10-K 1 a12292018q4-10kdocument.htm 10-K Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
(Mark One)
þ


ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 29, 2018.
 
or
¨


TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                    .
Commission File Number 000-06217
 
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INTEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
94-1672743
State or other jurisdiction of
incorporation or organization
 
(I.R.S. Employer
Identification No.)
 
 
 
2200 Mission College Boulevard, Santa Clara, California
 
95054-1549
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (408) 765-8080
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common stock, $0.001 par value
 
The Nasdaq Global Select Market*
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes þ  No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨  No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ  No ¨
Indicate by check mark whether the registrant has submitted electronically every interactive data file required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes þ  No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ
Accelerated filer  ¨
Non-accelerated filer  ¨
Smaller reporting company  ¨
Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes ¨  No þ
Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 29, 2018, based upon the closing price of the common stock as reported by the Nasdaq Global Select Market on such date, was $229.2 billion. 4,497 million shares of common stock were outstanding as of January 26, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement related to its 2019 Annual Stockholders’ Meeting to be filed subsequently are incorporated by reference into Part III of this Annual Report on Form 10-K. Except as expressly incorporated by reference, the registrant’s proxy statement shall not be deemed to be part of this report.



TABLE OF CONTENTS
ORGANIZATION OF OUR ANNUAL REPORT ON FORM 10-K
The order and presentation of content in our Annual Report on Form 10-K (Form 10-K) differs from the traditional U.S. Securities and Exchange Commission (SEC) Form 10-K format. We believe that our format improves readability and better presents how we organize and manage our business. See "Form 10-K Cross-Reference Index" within the Financial Statements and Supplemental Details for a cross-reference index to the traditional SEC Form 10-K format.
The preparation of consolidated financial statements is in conformity with U.S. generally accepted accounting principles (GAAP). We have included key metrics that we use to measure our business, some of which are non-GAAP measures. See these "Non-GAAP Financial Measures" within Other Key Information.
FUNDAMENTALS OF OUR BUSINESS
 
PAGE
Introduction to Our Business
 
A Year in Review
 
Our Strategy
 
How We Organize Our Business
 
Our Products
 
Our Capital
 
Who Manages Our Business
 
 
 
 
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
 
 
Overview
 
Revenue, Gross Margin, and Operating Expenses
 
Segment Trends and Results
 
Other Consolidated Results of Operations
 
Liquidity and Capital Resources
 
Contractual Obligations
 
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
OTHER KEY INFORMATION
 
 
Selected Financial Data
 
Sales and Marketing
 
Competition
 
Intellectual Property Rights and Licensing
 
Critical Accounting Estimates
 
Risk Factors
 
Non-GAAP Financial Measures
 
Properties
 
Market for Our Common Stock
 
Availability of Company Information
 
 
 
 
FINANCIAL STATEMENTS AND SUPPLEMENTAL DETAILS
 
 
Auditor's Reports
 
Consolidated Financial Statements
 
Notes to the Consolidated Financial Statements
 
Financial Information by Quarter
 
Controls and Procedures
 
Exhibits and Financial Statement Schedules
 
Form 10-K Cross-Reference Index
 




FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that involve a number of risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “goals,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” “would,” “should,” “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, projected growth and trends in markets relevant to our businesses, future products and the expected availability and benefits of such products, uncertain events or assumptions, including statements relating to total addressable market (TAM) or market opportunity, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on management's expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include those described throughout this report and particularly in “Risk Factors” within Other Key Information. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-K and in other documents we file from time to time with the SEC that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-K do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of the date of this filing. In addition, the forward-looking statements in this Form 10-K are made as of the date of this filing, including expectations based on third-party information and projections that management believes to be reputable, and Intel does not undertake, and expressly disclaims any duty, to update such statements, whether as a result of new information, new developments, or otherwise, except to the extent that disclosure may be required by law.
NOTE REGARDING THIRD-PARTY INFORMATION
This Annual Report on Form 10-K includes market data and certain other statistical information and estimates that are based on reports and other publications from industry analysts, market research firms, and other independent sources, as well as management’s own good faith estimates and analyses. Intel believes these third-party reports to be reputable, but has not independently verified the underlying data sources, methodologies, or assumptions. The reports and other publications referenced are generally available to the public and were not commissioned by Intel. Information that is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances reflected in this information.
INTEL UNIQUE TERMS
We use specific terms throughout this document to describe our business and results. Below are key terms and how we define them:
PLATFORM PRODUCTS
 
A microprocessor (processor or central processing unit (CPU)) and chipset, a stand-alone System-on-Chip (SoC), or a multichip package, based on Intel® architecture. Platform products are primarily used in solutions sold through the Client Computing Group (CCG), Data Center Group (DCG), and Internet of Things Group (IOTG) segments.
 
 
 
ADJACENT PRODUCTS
 
All of our non-platform products for CCG, DCG, and IOTG, such as modem, Ethernet and silicon photonics, as well as Non-Volatile Memory Solutions Group (NSG), Programmable Solutions Group (PSG), and Mobileye products. Combined with our platform products, adjacent products form comprehensive platform solutions to meet customer needs.
 
 
 
PC-CENTRIC BUSINESS
 
Our CCG business, including both platform and adjacent products.
 
 
 
DATA-CENTRIC BUSINESSES
 
Our DCG, IOTG, NSG, PSG, and all other businesses, including Mobileye.





* Other names and brands may be claimed as the property of others.

The Bluetooth® word mark and logos are registered trademarks owned by Bluetooth SIG, Inc. and any use of such marks by Intel Corporation is under license.

Intel, the Intel logo, 3D XPoint, Arria, Celeron, Intel Atom, Intel Core, Intel Inside, the Intel Inside logo, Intel Nervana, Intel Optane, Intel Xeon Phi, Itanium, Movidius, Myriad, OpenVINO, Pentium, Quark, Stratix, Thunderbolt, Xeon, and XMM are trademarks of Intel Corporation or its subsidiaries in the U.S. and/or other countries.

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INTRODUCTION TO OUR BUSINESS
 
 
 
 
 
We are a world leader in the design and manufacturing of essential technologies that power the cloud and an increasingly smart, connected world. We offer computing, networking, data storage, and communications solutions to a broad set of customers spanning multiple industries. In 1968, Intel was incorporated in California (reincorporated in Delaware in 1989), in what became known as Silicon Valley, and our technology has been at the heart of computing breakthroughs ever since.
We're now in the midst of a corporate transformation as we grow beyond our traditional PC and server businesses into data-rich markets addressing the explosive demands to process, analyze, store, and transfer data. The transformation is well underway, with our data-centric businesses representing an increasing share of our overall revenue.
Our vision is to build a smart and connected world that runs on Intel® solutions. This vision is supported by our commitment to corporate responsibility, our relentless pursuit of Moore's Law, and the talent of our amazing employees.

 
 
 
 
 
 
 "Don’t be encumbered by history. Go off and do
something wonderful."
 
Bob Noyce, Intel Co-Founder

 

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A YEAR IN REVIEW
Five years ago, we set out a strategy to transform from a PC-centric to a data-centric company. Our 2018 results serve as a strong proof point that our strategy is working and our transformation is well underway. We achieved record revenue and earnings per share (EPS), driven by strong business performance, continued operating leverage, and a lower tax rate. Revenue from our data-centric businesses collectively increased by double digits. Our PC-centric business grew above our expectations and continued to be a source of profit, cash flow, scale, and intellectual property (IP). While we have had delays in implementing our 10 nanometer (nm) manufacturing process technology, we have continued to innovate in our 14nm products, introducing leadership products that deliver more value to our customers. We've expanded beyond PC and server businesses with significant growth in adjacent products, and gained share in an expanded $300 billion TAM1. Our employees are executing to our strategy by developing compelling technology and delivering innovative products to our customers, enabling strong financial growth.
 
 
"The investments in technology and talent we have made in our transformation to a data-centric company position Intel to serve a broader set of customers in an expanded market for silicon."

—Bob Swan, Intel Chief Executive Officer
REVENUE
 
OPERATING INCOME
 
DILUTED EPS
 PC-CENTRIC $B  DATA-CENTRIC $B
 
GAAP $B   NON-GAAP $B
 
GAAP  NON-GAAP
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$70.8B
 
 
$23.3B
 
$24.5B
 
$4.48
 
$4.58
 
 
 
GAAP
 
 
GAAP
 
non-GAAP2
 
GAAP
 
non-GAAP2
Revenue up $8.1B or 13% from 2017; data-centric up 18% and PC-centric up 9%
 
Operating income up $5.3B or 29% from 2017
 
Operating income up $4.9B or 25% from 2017
 
Diluted EPS up $2.49 or 126% from 2017
 
Diluted EPS up $1.11 or 32% from 2017
 
 
 
 
 
 
 
 
 
Strong growth with record revenue across the business.
 
Top-line growth and continued operating margin leverage while investing in key opportunities such as artificial intelligence (AI) and autonomous driving.
 
Demand for high-performance products, adjacency growth, disciplined spending focus, and lower tax rate from Tax Reform3.
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
GOAL
 
 
GOAL
 
 
GOAL
 
Achieve at least low double-digit growth of data-centric businesses and limit PC-centric business decline to low single digits.
 
Grow non-GAAP operating income faster than revenue.
 
Grow non-GAAP diluted EPS faster than non-GAAP operating income.
 
 
 
 
 
 
 
 
 
 
RESULT ACHIEVED
 
RESULT ACHIEVED
 
RESULT ACHIEVED
Exceeded our goal on both fronts with 18% data-centric businesses growth and 9% PC-centric business growth. Total revenue was approximately $6.0 billion higher than our expectation at the beginning of 2018.
 
On a non-GAAP basis, operating income grew faster than revenue two years in a row. From 2017 to 2018, non-GAAP operating income grew 25%, compared to 13% revenue growth.
 
On a non-GAAP basis, diluted EPS grew faster than operating income two years in a row. From 2017 to 2018, non-GAAP diluted EPS grew 32%, compared to 25% non-GAAP operating income growth.


1 
Source: Intel calculated 2022 TAM derived from industry analyst reports.
2 
See "Non-GAAP Financial Measures" within Other Key Information.
3 
Tax Reform refers to the U.S. Tax Cuts and Jobs Act enacted in December 2017.

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  A Year In Review
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DATA-CENTRIC BUSINESSES EXPAND WITH NEW OPPORTUNITIES
 
PC-CENTRIC BUSINESS THRIVES
Our data-centric businesses have grown significantly over the last two years. To extend the momentum of this growth, we continue to offer innovative new products that provide higher performance and better value for our customers. We expect that our leadership products such as the second generation Intel® Xeon® Scalable processors and Intel® Stratix®10 SX FPGA will further advance our opportunity in AI and help our customers process and analyze the flood of data implicit in big bets.
 
Our focus on product segmentation, innovation, and performance in PCs continued. To extend product leadership and deliver more value to customers, we launched our 9th generation Intel® Core i9 processors, which target the growing gaming market segment.
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BIG BETS MAKE PROGRESS
 
BOB SWAN OUR NEW CEO
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Our big bets are memory, autonomous driving, and 5G, and we have made progress on all fronts to expand and compete in the data-centric world. We are shipping Intel® Optane DC persistent memory for data centers. We also announced our first 5G new radio (NR) multi-mode modem for 2019 and our plan to commercialize Mobility-as-a-Service (MaaS) with autonomous vehicles through a joint venture starting 2019.
 
On January 30, 2019, our Board of Directors appointed Bob Swan as our Chief Executive Officer, the seventh CEO in Intel’s 50-year history. Mr. Swan joined Intel as our Chief Financial Officer in October 2016.
 
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WE ARE PROUD OF OUR HERITAGE
Fifty years ago, Robert Noyce and Gordon Moore founded Intel. In honor of our golden anniversary, we are embracing Noyce’s inspiring challenge, "Don't be encumbered by history. Go off and do something wonderful.” We celebrated our heritage and the wonderful things we are doing to create a bright future for Intel and the world. Two years ahead of schedule, we announced that we have achieved our goal of a U.S. workforce that reflects the diversity of the available skilled labor market.
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  A Year In Review
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OUR STRATEGY
We are in the midst of one of the most significant transformations in our corporate history. Over the last five years, we’ve made key investments and decisions to enter data-rich markets and deploy our IP and manufacturing technologies to redefine and expand our target market. We have evolved from a PC-centric company with a server business, to a data-centric company with an expanding portfolio of technology solutions that address customer needs across platform, storage, connectivity, and software. This transformation is evidenced by our 2018 revenue, of which roughly half was earned from data-centric businesses, and the expansion of our TAM, which we last estimated at more than $300 billion1.
Our customers are looking for solutions that can process, analyze, store, and transfer data—turning it into actionable insights, amazing experiences, and competitive advantages. The Intel® architecture platform provides the foundation for new solutions that take advantage of this growth of data.
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MAKE THE WORLD'S BEST SEMICONDUCTORS
We make significant investments and innovations in our silicon manufacturing technologies and platforms. Our proprietary technologies make it possible to integrate products and platforms that address evolving customer needs and expand the markets we serve. Our innovation strategy includes investments in advanced manufacturing processes and packaging, architecture, interconnects, and embedded security features, as part of our efforts to be the leading end-to-end platform provider.
Realizing the economics of Moore’s Law has been and will continue to be a strategic priority, making possible the innovation of new high-performance products and improving user experience at exponential rates while balancing performance, cost, and power to meet our customers' needs. Unlike many semiconductor companies, we primarily develop and manufacture our products in our own facilities using our proprietary process technologies. We have the scale and expertise necessary to enable deep engagement with our customers, which provides us with a competitive advantage. Our manufacturing capital enables us to optimize performance, shorten time-to-market for new product introduction, and control essential elements of our supply chain. Sharing architectural innovation and IP enables us to spread our investments over a large manufacturing base of products, which reduces our costs and increases our return on capital.
LEAD THE AI AND AUTONOMOUS REVOLUTION
We are positioned to be a driving force of the AI and autonomous revolution. By striving to build the world’s best AI platform, our strategy is to meet the needs of our most innovative customers, to advance and accelerate the AI industry’s open software stacks, to deliver the best AI products, and to seed and drive the AI ecosystem. Mobileye’s EyeQ* family of SoCs is already the automobile industry’s leading solution for advanced driver assistance systems (ADAS). Mobileye is building on that leadership as the industry pursues higher levels of autonomy, developing Road Experience Management for real-time crowdsourced mapping, and the Responsibility Sensitive Safety model for autonomous vehicle safety. Customers use Intel® Xeon® processors for workloads such as image recognition, enhanced public security, and natural language processing, the foundation of the AI revolution. Intel® Nervana Neural Network Processors and Intel® Movidius Myriad Vision Processing Units (VPUs) provide a comprehensive suite of hardware and software technologies that deliver broad capabilities and support diverse approaches for AI, enabling our customers to infuse AI into everything they do.








1 Source: Intel calculated 2022 TAM derived from industry analyst reports and internal estimates.

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 Our Strategy
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BE THE LEADING END-TO-END PLATFORM PROVIDER FOR THE NEW DATA WORLD
Growth in processing power and breakthroughs in connectivity, storage, memory, and algorithms have led to a new era of data-centric computing. We have an unparalleled product portfolio that spans the entire data-centric market and we are inventing new solutions in the highest growth areas by investing across six engineering pillars:
advanced manufacturing processes and packaging;
new architectures to speed up specialized tasks like AI and graphics;
super-fast memory;
interconnects;
embedded security features; and
common software to unify and simplify programming for developers across our compute roadmap.

We are making significant investments and pursuing innovations in these areas to drive leaps forward in technology and user experience, and meet our customers’ data needs.
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Enabling our customers to move faster, store more, and process everything is at the core of our strategy. Our customers’ appetite for high-performance computing is greater than ever and, in response, we continue to make investments in optimizing our Intel® Xeon® processors. 5G connectivity will transform industries from all business sectors, initiating ripples of impact that spur market growth and the global economy. We are collaborating with ecosystem and vertical industry partners to define, prototype, test, and deliver 5G standards and solutions. We are also unveiling innovative memory and storage solutions, including Intel® QLC 3D NAND and Intel® Optanememory, and providing data center products that are optimized to deliver world-class performance and drive lower total cost of ownership for cloud workloads. Our advancements in programmable solutions, such as FPGAs, can efficiently manage the changing demands of next-generation data centers and accelerate the performance of emerging applications.  
From end-to-end, our solutions help our customers stay ahead of their growing infrastructure demands by offering scale, innovation, and expertise from the edge to the cloud and back.
RELENTLESS FOCUS ON OPERATIONAL EXCELLENCE AND EFFICIENCY
Underlying our transformation to a data-centric company is a relentless focus on operational excellence and efficiency. This focus includes the elimination of lower growth investments and activities, and the simplification and automation of routine processes and activities. These improvements enable us to achieve scale in our core operations, providing a stable and cost-effective platform to support additional investments in the design, development, and production of products that delight our customers. Operational excellence helps us fund the expansion of our TAM through big-bet investments such as memory, 5G technology, and autonomous driving.

CONTINUE TO HIRE, DEVELOP AND RETAIN THE BEST, MOST DIVERSE AND INCLUSIVE TALENT
Andy Grove, former Intel CEO and Chairman, once said, “A corporation is a living organism; it has to continue to shed its skin. Methods have to change. Focus has to change. Values have to change. The sum total of those changes is transformation.” At the core of our organization are highly skilled, diverse, and talented people capable of accelerating, as one team, in everything we do. Our rich and powerful culture sets a solid foundation based upon 50 years of invention; product leadership; purposeful leadership in corporate governance practices; and partnership with suppliers, customers, regulators, and local communities in the development and deployment of sustainable business practices. We are proud of our past and inspired by our employees who are rising to the challenge to transform our methods, focus, and values in a way that helps each person achieve their personal best in delighting our customers with compelling products, winning in dynamic and competitive markets, and making a positive impact on our communities.

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 Our Strategy
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HOW WE ORGANIZE OUR BUSINESS
DATA-CENTRIC BUSINESSES1
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KEY PRODUCTS AND MARKETS
 
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KEY PRODUCTS AND MARKETS
Includes workload-optimized platforms and related products designed for cloud, enterprise, and communication infrastructure market segments.
 
Includes Intel® Optane technology and 3D NAND flash memory, primarily used in solid-state drives (SSDs).
 
 
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OF INTEL'S TOTAL REVENUE
 
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OF INTEL'S TOTAL REVENUE
 
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KEY PRODUCTS AND MARKETS
 
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KEY PRODUCTS AND MARKETS
Includes high-performance compute solutions for targeted verticals and embedded applications in market segments such as retail, manufacturing, health care, energy, automotive, and government.
 
Includes programmable semiconductors, primarily field-programmable gate arrays (FPGAs), and related products for a broad range of markets, such as communications, data center, industrial, and military.
 
 
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OF INTEL'S TOTAL REVENUE
 
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OF INTEL'S TOTAL REVENUE
 
HIGHLIGHTS
Our data-centric businesses collectively grew 18% led by the growth in DCG, due in part to customer transition to Intel® Xeon® Scalable processors and higher demand across cloud and communication service providers. To extend the growth, we have new products, such as the Intel® Programmable Acceleration Card (Intel® PAC) with Intel® Stratix® 10 SX FPGA, and are now shipping the second generation Intel Xeon Scalable processor and Intel® Optane™ DC persistent memory, which combines the speed of traditional memory with the capacity and native persistence of storage. In addition, Mobileye continued to secure new design wins at major U.S. and global automakers and announced plans to commercialize MaaS.
OPPORTUNITIES
We have expanded our data-centric TAM to $200 billion2 with acquisitions and product innovations. Our broadened portfolio enables new opportunities for us and creates better synergistic value for our customers. For example, our product offerings for AI workloads reach from the cloud to the edge, and we are developing CPU, graphics processing unit (GPU), FPGA, and AI accelerator products to span inference and training AI workloads, while also pursuing ongoing software optimizations for AI.
CHALLENGES
Our 2018 revenue growth exceeded our expectation and put pressure on our factory network. We prioritized production on server and higher performance PC market segments, which consequently constrained supply in other areas, including IOTG. In addition, due to challenging market conditions, as well as continued investments in new memory products and in manufacturing capacity, the profitability of our memory business improved more slowly than expected in 2018. Our data center business was impacted by weakness in China demand and cloud market segment deceleration in Q4 2018.
PC-CENTRIC
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KEY PRODUCTS AND MARKETS
 
HIGHLIGHTS
Includes platforms designed for end-user form factors, focusing on higher growth segments of 2-in-1, thin-and-light, commercial and gaming, and growing adjacencies such as WiFi and modem.
 
CCG had record revenue and operating income with three years of growth in a row by executing to our strategy. We announced additions to our 8th generation Intel® Core mobile processors, the first Intel® Core i9 processor for laptops, and the first 9th generation Intel® Core processor, i9-9900K, targeting the growing gaming market segment.
 
OPPORTUNITIES
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OF INTEL'S TOTAL REVENUE
 
We are targeting an expanded $60 billion revenue TAM2, which is $25 billion higher than our traditional CPU TAM. This expanded opportunity includes markets such as memory, graphics, and connectivity, and is in addition to a $40 billion modem market where we are gaining share.
 
CHALLENGES
 
 
 
We are operating in an increasingly competitive environment and are focused on executing an annual cadence of leadership products. Strong demand across our product lines has resulted in tight supply, particularly in the entry-level PC market. We are making additional investments in our 14nm factory network and working with customers to align demand with available supply.

1 
Data-centric businesses include DCG, IOTG, NSG, PSG, and all other businesses, including Mobileye.
2 
Source: Intel calculated 2022 TAM derived from industry analyst reports.

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  How We Organize Our Business
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OUR PRODUCTS

We are at the forefront of developing new technologies and new products as building blocks for the increasingly smart and connected world. These technologies and products are utilized as integrated solutions for a broad spectrum of markets.
PRODUCT LEADERSHIP CREATES ESSENTIAL VALUE FOR OUR CUSTOMERS
We focus on providing compelling user experiences by developing our next generation of products based on customer needs and expectations. We invest in product and process technologies to deliver higher performance and lower total cost of ownership by closely working with our customers and partners. By continuing to improve our products and expanding our product portfolio—including in adjacent products such as modem and memory, where we had significant growth this year—we were able to deliver more value to our customers.
WE HAVE A BROAD PRODUCT PORTFOLIO
From processing to transferring, storing, and analyzing data, our broad product portfolio offers innovative solutions to a wide array of customers. These products, such as our gaming CPUs, may be sold directly to end consumers, or they may be further integrated by our customers into end products such as notebooks and storage servers. Combining some of these products—for example, integrating FPGA and memory with Intel® Xeon® processors in a data-center solution—enables incremental synergistic value and performance.
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OUR PRODUCTS PROVIDE END-TO-END SOLUTIONS
As the company transforms beyond a PC-centric company to address the needs of the new data-centric world, we have expanded our product offerings to provide end-to-end solutions, scaling from edge computing to the network, the cloud, and the emerging field of AI and autonomous driving. In 2018 we introduced the Intel® Neural Compute Stick 2 and new Mobileye EyeQ* SoC. Meanwhile, we continue to push the boundary of client computing with innovations, including new form factors (e.g., dual-screen 2-in-1s), new functionalities (e.g., cellular connectivities), and performance enhancements (e.g., Intel® Optane™ memory).
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  Our Products
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OUR CAPITAL
We deploy various forms of capital to execute our transformation strategy in a way that seeks to reflect our corporate values, delight our customers, and create value for our stockholders.

Our commitment to corporate responsibility creates value for Intel and our stockholders by helping us mitigate risks, reduce costs, build brand value, and identify new market opportunities. We set ambitious goals for our company and make strategic investments to advance progress in the areas of environmental sustainability, supply chain responsibility, diversity and inclusion, and social impact that benefit the environment and society.

We empower and invest in attracting and retaining talented employees who enable the development of solutions and enhance our intellectual and manufactured capital. Our effective utilization of natural resources and focus on corporate responsibility result in trusted relationships that support the growth of our business. Through these activities, we strive to develop the world's best semiconductors, deliver great customer experiences, efficiently manage our supply chain, improve the communities in which we operate, and, ultimately, generate financial capital that is reinvested in our business and returned to stockholders.
 
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DRIVERS
STRATEGY
VALUE
 
 
 
 
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Cash flow and capital allocation strategy
Leverage financial capital to invest in the business, acquire and integrate strategic investments, and provide returns to stockholders in the forms of dividends and share repurchases.

We strategically invest financial capital to create value for our stockholders. Over the last five years, we:
- Generated $113 billion cash from operating activities
- Generated $59 billion in free cash flow1
- Returned $55 billion to stockholders.

 
 
 
 
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Research and development (R&D) and IP rights
Invest significantly in R&D to ensure our process and product technologies compete successfully as we pursue our strategy to make the world’s best semiconductors and realize new data-centric opportunities.
We develop IP for our platforms to enable next-generation products, create synergies across our businesses, provide a higher return as we expand into new markets, and establish and support our brands.
 
 
 
 
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Capital assets and strategic supply chain investments
Invest timely and at a level sufficient to meet customer demand for current technologies and prepare for future technologies.
Our world-wide manufacturing scope and scale enable innovations to provide our customers and consumers with a broad range of leading-edge products in high volume.
 
 
 
 
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Employees and culture
Develop the talent needed to keep the company at the forefront of innovation and create a diverse, inclusive, and safe workplace.

We attract and retain talented and engaged employees who can deliver their workplace best every day and who create the intellectual capital we rely on to develop and advance our technologies and manufacturing.
 
 
 
 
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Supply chain responsibility and positive social impact
Build trusted relationships for both Intel and our stakeholders, including local communities, governments, suppliers, customers, and employees.

We collaborate on programs to empower underserved communities through education and technology, and on initiatives to advance accountability and capabilities across our global supply chain, including advancing respect for human rights.

 
 
 
 
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Resource efficiency
Continually strive to reduce our environmental footprint through efficient and responsible use of natural resources and materials used to create our products.
Our proactive efforts help us mitigate climate and water risk, achieve efficiencies, lower costs, and position us to respond to the needs and expectations of our stakeholders.
 
1  
See "Non-GAAP Financial Measures" within Other Key Information.

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FINANCIAL CAPITAL
Our financial capital allocation strategy focuses on building stockholder value. We do this by first investing in ourselves and growing our capabilities. We then look to supplement and strengthen our capabilities through acquisitions and strategic investments. And finally, we provide the return realized by these investments to our stockholders.
CASH FROM OPERATING ACTIVITIES $B
    c004cashfromopactivities.jpg

 Capital Investment
  Free Cash Flow1
OUR FINANCIAL CAPITAL ALLOCATION DECISIONS ARE DRIVEN BY THREE PRIORITIES
INVEST IN THE BUSINESS
 
ACQUIRE AND INTEGRATE
 
RETURN CASH TO STOCKHOLDERS
Our first priority is to invest in R&D and capital spending to strengthen our competitive position. We shifted our R&D focus as we transformed to a data-centric company, while efficiently maintaining our investment at approximately 20% of revenue. Our capital investment in logic (silicon wafer manufacturing of our platform products) and memory both increased in 2018 as we looked to improve supply of platform products and continued to ramp production capacity in our memory fab (Fab 68). We obtained customer prepayments of over $1.6 billion in 2018 and $1.1 billion in 2017, which helped to offset our investment in memory.
 
Our second financial capital allocation priority is to invest in companies around the world that will complement our strategic objectives and stimulate growth of data-centric opportunities. We look for acquisitions that further leverage and strengthen our capital and R&D investments. In 2018, we completed various small acquisitions, while leveraging Altera and Movidius to partner with customers and expand the markets we serve. Mobileye achieved record revenue, various design wins, and announced the ability to retrofit existing vehicles to deliver full autonomy. Intel Capital investments also support our strategic objectives.
 
Our third financial capital allocation priority is to return cash to stockholders. We achieve this through our dividend and share repurchase programs. During 2018, we paid $5.5 billion in dividends and increased our quarterly cash dividends by 10% from 2017. We also repurchased $10.7 billion in shares, up from 2017, and have reduced the level of diluted shares outstanding over time.
 
 
Dividends Per Share
 
 
Diluted Shares Outstanding
(In Millions)
 
 
 
 
 
 
 
 
 
2018
$1.20
 
 
7%
CAGR
4,701
 
 
2017
$1.0775
 
4,835
 
 
2016
$1.04
 
4,875
 
 
 
 
 
 
 
 
 
 
R&D AND CAPITAL INVESTMENTS $B
 
ACQUISITIONS
 
CASH TO STOCKHOLDERS $B
c005rndcapinvestments.jpgc006acquisitions.jpgc007cashtostockholders.jpg
 
 R&D
 Logic
Memory
 
# of Acquisitions
Total Spent $B
 
Buyback
 Dividend
1 
See "Non-GAAP Financial Measures" within Other Key Information.

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INTELLECTUAL CAPITAL
RESEARCH AND DEVELOPMENT
Every year we make a significant investment in R&D, as it is a critical factor in achieving our strategic objectives to make the world's best semiconductors, lead the AI and autonomous revolution, and provide leading end-to-end platform solutions. Successful R&D efforts can lead to new products and technologies, or improvements to existing ones, which we seek to protect through our IP rights. We may augment our R&D initiatives by investing in or acquiring companies or entering into R&D agreements with other companies, as well as by directly purchasing or licensing technology.
We have increased our investments in R&D in each of the last five years and intensified our focus on key priorities in product technology while exiting non-core businesses, such as our divestiture of Wind River Systems, Inc. (Wind River) during 2018.
PRODUCT TECHNOLOGY
 
We are focusing our R&D activities on six areas of engineering to advance our product capabilities. Our goal is to improve user experiences and value at the pace of Moore's Law through advances in performance, power, cost, connectivity, security features, form factor, and other features with each new generation of products.
Process technology. While development of next-generation manufacturing processes remains a critical and fundamental area of research, we are also pursuing innovations in packaging technology to enable new approaches to chip design. In 2018, we announced a new 3D packaging technology called "Foveros" that allows for stacking of logic chips, enabling products where input/output (I/O), static random-access memory (SRAM), and power delivery circuits can be fabricated in a base die and high-performance logic "chiplets" can be stacked on top. Together with our Embedded Multi-die Interconnect Bridge (EMIB) technology, advanced packaging allows for new hybrid chip designs that can "mix and match" different technology IP blocks, which may be manufactured on different process nodes, into a single system-in-package, enabling new design flexibility and new device form factors.
 
a029foveros.jpg
 
“Foveros” 3D packaging technology
Architecture. We are designing products for four major computing architectures—scalar (CPU products), vector (GPU products), matrix (AI accelerator products), and spatial (FPGA products)—as we move toward a model of providing multiple "xPU" compute platforms for a more diverse era of computing. In 2018, we announced "Sunny Cove," our next-generation CPU microarchitecture, with architectural extensions designed for special-purpose computing tasks such as AI and cryptography, among other features. We are also continuing development on our first discrete GPU.
Memory. With our Intel® 3D NAND and Intel® Optane™ technologies, we are developing products to disrupt the memory and storage hierarchy. We are shipping our Intel® Optane™ DC Persistent Memory, which combines memory-like performance with the larger capacity and persistence of storage, bringing more data closer to the CPU to help improve processing of big data sets like those used in AI and large databases. Our QLC 3D NAND technology allows users to move more data from hard disks to SSDs, giving them faster access to their data.
Interconnect. We have a broad portfolio of interconnect solutions, ranging from silicon to the data center to wireless. Our silicon photonics technology integrates lasers into silicon to create high-speed optical connections that can help remove networking bottlenecks in the data center. We are driving the 5G transition by offering products that communications service providers use to transform their networks for 5G, as well as through development of 5G modems.
Security technologies. We have made significant investments in security technologies, and built-in security features are integrated into our design process and roadmap. In the first half of 2018, we created the Intel Product Assurance and Security Group to serve as a center for security research across our products and businesses, not only to address the security issues of today, but also to monitor the evolving threat landscape and seek to continuously improve our product security in the years ahead.
Software. Software plays a critical role in unlocking the performance potential of our hardware products. Our vision is to unify our software abstractions across all of our xPU platforms. We are developing a project called OneAPI to simplify programming for developers across our CPU, GPU, FPGA, AI and other accelerator products, providing a unified portfolio of developer tools for mapping software to the hardware that can best accelerate the code.
IP RIGHTS
We own and develop significant IP and related IP rights around the world that relate to our products, services, R&D, and other activities and assets. Our IP portfolio includes patents, copyrights, trade secrets, trademarks, maskwork, and other rights. We actively seek to protect our global IP rights and to deter unauthorized use of our IP and other assets. For a detailed discussion of our IP rights, see "Intellectual Property Rights and Licensing" within Other Key Information.

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MANUFACTURED CAPITAL
We are an integrated device manufacturer (IDM). Unlike many other semiconductor companies, we primarily design and manufacture our products in our own manufacturing facilities. We see our in-house manufacturing as one of our most critical forms of capital and an important advantage.
MANUFACTURING PROCESS TECHNOLOGY
We continue to develop new generations of manufacturing process technology as we seek to realize the benefits from Moore’s Law, a law of economics predicted by Intel’s co-founder Gordon Moore more than 50 years ago. Realizing Moore’s Law results in economic benefits as we are able to either reduce a chip's cost as we shrink its size or increase functionality and performance of a chip while maintaining the same cost with higher density. This makes possible the innovation of new products with higher performance while balancing power efficiency, cost, and size to meet customers' needs.
As of the end of 2018, our platform products were manufactured on 300mm wafers, with the majority manufactured using our 14nm process node, and we are currently ramping our next-generation 10nm process node. We have lengthened our utilization of our 14nm process to meet an annual cadence of product introductions while developing 10nm process technology. Over the course of our 14nm process generation, we have achieved significant product performance improvement. We expect the same trend of utilizing a process node for multiple waves of products to continue as we ramp 10nm.
With our 10nm process technology, we are striving for an aggressive density improvement target, beyond the density scaling we delivered with 14nm. We have experienced challenges associated with 10nm development and implementation, and announced in 2018 that volume production on our 10nm products would be delayed from the second half of 2018 into 2019. We have made good progress on improving 10nm yields in 2018, and we continue to expect volume client systems on retail shelves for the 2019 holiday season, with data center products to follow in 2020.
FACTORY NETWORK AND SUPPLY CHAIN
The map marks our manufacturing facilities and their primary functions, as well as the countries where we have a significant R&D or sales and marketing presence.

Approximately half of our wafer manufacturing is conducted within the U.S. We incur factory start-up costs as we ramp our facilities for new process technologies. We continued to ramp the 10nm process node in our Oregon and Israel locations and to expand our memory fab, Fab 68. Memory investments represented approximately 20% of total capital spending for 2018.


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Our manufacturing facilities are primarily used for silicon wafer manufacturing of our platform and memory products. These facilities are built following a “copy exactly” methodology, whereby new process technologies are transferred identically from a central development fab to each manufacturing facility. This enables fast ramp of the operation as well as better quality control. These wafer fabs operate in a network of manufacturing facilities integrated as one factory to provide the most flexible supply capacity, allowing us to better analyze our production costs and adapt to changes in capacity needs.
We use a multi-source strategy for our memory business to enable a robust and flexible supply chain. Throughout 2018, we increased the memory capacity in Fab 68, where we ramped 3D NAND production. In addition, we have a supplemental supply agreement with Micron Technology, Inc. (Micron), as well as capacity from our joint venture, IM Flash Technologies, LLC (IMFT) factory in Lehi, Utah. In January 2019, Micron called our interest in IMFT. The IMFT agreement provides for supply for up to one year after the close of the transaction.
We use third-party foundries to manufacture wafers for certain components and leverage subcontractors to augment capacity to perform assembly and test in addition to our in-house manufacturing, primarily for chipsets and adjacent products.

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HUMAN CAPITAL
Given the highly technical nature of our business, our success depends on our ability to attract and retain talented and skilled employees to create the technology of the future and delight our customers. Our global workforce of 107,400 is highly educated, with approximately 85% of our people working in technical roles. We invest in creating a diverse, inclusive, and safe work environment where our employees can deliver their workplace best every day. This environment fosters a rich and powerful culture that allows us to make a profound impact on the world.
 
"In 2018, we met our U.S. diversity and inclusion goaltwo years ahead of schedule. We are proud of our progress but not satisfied. We view diversity and inclusion as a business imperative that drives innovation and future growth. Every voice matters."

Barbara Whye, Intel’s Chief Diversity and Inclusion Officer and Vice President of Human Resources
All employees are responsible for upholding the Intel Values, Intel Code of Conduct, and Intel Global Human Rights Principles, which form the foundation of our policies and practices. We also place value on providing a wide range of opportunities to support the ongoing career development of employees. For over a decade, we have tracked and publicly reported on key human capital metrics, including workforce demographics, diversity and inclusion data, turnover, and training data.
 
DIVERSITY AND INCLUSION
 
 
Building an inclusive workforce, industry, and ecosystem is critical to helping us drive our business forward. We committed $300 million to advance diversity and inclusion in our workforce and in the technology industry, and met our goal to achieve full representation of women and underrepresented minorities in our U.S. workforce in 2018two years ahead of schedule. We have a long-standing commitment to inclusive workplace policies. For example, to help ensure employee concerns are openly and transparently resolved, Intel does not seek arbitration of sexual harassment and other employment claims.
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GROWTH AND DEVELOPMENT
We invest significant resources to develop the talent needed to keep the company at the forefront of innovation and make Intel an employer of choice. We deliver training annually and provide rotational assignment opportunities. During 2017 and 2018, we trained our managers in inclusive management practices. Over the past five years, our undesired voluntary turnover rate has been below 5%.
COMMUNICATION AND ENGAGEMENT
 
Our success depends on employees understanding how their work contributes to the company’s overall strategy. We use a variety of channels to facilitate open and direct communication, including open forums with executives; quarterly Organizational Health Polls; and engagement through more than 30 different employee resource groups, including the Women at Intel Network, the Network of Intel African American Employees, the Intel Latino Network, and others.
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COMPENSATION AND BENEFITS
We strive to provide pay, benefits, and services that help meet the varying needs of our employees. Our generous total rewards package includes market-competitive pay, broad-based stock grants and bonuses, a popular Employee Stock Purchase Plan, healthcare and retirement benefits, paid time off, flexible work schedules, sabbaticals, fertility assistance, and on-site services. For more than a decade, we’ve performed an annual compensation analysis in the U.S. to ensure pay equity by gender and race/ethnicity. In 2018, we began globalizing our analytics and recently announced that we’ve achieved gender pay equity globally.
HEALTH, SAFETY, AND WELLNESS
Our ultimate goal is to achieve zero serious injuries through continued investment in and focus on our core safety programs and injury-reduction initiatives. We provide access to a variety of innovative, flexible, and convenient employee health and wellness programs, including on-site health centers.

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SOCIAL AND RELATIONSHIP CAPITAL
We are committed to operating with transparency, and through open and direct communication, we work to develop trusted relationships with all stakeholders, including employees, customers, suppliers, governments, and communities. We also empower our employees to give back to the communities where we operate and engage them in corporate responsibility and sustainability initiatives. Our commitment to stakeholder collaboration and investments in social impact initiatives, including support of the United Nations Sustainable Development Goals, has resulted in our reputation as a leading corporate citizen, which has created value for Intel in terms of social license to operate and a positive operating environment. Each year, we receive third-party recognitions for our corporate responsibility leadership and ethical business practices. In 2018, recognitions included the Fortune 2018 Change the World List, Ethisphere’s World’s Most Ethical Companies, and Forbes/Just Capital’s America’s Most “Just” Companies.
ECONOMIC IMPACT


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The health of our company and local economies depend on continued investments in innovation. We provide high-skill, high-paying jobs at Intel sites around the world and also impact economies through our R&D ecosystem spending, sourcing activities, consumer spending by our employees, and tax revenue. Many of these are manufacturing and R&D jobs located in our own domestic and international factories. In addition, we make sizable capital investments and provide leadership in public-private partnerships to spur economic growth and innovation.
SOCIAL IMPACT
We are at the forefront of new technologies—such as AI, autonomous driving, and 5G wireless broadband—that are increasingly being used to empower individuals, companies, and governments around the world to solve major societal challenges. Simultaneously, we are empowering people through education and advancing social impact initiatives, helping us build trust with key external stakeholders and support the interests of our employees. Through the Intel® She Will Connect program, we have collaborated with global and local partners to empower millions of women and girls through technology skills training. Our employees actively share their expertise and skills through technology-related volunteer initiatives, and over the past 10 years have contributed more than 10 million hours of service in the communities where we operate. In celebration of our 50th anniversary, we set a goal to have 50,000 employees donate 1 million volunteer hours during 2018. We exceeded the goal with more than 68,000 employees contributing approximately 1.5 million hours.
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SUPPLY CHAIN RESPONSIBILITY
Actively managing our supply chain creates business value for Intel and our customers by helping us reduce risks, improve product quality, achieve environmental and social goals, and raise the overall performance of our suppliers. Over the past five years, we have completed more than 500 supplier audits using the Responsible Business Alliance Code of Conduct standard and have expanded training and capacity-building programs with our suppliers. We actively collaborate with others and lead industry initiatives on key issues such as advancing responsible minerals sourcing, addressing risks of forced and bonded labor, and improving transparency around climate and water impacts in the global electronics supply chain. We also continue to work toward our goal of reaching $1 billion in annual spending with diverse-owned suppliers by 2020, and are investing in programs to create new career pathways into the technology industry.


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NATURAL CAPITAL
Driving to the lowest environmental footprint possible helps us achieve efficiency, lower costs, and respond to the needs of our customers and community stakeholders. We invest in conservation projects and set company-wide environmental targets, seeking to drive reductions in greenhouse gas emissions, energy use, water use, and waste generation. We focus on building energy efficiency into our products to help our customers lower their own emissions and energy costs. We also collaborate with policymakers and other stakeholders to identify opportunities to apply technology to environmental challenges such as climate change and water conservation.

CLIMATE AND ENERGY
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We focus on reducing our own direct climate “footprint” and over the past two decades have reduced our direct emissions and electricity generated emissions. We also continue to be one of the largest voluntary corporate purchasers of green power. Since 2012, we have invested more than $200 million in energy conservation projects in our global operations, resulting in cumulative savings of more than 4 billion kilowatt hours and cost savings of approximately $500 million through the end of 2018. We also focus on increasing our “handprint”—the ways in which Intel technologies can help others reduce their footprints, and collaborate on shaping public policy responses to climate change, both at the international level and in the countries and regions where we operate.
GREENER BUILDINGS
Our engineers have long incorporated green design standards and concepts into the new construction and renovation of our facilities. We continue to be on track to meet our goal to design all new buildings to a minimum Leadership in Energy and Environmental Design (LEED) Gold certification, and to date have achieved LEED certification for more than 17 million square feet, or approximately 26% of our total operational space. The Internet of Things is also expanding opportunities in the area of green buildings, including smart building energy management systems. Working with ecosystem partners, we are advancing solutions in this area, as well as incorporating these technologies into our own green building strategies. For example, one of our newest buildings, an office building in Bangalore, India that received LEED Platinum certification, is equipped with more than 9,000 sensors and has 50% lower energy demand compared to most traditional office buildings in the area.
WASTE MANAGEMENT AND RECYCLING
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In each of the past five years, we have recycled more than 84% of the non-hazardous waste generated in our global operations and continue to work toward our 2020 goals of recycling 90% of our non-hazardous waste and sending zero hazardous waste to landfills. Our aim is to continue to invest in reducing the amount of waste we generate while increasing the amount recycled.

WATER STEWARDSHIP
Water is essential to the semiconductor manufacturing process. We use ultrapure water to remove impurities from our silicon wafers, and we use industrial and reclaimed water to run our manufacturing facility systems. Over the last two decades, our sustainable water management efforts and partnerships have enabled us to conserve billions of gallons of water and we return approximately 80% of our water back to our communities. In 2018, we continued to make progress toward our goal to restore 100% of our global water use by 2025 through funding collaborative community-based projects that will restore water in amounts equivalent to what our business consumes.
SUPPLIER ENVIRONMENTAL IMPACT
We also partner with our suppliers to manage their environmental impact, which in turn reduces our own environmental impact, lowers supply chain risk, and can decrease costs. In 2018, we again attained a Leadership “A” rating on Supplier Engagement from CDP (which evaluates global companies on their environmental disclosure) for our work to encourage our suppliers to increase the level of transparency on their climate and water footprints.
 
 
 
 

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STOCKHOLDER RETURN
Through attention to constant improvement, we strive for our capital to work together in a manner consistent with our focus on long-term value creation. Long-term total stockholder return provides one measure of value creation, though we also consider other indicators of success for our deployment of capital, such as diversity advancement for our human capital. The stock performance graph and table that follow compare the cumulative total stockholder return on Intel's common stock with the cumulative total return of the Dow Jones U.S. Technology Index*, the Standard & Poor’s 100 Stock Index (S&P 100 Index*), the Standard & Poor’s 500 Stock Index (S&P 500 Index*), the Standard & Poor’s 500 IT Stock Index (S&P 500 IT Index*), and the PHLX Semiconductor Sector Index (SOX Index*)1 for the five years ended December 29, 2018. The cumulative returns shown on the graph are based on Intel's fiscal year.

Comparison of Five-Year Cumulative Return for Intel,
the Dow Jones U.S. Technology Index, S&P 100 Index, S&P 500 Index, S&P 500 IT Index, and SOX Index
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Years Ended
 
Dec 28,
2013
 
Dec 27,
2014
 
Dec 26,
2015
 
Dec 31,
2016
 
Dec 30,
2017
 
Dec 29,
2018
Intel Corporation
 
$
100

 
$
151

 
$
145

 
$
156

 
$
204

 
$
211

Dow Jones U.S. Technology Index
 
$
100

 
$
123

 
$
126

 
$
143

 
$
196

 
$
193

S&P 100 Index
 
$
100

 
$
114

 
$
117

 
$
129

 
$
157

 
$
150

S&P 500 Index
 
$
100

 
$
116

 
$
117

 
$
130

 
$
158

 
$
150

S&P 500 IT Index
 
$
100

 
$
123

 
$
128

 
$
145

 
$
201

 
$
199

SOX Index
 
$
100

 
$
133

 
$
131

 
$
179

 
$
252

 
$
235

1  
The graph and table assume that $100 was invested on the last day of trading for the fiscal year ended December 28, 2013 in Intel's common stock, the Dow Jones U.S. Technology Index, S&P 100 Index, S&P 500 Index, S&P 500 IT Index, and SOX Index, and that all dividends were reinvested. The Dow Jones U.S. Technology Index was presented as a comparison in the 2017 Form 10-K stock performance graph as a peer index. We have added three indices that we consider more representative than the Dow Jones U.S. Technology Index: the S&P 100 Index, which includes a more diversified group of companies across major industrial sectors; the S&P 500 IT Index, which represents large capitalization IT industry performance; and the SOX Index, which more precisely represents overall semiconductor industry performance.



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WHO MANAGES OUR BUSINESS
EXECUTIVE OFFICERS OF THE REGISTRANT
 
AGE
 
OFFICE(S)
Andy D. Bryant
 
68
 
Chairman of the Board
Dr. Venkata S.M. Renduchintala
 
53
 
Group President, Technology, Systems Architecture and Client Group; Chief Engineering Officer
Steven R. Rodgers
 
53
 
Executive Vice President; General Counsel
Navin Shenoy
 
45
 
Executive Vice President; General Manager, Data Center Group
Robert H. Swan
 
58
 
Chief Executive Officer
Todd M. Underwood
 
49
 
Interim Chief Financial Officer; Vice President of Finance and Director, Corporate Planning and Reporting
Andy D. Bryant has been Chairman of our Board of Directors since May 2012. Mr. Bryant served as Vice Chairman of the Board of Directors of Intel from July 2011 to May 2012. From 2007 to 2012, Mr. Bryant served as Chief Administrative Officer. Mr. Bryant joined Intel in 1981 and served in a number of executive roles at the company. He was Executive Vice President, Technology, Manufacturing, and Enterprise Services from 2009 to 2012. Mr. Bryant previously served as Executive Vice President, Finance and Enterprise Services from 2007 to 2009; Executive Vice President, Chief Financial and Enterprise Services Officer from 2001 to 2007; Senior Vice President, Chief Financial and Enterprise Services Officer from 1999 to 2001; Senior Vice President, Chief Financial Officer from January 1999 to December 1999; and Vice President, Chief Financial Officer from 1994 to 1999. Mr. Bryant also serves on the board of directors of Columbia Sportswear Company and McKesson Corporation.
Dr. Venkata S.M. (“Murthy”) Renduchintala joined Intel in November 2015 and serves as Group President of our Technology, Systems Architecture and Client Group (TCSG) and Chief Engineering Officer. In this role, Dr. Renduchintala oversees Intel's labs, technology development, manufacturing, and systems architecture engineering teams, as well as our client computing and connectivity business. His TCSG organization is responsible for aligning technology, engineering, product design, and process development across all our businesses and for providing business and strategic direction for our client and connectivity offerings. Dr. Renduchintala joined Intel as Executive Vice President and President, Client and Internet of Things Businesses and System Architecture Group, which expanded into the TSCG organization in 2018, and was named Group President and Chief Engineering Officer in April 2017. From 2004 to 2015, Dr. Renduchintala held various senior positions at Qualcomm Incorporated, most recently as Co-President of Qualcomm CDMA Technologies from June 2012 to November 2015 and Executive Vice President of Qualcomm Technologies Inc. from October 2012 to November 2015. Before joining Qualcomm, Dr. Renduchintala served as Vice President and General Manager of the Cellular Systems Division of Skyworks Solutions Inc./Conexant Systems Inc. and he spent a decade with Philips Electronics, where he held various positions, including Vice President of Engineering for its consumer communications business. Dr. Renduchintala also serves on the board of directors of Accenture plc.
Steven R. Rodgers has been our Executive Vice President and General Counsel since January 2017 and oversees our legal, government, human resources, and China groups. He previously led our legal and government groups as Senior Vice President and General Counsel from January 2015 to January 2017 and as Corporate Vice President and General Counsel from June 2014 to January 2015. Mr. Rodgers joined Intel in 2000 and has held a number of roles in our legal department, including as Corporate Vice President and Deputy General Counsel from January 2014 until his appointment as Intel's fifth General Counsel in June 2014. Prior to joining Intel, Mr. Rodgers was a litigation partner at the firm of Brown & Bain, P.A.
Navin Shenoy has been Executive Vice President and General Manager of the Data Center Group since May 2017. In this role, he oversees our Data Center Group, Internet of Things Group, and Programmable Solutions Group and leads strategy and product development for many of our data-centric offerings, including server, network, storage, AI, Internet of Things, and FPGA products, across a range of use cases that include cloud computing, virtualization of network infrastructure, and AI adoption. From May 2016 to May 2017, Mr. Shenoy was Senior Vice President and General Manager of the Client Computing Group. From April 2012 to April 2016, he served as General Manager of the Mobility Client Platform Division, as Vice President from April 2012 until December 2014 and Corporate Vice President from January 2015 to May 2016. From October 2007 to April 2012, Mr. Shenoy served as Vice President and General Manager of our Asia-Pacific business. Mr. Shenoy joined Intel in 1995.
Robert ("Bob") H. Swan was appointed our Chief Executive Officer and a member of our Board of Directors on January 30, 2019. Mr. Swan had served as our interim Chief Executive Officer since June 2018 and has been our Executive Vice President, Chief Financial Officer since joining Intel in October 2016. As CFO, he oversees Intel’s global finance organization—including finance, accounting and reporting, tax, treasury, internal audit, and investor relations—IT, Intel Capital, and our corporate strategy office. From September 2015 to September 2016, Mr. Swan served as an Operating Partner at General Atlantic LLC, a private equity firm. He served as Senior Vice President, Finance and Chief Financial Officer of eBay Inc. from March 2006 to July 2015. Previously, Mr. Swan served as Executive Vice President, Chief Financial Officer of Electronic Data Systems Corporation, Executive Vice President, Chief Financial Officer of TRW Inc., as well as Chief Financial Officer, Chief Operating Officer, and Chief Executive Officer of Webvan Group, Inc. Mr. Swan began his career in 1985 at General Electric, serving for 15 years in numerous senior finance roles. Mr. Swan also serves on the board of directors of eBay.
Todd M. Underwood was appointed our interim Chief Financial Officer as of January 31, 2019. Since August 2016, Mr. Underwood has been our Vice President of Finance and Director, Corporate Planning and Reporting, with responsibility for leading our financial planning processes, management reporting, and quarterly earnings process. From June 2015 to August 2016, he served as Vice President of Finance and Co-Executive-in-Residence with responsibility for integration activities of Intel’s acquisition of Altera. Mr. Underwood served as Vice President of Finance for the Mobile and Communications Group from January 2012 to June 2015. Prior to that, he served as Director of Finance for Intel Capital from June 2008 to January 2012. Mr. Underwood joined Intel in 1992.

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MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
Five years ago, we set out a strategy to transform from a PC-centric to a data-centric company. Our 2018 results serve as a strong proof point that our strategy is working and our transformation is well underway. We achieved record revenue and earnings per share (EPS), driven by strong business performance, continued operating leverage, and a lower tax rate. Revenue from our data-centric businesses collectively increased by double digits. Our PC-centric business grew above our expectations and continued to be a source of profit, cash flow, scale, and intellectual property (IP). While we have had delays in implementing our 10 nanometer (nm) manufacturing process technology, we have continued to innovate in our 14nm products, introducing leadership products that deliver more value to our customers. We've expanded beyond PC and server businesses with significant growth in adjacent products, and gained share in an expanded $300 billion TAM1. Our employees are executing to our strategy by developing compelling technology and delivering innovative products to our customers, enabling strong financial growth. For key highlights of the results of our operations, see "A Year in Review" within Fundamentals of Our Business.
Years Ended
(In Millions, Except Per Share Amounts)
 
December 29, 2018
 
December 30, 2017
 
December 31, 2016
 
Amount
 
% of Net
Revenue
 
Amount
 
% of Net
Revenue
 
Amount
 
% of Net
Revenue
Net revenue
 
$
70,848

 
100.0
 %
 
$
62,761

 
100.0
 %
 
$
59,387

 
100.0
 %
Cost of sales
 
27,111

 
38.3
 %
 
23,663

 
37.7
 %
 
23,154

 
39.0
 %
Gross margin
 
43,737

 
61.7
 %
 
39,098

 
62.3
 %
 
36,233

 
61.0
 %
Research and development
 
13,543

 
19.1
 %
 
13,035

 
20.8
 %
 
12,685

 
21.4
 %
Marketing, general and administrative
 
6,750

 
9.5
 %
 
7,452

 
11.9
 %
 
8,377

 
14.1
 %
Restructuring and other charges
 
(72
)
 
(0.1
)%
 
384

 
0.6
 %
 
1,744

 
2.9
 %
Amortization of acquisition-related intangibles
 
200

 
0.3
 %
 
177

 
0.3
 %
 
294

 
0.5
 %
Operating income
 
23,316

 
32.9
 %
 
18,050

 
28.8
 %
 
13,133

 
22.1
 %
Gains (losses) on equity investments, net
 
(125
)
 
(0.2
)%
 
2,651

 
4.2
 %
 
506

 
0.9
 %
Interest and other, net
 
126

 
0.2
 %
 
(349
)
 
(0.6
)%
 
(703
)
 
(1.2
)%
Income before taxes
 
23,317

 
32.9
 %
 
20,352

 
32.4
 %
 
12,936

 
21.8
 %
Provision for taxes
 
2,264

 
3.2
 %
 
10,751

 
17.1
 %
 
2,620

 
4.4
 %
Net income
 
$
21,053

 
29.7
 %
 
$
9,601

 
15.3
 %
 
$
10,316

 
17.4
 %
Earnings per share - Diluted
 
$
4.48

 
 
 
$
1.99

 
 
 
$
2.12

 
 















1 
Source: Intel calculated 2022 TAM derived from industry analyst reports.

a001intellogocolor.jpg  MD&A
 Consolidated Results and Analysis
19


REVENUE
We have achieved our third year in a row of record revenue, demonstrating that our strategy and transformation from a PC to a data-centric company is paying off. Our total revenue grew from $55.9 billion in 2014 to $70.8 billion in 2018, representing 6% compound annual growth rate (CAGR). Data-centric businesses collectively grew faster than Intel as a whole at 13% CAGR over the last five years and are approaching 50% of our revenue.
PC TO DATA-CENTRIC TRANSFORMATION OVER THE LAST 5 YEARS
    c0095yearrevenue.jpg
 
PC-centric $B
 Data-centric $B
Data-centric as a % of total Intel revenue

 

SEGMENT REVENUE WALK $B
c010segementrevwalk.jpg
2018 – 2017
In 2018, revenue was $70.8 billion, up $8.1 billion, or 13%, from 2017. The increase in revenue was primarily driven by strong performance across our data-centric businesses, which collectively grew 18% year over year and made up nearly half of our total revenue in 2018. Our recently acquired Mobileye business had revenue of $698 million. Our PC-centric business grew 9%, above our expectations, due to PC TAM1 growth and demand for our leadership products. The increase in 2018 revenue was partially offset by the loss of revenue from businesses that were divested, specifically $534 million from the divestiture of the Intel Security Group (ISecG) and approximately $165 million from the divestiture of Wind River.
2017 – 2016
2017 revenue of $62.8 billion was up $3.4 billion, or 6%, from 2016. After adjusting for the Q2 2017 divestiture of ISecG, revenue grew 9% from 2016. The increase in revenue was primarily driven by strong performance across our data-centric businesses, which collectively grew 16% year over year after adjusting for ISecG. We saw revenue growth across our DCG, IOTG, NSG, and PSG businesses, and 2017 revenue included $210 million from our Mobileye business. The increase in 2017 revenue was partially offset by $1.6 billion from the divestiture of ISecG and by approximately $500 million from a change to the Intel Inside® program.



1 
Source: Intel calculated PC TAM derived from industry analyst reports.

a001intellogocolor.jpg  MD&A
 Consolidated Results and Analysis
20


GROSS MARGIN
We derived most of our overall gross margin dollars from the sale of platform products in the CCG and DCG operating segments. Our overall gross margin dollars in 2018 increased by $4.6 billion, or 12%, compared to 2017, and in 2017 increased by $2.9 billion, or 8%, compared to 2016. In 2018, our adjacent products continued to grow, primarily due to memory and modem products, which have a lower gross margin percentage than our overall average. Adjacent products represented a larger proportion of our overall business in 2018, which positively impacted our gross margin dollars but substantially offset the increase in gross margin percentage from platform products.
GROSS MARGIN $B
(Percentages in chart indicate gross margin as a percentage of total revenue)
c011grossmargin.jpg
(In Millions)
 
 
$
43,737

 
2018 Gross Margin
5,810

 
Higher gross margin from platform revenue
(1,085
)
 
Higher platform unit cost, primarily from increased mix of performance products
(86
)
 
Other, primarily due to impact from divestitures, offset by higher gross margin from adjacent businesses
$
39,098

 
2017 Gross Margin
2,380

 
Higher gross margin from platform revenue
1,010

 
Lower platform unit cost, primarily on 14nm cost improvement
420

 
Lower Altera and other acquisition-related charges
315

 
Lower period charges associated with product warranty and IP agreements incurred in 2016
(535
)
 
Higher factory start-up costs, primarily driven by the ramp of our 10nm process technology
(390
)
 
Impact of the ISecG divestiture, offset by higher gross margin from adjacent businesses
(275
)
 
Period charges primarily associated with engineering samples and higher initial production costs from our 10nm products
(60
)
 
Other
$
36,233

 
2016 Gross Margin

a001intellogocolor.jpg  MD&A
 Consolidated Results and Analysis
21


OPERATING EXPENSES
Total R&D and marketing, general and administrative (MG&A) expenses for 2018 were $20.3 billion, down 1% from 2017. These expenses represented 28.6% of revenue for 2018 and 32.6% of revenue for 2017. In 2018, we met our goal to have annual R&D and MG&A be 30% of revenue, two years ahead of our 2020 target.
We continue to invest in R&D to accelerate our growth and profitability while driving operational efficiencies to reduce our MG&A spending.
RESEARCH AND DEVELOPMENT $B
 
MARKETING, GENERAL AND ADMINISTRATIVE $B
(Percentages indicate expenses as a percentage of total revenue)
c012opexrnd.jpgc013opexmga.jpg
RESEARCH AND DEVELOPMENT
2018 – 2017
R&D spending increased by $508 million, or 4%, driven by the following:
+
Investments in data-centric businesses
+ Investments in 10nm process technology
+
Profit-dependent compensation due to an increase in net income
-
Lack of expenses due to the divestitures of ISecG in Q2 2017 and Wind River in Q2 2018
2017 – 2016
R&D spending increased by $350 million, or 3%, driven by the following:
+
Investments in data-centric businesses, including the addition of Mobileye
+ Process development costs for our 7nm process technology
+
Profit-dependent compensation due to an increase in net income, excluding Tax Reform impacts
-
Lack of expenses due to the 2017 divestiture of ISecG
-
Cost savings from gained efficiencies
MARKETING, GENERAL AND ADMINISTRATIVE
2018 – 2017
MG&A expenses decreased by $702 million, or 9%, driven by the following:
-
Reduction in marketing programs in 2018
-
Lack of acquisition costs due to our 2017 acquisition of Mobileye
-
Lack of expenses due to the divestitures of ISecG in Q2 2017 and Wind River in Q2 2018
-
Change to the Intel Inside program in 2017
+
Olympics sponsorship in 2018
+
Profit-dependent compensation due to an increase in net income
2017 – 2016
MG&A expenses decreased by $925 million, or 11%, driven by the following:
-
Lack of expenses due to the 2017 divestiture of ISecG
-
Change to the Intel Inside program in 2017
+
Profit-dependent compensation due to an increase in net income, excluding Tax Reform impacts



a001intellogocolor.jpg  MD&A
 Consolidated Results and Analysis
22


a039ccgtitle.jpg
OVERVIEW
 
CCG is our largest business unit, delivering 52% of our revenue. The PC market remains a critical facet of our business, providing an important source of IP, scale, and cash flow. CCG is dedicated to delivering client computing end-user solutions, focusing on higher growth segments of 2-in-1, thin-and-light, commercial, and gaming, as well as growing adjacencies such as WiFi and modem. CCG is the human touchpoint in a data-centric world. We deploy platforms that connect people to data and analytics, allowing each person to focus, create, and connect in ways that unlock their individual potential.
a014ccgdonut.jpg
HIGHLIGHTS AND SEGMENT IMPERATIVES
 
 
 
 
 
 
 
 

Since 2014, the PC TAM has decreased by approximately 16%1, while CCG profitability has improved by over 37%, with focus on higher growth segments and innovative form factors.
 
 
"The PC is the human touchpoint of our data-centric strategy. We are committed to making the PC the platform that powers everyone’s greatest contribution."

—Gregory Bryant, CCG General Manager

Delivering an annual cadence of leadership products is foundational to our business. In 2019 we will begin transitioning to 10nm products, which are expected to be on shelves for the 2019 holiday season.
 
 

Leveraging our engineering capabilities and working with our customers and partners, we drive innovation across key vectors of performance, battery life, connectivity (e.g., WiFi, 5G), graphics, form factors, and AI.
 
 

As a critical facet of Intel's business, CCG is transforming the PC into the platform that powers every person’s greatest contribution and fundamentally supports Intel's data-centric vision of the future.
 
 
5-YEAR TRENDS
c014ccg5yrrevenue.jpg c015ccg5yropincome.jpg
 
Revenue $B
Year over Year Growth
 
 Op Income $B
Year over Year Growth

 
1 
Source: Intel calculated TAM derived from industry analyst reports

a001intellogocolor.jpg  MD&A
 Segment Trends and Results
23


MARKET AND BUSINESS OVERVIEW
Market trends and strategy
Overall market conditions have improved and we saw a modest growth in the PC TAM1 this year for the first time since 2011. Our revenue in 2018 increased due to strong demand in commercial and gaming market segments, and higher demand for our high-performance processors, which more than offset declines in desktop volume. We are operating in an increasingly competitive market, particularly in desktop. We continue to invest in product and process technology and in partnerships with our customers to deliver platform innovation and an annual cadence of leadership products. As we move to being a data-centric company, the PC is the connection between people, data, and analytics. It is the bridge between people and the cloud, allowing individuals to focus, create, and connect in new ways.
a040ccgmarketfocus.jpg
a041ccgmarketcreate.jpg
a042ccgmarketconnect.jpg
Products and competitiveness
With a focus on an annual cadence of leadership products, we seek to deliver security-enhanced solutions that continue to open the doors for new technologies, new use cases, and new categories. We expanded our 8th generation Intel® Core mobile processor U-series and Y-series families, which are optimized for mobility. These new processors have integrated Gigabit WiFi and enable faster connectivity speeds, better performance, more intuitive voice experiences, and longer battery life for 2-in-1s and thin-and-light laptops. 
We introduced the first Intel® Core i9 processor for laptops, an Intel Core platform extension that brings together the benefits of 8th generation Intel Core processors with Intel® Optane™ memory, and high-performance desktop CPUs and chipsets that deliver modern standby and ambient computing capabilities. We also announced the first 9th generation Intel® Core desktop processors, including the i9-9900K gaming processor, which significantly improves performance and platform features to meet a range of consumer needs. Additionally, we are investing in AI usages to make the client smarter, more adaptable, and more responsive.
Our platform products continue to be enhanced by new adjacent technologies. We introduced our 6th generation LTE* modem, the Intel® XMM7660 modem, built on Intel's 14nm process technology. We also announced our first 5G NR multi-mode product, the Intel XMM 8160 modem, in our Intel XMM 8000 series product family. In addition, we introduced an Intel® NUC family of products based on 8th generation Intel® Coreprocessors. These mainstream products can power home theater systems, drive content creation solutions, and serve as personal voice assistants. We also launched new Thunderbolt products, increasing the presence of fast and simple connectivity in premium PCs and universal docking solutions.



























1 
Source: Intel calculated PC shipment estimate derived from industry analyst reports.

a001intellogocolor.jpg  MD&A
 Segment Trends and Results
24


FINANCIAL PERFORMANCE
 
CCG REVENUE $B
 
CCG OPERATING INCOME $B
 
c016ccgrevenue.jpgc017ccgopincome.jpg
 
 Platform
  Adjacent
REVENUE SUMMARY
First year over year PC TAM1 growth since 2011 drove an increase in notebook platform volume in 2018. We are operating in an increasingly competitive environment, especially in desktop.
Increased demand for performance products, and segmentation drove strong product mix and higher ASP.
Strong demand for commercial, 2-in-1, and gaming market segments, along with higher modem share.
 
 
2018 – 2017
 
2017 – 2016
(Dollars in millions)
 
%
 
$ Impact
 
%
 
$ Impact
 
 
 
 
 
 
 
 
 
 
 
Desktop platform volume
 
down
(6)%
 
$
(608
)
 
down
(5)%
 
$
(686
)
Desktop platform ASP
 
up
11%
 
1,181

 
flat
—%
 
(38
)
Notebook platform volume
 
up
4%
 
839

 
up
5%
 
885

Notebook platform ASP
 
up
3%
 
677

 
up
2%
 
326

Adjacent products and other
 
 
 
 
912

 
 
 
 
608

 
 
 
 
 
 
 
 
 
 
 
Total change in revenue
 
 
 
 
$
3,001

 
 
 
 
$
1,095

OPERATING INCOME SUMMARY
Operating income increased 10% from 2017 to 2018, primarily due to higher gross margin from platform products. CCG achieved better operating efficiency with lower spending while continuing to invest in growth areas.
(In Millions)
 
 
$
14,222

 
2018 Operating Income
2,080

 
Higher gross margin from CCG platform revenue
235

 
Lower operating expenses
(690
)
 
Higher platform unit cost due to increased mix to performance products
(225
)
 
Higher period charges, primarily due to reserved non-qualified platform product as we ramp 10nm
(97
)
 
Other
$
12,919

 
2017 Operating Income
1,135

 
Lower platform unit cost, primarily on 14nm cost improvement
635

 
Higher gross margin from platform revenue
630

 
Lower operating expenses and share of technology development and MG&A costs
(430
)
 
Period charges primarily associated with engineering samples and higher initial production costs from 10nm products
303

 
Other
$
10,646

 
2016 Operating Income
1 Source: Intel calculated PC TAM derived from industry analyst reports and internal estimates.


a001intellogocolor.jpg  MD&A
 Segment Trends and Results
25


a043dcgtitle.jpg
OVERVIEW
 
DCG develops workload-optimized platforms for compute, storage, and network functions. Customers include cloud service providers, enterprise and government, and communications service providers. In 2018, DCG continued to grow faster than Intel as a whole, generating over 30% of our total revenue. Growth was fueled by strong demand in key workloads like AI and network function virtualization in the cloud service provider and communications service provider market segments.
a010dcgdonut.jpg
HIGHLIGHTS AND SEGMENT IMPERATIVES
 
 
 
 
 
 
 
 
DCG had record revenue and operating income in 2018. Customer transition to Intel® Xeon® Scalable processors and higher demand across cloud and communication service providers contributed to the growth.
 
 
"Our workload-optimized, broad portfolio strategy uniquely positions us to enable the global appetite to move, store and process data."

—Navin Shenoy, DCG General Manager
Adjacent products collectively grew revenue at double digits. Silicon photonics led the adjacencies with significant revenue growth year over year.
 
 
We see significant opportunities in cloud, networking, AI, and data analytics. As we broadened our product offerings and continued to innovate, the data center market TAM1 expanded to over $70 billion in 2018 and is expected to grow to over $90 billion by 2022.
 
 
We shipped the second generation Intel® Xeon® Scalable processors and Intel® Optane DC persistent memory for the data center.
 
 
5-YEAR TRENDS
c018dcg5yrrevenue.jpg c019dcg5yropincome.jpg
 
Revenue $B
Year over Year Growth
 
 Op Income $B
Year over Year Growth

 
1 Source: Intel calculated 2018 and 2022 TAM derived from industry analyst reports.

a001intellogocolor.jpg  MD&A
 Segment Trends and Results
26


MARKET AND BUSINESS OVERVIEW
Market trends and strategy
a044datadeluge.jpg
Data is a significant force in society today, and data is generated by intelligent and connected devices and infrastructures, such as phones and automated factories. Data is transmitted through network infrastructure, processed, and analyzed to become real-time information. This real-time information enables actionable insights and is the lifeblood for the future of technology innovation in areas such as AI.
Our thesis is that the massive growth of data worldwide will increase demand to process, analyze, store, and move data. We are one of the few companies that touches every part of the data revolution, and we've invested both organically and acquisitively to capitalize on these demands. We expect the growth momentum in DCG and the other data-centric businesses to continue in the long term.
DCG focuses on three market segments: cloud service providers, enterprise and government, and communication service providers. In 2018, cloud revenue grew as service providers continued to invest in infrastructure to meet the explosive demand for digital services, AI, and data analytics. Enterprise and government revenue was stable, driven by macro environment strength and increased deployment of hybrid cloud solutions and data-intensive workloads. Compared to 2017, where we saw workload migration as the main force of cloud growth, we now see new services as the primary drivers to public cloud demand while enterprise increased on-premises investments, including hybrid and private cloud deployments. In the communication service provider segment, we gained market segment share as customers chose to virtualize and transform their networks and prepare for the 5G transition using Intel® architecture.
a045datainfrastructure.jpg
Products and competitiveness
We offer a broad portfolio of platforms and technologies designed to provide workload-optimized performance across compute, storage, and network. These offerings span the full spectrum from the data center core to the network edge. In addition, DCG focuses on lowering the total cost of ownership and on other specific workload optimizations for the enterprise, cloud service provider, and communications service provider market segments, with hardware-enhanced performance, security features, and reliability. DCG's platform value can be extended through Intel adjacent products such as FPGAs and SSDs.
In 2018, we began shipping for revenue the second generation Intel Xeon Scalable processors, formerly code-named Cascade Lake, and they will launch in 2019. The new product delivers performance improvement over the prior generation on popular workloads, includes hardware-based mitigations for certain side-channel vulnerabilities, and introduces new capabilities with support for Intel Optane DC persistent memory. The combination of Intel Xeon processors and Intel Optane memory significantly boosted overall system performance and reduced total cost of ownership compared to the prior generation.

a001intellogocolor.jpg  MD&A
 Segment Trends and Results
27


FINANCIAL PERFORMANCE
 
DCG REVENUE $B
 
DCG OPERATING INCOME $B
 
c020dcgrevenue.jpgc021dcgopincome.jpg
 
 Platform
  Adjacent
REVENUE SUMMARY
Platform volume growth primarily from cloud and communication service provider market segments, with higher platform ASPs from the adoption of 14nm Intel® Xeon® Scalable processors.
Adjacent growth driven by the continued expansion of silicon photonics and Intel Optane memory technology in 2018.
When comparing 2018 to 2017, revenue from cloud service providers was up 40%, enterprise and government was up 2%, and communication service providers was up 25% (up 28%, down 3%, and up 15%, respectively, when comparing 2017 to 2016). In Q4 2018, we saw all DCG market segments were impacted by weakness in China demand and some cloud customers absorbing existing capacity.
 
2018 – 2017
 
2017 – 2016
(Dollars in millions)
% Growth
 
$ Impact
 
% Growth
 
$ Impact
 
 
 
 
 
 
 
 
 
 
Platform volume1
up
13%
 
$
2,334

 
up
5%
 
$
801

Platform ASP
up
7%
 
1,382

 
up
4%
 
743

Adjacent Products
up
13%
 
211

 
up
21%
 
284

 
 
 
 
 
 
 
 
 
 
Total change in revenue
 
 
 
$
3,927

 
 
 
 
$
1,828

OPERATING INCOME SUMMARY
Operating income increased 37% year over year, reaching an operating margin of 50% in 2018.
(In Millions)
 
 
$
11,476

 
2018 Operating Income
3,445

 
Higher gross margin from platform revenue
(350
)
 
Higher platform unit cost
(14
)
 
Other
$
8,395

 
2017 Operating Income
1,450

 
Higher gross margin from DCG platform revenue
215

 
Lower period charges associated with product warranty and IP agreements incurred in 2016
(585
)
 
Higher factory start-up costs, primarily driven by the ramp of our 10nm process technology
(315
)
 
Higher DCG spending and share of technology development and MG&A costs
110

 
Other
$
7,520

 
2016 Operating Income
1 DCG platform products are sold across the cloud service provider, communication service provider, and enterprise and government market segments.    


a001intellogocolor.jpg  MD&A
 Segment Trends and Results
28


a046iotgtitle.jpg
OVERVIEW
 
IOTG develops high-performance compute for targeted verticals and embedded markets. Our customers include retailers, manufacturers, health care providers, energy companies, automakers, and governments. We facilitate our customers creating, storing, and processing data generated by connected devices to accelerate business transformations.
a011iotgdonut.jpg
HIGHLIGHTS AND SEGMENT IMPERATIVES
 
 
 
 
 
 
 
 
IOTG achieved record revenue and operating income in 2018 on broad business strength and growing demand for edge computing and computer vision-based applications.
 
 
"Industries are undergoing data-driven digital transformations fueled by the Internet of Things. We work with our partners' ecosystems to build end-to-end solutions that provide solid business results today and lay the foundation for a more autonomous tomorrow."

—Tom Lantzsch, IOTG General Manager
Since 2014, IOTG has had average revenue growth of 14% and operating income growth of 15% per year. As we broaden our product offerings to meet market demand for Internet of Things solutions, our TAM is expected to reach approximately $30 billion by 20221.
 
 
We see significant opportunity for growth driven by an architectural shift toward edge computing, which extends applications, data, and compute from centralized points to be closer to the source inputs, enabling compute-hungry Internet of Things applications.
 
 
In 2018, we launched hardware solutions such as the Intel® Vision Accelerator Design Products and software solutions like the Intel® Distribution of OpenVINO™ toolkit to accelerate market adoption of computer vision and AI applications.
 
 
5-YEAR TRENDS
c022iotg5yrrevenue.jpg c023iotg5yropincome.jpg
 
Revenue $B
Year over Year Growth
 
 Op Income $B
Year over Year Growth

 
1 
Source: Intel calculated TAM derived from industry analyst reports.

a001intellogocolor.jpg  MD&A
 Segment Trends and Results
29


MARKET AND BUSINESS OVERVIEW
Market trends and strategy
The world is becoming smarter, more connected, and more data driven, and the Internet of Things sits at the center of this global digital transformation. Through a robust network of devices, software, networks, and sensors, the Internet of Things is transforming the way businesses create products, deliver services, and conduct operations—from schools and hospitals, to retailers and smart factories. Internet of Things-based solutions represent one of the fastest growing segments within the semiconductor industry, with 10% CAGR forecast from 2018 to 20221. However, the Internet of Things is a highly fragmented market with a diverse collection of competitors, products, and vertical segments. As such, IOTG specifically focuses on market sectors such as retail, industrial, and smart infrastructure/cities that align well with Intel’s ability to provide high-performance computing solutions.
a047iotgretaila01.jpg
a048iotgindustriala01.jpg
a049iotginfrastructurea01.jpg
Retailers are under tremendous pressure to compete in the age of accelerated digital disruption brought on by connected consumers and online shopping. We are helping retailers turn their data into powerful new insights. The results are highly curated experiences, improved inventory and supply chain efficiencies, and precision marketing.

The industrial Internet of Things involves making operations smarter, more connected, and, ultimately, autonomous. We enhance collaboration between humans, machines, and enterprise systems from the supply chain to the factory floor. Example use cases include predictive maintenance, machine vision, robotics, quality control, and defect detection.

Infrastructure providers and cities are seeking the best ways to use Internet of Things technology to enhance quality of services, improve public safety, reduce congestion, and achieve new levels of efficiency. We help cities and service providers turn data into actionable insights to enable smarter, safer and more efficient solutions.
a050iotgvisiona01.jpg
 
By 2021, we expect approximately 80% of data traffic will be video². Processing high-quality video requires the ability to rapidly analyze vast streams of data near the source and respond in real time, moving only relevant insights to the cloud. To process video data efficiently, our customers need the right solution for the job. We offer a broad range of hardware, software tools, and ecosystem programs to help scale vision technology across Internet of Things verticals and match specific needs with the right performance, cost, and power efficiency at every point in an Internet of Things architecture. Use cases include machine vision, industrial automation, and intelligent traffic management and pedestrian safety.
Products and competitiveness
IOTG utilizes adjacent products across Intel while making the investments needed to adapt products to the specific requirements for our vertical segments. We offer end-to-end solutions with our wide spectrum of products, including Intel Atom® and Intel® Xeon® processor-based computing, wireless connectivity, FPGAs, Movidius VPUs, and developer tools such as the OpenVINO™ software toolkit. IOTG product development focuses on addressing the key challenges businesses face when implementing Internet of Things solutions, including interoperability, connectivity, safety, security, industrial use conditions, and long life support.
IOTG enables a global ecosystem of industry partners, developers, and innovators to create solutions based on our products that accelerate return on investment and time-to-value for end customers. These Intel® Internet of Things Market Ready Solutions are vetted and tested in the market, scalable, repeatable, commercially available, and fully supported through our ecosystem partners. These solutions can help streamline operations, automate manual tasks, provide insights from data, and more.





1 
Source: Intel calculated Internet of Things TAM CAGR derived from industry analyst reports.
²
Source: Cisco Visual Networking Index: Forecast and Trends, 2017-2022, updated November 26, 2018.  

a001intellogocolor.jpg  MD&A
 Segment Trends and Results
30


FINANCIAL PERFORMANCE
 
IOTG REVENUE $B
 
IOTG OPERATING INCOME $B
 
c024iotgrevenue.jpgc025iotgopincome.jpg
 
 Platform
  Adjacent
REVENUE SUMMARY
2018 – 2017
Net revenue increased $286 million, or 9%, driven by $632 million higher IOTG platform unit sales, offset by $212 million mix of platform products sold and $134 million lower adjacent revenue due to the divestiture of Wind River in June 2018. After adjusting for Wind River, IOTG revenue grew $447 million, or 16%, year over year. Revenue grew due to strength across the retail, industrial, video, and other market segments.
2017 – 2016
Net revenue increased $531 million, driven by $329 million higher IOTG platform unit sales and $176 million growth in IOTG adjacent products, including $74 million from milestone-based revenue. Revenue grew across the retail, industrial, and smart video market segments.
OPERATING INCOME SUMMARY
2018 – 2017
Operating income increased $330 million due to higher revenue and lower spending as we reprioritized investments within the automotive business and Wind River.
2017 – 2016
Operating income increased $65 million due to higher revenue offset by higher investment in growth areas such as automotive, and by increased share of technology development and MG&A costs.



a001intellogocolor.jpg  MD&A
 Segment Trends and Results
31


a051nsgtitle.jpg
OVERVIEW
 
NSG's core offerings include Intel® Optane™ and Intel® 3D NAND technologies, driving innovation in SSDs and next-generation memory and storage products. Our customers include enterprise and cloud-based data centers, users of business and consumer desktops and laptops, and a variety of Internet of Things application providers. We are ramping 64-layer (64L) triple-level cell (TLC) and quad-level cell (QLC) NAND technologies, and Intel Optane technology in innovative new form factors and densities to address the challenges our customers face in a rapidly evolving technological landscape.
a012nsgdonut.jpg
HIGHLIGHTS AND SEGMENT IMPERATIVES
 
 
 
 
 
 
 
 
Achieved more than 20% revenue growth in 2018 and drove improvements in operating margins by approximately $250 million to approximately break even for 2018.

 
 
“Our Optane™ technology products are critical to helping our customers analyze valuable data in ways that allow real time business impact and our Intel QLC 3D NAND products enable them to store more data for cost effective analysis.”  

—Rob Crooke, NSG General Manager
Introduced the industry's first PCIe*-based QLC SSD and grew our Intel® Optane™ and NAND product lines with a focus on new densities and innovative form factors in 2018, resulting in 64L QLC products making up more than half of our sales volume.
 
 
Announced the release of Intel® Optane™ DC Persistent memory, available on next-generation Intel® Xeon® processors for datacenters—which is redefining the memory/storage hierarchy and bringing persistent, large-scale, memory closer to the processor.
 
 
During 2018, Intel and Micron announced they will independently develop future generations of 3D NAND and 3D XPoint technology and in January 2019, Micron called our interest in IMFT. The IMFT agreement provides for supply for up to one year after the close of the transaction.
 
 
5-YEAR TRENDS
c026nsg5yrrevenue.jpg c027nsg5yropincome.jpg
 
Revenue $B
Year over Year Growth
 
 Op Income $B
 
 

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 Segment Trends and Results
32


MARKET AND BUSINESS OVERVIEW
Market trends and strategy
As technology penetration continues to grow worldwide, the amount of data that is produced has grown exponentially. Audio, video, and sensory data is produced and collected by a vast array of devices that require a significant increase in storage and memory technology. This has resulted in the storage and memory TAM growing to approximately $180 billion in 2018, a 25% increase from 20171. Our focus continues to be within the high-performance compute, financial services, cloud service provider, and Internet usage markets. NSG delivered over 20% annual revenue growth and improved profitability to break even for 2018.
With data growth expanding, our customers face the challenge of ensuring that critical, or "hot," data is close to the CPU for rapid access. Our innovations in technology address the need for various storage tiers, based on different usages, while keeping a focus on performance and cost. As customers look to improve the performance of their storage and memory devices, NSG is seeing and leading a transition to the PCIe* interface with Non-Volatile Memory Express* for SSDs, as well as efficiency and game-changing form factors like the "ruler" based on EDSFF.
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Products and competitiveness
The acceleration in data growth across our customer base requires significant innovation in storage and memory technology. Our storage and memory roadmap has led the way in reimagining usages and architecting innovative solutions that have disrupted the industry with 64L 3D NAND TLC and QLC solutions, as well as Intel® Optane™ technology. We have launched over 15 new products in 2018 to keep up with the evolving business needs of our customers. These new products have driven our 64L products to be more than half of 2018 NSG volume and a meaningful ramp in the Optane business.
A key highlight in 2018 was the announcement of Intel® Optane™ DC Persistent Memory, available on next-generation Intel® Xeon® processor platforms for data center usages. This technology redefines the memory storage hierarchy and offers the performance of memory with the large capacities and persistence characteristics of storage. We are also leading the way in the NAND industry with the announcement of the first PCIe* QLC 3D NAND SSD for the Data Center and Client markets. This new technology will enable innovative new form factors and higher capacity drives. With the addition of these new NAND and Optane product lines, we have strengthened our commitment to driving customer value through platform-connected features and solutions.
INTEL® OPTANE TECHNOLOGY
 
INTEL® 3D NAND TECHNOLOGY
 
 
 
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1 
Source: Gartner, Inc., Forecast: DRAM Market Statistics, Worldwide, 2014-2021, 3Q18 Update, Gartner, Inc., Forecast: Hard-Disk Drives, Worldwide, 2014-2022, 2Q18 Update, Gartner, Inc., Forecast: NAND Flash Supply and Demand, Worldwide, 1Q16-4Q18, 2Q18 Update.

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FINANCIAL PERFORMANCE
 
NSG REVENUE $B
 
NSG OPERATING INCOME $B
 

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REVENUE SUMMARY
2018 – 2017
Net revenue increased $787 million, driven by $2.6 billion increase in unit sales due to strong demand in data center and client SSD and the ramp of Intel Optane technology products, partially offset by $1.8 billion lower ASP due to NAND market pricing weakness and mix of products sold.
2017 – 2016
Net revenue increased $944 million, driven by $1.6 billion from higher unit sales due to strong demand in data center, partially offset by $655 million lower ASP due to market conditions and the ramp of our new TLC 3D NAND product line, which has a lower cost and ASP compared to our primary multi-level cell 3D NAND.
OPERATING INCOME SUMMARY
2018 – 2017
Operating income improved $255 million as our sales mix shifted to our latest 64L NAND and we continued to see the cost ramp at Fab 68. The improved unit costs and higher unit sales more than offset the decline in ASP. In addition, we had a total of $160 million earned government grants benefiting 2018.
2017 – 2016
Operating income increased $284 million, driven primarily by $725 million unit cost reductions due to the cost improvements associated with Fab 68 and lower costs from the ramp of the Intel® 3D NAND product line compared to prior generation NAND products. The lower unit cost impact was offset by $380 million lower gross margin from NSG revenue.


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 Segment Trends and Results
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OVERVIEW
 
PSG offers programmable semiconductors, primarily FPGAs and related products for a broad range of market segments, including communications, data center, industrial, and military. PSG collaborates with the other Intel businesses to deliver FPGA acceleration in tandem with Intel microprocessors. This "better together" integration broadens the use of FPGAs and combines the benefits of both technologies to allow more flexibility for systems to operate with increased efficiency and higher performance.
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HIGHLIGHTS AND SEGMENT IMPERATIVES
 
 
 
 
 
 
 
 
PSG achieved a record design win year in 2018, driven by Intel® Arria® 10 and Intel® Stratix® 10 device families.
 
 
"The increased adoption of FPGA and eASIC solutions across data center, networking, and IoT is driving value to our data-centric businesses."

—Dan McNamara, PSG General Manager
In 2018 we announced the Intel® Programmable Acceleration Card (Intel® PAC) with Intel® Stratix®10 SX FPGA, which operates seamlessly with Intel Xeon processors and an acceleration software stack, extending our portfolio of FPGA acceleration platforms.
 
 
In 2018, we acquired eASIC, a leading provider of structured application-specific integrated circuits (ASICs). These products expand PSG’s chip portfolio to better meet customers’ needs to further optimize cost and power. Customers have more choices and can achieve faster time-to-market and lower development costs—including a low-cost conversion process from FPGA to structured ASICs.
 
 
In 2019, PSG will continue to focus on becoming the multi-function acceleration solution of choice for continuously evolving technologies from the edge to the cloud.
 
 
3-YEAR TRENDS
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Revenue $B
Year over Year Growth
 
 Op Income $B
 
 

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 Segment Trends and Results
35


MARKET AND BUSINESS OVERVIEW
Market trends and strategy
PSG delivers solutions in the programmable logic device (PLD) market, primarily FPGAs, to accelerate applications that help secure, power, and connect billions of devices and the infrastructure of the smart, connected, data-centric world. PSG enables a broad range of solutions targeting the data center, wireless, networking, military, medical, and industrial markets. The configurability and efficiency of FPGAs provide advantages to enable transformative applications such as 5G wireless, network function virtualization offload, and edge acceleration for video analytics and Industry 4.0. PSG has expanded its product portfolio by providing Intel® PAC, complete with an acceleration software stack, enabling new customers to plug cards directly into an Intel® Xeon® processor-based server for application accelerations in markets such as finance, genomics, video transcoding, and database acceleration.
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Products and competitiveness
With the rise of pervasive connectivity and autonomous transactions, vast networks of devices and systems are linked from the edge through infrastructure to the cloud. The Intel® FPGA portfolio enables this transformation with discrete FPGAs and software-defined, hardware-based, multi-function acceleration cards that allow faster development times, high performance, and power efficiency with lower overall total cost of ownership. In the cloud, where workloads shift dynamically and algorithms change, Intel FPGAs are the ideal solution for adapting to new demands through reconfigurability.

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 Segment Trends and Results
36


FINANCIAL PERFORMANCE
 
PSG REVENUE $B
 
PSG OPERATING INCOME $B
 
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REVENUE SUMMARY
2018 – 2017
Revenue increased $221 million, driven by growth in the data center market segment and our advanced products (28nm, 20nm, and 14nm process technologies), which grew approximately 60% from 2017.
2017 – 2016
Revenue increased $233 million, driven by growth in industrial, military, and automotive market segments, as well as in our advanced products and last-time buys of our legacy products. Also, a one-time $99 million deferred revenue write-down due to the acquisition of Altera negatively impacted 2016 PSG revenue.
OPERATING INCOME SUMMARY
2018 – 2017
Operating income was flat year over year, at $466 million. Revenue increased from the growth in the data center and advanced products, but was offset by higher costs from an unfavorable product mix and increased investments.
2017 – 2016
Operating income increased $562 million. Higher revenue and operational synergies contributed $111 million of the year over year increase. The remainder was due to one-time acquisition-related charges, including a $99 million deferred revenue write-down with a $64 million operating income impact and an inventory valuation adjustment of approximately $387 million.

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 Segment Trends and Results
37



RESTRUCTURING AND OTHER CHARGES
Years Ended
(In Millions)
 
Dec 29,
2018
 
Dec 30,
2017
 
Dec 31,
2016
2016 Restructuring Program
 
$
(72
)
 
$
135

 
$
1,681

ISecG separation costs and other charges
 

 
249

 
63

Total restructuring and other charges
 
$
(72
)
 
$
384

 
$
1,744

We commenced the 2016 Restructuring Program in the second quarter of 2016 and the program was completed in 2017. Other charges consist primarily of expenses associated with the divestiture of ISecG that was completed in Q2 2017. For further information, see "Note 8: Restructuring and Other Charges" within the Consolidated Financial Statements.
GAINS (LOSSES) ON EQUITY INVESTMENTS AND INTEREST AND OTHER, NET
Years Ended
(In Millions)
 
Dec 29,
2018
 
Dec 30,
2017
 
Dec 31,
2016
Gains (losses) on equity investments, net
 
$
(125
)
 
$
2,651

 
$
506

Interest and other, net
 
$
126

 
$
(349
)
 
$
(703
)
GAINS (LOSSES) ON EQUITY INVESTMENTS, NET
We recognized ongoing mark-to-market net losses on our marketable equity securities of $129 million in 2018, primarily related to changes in value of our interests in ASML Holding N.V. (ASML) and Cloudera, Inc. In addition to the mark-to-market losses, we also recognized impairment charges, including a $290 million impairment charge to our equity method investment in IMFT. These losses were partially offset by $202 million of upward observable price adjustments.
We recognized $3.5 billion of net realized gains on sales in 2017, primarily related to sales of a portion of our interest in ASML. The higher net realized gains were partially offset by $833 million of impairment charges and our share of equity method investee losses in 2017. We recognized higher reported gains in 2017 compared to 2016, primarily related to sales of a portion of our interest in ASML.
INTEREST AND OTHER, NET
We recognized a net gain in interest and other in 2018 compared to a net loss in 2017, primarily due to lower losses on debt conversions, higher assets under construction resulting in more capitalized interest, and larger divestiture gains in 2018 compared to 2017.
We recognized a lower net loss in interest and other in 2017 compared to 2016, primarily due to higher interest income in 2017.
PROVISION FOR TAXES
Years Ended
(Dollars in Millions)
 
Dec 29,
2018
 
Dec 30,
2017
 
Dec 31,
2016
Income before taxes
 
$
23,317

 
$
20,352

 
$
12,936

Provision for taxes
 
$
2,264

 
$
10,751

 
$
2,620

Effective tax rate
 
9.7
%
 
52.8
%
 
20.3
%
The majority of the decrease in our effective tax rate in 2018 compared to 2017 resulted from initial tax expense from the U.S. Tax Cuts and Jobs Act (Tax Reform) and the tax impacts from the ISecG divestiture that we had in 2017, but not in 2018. The reduction of the U.S. statutory rate, combined with the net impact of the enactment or repeal of specific tax law provisions through the Tax Reform, drove the remaining decrease in our effective tax rate in 2018. For further information on Tax Reform and its impacts, see "Note 9: Income Taxes" within the Consolidated Financial Statements.
Substantially all of the increase in our effective tax rate in 2017 compared to 2016 was driven by the one-time provisional impacts from the Tax Reform enacted on December 22, 2017, the 2017 ISecG divestiture, and a higher proportion of our income in higher tax rate jurisdictions.

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 Consolidated Results and Analysis
38


LIQUIDITY AND CAPITAL RESOURCES
We consider the following when assessing our liquidity and capital resources:
(Dollars in Millions)
 
Dec 29,
2018
 
Dec 30,
2017
Cash and cash equivalents, short-term investments, and trading assets
 
$
11,650

 
$
14,002

Other long-term investments
 
$
3,388

 
$
3,712

Loans receivable and other
 
$
1,550

 
$
1,097

Reverse repurchase agreements with original maturities greater than three months
 
$
250

 
$
250

Total debt
 
$
26,359

 
$
26,813

Temporary equity
 
$
419

 
$
866

Debt as a percentage of permanent stockholders’ equity
 
35.4
%
 
38.8
%
Cash generated by operations is our primary source of liquidity. We maintain a diverse investment portfolio that we continually analyze based on issuer, industry, and country. When assessing our sources of liquidity, we include investments as shown in the preceding table. Substantially all of our investments in debt instruments and financing receivables are in investment-grade securities.
Other potential sources of liquidity include our commercial paper program and our automatic shelf registration statement on file with the SEC, pursuant to which we may offer an unspecified amount of debt, equity, and other securities. Under our commercial paper program, we have an ongoing authorization from our Board of Directors to borrow up to $10.0 billion. As of December 29, 2018, $480 million of commercial paper remained outstanding. During 2018, we remarketed a total of $423 million aggregate principal amount of bonds issued by the Industrial Development Authority of the City of Chandler, Arizona and the State of Oregon Business Development Commission. We also repaid $600 million of our 2.50% senior notes that matured in November 2018 and paid $2.4 billion in cash to satisfy conversion requests for a portion of our $2.0 billion 3.25% junior subordinated convertible debentures due 2039.
The enactment of Tax Reform in December 2017 imposed a tax on all previously untaxed earnings of non-U.S. subsidiaries of U.S. corporations. Future distributions of non-U.S. assets to the U.S. are no longer subject to U.S. taxation in most cases. As a result, in Q4 2017 we recognized a one-time provisional transition tax expense of $6.1 billion, which was adjusted to $5.9 billion in 2018. We expect to pay the tax in annual installments from 2019 through 2026. We believe that our current U.S. sources of cash and liquidity are sufficient to meet our tax liability.
During Q3 2017, we acquired 97.3% of Mobileye's outstanding ordinary shares for $14.5 billion net cash. We funded the acquisition of shares with cash held by our non-U.S. subsidiaries. During Q2 2018, we acquired the remaining outstanding ordinary shares for $380 million.
We believe we have sufficient financial resources to meet our business requirements in the next 12 months, including capital expenditures for worldwide manufacturing and assembly and test; working capital requirements; and potential acquisitions, strategic investments, dividends, and common stock repurchases.

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 Consolidated Results and Analysis
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SOURCES AND USES OF CASH
(In Millions)
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In summary, our cash flows for each period were as follows:
Years Ended
(In Millions)
 
Dec 29,
2018
 
Dec 30,
2017
 
Dec 31,
2016
Net cash provided by operating activities
 
$
29,432

 
$
22,110

 
$
21,808

Net cash used for investing activities
 
(11,239
)
 
(15,762
)
 
(25,817
)
Net cash provided by (used for) financing activities
 
(18,607
)
 
(8,475
)
 
(5,739
)
Net increase (decrease) in cash and cash equivalents
 
$
(414
)
 
$
(2,127
)
 
$
(9,748
)

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 Consolidated Results and Analysis
40


OPERATING ACTIVITIES
Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities.
For 2018 compared to 2017, the $7.3 billion increase in cash provided by operating activities was primarily due to higher net income, offset by changes in working capital. Changes in working capital were driven by taxes and accounts receivables, offset by relatively flat inventory levels. Income taxes paid, net of refunds, in 2018 compared to 2017 were flat as the benefit of a lower U.S. corporate tax rate was offset by the payment related to the 2017 U.S. Tax Reform transition tax. We received $1.4 billion of customer deposits and prepaid supply agreements in 2018, net of customer utilization, compared to $1.1 billion in 2017.
For 2017 compared to 2016, the $302 million increase in cash provided by operating activities was due to changes to working capital partially offset by adjustments for non-cash items and lower net income. Tax Reform did not have an impact on our 2017 cash provided by operating activities. The increase in cash provided by operating activities was driven by increased income before taxes and $1.1 billion receipts of customer deposits and prepaid supply agreements. These increases were partially offset by increased inventory and accounts receivable. Income taxes paid, net of refunds, in 2017 compared to 2016 were $2.9 billion higher due to higher income before taxes, taxable gains on sales of ASML, and taxes on the ISecG divestiture.
INVESTING ACTIVITIES
Investing cash flows consist primarily of capital expenditures; investment purchases, sales, maturities, and disposals; and proceeds from divestitures and cash used for acquisitions. Our capital expenditures were $15.2 billion in 2018 ($11.8 billion in 2017 and $9.6 billion in 2016).
The decrease in cash used for investing activities in 2018 compared to 2017 was primarily due to lower cash paid on acquisitions and increased cash from net trading asset activity. This was partially offset by increased capital expenditures, net available-for-sale debt investments activity, decreased proceeds from divestitures, and decreased sales of equity investments (substantially all from ASML sales).
The decrease in cash used for investing activities in 2017 compared to 2016 was primarily due to higher net activity of available-for-sale debt investments in 2017, proceeds from our divestiture of ISecG in 2017, and higher maturities and sales of trading assets in 2017. This activity was partially offset by higher capital expenditures in 2017.
FINANCING ACTIVITIES
Financing cash flows consist primarily of repurchases of common stock, payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, and proceeds from the sale of shares of common stock through employee equity incentive plans.
The increase in cash used for financing activities in 2018 compared to 2017 was primarily due to decreased long-term debt issuance and increased repurchases of common stock. During 2018, we repurchased $10.7 billion of common stock under our authorized common stock repurchase program, compared to $3.6 billion in 2017. In 2018, the Board approved a $15.0 billion increase in our authorized stock repurchase program. As of December 29, 2018, $17.3 billion remained available for repurchasing common stock under the repurchase authorization limit. We base our level of common stock repurchases on internal cash management decisions, and this level may fluctuate. Our total dividend payments were $5.5 billion in 2018 compared to $5.1 billion in 2017. We have paid a cash dividend in each of the past 105 quarters. In Q1 2019, the Board declared a quarterly cash dividend of $0.315 per share of common stock, payable on March 1, 2019 to stockholders of record on February 7, 2019.
The increase in cash used for financing activities in 2017 compared to 2016 was primarily due to net long-term debt activity, which was a use of cash in 2017 compared to a source of cash in 2016. Additionally, cash used for common stock repurchases was higher in 2017 compared to 2016.


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 Consolidated Results and Analysis
41


CONTRACTUAL OBLIGATIONS
Significant contractual obligations as of December 29, 2018 were as follows:
  
 
Payments Due by Period
(In Millions)
 
Total
 
Less Than
1 Year
 
1–3 Years
 
3–5 Years
 
More Than
5 Years
Operating lease obligations
 
$
835

 
$
229

 
$
314

 
$
171

 
$
121

Capital purchase obligations
 
9,029

 
7,888

 
795

 
345

 
1

Other purchase obligations and commitments
 
3,249

 
1,272

 
1,781

 
178

 
18

Tax obligations3
 
4,732

 
143

 
426

 
1,234

 
2,929

Long-term debt obligations4
 
40,187

 
1,518

 
7,583

 
6,173

 
24,913

Other long-term liabilities5
 
1,626

 
722

 
708

 
95

 
101

Total6
 
$
59,658

 
$
11,772

 
$
11,607

 
$
8,196

 
$
28,083

1 
Capital purchase obligations represent commitments for the construction or purchase of property, plant and equipment. They were not recorded as liabilities on our consolidated balance sheets as of December 29, 2018, as we had not yet received the related goods nor taken title to the property.
2 
Other purchase obligations and commitments include payments due under various types of licenses and agreements to purchase goods or services, as well as payments due under non-contingent funding obligations.
3 
Tax obligations represent the future cash payments related to Tax Reform enacted in 2017 for the one-time transition tax on our previously untaxed foreign earnings. For further information, see "Note 9: Income Taxes" within the Consolidated Financial Statements.
4 
Amounts represent principal payments for all debt obligations and interest payments for fixed-rate debt obligations. Interest payments on floating-rate debt obligations, as well as the impact of fixed-rate to floating-rate debt swaps, are excluded. Debt obligations are classified based on their stated maturity date, regardless of their classification on the consolidated balance sheets. Any future settlement of convertible debt would impact our cash payments.
5 
Amounts represent future cash payments to satisfy other long-term liabilities recorded on our consolidated balance sheets, including the short-term portion of these long-term liabilities. Derivative instruments are excluded from the preceding table, as they do not represent the amounts that may ultimately be paid.
6 
Total excludes contractual obligations already recorded on our consolidated balance sheets as current liabilities, except for the short-term portions of long-term debt obligations and other long-term liabilities.
The expected timing of payments of the obligations in the preceding table is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations.
Contractual obligations for purchases of goods or services included in "Other purchase obligations and commitments" in the preceding table include agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. For obligations with cancellation provisions, the amounts included in the preceding table were limited to the non-cancelable portion of the agreement terms or the minimum cancellation fee.
For the purchase of raw materials, we have entered into certain agreements that specify minimum prices and quantities based on a percentage of the total available market or based on a percentage of our future purchasing requirements. Due to the uncertainty of the future market and our future purchasing requirements, as well as the non-binding nature of these agreements, obligations under these agreements have been excluded from the preceding table. Our purchase orders for other products are based on our current manufacturing needs and are fulfilled by our vendors within short time horizons. In addition, some of our purchase orders represent authorizations to purchase rather than binding agreements.
Contractual obligations that are contingent upon the achievement of certain milestones have been excluded from the preceding table. Most of our milestone-based contracts are tooling related for the purchase of capital equipment. These arrangements are not considered contractual obligations until the milestone is met by the counterparty. As of December 29, 2018, assuming that all future milestones are met, the additional required payments would be approximately $688 million.
For the majority of restricted stock units (RSUs) granted, the number of shares of common stock issued on the date the RSUs vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. The obligation to pay the relevant taxing authority is excluded from the preceding table, as the amount is contingent upon continued employment. In addition, the amount of the obligation is unknown, as it is based in part on the market price of our common stock when the awards vest.

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 Consolidated Results and Analysis
42


During 2014, we entered into a series of agreements with Tsinghua Unigroup Ltd. (Tsinghua Unigroup), an operating subsidiary of Tsinghua Holdings Co. Ltd., to, among other things, jointly develop Intel architecture and communications-based solutions for phones. Subject to regulatory approvals and other closing conditions, we have agreed to invest up to $9.0 billion Chinese yuan (approximately $1.5 billion as of the date of the agreement) for a minority stake of Beijing Unisoc Technology Ltd. (Unisoc), formally Beijing UniSpreadtrum Technology Ltd. During 2015, we invested $966 million to complete the first phase of the equity investment, and the second phase of the investment will require additional funding of approximately $500 million; however, as our obligation is contingent upon regulatory approvals and other closing conditions, it has been excluded from the preceding table.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are affected by changes in currency exchange and interest rates, as well as equity and commodity prices. Our risk management programs reduce, but may not entirely eliminate, the impacts of these risks. All of the following potential changes are based on sensitivity analyses performed on our financial positions as of December 29, 2018 and December 30, 2017. Actual results may differ materially.
CURRENCY EXCHANGE RATES
We are exposed to currency exchange risks of non-U.S.-dollar-denominated investments in debt instruments and loans receivable, and may economically hedge this risk with foreign currency contracts, such as currency forward contracts or currency interest rate swaps. Gains or losses on these non-U.S.-currency investments are generally offset by corresponding losses or gains on the related hedging instruments. We are exposed to currency exchange risks from our non-U.S.-dollar-denominated debt indebtedness and may use foreign currency contracts designated as cash flow hedges to manage this risk.
Substantially all of our revenue is transacted in U.S. dollars. However, a significant portion of our operating expenditures and capital purchases are incurred in other currencies, primarily the euro, the Japanese yen, the Israeli shekel, and the Chinese yuan. We have established currency risk management programs to protect against currency exchange rate risks associated with non-U.S. dollar forecasted future cash flows and existing non-U.S. dollar monetary assets and liabilities. We may also hedge currency risk arising from funding of foreign currency-denominated future investments. We may utilize foreign currency contracts, such as currency forwards or option contracts in these hedging programs. We considered the historical trends in currency exchange rates and determined that it was reasonably possible that a weighted average adverse change of 20% in currency exchange rates could be experienced in the near term. Such an adverse change, after taking into account balance sheet hedges only and offsetting recorded monetary asset and liability positions outstanding as of December 29, 2018 and December 30, 2017, would result in an adverse impact on income before taxes of less than $46 million and less than $95 million, respectively.
INTEREST RATES
We are exposed to interest rate risk related to our fixed-rate investment portfolio and outstanding debt. The primary objective of our investment policy is to preserve principal and the financial flexibility to fund our business while maximizing yields, which generally track the U.S. dollar three-month LIBOR. We generally enter into interest rate contracts to convert the returns on our fixed-rate debt investment with remaining maturities longer than six months into U.S. dollar three-month LIBOR-based returns. We also enter into swaps to convert fixed-rate coupon payments into floating-rate coupon payments for our existing indebtedness. Gains or losses on these instruments are generally offset by corresponding losses or gains on the related hedging instruments.
A hypothetical increase in benchmark interest rates of up to 1.0%, after taking into account investment hedges, would have resulted in a decrease in the fair value of our investment portfolio of approximately $110 million as of December 29, 2018 (a hypothetical decrease of 1.0% would have resulted in an increase of approximately $100 million as of December 30, 2017).
Taking into account floating-rate debt, and fixed-rate debt that is swapped to floating-rate debt, a hypothetical increase in interest rates of up to 1.0% would result in an increase in annual interest expense on our indebtedness of approximately $215 million from debt outstanding as of December 29, 2018 (an increase of approximately $140 million from debt outstanding as of December 30, 2017). We have changed our presentation from the prior year to show the impact of interest rate changes on interest expense rather than on fair value of debt in order to present information that could hypothetically impact our net income and cash flows.
EQUITY PRICES
Our investments include marketable equity securities and equity derivative instruments. We typically do not attempt to reduce or eliminate our equity market exposure through hedging activities at the inception of our investments. In the event we do decide to enter into hedge arrangements, before doing so we evaluate legal, market, and economic factors, as well as the expected timing of disposal, to determine whether hedging is appropriate. Our equity market risk management program may include equity derivatives with or without hedge accounting designation that utilize warrants, equity options, or other equity derivatives.
We also utilize total return swaps to offset changes in liabilities related to the equity market risks of certain deferred compensation arrangements. Gains or losses from changes in fair value of these total return swaps are generally offset by the losses or gains on the related liabilities.

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 Consolidated Results and Analysis
43


As of December 29, 2018, the fair value of our marketable equity investments and our equity derivative instruments, including hedging positions, was $1.4 billion ($4.2 billion as of December 30, 2017). A substantial majority of our marketable equity investments portfolio as of December 29, 2018 was concentrated in our investment in ASML of $1.1 billion ($3.6 billion as of December 30, 2017). To determine reasonably possible decreases in the market value of our marketable equity investments, we have analyzed the historical market price sensitivity of our marketable equity investment portfolio. Assuming a decline of 40% in market prices, and after reflecting the impact of hedges and offsetting positions, the aggregate value of our marketable equity investments could decrease by approximately $0.6 billion, based on the value as of December 29, 2018 (a decrease in value of approximately $1.1 billion, based on the value as of December 30, 2017 using an assumed decline of 25%). Beginning in 2018, as explained in "Note 3: Recent Accounting Standards" within the Consolidated Financial Statements, changes in the fair value of our marketable equity securities will be measured and recorded at fair value with changes in fair value recorded through the income statement.
Many of the same factors that could result in an adverse movement of equity market prices affect our non-marketable equity investments, although we cannot always quantify the impacts directly. Financial markets are volatile, which could negatively affect the prospects of the companies we invest in, their ability to raise additional capital, and the likelihood of our ability to realize value in our investments through liquidity events such as initial public offerings, mergers, and private sales. These types of investments involve a great deal of risk, and there can be no assurance that any specific company will grow or become successful; consequently, we could lose all or part of our investment. Our non-marketable equity securities had a carrying amount of $3.0 billion as of December 29, 2018 ($2.6 billion as of December 30, 2017) and included our investment in Unisoc of $658 million ($658 million for Unisoc as of December 30, 2017). The carrying amount of our equity method investments was $1.6 billion as of December 29, 2018 ($1.8 billion as of December 30, 2017). Substantially all of our equity method investments balance as of December 29, 2018 was concentrated in our IMFT investment of $1.6 billion ($1.5 billion for IMFT as of December 30, 2017).
COMMODITY PRICE RISK
Although we operate facilities that consume commodities, we are not directly affected by commodity price risk to a material degree. We have established forecasted transaction risk management programs to protect against fluctuations in commodity prices. We may use commodity derivatives contracts, such as commodity swaps, in these hedging programs. In addition, we have sourcing plans in place that mitigate the risk of a potential supplier concentration for our key commodities.



a001intellogocolor.jpg  MD&A
 Consolidated Results and Analysis
44


OTHER KEY INFORMATION
SELECTED FINANCIAL DATA
Years Ended
(Dollars in Millions, Except Per Share Amounts)
 
Dec 29,
2018
 
Dec 30,
2017
 
Dec 31,
2016
 
Dec 26,
2015
 
Dec 27,
2014
Net revenue
 
$
70,848

 
$
62,761

 
$
59,387

 
$
55,355

 
$
55,870

Gross margin1
 
$
43,737

 
$
39,098

 
$
36,233

 
$
34,679

 
$
35,609

Gross margin percentage1
 
61.7
%
 
62.3
%
 
61.0
%
 
62.6
%
 
63.7
%
Research and development1
 
$
13,543

 
$
13,035

 
$
12,685

 
$
12,128

 
$
11,537

Marketing, general and administrative1
 
$
6,750

 
$
7,452

 
$
8,377

 
$
7,930

 
$
8,136

R&D and MG&A as a percentage of revenue1
 
28.6
%
 
32.6
%
 
35.5
%
 
36.2
%
 
35.2
%
Operating income1
 
$
23,316

 
$
18,050

 
$
13,133

 
$
14,002

 
$
15,347

Net income2
 
$
21,053

 
$
9,601

 
$
10,316

 
$
11,420

 
$
11,704

Effective tax rate2
 
9.7
%
 
52.8
%
 
20.3
%
 
19.6
%
 
25.9
%
Earnings per share2
 
 
 
 
 
 
 
 
 
 
Basic
 
$
4.57

 
$
2.04

 
$
2.18

 
$
2.41

 
$
2.39

Diluted
 
$
4.48

 
$
1.99

 
$
2.12

 
$
2.33

 
$
2.31

Weighted average diluted shares of common stock outstanding
 
4,701

 
4,835

 
4,875

 
4,894

 
5,056

Dividends per share of common stock, declared and paid
 
$
1.20

 
$
1.0775

 
$
1.04

 
$
0.96

 
$
0.90

Net cash provided by operating activities
 
$
29,432

 
$
22,110

 
$
21,808

 
$
19,018

 
$
20,418

Additions to property, plant and equipment
 
$
15,181

 
$
11,778

 
$
9,625

 
$
7,326

 
$
10,105

Repurchase of common stock
 
$
10,730

 
$
3,615

 
$
2,587

 
$
3,001

 
$
10,792

Payment of dividends to stockholders
 
$
5,541

 
$
5,072

 
$
4,925

 
$
4,556

 
$
4,409

 
 
 
 
 
 
 
 
 
 
 
(Dollars in Millions)
 
Dec 29,
2018
 
Dec 30,
2017
 
Dec 31,
2016
 
Dec 26,
2015
 
Dec 27,
2014
Property, plant and equipment, net
 
$
48,976

 
$
41,109

 
$
36,171

 
$
31,858

 
$
33,238

Total assets
 
$
127,963

 
$
123,249

 
$
113,327

 
$
101,459

 
$
90,012

Debt
 
$
26,359

 
$
26,813

 
$
25,283

 
$
22,670

 
$
13,655

Stockholders’ equity
 
$
74,563

 
$
69,019

 
$
66,226

 
$
61,085

 
$
55,865

Employees (in thousands)
 
107.4

 
102.7

 
106.0

 
107.3

 
106.7

1 
In Q1 2018, we adopted "Retirement Benefits - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" on a retrospective basis. As a result of the adoption of this standard, cost of sales, operating expenses, and interest and other, net for periods 2017 and 2016 in the preceding table have been restated.
2 
In Q4 2017, we recognized a $5.4 billion higher income tax expense as a result of one-time impacts from Tax Reform. In 2018, our effective tax rate benefited from the reduction of the U.S. statutory federal tax rate.  



a001intellogocolor.jpg  OTHER KEY INFORMATION
 
45


SALES AND MARKETING
CUSTOMERS
We sell our products primarily to original equipment manufacturers (OEMs) and original design manufacturers (ODMs). ODMs provide design and manufacturing services to branded and unbranded private-label resellers. In addition, our customers include other manufacturers and service providers, such as industrial and communication equipment manufacturers and cloud service providers, who buy our products through distributor, reseller, retail, and OEM channels throughout the world. For more information about our customers, including customers who accounted for greater than 10% of our net consolidated revenue, see "Note 4: Operating Segments" within the Consolidated Financial Statements.
Our worldwide reseller sales channel consists of thousands of indirect customers—systems builders that purchase Intel® processors and other products from our distributors. We have incentive programs that allow distributors to sell our microprocessors and other products in small quantities to customers of systems builders. Our microprocessors and other products are also available in direct retail outlets.
SALES ARRANGEMENTS
Our products are sold through sales offices throughout the world. Sales of our products are frequently made via purchase order acknowledgments that contain standard terms and conditions covering matters such as pricing, payment terms, and warranties, as well as indemnities for issues specific to our products, such as patent and copyright indemnities. From time to time, we may enter into additional agreements with customers covering, for example, changes from our standard terms and conditions, new product development and marketing, and private-label branding. Our sales are routinely made using electronic and web-based processes that allow the customer to review inventory availability and track the progress of specific goods ordered. Pricing on particular products may vary based on volumes ordered and other factors. We also offer discounts, rebates, and other incentives to customers to increase acceptance of our products and technology.
In accordance with contract terms, revenue for product sales is recognized at the time of product shipment from our facilities or delivery to the customer location, as determined by the agreed-upon shipping terms. Our standard terms and conditions of sale typically provide that payment is due at a later date, 30 days after shipment or delivery. We assess credit risk through quantitative and qualitative analysis. From this analysis, we establish shipping and credit limits, and determine whether we will seek to use one or more credit support protection devices, such as obtaining a parent guarantee, standby letter of credit, or credit insurance. Credit losses may still be incurred due to bankruptcy, fraud, or other failure of the customer to pay.
Our sales to distributors are typically made under agreements allowing for price protection on unsold merchandise and a right of return on stipulated quantities of unsold merchandise. Under the price protection program, we give distributors credits for the difference between the original price paid and the current price that we offer. Our products typically have no contractual limit on the amount of price protection, nor is there a limit on the time horizon under which price protection is granted. The right of return granted generally consists of a stock rotation program in which distributors are able to exchange certain products based on the number of qualified purchases made by the distributor.
DISTRIBUTION
Distributors typically handle a wide variety of products, including those that compete with our products, and fill orders for many customers. Customers may place orders directly with us or through distributors. We have several distribution warehouses that are located in proximity to key customers.
SEASONAL TRENDS
Historically, our net revenue has typically been higher in the second half of the year than in the first half of the year, accelerating in the third quarter and peaking in the fourth quarter.
MARKETING
Our global marketing objectives are to build a strong, well-known, differentiated, and meaningful Intel corporate brand that drives preference with businesses and consumers, and to offer a limited number of meaningful and valuable brands in our portfolio to aid businesses and consumers in making informed choices about technology purchases. The Intel Core processor family and the Intel® Quark™, Intel Atom®, Intel® Celeron®