13 October 2009

INTC: Income Statement Analysis for the September 2009 Quarter

Intel Corporation (NASDAQ: INTC) earned $0.33 per share in the third quarter of 2009, compared to Net Income of $0.35 last year and our overly pessimistic target of $0.27.  This post examines the Income Statement for the quarter, and it compares the entries on each line to our "look-ahead" estimates

In a second article, 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 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 the look-ahead.

Our principal sources for the income statement analysis were the earnings announcement, the CFO's commentary [pdf], and the Seeking Alpha conference call transcript.

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.

Revenue of $9.4 billion substantially exceeded the $9.2 billion upper bound identified by Intel when it raised third-quarter expectations in late August.  Third-quarter Revenue surpassed its second quarter value by an almost unprecedented 17 percent.

However, Revenue was 8.1 percent less than Revenue in the same period of 2008.

Intel attributed the better-than-expected Revenue to "Healthy back to school sales and inventory stocking" and sales of conventional and Atom™ microprocessors "better than seasonal patterns."  Sales of the low-power Atom microprocessors and associated components, which are used in netbooks and mobile devices, increased a solid 15 percent from the June quarter.

The Cost of Goods Sold was 42.4 percent of Revenue in the quarter, which translates into a Gross Margin of 57.6 percent.  We had expected a 54 percent Gross Margin, but robust sales allowed the company's factories to operate more efficiently and newer technologies had improved yields.

In last year's third quarter, the Gross Margin was 58.9 percent.  The recovery from the year-end collapse isn't quite complete.

Management's pre-announcement guidance indicated that investors should expect Research and Development and Sales, General, and Administrative expenses totaling $2.8 billion.  The reported figures for the two expense categories in any given quarter are normally comparable, so we were looking for each to be around $1.4 billion in the third quarter.

The R&D expense was only 2 percent more than the $1.4 billion target, and it was $41 million less than in last year's third quarter. 

The SG&A expense was 6 percent less the $1.4 billion target, and it was $96 million less than in last year's third quarter. 

Restructuring and asset impairment charges were $75 million, compared to Intel's $40 million guidance. 

Subtracting these expenses from Revenue yields Operating Income of $2.579 billion, which is 17 percent less than last year.  However, better-than-expected Revenue and a higher-than-expected Gross Margin pushed Operating Income 28 percent above our tepid $2.02 billion target.

Intel recorded a $79 million loss on equity investments, which was not as severe as our estimate of $100 million.  Interest and other non-operating income surpassed our $20 million projection by $12 million.

The one negative was that the 26.7 percent income tax rate in the quarter substantially exceeded the company's 23-percent estimate.

Net Income was $1.86 billion ($0.33 per share), compared to income of $2.0 billion ($0.35 per share) in last year's third quarter. 

In summary, Intel's rebound continued in the third quarter.  Revenue was 4 percent greater than the company had forecast after the first two months of the quarter. 

When compared to the second quarter, Revenue shot up a stunning 17 percent and the Gross Margin rose a remarkable 6.8 percent.  Other expenses increased about 8 percent, excluding last quarter's gargantuan $1.447 billion fine by the European Commission for antitrust violations. 

Paul Otellini, Intel president and CEO, stated:

"The strength in our business remains primarily consumer driven with broad-based demand across all geographies. Our mobile business had a particularly strong quarter -- in fact, we saw the sequential unit growth rate of notebook processors and chipsets actually exceed the growth rate of Atom processors and chipsets."
-Conference call transcript

“This momentum in the current economic climate, plus our product leadership, gives us confidence about our business prospects going forward.
-Earnings announcement

Intel bragged that volume production of 32 nanometer integrated circuits began in the third quarter, and these devices will eventually supplant today's 45 nanometer processors.

Full disclosure: Long INTC at time of writing.

No comments:

Post a Comment