25 May 2008

INTC: Look Ahead to June 2008 Results

When we evaluated Intel after the first quarter of this year, our Overall Gauge of the company rose to 49 points, of the 100 possible points, from just 33 points the previous quarter. The increase was driven by the rejuvenated Value gauge, which rose from zero to 8 points of the 25 possible points. The Value leap was enabled by a painful market correction that rained on both healthy and ailing companies. The first-quarter data also lifted the Growth and Profitability gauges; both read a tempting 15 points, where 25 is the maximum value.

High-tech bellwether Intel Corporation (INTC) manufactures integrated circuits for computers, servers, hand-held devices, and communication products.

With the good operating performance reflected in the rising gauge scores, it's not surprising that the price of Intel shares has edged upwards in the second quarter to date. In addition, at least one analyst has made positive comments about the impact the new, low-cost Atom microprocessor will have on sales and margins.

When Intel's second quarter results are reported on 15 July 2008, we will get a measure of the effect the slowing U.S. economy is having on technology companies. While Intel's sales mostly met expectations in the first quarter, the Gross Margin was hurt by lower-than-expected prices for NAND flash memory chips.

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.)

Comparisons with previous results will be complicated by Intel's first-quarter transfer of assets to Numonyx B.V., a new company that combines Intel's NOR flash memory business and STMicro's NAND business.

In the first quarter report, Intel provided several forward-looking statements, with appropriate caveats, about its expectations for the second quarter. The company also updated its guidance for the full year. Since management knows the business infinitely better than we do, their guidance forms the basis for our expectations.

Intel estimated that Revenue in the June 2008 quarter will be between $9.0 and $9.6 billion. If this seems a little light, it reflects the spin-off of NOR flash memory assets. The midpoint of this range, $9.3 billion, would equate to a 7.1-percent gain over the Revenue figure reported for the June 2007 quarter. However, Intel's Flash Memory Group operating segment was responsible for $494 million (5.7 percent) of Intel's total Revenue of $8.68 billion in the June 2007 quarter. if we assume half of the flash memory Revenue was due to assets subsequently transferred to Numonyx, the comparable year-earlier total Revenue figure would be about $8.43 billion, and the truer second quarter sales gain would be 10.3 percent.

Collectively, financial analysts have also centered their aim at the midpoint value of the forecast range for the second quarter; their Revenue predictions average $9.31 billion.

Intel predicted it would achieve a Gross Margin in the second quarter of "56 percent plus or minus a couple of points." After having reduced the margin forecast in the middle of the first quarter, establishing 56 percent as the target for the second quarter indicated management's optimism. Given the Revenue estimate above, Intel is leading us to expect a CGS of about (1 - 0.56) * $9.3 billion = $4.1 billion.

The company indicated R&D and SG&A costs would total between $2.8 and $2.9 billion in the second quarter. This is about 30.6 percent of the forecast Revenue. Since the company didn't break down this figure for us, we have used historical results to allocate 15.5 of the 30.6 percent to R&D and the remaining 15.1 percent to SG&A.

We will accept without question the company's $250 million estimate for restructuring and asset impairment charges.

The assumptions described above yield an estimated Operating Income for the quarter of $2.1 billion, a substantial 56 percent gain over the year-earlier figure.

Intel's guidance for net gains from equity investments, interest and other non-operating income was $75 million. We suspect -- and this is just a guess -- the guidance signals an expectation for a significant loss on equity investments. The indicated figure would result in Income before Taxes just under $2.2 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 second quarter of 2008, we'll use Intel's estimate of a more typical 33 percent. This estimate would lead to a provision for income taxes of $720 million.

With all these assumptions, Net Income in the first quarter will be $1.47 billion ($0.25/share), up modestly from $1.28 billion in the year-earlier quarter. The comparison with the June 2007 quarter is made more difficult because the effective income tax rate in the earlier quarter was only 16.4 percent. Analysts are predicting earnings per share of $0.26 in the current quarter, which suggests they are expecting the company to surpass company guidance by a small amount. This wouldn't surprise us.

Please note that the presentation format below, which we use for all analyses, may differ in material respects from company-used formats and terminology. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.


June 2008
June 2007





Other income


Interest, etc.
Pretax income

Income tax

Net Income

Shares outstanding

1. Includes the NOR flash memory business subsequently transferred to Numonyx.

No comments:

Post a Comment