04 September 2009

INTC: Look Ahead to September 2009 Quarterly Results

The GCFR Overall Gauge of Intel Corporation (NASDAQ: INTC) slipped from 30 to 27 of the 100 possible points in the second quarter of 2009, which ended 27 June 2009.  Our initial and updated analysis reports explained in some detail how the score was attained.

Second-quarter Revenue exceeded expectations by rebounding 12.3 percent above the first quarter's disappointing result. However, Revenue was still 15 percent less than in last year's second quarter.  A bright spot was robust sales of the low-power Atom™ microprocessors and associated components used in netbooks and mobile devices.

Intel lost $0.07 per share in the second quarter, compared to earnings of $0.28 in the same period of 2008.  If the European Commission had not fined Intel $1.447 billion for anti-competitive actions, the company would have earned $0.18 per share.

We have now modeled Intel's Income Statement for the quarter that will end on 26 September 2009.  The intent of this exercise was to produce a baseline for identifying deviations, positive or negative, in the actual data the company will announce on 13 October.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

First, we present some background information.

Intel Corporation is the foremost manufacturer of integrated circuits for computers, servers, hand-held devices, and communication products. 

Hewlett Packard (NYSE: HPQ) and Dell (NASDAQ: DELL) are Intel's two largest customers

Intel's most direct competitor in the market for general-purpose microprocessors has long been the scrappy, smaller, and now financially stressed, Advanced Micro Devices (NYSE: AMD).  However, NVIDIA (NASDAQ: NVDA) has also emerged as a competitor as new uses are being found for high-power Graphics Processing Units.

Because financially strapped consumers and businesses have been buying fewer computers, the semiconductor industry has been ailing.   However, semiconductor sales in the second quarter were much better than in the first. 

A Gartner press release reports:

Worldwide semiconductor revenue is on track to total $212 billion in 2009, a 17.1 percent decline from 2008 revenue of $255 billion, according to the latest outlook by Gartner, Inc. This forecast is better than the second quarter projections when Gartner projected semiconductor revenue to decline 22.4 percent this year. ...

While the outlook for 2009 has improved, Gartner analysts point out that all major segments of the semiconductor market are expected to experience double-digital declines in revenue this year.

With regard to the improved microprocessor shipments in the second quarter, a press release from IDC indicates:

IDC analysis of the results indicate that Intel and OEM inventory refreshes drove this performance and not the return of significant end demand for PCs.

We're now ready to look ahead.

Intel makes this easy.  When the company announced its second quarter results, it provided the following quantitative guidance for the third quarter of 2009.
  • Revenue: $8.5 billion, plus or minus $400 million.
  • Gross margin percentage: 53%, plus or minus 2 percentage points.
  • Spending (R&D plus MG&A): approximately $2.8 billion.
  • Restructuring and asset impairment charges: Approximately $40 million.
  • Amortization of acquisition-related intangibles and costs: Approximately $40 million.
  • Net loss from equity investments and interest and other: Approximately $80 million.
  • Depreciation: Approximately $1.2 billion.

More recently, Intel raised third-quarter expectations.

Intel Corporation now expects revenue for the third quarter to be $9.0 billion, plus or minus $200 million, as compared to the previous range of $8.5 billion, plus or minus $400 million.

The gross margin percentage for the third quarter is expected to be in the upper half of the previous range of 53 percent, plus or minus two percentage points. All other expectations are unchanged.

Although Intel might have been a little conservative, even when raising its guidance, we will use the indicated $9.0 billion midpoint as our estimate for third-quarter Revenue.  This figure is about 12 percent less than Revenue in the September 2008 quarter.

The latest guidance from Intel states they expect a Gross Margin "in the upper half" of the 53 plus or minus 2 percent range.  This leads us to assume 54 percent of Revenue would be a good estimate.  Given the Revenue estimate above, our target for CGS is (1 - 0.54) * $9.0 billion = $4.14 billion.

For R&D and SG&A expenses, the guidance is a total expense of $2.8 billion.  This seems a little high, but not unreasonably so.  We will split the expense equally between the two categories.

We will also accept without change the company's $40 million estimate for restructuring and asset impairments charges.

With these assumptions, the estimated Operating Income for the quarter is $2.02 billion.  This amount would be down 35 percent from the September 2008 quarter.  Operating income in the second quarter was weighed down by the huge EU fine.

Intel's guidance for equity investments, interest and other non-operating income is a net loss of $80 million.  To fit this within our presentation, we partition the loss as a $100 million loss on equity investments and a $20 million gain on interest and other income.

The non-operating figures would drop Pretax Income to $1.94 billion. 

For the income tax rate, we have used Intel's estimate of 23 percent.  This results in a third-quarter Net Income estimate of $1.5 billion (about $0.27 per share).  In the third quarter of 2008, Net Income was $2.0 billion ($0.35 per share).

Please click here to see a full-sized, normalized depiction of the projected results next to Intel's 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.

Full disclosure: Long INTC at time of writing.

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