14 March 2009

INTC: Look Ahead to March 2009 Quarterly Results

2008 ended painfully for many firms, their employees, and shareholders, but the weak global economy hit Semiconductor companies especially hard.  The Semiconductor Industry Association (SIA) reported that sales of the items they track were 2.8 percent lower in 2008 than 2007.  This was the first yearly drop since 2001. 

Conditions were much worse at year's end.  The SIA noted, "Sales fell from $22.3 billion in December 2007 to $17.4 billion in December 2008, a decline of 22 percent."

To put it simply, financially strapped consumers and businesses were forced to spend less on products from tech titans such as Dell (NASDAQ: DELL) and Hewlett Packard (NYSE: HPQ).  These companies, as a result, placed far fewer orders for chips with Intel.

Intel Corporation (NASDAQ: INTC) manufactures integrated circuits for computers, servers, hand-held devices, and communication products.  The company's most significant competitor has long been Advanced Micro Devices (NYSE: AMD), but Intel is paying increasing attention to NVIDIA (NASDAQ: NVDA).  Intel sued NVIDIA in February 2009 over the future applicability of an earlier license that "allowed nVidia to provide chipsets for Intel-based motherboards."  In addition, reports have circulated that NVIDIA might augment its product line with general purpose "x86" microprocessors now made by Intel and AMD.

Intel's Revenue in the fourth quarter of 2008 was $8.23 billion, which was 23.2 percent less than in the December 2007 quarter.  In October 2008, Intel management forecast Revenue would be between $10.1 billion to $10.9 billion in the fourth quarter.  The huge shortfall is graphic illustration of how quickly business turned down.

To add to the misery, Intel recorded a $1.2 billion loss on equity investments in the fourth quarter.  The loss reflected the much reduced market value of an investment in Clearwire Corp. (NASDAQ: CLWR). 

As a result of weaker sales and various charges, Net Income dropped by 90 percent relative to the year-earlier period.

The dismal fourth quarter slashed the GCFR Overall Gauge measure of Intel from to 62 to 51 of the 100 possible points.  The Growth and Profitability gauges (no surprise) weakened the most.  The evaluation was explained fully in this analysis report and this update.  

To look ahead, we've now modeled the company's Income Statement for the first quarter of 2009.  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 14 April 2009.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management. 

In normal times, Intel makes our task easy by providing explicit guidance for most of the items on the Income Statement.  However, when announcing fourth-quarter results, the company chose not to provide formal Revenue guidance for the first quarter of 2009.  Strangely, Intel indicated that, "For internal purposes, the company is currently planning for revenue in the vicinity of $7 billion."

Revenue guidance was also omitted in the Business Outlook section of Intel's 10-K for 2008.

At this point, we only have industry data for January 2009 as a predictor of Intel's Revenue in the first quarter.  The SIA reported that "Worldwide sales of semiconductors were $15.3 billion in January, a decline of 28.6 percent compared to January 2008 sales of $21.5 billion."

On this rather shaky basis, we will assume that Intel's Revenue in the first quarter of 2009 will be 30 percent below their Revenue in the first quarter of 2008.  Since the year-earlier figure was $9.7 billion, our target for Revenue in the current quarter is $6.8 billion.  For what it's worth, our target is not terribly far off from Intel's so-called internal estimate.

Revenue uncertainty also makes it difficult to project the first quarter's Gross Margin because diminished sales lead to production inefficiencies.  Intel suggested in January that they expect a gross margin percentage in "the low 40s," which is far weaker than what Intel has historically attained.  If this expectation proves to be correct, the gross margin would be the worst for Intel since it was 37 percent in the fourth quarter of 1994.

Our Gross Margin target for the first quarter is 42.5 percent.  Given the Revenue estimate above, we expect a CGS equal to (1 - 0.425) * $6.8 billion = $3.9 billion.

The company indicated R&D and SG&A costs in the first quarter would total $2.5 billion.  It's not unreasonable, given the historical record, to assume that this figure will be split more or less equally between R&D and SG&A.  Not surprisingly, the operating costs as a percentage of Revenue (about 18.5 percent for each item) will be much higher than normal.

We will accept the company's rather substantial $160 million estimate for restructuring and asset impairments.

With these assumptions, we find that the estimated Operating Income for the quarter is a mere $218 million, down 90 percent from the March 2008 quarter.

Intel's guidance for equity investments, interest and other non-operating income is a net loss of $130 million.  We estimate a $230 million loss on equity investments and a $100 million gain on interest and other income.

The non-operating figures would drop Pre-tax Income to $88 million.  For the income tax rate, we have used Intel's estimate of 27 percent.  This rate would lead to a Provision for Income Taxes of $24 million. 

Therefore, it appears that Net Income in the first quarter will be $64 million ($0.01 per share).  In the first quarter of 2008, Net Income was $1.4 billion ($0.25 per share).

Please note that the presentation format 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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