02 December 2007

INTC: Looking Ahead to 2007 Q4 Results

When we evaluated Intel after the third quarter, we noted improvements in Revenue, Cash Flow from Operations (CFO), and Net Income. These and other financial metrics pushed our Overall Gauge up from 20 to 30 points. This nice increase was limited because the double-weighted Value Gauge made no contribution to the score. [Recent performance improvements will have to be sustained, or the stock price will have to dip, to move our Value gauge.]

From April through October, and into November, Intel's share price moved up smartly. The rise was helped by favorable reviews given to Intel's newest products and predictions that Intel will regain market share from steadfast competitor Advanced Micro Devices (AMD). The closing low price for the shares was $18.86 on 28 March, and the closing high was $27.49 on 6 November, for a gain of nearly 46 percent (hence the Value Gauge's disapproval). The market turmoil during the summer might ironically have contributed to Intel's price rise, as well-capitalized high-tech companies were, for a time, seen as being insulated from the stormy financial and housing industries. By the middle of last month, though, the pessimism had seeped into nearly every sector of the market.

When looking ahead, our approach is to extrapolate from the past and to make some adjustments based on credible current conditions and forecasts. Intel makes our job easy by providing explicit guidance for most of the items on the Income Statement. In their third quarter report, Intel provided several forward-looking statements, with appropriate caveats, about their expectations for the fourth quarter. Since management knows their business infinitely better than we do, their guidance forms the basis for our expectations. All we have to do is a little basic arithmetic and look for figures that deviate from recent trends.

Year-over-year Revenue Growth through the September 2007 quarter was +4.0 percent. This rate doesn't seem impressive, but it was negative after each of the four previous quarters. In October, Intel estimated that revenue in the December quarter would be between $10.5 and $11.1 billion. The midpoint of this range, $10.8 billion, would equate to a 11.4-percent gain over the year-earlier quarter. Year-over-year Revenue Growth would be 8.6 percent, which would be the healthiest rate since 2005. Professional analysts have also centered their aim just a tad above the midpoint value of the range announced by the company; their revenue predictions average $10.83 billion.

To maintain market share in a highly competitive business, Intel's Gross Margin dropped under 50 percent in some recent quarters, before rebounding to 51.2 percent in September. [It would have been another point or so higher if Intel hadn't charged $113 million to Cost of Goods Sold (CGS) to account for the present value of intellectual property licensed as the result of a settlement with Transmeta.] Intel signaled that the Gross Margin in the fourth quarter would soar to 57 percent, plus or minus a couple of percentage points. Intel hasn't had a Gross Margin that high in the last couple of years. On our own, we wouldn't have set the expectations that far above the trendline, but we're going to give the company the benefit of the doubt. Given the revenue estimate above, Intel is telling us to expect a CGS of 0.43 * 10.8 billion = $4.64 billion.

Intel has had some recent success in bringing down R&D and SG&A costs, as a percentage of Revenue. In the December quarter, we're assuming these R&D will be 15 percent of revenue and SG&A will be about 14 percent of revenue. At a total of $3.1 billion, our assumption is little above the company's guidance of $2.8 to $3.0 billion. We will accept without modification the company's $130 million estimate for restructuring and asset impairment charges.

The aforementioned assumptions lead to an estimated Operating Income for the quarter of $2.9 billion, a hefty 94.5 percent gain over the year-earlier figure.

Intel's guidance for non-operating income was $150 million. This would result in a predicted level of Income before Taxes of $3.0 billion. Non-operating income in the December 2006 quarter benefited substantially from a $483 million one-time gain on the divestiture of certain assets of the communications and application processor business to Marvell Technology Group, Ltd.

Effective income tax rates shouldn't change dramatically from quarter to quarter, but the resolution of a dispute with the IRS led to wide swings as Intel was allowed to reverse some previously accrued taxes. This caused the first and second quarter tax rates to be abnormally low. For the tax rate in the fourth quarter, we'll use Intel's estimate of a more typical 29 percent.

With all these assumptions, Net income in the fourth quarter will be almost $2.2 billion ($0.37/share), up from $1.5 billion in the year-earlier quarter. Analysts are assuming $0.40 per share, which suggests they are more optimistic than the company itself.

Dec 2007
Dec 2006
Op expenses




Op income
Other income


Interest, etc.150632
Pretax income
Income tax
Net income


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