14 January 2010

INTC: Income Statement Analysis for the December 2009 Quarter

Intel Corporation (NASDAQ: INTC) earned $0.40 per diluted share in the fourth quarter of 2009, which ended on 26 December, up from $0.04 in the same quarter of the previous year.

This post examines Intel's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates.  Our target for Net Income in the latest quarter was $0.29 per share, $0.11 less than the reported amount.

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

In a second article, we will report Intel's scores as measured by the GCFR financial gauges.  The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

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

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 $10.57 billion topped the high end of the $10.1 billion, plus or minus $400 million, range Intel identified when announcing third quarter results on 13 October 2009.  Fourth-quarter Revenue was 28.5 percent greater than in the same period of 2008.

Intel attributed the better-than-expected Revenue to .... "strong sequential growth" of microprocessors and higher average selling prices, due in part to new 32 nanometer processors.

"The demand picture in the quarter reflected broad based strength across all regions and all product categories with notebooks leading the way. Our product mix was also a notable highlight. Demand for our latest generation of processors, both PC and server, was particularly strong providing an ASP uplift in the quarter."

The Cost of Goods Sold was 35.3 percent of Revenue in the quarter, which translates into a Gross Margin of 64.7 percent -- a record high.  The company's guidance had been to expect a Gross Margin of 62 percent, plus or minus 3 percent.  The Gross Margin was 53.1 percent in the fourth quarter of 2008.

Intel said that higher selling prices and, to a lesser extent, lower costs (e.g., fewer inventory write-offs), were responsible for the Gross Margin exceeding expectations.  With sales more robust, the company's factories operated more efficiently.

Management's pre-announcement guidance update indicated that investors should expect Research and Development and Sales, General, and Administrative expenses totaling $4.2 billion, including a $1.25 billion payment to Advanced Micro Devices (NYSE: AMD) to settle an antitrust complaint AMD filed in 2004.

The actual figure was closer to $4.3 billion.

The Research and Development expense was $100 million (about 7 percent) more than the $1.5 billion target we had established.  This expense was $287 million more than in the fourth quarter of 2008. 

The Sales, General, and Administrative expense nearly matched the $1.45 billion target, and it was 16 percent more than in 2008's fourth quarter. 

Restructuring and asset impairment charges were $22 million, compared to Intel's $40 million guidance. 

The $1.25 billion settlement with Advanced Micro Devices was expected.

Subtracting these expenses from Revenue yields Operating Income of $2.5 billion, which is 62 percent more than last year.  Better-than-expected Revenue and a more lucrative Gross Margin pushed Operating Income 23.5 percent above our $2.02 billion target.

Intel recorded a $91 million gain on equity investments, whereas we budgeted for a $30 million loss.  Interest and other non-operating income was only $5 million, much less than our $30 million projection.

The quarterly results, which would have been strong by any measure, also benefited from a very low effective tax of only 12 percent.  Intel's updated guidance had been a tax rate of 20 percent.

Net Income was $2.23 billion ($0.40 per share), compared to income of $234 billion ($0.04 per share) in last year's fourth quarter.  Our estimate was $1.6 billion ($0.29 per share)

In summary, Intel's rebound accelerated in the fourth quarter.  Revenue exceeded in the top end of the guidance range, and the quarterly Gross Margin was the highest ever.

Even with a $1.25 billion settlement charge, the quarter was one of Intel's most profitable.

Paul Otellini, Intel president and CEO, stated:

“Intel's strong 2009 results reflect our investment in industry-leading manufacturing and product innovation,” said Paul Otellini, Intel president and CEO. “This strategy has enabled us to generate unprecedented operating efficiencies while growing our traditional businesses and creating exciting new market opportunities, even in difficult economic times. Our ability to weather this business cycle demonstrates that microprocessors are indispensable in our modern world. Looking forward, we plan to deliver the benefits of computing to an expanding set of products, markets and customers.”

Full disclosure: Long INTC at time of writing.

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