07 January 2009

INTC: Second Earnings Warning for the December 2008 Quarter

Next week, Intel Corporation (NASDAQ: INTC), the preeminent manufacturer of integrated circuits, will formally announce its results for the fourth quarter of 2008.

We had earlier provided a "look-ahead" model for the Income Statement that will be the centerpiece of the financial report.  GCFR estimates are derived from trends in the historical results and guidance provided by company management. 

Intel initially provided guidance for the fourth quarter when it announced its third-quarter results in October 2008.  One month later, Intel cut its forecast when it warned that business was substantially below the original expectations. 

Intel has now issued a second warning.  The model we posted hewed too closely to the guidance in the November warning.

The original guidance for Revenue in the fourth quarter was $10.1 billion to $10.9 billion.  In November, this range was reduced to $8.7 billion and $9.3 billion.   Intel now indicates that Revenue was actually $8.2 billion.  The shortfall is a consequence of lower demand for the computers, etc., that use Intel's semiconductors and inventory reductions throughout the supply chain.

Intel now estimates that Gross Margin in the fourth quarter was "at the bottom of the previous expectation of 55 percent, plus or minus a couple of points."  We assume this means that the Gross Margin was approximately 53 percent.  In other words, the Cost of Goods Sold was probably around (1 - 0.53) * $8.2 billion = $3.85 billion.

The company cut R&D and SG&A costs from $2.8 billion to $2.6 billion.  We assume that the expense was split more or less equally between the two categories.

There was no revision to the company's rather substantial $250 million estimate for restructuring and asset impairment.  Earlier reports indicated this charge is primarily due to the discontinuation of 200 mm NAND flash memory devices manufactured with Micron Technology (NYSE: MU).

Given the latest news, Operating Income in the fourth quarter was probably about $1.5 billion.  This value is less than half the equivalent figure in the December 2007 quarter.

Intel had forecast a $50 million net loss for equity investments, interest and other non-operating income.   The latest guidance is to expect a net loss between $1.1 and $1.2 billion.  The company will record a non-cash impairment charge of approximately $950 million to reflect the much reduced market value of an investment in Clearwire Corp. (NASDAQ: CLWR).

The non-operating figures would drop Pre-tax Income to a mere $350 million. 

There was no new information about the expected income tax rate.  For the time being, we will use Intel's earlier estimate of 29 percent.  This rate would lead to a Provision for Income Taxes of $100 million. 

Therefore, it appears that Net Income in the fourth quarter will be about $250 million (about $0.04/share, depending on how many shares the company repurchased).  This is 89 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.


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