14 July 2009

INTC: 2009-2Q Income Analysis

Intel Corporation (NASDAQ: INTC) lost $0.07 per share in the second quarter of fiscal 2009, compared to earnings of $0.28 last year.  If the European Commission had not fined Intel $1.447 billion, the company would have earned $0.18 per share.

This post examines the Income Statement and compares the figures on it to our "look-ahead" estimates.  In a later post, we will report Intel's scores as measured by the GCFR Financial Gauges.  The follow-up post will provide the latest figures for the various financial metrics we use to analyze Intel's Cash Management, Growth, Profitability and Value.

Some background information about Intel and the business environment in which it is currently operating can be found in the beginning of our look-ahead.

Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Second-quarter Revenue rebounded 12.3 percent above the first quarter's disappointing result. This sequential growth rate far exceeded our 5-percent estimate. Still, when compared to last year's second quarter, Revenue fell 15.3 percent.

One reason Revenue surged was robust sales of the low-power Atom™ microprocessors and associated components.  Revenue from these chips used in netbooks and mobile devices increased 65 percent from the first quarter.

The Cost of Goods Sold was 49.2 percent of Revenue in the quarter, which translates into a Gross Margin of 50.8 percent.  We had expected a much weaker 46.3 percent Gross Margin, but the faster pace of sales allowed the company's factories to operate more efficiently.  In last year's second quarter, the Gross Margin was 55.4 percent.

We had expected the Research and Development expense to remain unchanged from the first quarter, and this was essentially the case.  The R&D expense was down a mere 1 percent.  Intel spent 11.2 percent less on R&D in the three months ended June 2009 than in June 2008.

Sales, General, and Administrative expenses were 4 percent greater than in the first quarter.  We had assumed that the SG&A spending level would remain unchanged.  Intel spent $180 million less on SG&A than in June 2008.

Restructuring and asset impairment charges were $91 million, compared to Intel's $115 million guidance.  However, the $1.45 billion fine for antitrust violations in Europe, which we didn't include in our model, is found on the special operating expense line.

As a result of the fine, Operating Income was negative, but only by $12 million.  If the fine were to be excluded, Operating Income would have been $1.4 billion, greatly exceeding our $840 million target.

Intel recorded a $69 million loss on equity investments, which was much better than our estimate of $250 million.  This is was partially offset by Interest and other non-operating income falling short of our $100 million estimate.

Because the fine was not be a taxable expense, negative pretax income did not preclude a hefty provision for income taxes.

Net Income was a $398 million loss for the quarter, compared to income of $1.6 billion in last year's second quarter. 

In summary, Intel staged a rebound in the second quarter that was more robust than expected.  When compared to the March period, Revenue was up 12 percent, the Gross Margin rose from 45 to 51 percent, and other expenses were more or less flat.  Other expenses, that is, excluding the gargantuan $1.45 fine by the European authorities for antitrust violations. 

Paul Otellini, Intel president and CEO, stated:

“Intel’s second-quarter results reflect improving conditions in the PC market segment with our strongest first- to second-quarter growth since 1988 and a clear expectation for a seasonally stronger second half.”

A BusinessWeek article by Arik Hesseldahl reported:

During a conference call with financial analysts, Otellini credited much of the good news to a surprisingly healthy environment for PC sales to consumers in both the U.S. and Asia. Sales in China, he said, were especially strong, owing in part to government stimulus efforts in that country. "From a consumption standpoint, consumer purchases led the way with a strong rebound in mobile processor shipments," he said.

While we congratulate Mr Otellini for the rebound and for the prescient call three months ago that the PC market was bottoming out, we also remember how far the semiconductor manufacturer had fallen.  The now-welcome $8 billion figure for Revenue was 15 percent less than last year's $9.5 billion.  The Gross Margin in the earlier period, 59 percent, was 8 percent more lucrative. 

Full disclosure: Long INTC at time of writing.

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