group's revenue fell 2% lower. At this point, data-centric products account for 47% of the company's total sales, and the divergent growth rates will inevitably lead to these operations outweighing the PC market. Among this classification's four reportable segments, programmable solutions led the way with a 35% revenue jump.
Image source: Intel.
The ins and outs of the new tax rules
Of course, the gloomy earnings line looks very different if we back out the effects of the Trump administration's new tax regulations.
The tax act resulted in a charge against net income of $5.4 billion in the fourth quarter, producing an effective income tax rate of 111%. These one-time charges included a $0.7 billion non-cash benefit from increased valuations of Intel's deferred tax balances, set against a $6.1 billion charge for "deemed repatriation" of earnings collected abroad. That enormous tax bill will be paid in cash over the next eight years, and Intel is now essentially free to bring its foreign profits back home at no further cost because the tax payments have already been accounted for.
The up-front earnings hit might seem burdensome, but Intel's management is downright excited about the new rules. After all, the company's effective tax rate is now expected to drop from 20% in 2017 to 14% in 2018 and beyond. That's a substantial reduction of the chip giant's tax bills in the long run.
"Intel has a rich history of investing in U.S.-led research and development and U.S. manufacturing," said Intel CFO Bob Swan in a prepared statement. "The tax reform is further incentive to continue these investments and reinforces our decision to invest in the buildout of our Arizona factory. It also informed the dividend increase we're announcing today."
Elsewhere, the company claimed that the tax act "significantly improves Intel competitiveness" and "helps level the playing field for U.S. manufacturers like Intel that compete in today's global economy." That's where the unusually generous 10% dividend increase comes from. Over the last five years, Intel's dividend payouts have increased by 8%, 7%, 0%, 0%, and 7%, respectively. The just-announced 10% hike is indeed stronger than usual.
The road ahead
Backing out this one-time tax effect and other unusual items, Intel's fourth-quarter earnings work out to $1.87 per diluted share. That's a 37% year-over-year earnings increase, based on adjusted net income of $5.2 billion. So this wasn't a tax-based wake after all, but a feast to celebrate long-term tax benefits.
Looking ahead, Intel expects to deliver revenue of roughly $15 billion in the first quarter of 2018. That would be a 5% year-over-year increase, excluding contributions from the divested McAfee security business when adding up the year-ago tally. On the bottom line, adjusted earnings should rise approximately 6% to $0.70 per diluted share.
