Did Intel lose money by selling its mobile phone baseband business to Apple for US$1 billion?

After the U.S. stock market closed on July 25, 2019, Intel first jointly announced with Apple the $1 billion acquisition agreement reached by the two parties (see previous reports from Leifeng.com for details), and then released the second quarter (Q2) financial report for the 2019 fiscal year ending June 29, 2019; obviously, this was not a coincidence, but a deliberate arrangement by Intel.

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The financial report shows:

• Intel's Q2 revenue was $16.5 billion, down 3% from $17 billion in the same period last year;
• Net profit was $4.2 billion, down 17% from $5 billion in the same period last year.

Despite this, Intel's Q2 revenue and profit performance still exceeded analysts' expectations; Wall Street analysts previously expected Intel's revenue to be $15.67 billion. At the same time, Intel's Q2 earnings per share were $1.06, while analysts expected $0.89.

In terms of business revenue, Intel's PC-centric segment (Client Computing Group, including laptops and desktop computers) had revenue of $8.8 billion, up 1% from the same period last year. Intel attributed this to Intel's product performance, the strength of the commercial sector, and the impact of customers buying in advance (before tariffs). Intel also emphasized that the 10nm-based Intel 10th-generation Ice Lake Core processor is currently shipping and will be available with devices during the 2019 holiday shopping season.

The data-centric segment revenue is as follows:

• DCG (Date Center Group) business revenue was US$5 billion, a year-on-year decrease of 10%; Intel said that in this business, communication service revenue increased by 3%, while cloud revenue decreased by 1%, and enterprise and government revenue decreased by 31%.
• IOTG (Internet of Things Group) business revenue was US$986 million, an increase of 12% year-on-year; Intel called it record growth.
• Mobileye's business revenue was US$201 million, an increase of 16% year-on-year; Intel said it was mainly driven by increased customer demand.
• NSG (Memory Business) revenue was US$940 million, a year-on-year decrease of 13%; Intel attributed this to challenges in pricing factors.
• PSG (Programmable Solution Group) business revenue was US$489 million, a year-on-year decrease of 5%.

With the combined effect of the above five business revenues, Intel's data-centric revenue decreased by 7% year-on-year. However, overall, Intel's revenue is still based on PCs and data centers, while IoT, storage chips and FPGA businesses, as emerging businesses, still have limited contributions to Intel's revenue.

Regarding the second quarter's performance, Intel CEO Bob Swan commented:

• Second quarter revenue and profit exceeded our expectations, primarily due to the growth of big data and sophisticated computing applications, which drove market demand for our data center and personal computer businesses.

However, Bob Swan admitted in a conference call that Intel's Q2 financial performance was affected by the uncertainty of Sino-US trade; specifically, as the US government included Huawei on the Entity List, Intel suspended its supply to it, but after evaluation, it resumed supply without violating regulations.

From the perspective of business progress, Intel highlighted some highlights in Q2, such as the shipment of the 10nm 10th-generation Ice Lake PC chip, the acquisition of Barefoot to strengthen its competitiveness in the Ethernet switch and network equipment processor market, and the partnership with Salesforce. In addition, after Bob Swan moved from CFO to CEO, Intel finally appointed a new CFO, George Davis, who previously served as Qualcomm's CFO.

However, in Leifeng.com's view, Intel's most eye-catching business progress in the second quarter can be said to be the $1 billion agreement reached with Apple. With this agreement, Intel successfully got rid of the tail of the smartphone modem business and obtained financial returns, which is obviously a good news for Intel.

The author learned that, in fact, before Apple and Qualcomm announced their settlement in April 2019, Intel CEO Bob Swan had considered stopping its smartphone modem business, which was continuing to lose money; now that Apple has taken over the business for $1 billion, it is a relatively ideal outcome.

It is worth mentioning that in order to enter the mobile communications field, Intel spent $1.4 billion in cash to purchase Infineon's wireless business. However, the two cannot be simply compared in terms of amount. For Intel at present, the smartphone modem business has lost its future value to Intel, and the longer it is retained, the less valuable it is. Therefore, seeking to sell it as soon as possible is the best option, and it can also stop losses in time at the financial level.

Overall, both the financial performance in Q2 and the $1 billion agreement reached with Apple are good news for Intel. At the same time, Intel also raised its full-year revenue forecast, expecting Q3 revenue of approximately $18 billion in fiscal 2019 and fiscal year revenue of approximately $69.5 billion, both of which exceeded analysts' expectations.

As a result, an unsurprising result is that as of 8 p.m. Eastern Time on July 25, Intel's stock price had risen 5.06% in after-hours trading.

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