02 September 2008

INTC: Look Ahead to September 2008 Quarterly Results

When we evaluated Intel's second quarter, our Overall Gauge of the company rose to a pleasing 56 of 100 possible points, from 51 points the previous quarter.   The Growth and Profitability gauges registered excellent scores of 18 and 19 points, respectively, of the 25 possible points per gauge.  We would have liked to have seen a Value gauge score healthier than 9 points, but we remembered that this measure had bottomed out at zero only two quarters earlier.

Semiconductor titan Intel Corporation (NASDAQ: INTC) manufactures integrated circuits for computers, servers, hand-held devices, and communication products.  Intel's most significant competitor is Advanced Micro Devices (NYSE: AMD), which has anti-trust complaints against its much larger rival.  Intel is also facing other antitrust challenges.

Despite regulatory and legal issues, Intel continues to churn out state-of-the art products.  These include the recently revealed next-generation  microprocessor known as Nehalem.

Shares of Intel began the third quarter at a price near $21.50.  The price per share rose by about $3, before settling back under $23.

When Intel's third-quarter results are reported in mid-October, we will learn how the company is weathering tough economic conditions.  Intel's sales exceeded expectations in the second quarter, but the Gross Margin was slightly lower than anticipated because low-end computers powered by inexpensive chips were in greater demand.

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 are 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 the NAND business of STMicroelectronics (NYSE: STM).

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

Intel estimated that Revenue in the September 2008 quarter will be between $10.0 and $10.6 billion.  The midpoint of this range, $10.3 billion, is only 2.1 percent more than the Revenue figure reported for the September 2007 quarter.  However, Intel's Flash Memory Group was responsible for $553 million (5.5 percent) of Intel's total Revenue of $10.09 billion in this 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 $10.09 - 0.5*($0.553) = $9.81 billion.  Therefore, a more valid estimate of the sales gain is (10.3 - 9.81)/9.81 = 5.0 percent.

Collectively, financial analysts have also centered their aim at the midpoint value of the Revenue guidance; their Revenue predictions average $10.31 billion for the third quarter.

Intel predicted it would achieve a Gross Margin in the third quarter of "58 percent plus or minus a couple of points."  Given the Revenue estimate above, Intel is leading us to expect a CGS of about (1 - 0.58) * $10.3 billion = $4.3 billion.  We consider this to be an optimistic forecast because Intel's Gross Margin has exceeded 58 percent in only one of the last 10 quarters.  In some periods the Gross Margin slipped below 50 percent. 

The company indicated R&D and SG&A costs would total $2.9 billion in the third quarter.  This is about 28.2 percent of the forecast Revenue.  Since the company didn't break down this figure for us, we have used historical results to allocate 14.5 of the 28.2 percent to R&D and the remaining 13.7 percent to SG&A.

We will accept the company's $60 million estimate for restructuring and asset impairment charges, but we have to note that non-recurring operating charges per quarter are normally somewhat greater.

The assumptions described above yield an estimate of the Operating Income for the quarter that is just above $3.0 billion, an impressive 40 percent gain over the year-earlier figure.

Intel's guidance for equity investments, interest and other non-operating income was a net lost of $30 million.  Since interest and other income has been between $150 and $200 million per quarter, the guidance might be signaling a loss on equity investments in the range of $180 to $230 million. 

The non-operating figures would drop Pre-tax Income a little below $3.0 billion.  For the income tax rate, we'll use Intel's estimate of 33 percent.  This rate would lead to a Provision for Income Taxes of $983 million. 

With all these assumptions, Net Income in the third quarter will be $2.0 billion ($0.35/share, depending on how many shares the company repurchased), up modestly from $1.8 billion in the year-earlier quarter.  The comparison with the September 2007 quarter is made more difficult because the earlier quarter featured a $148 million gain on an investments and and effective income tax rate of only 28.4 percent. 

Analysts are also predicting earnings per share of $0.35 in the current quarter, which suggests they are interpreting the company's guidance in the same way we have.

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.

September 2008
September 2007
(actual, 1)





Other income


Interest, etc.150211
Pretax income
Income tax
Net Income

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

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