17 November 2008

INTC: Look Ahead to December 2008 Results

The GCFR Overall Gauge assessment of Intel increased to 62 of the 100 possible points -- a good score -- in the third quarter.  The evaluation was explained fully in this analysis report.  

The 6-point rise in the Overall score was mostly due to a 12.8-percent decline in Intel's share price during third quarter.  Our contrarian Value gauge, which is the largest contributor to Overall score, moves in the opposite direction of the share price.

Since the share price has fallen much further in the last six weeks, the scores would be higher today.

To look ahead, we've modeled the company's Income Statement for the fourth quarter of 2008.  The intent of this exercise was to produce a baseline for identifying any deviations, positive or negative, in the actual data that Intel will announce on 15 January 2009.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management. 

Intel makes our task easy by providing explicit and timely guidance for most of the items on the Income Statement.  (We have to make many more assumptions to estimate the results of other companies.)

Semiconductor titan Intel Corporation (NASDAQ: INTC) manufactures integrated circuits for computers, servers, hand-held devices, and communication products.  The company recently revealed its next-generation microprocessor, known as Nehalem.  Intel's most significant competitor is Advanced Micro Devices (NYSE: AMD), which has filed an antitrust complaint against its much larger rival.  Intel is also facing other antitrust challenges.

Intel, as usual, provided guidance for the fourth quarter when the company announced its third-quarter results.  However, the company recently reported that business was substantially below the expectations communicated in mid-October.  Intel's new guidance indicates that Revenue in the fourth quarter will be between $8.7 billion and $9.3 billion.  Since the original range for the Revenue guidance was $10.1 billion to $10.9 billion, there can be no doubt that the economic slump is now having a substantial negative effect on sales of high technology products.  Intel stated that Revenue is significantly weaker than expected "in all geographies and market segments."

The midpoint of the new range, $9.0 billion, is 16 percent below Revenue in the December 2007 quarter.  A small part of this drop is due to Intel transferring NOR flash memory assets  to Numonyx in the first quarter of 2008.   Numonyx B.V., a new company, was formed by Intel and STMicroelectronics (NYSE: STM).

Intel now believes its Gross Margin in the fourth quarter will be "55 percent plus or minus a couple of points."  The margin was 59 percent in the third quarter, so the competitive landscape has clearly deteriorated markedly.  Given the Revenue estimate above, Intel is leading us to expect a CGS equal to (1 - 0.55) * $9.0 billion = $4.05 billion.

The company indicated R&D and SG&A costs in the fourth quarter would total $2.8 billion, which is 31.1 percent of the midpoint of the Revenue guidance.  Since Intel didn't decompose the $2.8 billion figure, we have used historical data to allocate 51 percent ($1.43 billion, 15.9 percent of Revenue) to R&D and the remaining 49 percent ($1.37 billion, 15.2 percent of Revenue) to SG&A.  These rather high expense ratios show that the suddenness and sharpness of the downturn didn't give Intel an opportunity to trim costs proportionately.

We will accept the company's rather substantial $250 million estimate for restructuring and asset impairment.  This charge is primarily due to the discontinuation of 200 mm NAND flash memory devices manufactured with Micron Technology (NYSE: MU).

With these assumptions, the estimated Operating Income for the quarter is easily determined to be $1.9 billion.  This value is a stunning 37.6 percent below Operating Income in the December 2007 quarter.

Intel's guidance for equity investments, interest and other non-operating income is a net loss of $50 million.  Based on recent experience, we estimate a $200 million loss on equity investments and a $150 million gain on interest and other income.

The non-operating figures would drop Pre-tax Income to $1.85 billion.  For the income tax rate, we'll use Intel's estimate of 29 percent.  This rate would lead to a Provision for Income Taxes of $537 million. 

Therefore, it appears that Net Income in the fourth quarter will be $1.3 billion (about $0.23/share, depending on how many shares the company repurchased).  This is 42 percent below the value in 2007's fourth quarter. 

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.

($M)December 2008
December 2007
(actual, 1)
Other income
Interest, etc.150233
Pretax income1,8513,261
Income tax(537)(990)
Net Income1,3142,271
Shares outstanding57005988
1.  Includes the NOR flash memory business subsequently transferred to Numonyx.

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