07 December 2009

INTC: Look Ahead to December 2009 Quarterly Results

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 target of $0.27.  Revenue was 8.1 percent less than in the same period of 2008, but Revenue increased from its second quarter 2009 value by a healthy 17 percent.

In October, we examined the Income Statement for the third quarter and compared the entries on each line to our "look-ahead" estimates.  We followed this up with financial gauge analyses.

We have now modeled Intel's Income Statement for the quarter that will end on 26 December 2009.  The intent of this exercise was to produce a baseline for identifying deviations, positive or negative, in the actual data that the company will announce on 14 January 2010.  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. 

The semiconductor industry and it customers have been recovering, to some extent, since late 2008 and early 2009, when financially strapped consumers and businesses dramatically scaled back their purchases of computers and other electronic devices.

According to the company's last 10-K, 20 percent of Intel's Revenue in 2008 was from Hewlett Packard (NYSE: HPQ) and 18 percent was from Dell (NASDAQ: DELL).

Intel's most direct competitor in the market for general-purpose microprocessors has long been the scrappy, smaller, and now financially struggling, Advanced Micro Devices (NYSE: AMD).  In November, Intel agreed to send $1.25 billion to AMD to settle an antitrust complaint AMD filed in 2004.

Earlier this year, Intel was fined $1.447 billion by the European Commission for antitrust violations.

Competition between Intel and NVIDIA (NASDAQ: NVDA) is also heating up,
as new uses are being found for high-power Graphics Processing Units.  Not surprisingly, the strained relationship between these two rivals is also getting the attention of antitrust authorities.

Intel recently canceled the first chip based on its developing Larrabee technology.  If it had met expectations, this device for high-power graphics would have competed against products made by AMD and NVIDIA.

Gartner forecasts worldwide semiconductor revenuein 2010 will return to the amount achieved in 2008, $255 billion.  This figure is 13 percent more than expected for 2009.  The research firm also

"predicts worldwide PC shipments will total 298.9 million units in 2009, a 2.8 percent increase from 2008.  In 2010, PC shipments are projected to reach 336.6 million units, a 12.6 percent increase over 2009."

We're now ready to look ahead to Intel's results.

Intel makes this easy.  When the company announced its third quarter results on 13 October 2009, it provided the following quantitative guidance for the fourth quarter.
  • Revenue: $10.1 billion, plus or minus $400 million.
  • Gross margin percentage: 62 percent, plus or minus 3 percentage points.
  • Spending (R&D plus MG&A): Approximately $2.9 billion.
  • Restructuring and asset impairment charges: Approximately $40 million.
  • Amortization of acquisition-related intangibles and costs: Approximately $20 million.
  • Impact of equity investments and interest and other: Approximately zero.
  • Tax rate: Approximately 26 percent.
  • Depreciation: Approximately $1.2 billion.
  • Full Year Capital spending: Expected to be $4.5 billion plus or minus $100 million, down from the prior expectation of $4.7 billion plus or minus $200 million.
More recently, on 12 November 2009, Intel updated its fourth-quarter guidance to account for the $1.25 billion payment to AMD.

Intel now expects spending (R&D plus MG&A) in the fourth quarter to be approximately $4.2 billion, up from $2.9 billion. In addition, the effective tax rate is expected to be approximately 20 percent, down from 26 percent. All other expectations are unchanged.

Although Intel was probably being conservative, we are using the indicated $10.1 billion midpoint as our estimate for fourth-quarter Revenue.  This figure is nearly 23 percent more than Revenue in the depressed December 2008 quarter.

The guidance states that Intel expects a Gross Margin of 62 percent, plus or minus 3 percent.  This could be considered a stretch since Intel has not attained a quarterly margin that high, according to our records, since December 2005.  However, because the Gross Margin has been rebounding steadily in the first three quarters of 2009 -- 45.3 percent, 50.8 percent, and 57.6 percent --  the 62 percent guidance does not seem unreasonable. 

Our target for Cost of Goods Sold (i.e., Cost of Sales) is (1 - 0.62) * $10.1 billion = $3.8 billion.

For R&D and SG&A expenses, the latest guidance is a total expense of $4.2 billion, plus restructuring and asset impairment charges of $40 million.  We are treating the $1.25 billion AMD payment as a special operating charge, and we are splitting the remaining $2.95 billion expense across R&D and SG&A.

With these assumptions, the estimated Operating Income for the quarter would be $2.02 billion.  Even with the huge settlement charge, this amount would be up 31 percent from the weak December 2008 quarter.

Intel suggested that equity investments, interest and other non-operating income would have no net impact.  Not that it really matters, but we are assuming a $30 million loss on equity investments and a $30 million gain on interest and other income.

For the income tax rate, we have used Intel's estimate of 20 percent.  This leads to a fourth-quarter Net Income estimate of $1.62 billion (about $0.29 per share).  In the fourth quarter of 2008, Net Income was $234 million ($0.04 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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