Intel slashes divdend by nearly two-thirds to shore up cash as chip giant braces for a tough year

In January, when Intel reported one of its worst financial quarters in years, the chip giant worked to keep up investor confidence by holding its dividend steady at $0.365/share. Less than a month later, it’s singing a very different tune. The company today announced that it was revising its dividend to $0.125 per share, down nearly two-thirds, as part of a bigger effort to conserve cash amid the very tough economic environment, and how it’s playing out specifically in the tech sector.

The dividend cut underscores the darker outlook Intel has for the year ahead. The company’s dividend has been level at $0.36 for many quarters and has dipped below $0.30 since 2017, and while dividends do not impact non-investors — can be used to keep investors happy even through rockier patches, such as a bad stock decline or disappointing earnings, and also simply to keep the stock at a premium overall: Intel’s paid out some $80 billion in dividends since 1992 — they are also a bellwether of the company’s bigger state.

Intel is explaining the cut in the context of bigger efforts at the company to cut up to $3 billion this year, and up to $10 billion per year by 2025 — which it will be doing by phasing out certain operations, laying off employees, reducing compensation from executives and making other cuts. It’s also taking a bigger bet on its own tech by building out its own internal foundry, which will take some investment (and comes with its own risk of course), alongside the always-clear-and-present threat of competition in the area of cutting-edge chip design. CEO Pat Gelsinger said the latter of these are still on track.

“Prudent allocation of our owners’ capital is important to enable our IDM 2.0 strategy and sustain our momentum as we rebuild our execution engine,” he said in a statement today. “We remain on track to deliver five nodes in four years and continue to expand the IFS (Intel Foundry Services) customer base. We are well into the ramp of 13th Gen Intel® Core™ and 4th Gen Intel® Xeon® Scalable processors, and we look forward to the launch of Meteor Lake and Emerald Rapids in 2023 and Granite Rapids and Sierra Forest in 2024.”

Intel in October 2022 was reportedly gearing up for thousands of job cuts in the quarter ahead. A spokesperson today confirmed that while it has reduced its workforce it has yet to confirm an exact number of people impacted. The company at the end of 2022 employed nearly 132,000 people. It’s also cut compensation for executives and managers, including a 25% cut for Gelsinger himself.

The company last quarter saw revenues decline 32% on the year before to $14 billion, which also missed analysts’ estimates. All eyes are now on how the company will be doing in the year ahead with current and future orders. Gelsinger dismissed recent reports alleging chip delays as “rumors” in a call today.

Intel slashes divdend by nearly two-thirds to shore up cash as chip giant braces for a tough year by Ingrid Lunden originally published on TechCrunch

Spotify to spend $1B buying its own stock

Music streaming service Spotify today said it will spend up to $1 billion between now and April 21, 2026 to repurchase its own shares. The dollar amount represents just under 2.5% of Spotify’s market cap, with the company valued at $41.06 billion this morning as its shares rose 5.1% following the repurchase news.

The company previously executed a similar buyback program in 2018.

A public company using some of its cash to repurchase its shares is nothing new. Many public companies, including Apple, Alphabet, and Microsoft, have active share repurchase programs, and it is common to see mature or nearly-mature companies devoting a fraction of their balance sheet or a regular percentage of their free cash flow to buying back their own equity.

The goal of such efforts is to return cash to shareholders. Buybacks, along with dividends, are among the key ways that companies can use their wealth to reward shareholders. Also, by buying their own stock, companies can boost the value of their individual shares. By limiting the shares in circulation, the company’s share count declines and the value of each share consequently rises, in theory, as it represents a larger fraction of ownership in the corporation.

Spotify shares have traded as high as $387.44 apiece in the past 12 months, but are now worth just $215.84, inclusive of today’s gains. From that perspective, seeing Spotify decide to deploy some cash to repurchase its own equity makes sense — the company is buying low.

But if you ask a recently public company what it intends to do with its excess cash, buybacks are not usually the answer. For example, TechCrunch asked Root Insurance CEO Alex Timm if his company intended to use cash reserves to purchase its own equity after its recent Q2 2021 earnings report. Root’s share price has declined in recent months, perhaps making it an attractive time to reward shareholders through buybacks. Timm demurred on the idea, saying instead that his company is building for the long-term. That translates to: That cash is earmarked for growth, not shareholder return.

But isn’t Spotify still a growth company? It certainly isn’t valued on the weight of its profits. In the first half of 2021, for example, Spotify posted net profit of a mere €3 million on revenues of €4.5 billion.

If Spotify is still a growth-focused company, shouldn’t it preserve its capital to invest in exclusive podcasts and the like — efforts that may grant it pricing power in the future and allow for stronger revenue growth and gross margins over time?

To answer that, we’ll have to check the company’s balance sheet. From its Q2 2021 earnings, here are the key numbers:

  • Spotify closed out the second quarter with “€3.1 billion in cash and cash equivalents, restricted cash, and short term investments.”
  • And in the second quarter, Spotify generated free cash flow of €34 million. That figure was up €7 million from a year earlier despite “higher working capital needs arising from select licensor payments (delayed from Q1), podcast-related payments, and higher ad-receivables”.

More simply, despite paying up for efforts that are generally understood to be key to Spotify’s long-term ability to improve its gross margins — and therefore its net profitability — the company is still throwing off cash. And with a huge bank account earning little, thanks to globally low prices for cash and equivalent holdings, Spotify is using a chunk of its funds to buy back stock.

By spending $1 billion over the next few years, Spotify won’t materially harm its cash position. Indeed, it will remain incredibly cash-rich. However, the move may help defend its valuation and keep itchy investors happy. Moreover, as the company is buying its stock at a firm discount to where the market valued it recently, it could get something akin to a deal, given Spotify’s long-term faith in the value of its own business.

Perhaps the better question as this juncture is not whether Spotify is a weird company for deciding to break off a piece of its wealth for shareholders, but instead why we aren’t seeing other breakeven-ish tech companies with neutral cash flows and fat accounts doing the same.

By keeping its head in the cloud, Microsoft makes it rain on shareholders

Thanks in part to its colossal cloud business, Microsoft earnings are drenching shareholders in dollars.

For the quarter ending March 31, 2018 the tech ringer from Redmond saw its revenue increase to $26.8 billion (up 16%), with operating income up 23% to $8.3 billion. Income was a whopping $7.4 billion and diluted earnings per share were 95 cents versus analyst expectations of 85 cents per share, according to FactSet.

Despite the earnings beat, shares of the company stock fell 1% in after hours trading on the Nasdaq stock exchange.

Floating much of Microsoft’s success for the quarter was the continued strength of the company’s cloud business, which chief executive Satya Nadella singled out in a statement.

“Our results this quarter reflect the trust people and organizations are placing in the Microsoft Cloud,”Nadella said. “We are innovating across key growth categories of infrastructure, AI, productivity and business applications.”

The company also returned $6.3 billion to shareholders in dividends and share repurchases in the third quarter 2018, an increase of 37%.

The company notched wins across the board. In addition to the growth of its cloud business, Microsoft also recorded wins from LinkedIn, which saw revenue increase 37% and Surface revenue increasing 32%.

The Surface numbers are notable because it’s perhaps the first indication that its hardware successes aren’t necessarily limited to the Xbox (insert Zune joke here).