In the previous parts of the series, we discussed how Intel (INTC) and its rivals reported strong profits in 2017, thanks to a higher ASP (average selling price) and strong holiday season sales. These profits converted into strong cash earnings.
Intel’s operating cash flow rose 1.3% YoY (year-over-year) to $22.1 billion in 2017, of which it spent $11.8 billion in capital expenditures, resulting in an FCF (free cash flow) of $10.3 billion. The 2017 FCF was lower than the last two years’ FCFs of $11.6 billion and $12.2 billion, respectively, because the company increased its capital spending.
Intel rivals NVIDIA (NVDA) and Advanced Micro Devices (AMD) also reported strong cash flows in 4Q17, as they witnessed better-than-expected demand for GPUs (graphics processing units) from crypto miners, which generated higher cash earnings.
FCF guidance for 2018
Intel expects to increase its FCF by 30% YoY to $13 billion in 2018 while maintaining its capital spending at $12 billion. Now that the company expects its profit margins to fall in 2018, analysts have questioned the basis for such high FCF guidance.
Responding to a related question at the fiscal 4Q17 earnings call, Intel CFO (chief financial officer) Bob Swan stated that the high FCF would come from higher cash earnings, lower working capital, and higher strategic customer supply agreements.
Swan stated that he guided a slowdown in EPS (earnings per share) growth because depreciation would increase in 2018. As depreciation is a non-cash expense, it has no impact on the cash earnings. Hence, Intel expects to report higher cash earnings.
Moreover, Intel is entering into supply agreements wherein the client pre-pays Intel for supplying chips. This pre-payment would reduce Intel’s working capital requirement and should result in higher FCF. However, these higher cash flows would likely partially be offset by higher capital spending.
In the next part, we’ll discuss where Intel is spending the cash it earns.