30 March 2008

INTC: Look Ahead to 2008 First Quarter Results

When we evaluated Intel after the fourth quarter of 2007, we noted rises in our Cash Management, Growth, and Profitability gauges. These improvement increased the Overall Gauge score to 33 points, but the advance was limited because the double-weighted Value Gauge made no contribution to the total.

In other words, the Intel's (INTC) financial and operating performance was improving, but it was already reflected in the $26.66 closing price of Intel shares last December.

The shares, however, are now selling for only about $21. When Intel's first quarter results are reported on 15 April 2008, we will get some indication of how much this high-tech bellwether is being affected by the slowing economy. Is Revenue slowing? Are margins dropping? Is inventory backing up? If not, we could have a situation where all four of our component gauges are displaying healthy values.

When looking ahead, the GCFR 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. (We have to make many more assumptions to estimate the results of other companies.) In the fourth quarter report, Intel provided several forward-looking statements, with appropriate caveats, about their expectations for the first quarter and full year of 2008. 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.

Intel estimated that Revenue in the March 2008 quarter will be between $9.4 and $10.0 billion. The midpoint of this range, $9.7 billion, would equate to a 9.6-percent gain over the year-earlier quarter. Professional analysts have also centered their aim at the midpoint value; their revenue predictions average $9.67 billion. If achieved, year-over-year Revenue Growth would be 11.0 percent, the healthiest rate since 2005.

To maintain market share, Intel's Gross Margin slipped in 2006. As the company's competitive position improved, the margin rebounded nicely in the second half of 2007. In January, Intel predicted that the first quarter 2008 Gross Margin would be 56 percent "plus or minus a couple of points." A few weeks ago, though, they reduced this forecast to 54 percent "plus or minus a point." The reduction was attributed "to lower than expected prices for NAND flash memory chips."

Given the revenue estimate above, Intel is telling us to expect a CGS of about (1 - 0.54) * $9.7 billion = $4.5 billion.

After a major spike in 2006, Intel has successfully brought down R&D and SG&A costs, as a percentage of Revenue. For the first quarter of 2008, the company predicted these two expenses would total between $2.8 and $2.9 billion. This is about 29.4 percent of the forecast Revenue. Since the company didn't break down this figure for us, we will allot 15 of the 29.4 percent to R&D and the remaining 14.4 percent to SG&A.

We will accept without question the company's $100 million estimate for restructuring and asset impairment charges.

The aforementioned assumptions lead to an estimated Operating Income for the quarter of $2.3 billion, a substantial 36 percent gain over the year-earlier figure.

Intel's guidance for non-operating income was $175 million. This would result in a predicted level of Income before Taxes just under $2.5 billion.

Effective income tax rates shouldn't change dramatically from quarter to quarter, but the resolution of a dispute with the IRS led to abnormally low rates in parts of 2007 as Intel was allowed to reverse some previously accrued taxes. For the tax rate in the first quarter of the new year, we'll use Intel's estimate of a more typical 31 percent.

With all these assumptions, Net income in the first quarter will be $1.7 billion ($0.28/share), up modestly from $1.6 billion in the year-earlier quarter. The comparison with the March 2007 quarter is made more difficult because the effective income tax rate in the earlier quarter was under 13 percent. Analysts are assuming $0.29 per share in the current quarter, which suggests they are expecting the company to surpass company guidance by a small amount.


March 2008
March 2007





Other income


Interest, etc.
Pretax income

Income tax

Net Income


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