17 March 2010

INTC: Look Ahead to March 2010 Quarterly Results

This post describes our model of Intel Corporation's (NASDAQ: INTC) Income Statement for the quarter that will end on 27 March 2010.  GCFR estimates are derived from guidance provided by company management, when available, and the company's historical financial results.

The intent of our look-ahead exercises is to produce a baseline for identifying surprises, positive or negative, in the reported data. 

First, we present some background information about Intel and the business environment in which it is currently operating.

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

The semiconductor industry started to recover in mid-2009 and analysts are optimistic about the industry's prospects for 2010.  For example, a Gartner press release states:

“We have seen clear evidence that the semiconductor industry is poised for strong growth in 2010,” said Bryan Lewis, research vice president at Gartner.

Gartner separately announced a forecast that worldwide PC shipments would increase nearly 20 percent in 2010.  The researcher expects the growth to be driven by mobile computers, including new tablets.

According to Intel's last 10-K, Hewlett Packard (NYSE: HPQ) and Dell (NASDAQ: DELL) accounted for 21 percent and 17 percent, respectively, of Intel's net revenue in 2009.

Intel's most direct competitor in the market for microprocessors used in personal computers and servers has long been the scrappy Advanced Micro Devices (NYSE: AMD).  For devices such as smartphones, where low power consumption is vital, Intel processors face off against those built to the ARM Architecture by companies such as Qualcomm (NASDAQ: QCOM).

Competition between Intel and NVIDIA (NASDAQ: NVDA) is also heating up, as new uses are being found for high-power Graphics Processing Units

Intel, last December, 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.

Intel's competitive practices have been subject to extensive scrutiny.  In May 2009, Intel was fined $1.447 billion by the European Commission for antitrust violations.  In November 2009, Intel agreed to send $1.25 billion to AMD to settle an antitrust complaint AMD filed in 2004.  A strained relationship between Intel and NVIDIA has also been subject to antitrust review

Micron Technology (NASDAQ: MU) agreed to purchase Numonyx for $1.27 billion in stock.  Numonyx is now owned by Intel, STMicroelectronics (NYSE: STM), and Francisco Partners.  We are assuming this transaction will not affect Intel's first-quarter earnings.

In the fourth quarter of 2009, Intel earned $0.40 per diluted share.  This result improved on earnings of $0.04 in the same quarter of 2008.  Revenue exceeded the top end of the guidance range, and the quarterly Gross Margin was the highest ever.

Intel's earnings in the December quarter substantially exceeded the $0.29 per share target we established in our last "look-ahead" for Intel.

We're now ready to look ahead to Intel's results for the March 2010 quarter..

Intel  provides more explicit guidance than most companies.  When the company announced its fourth quarter results on 14 January 2010, it provided the following quantitative guidance for the first quarter of the new year.
  • Revenue: $9.7 billion, plus or minus $400 million.
  • Gross margin percentage: 61 percent, plus or minus 2 percentage points.
  • R&D plus MG&A spending: Approximately $3 billion.
  • Amortization of acquisition-related intangibles and costs associated with the Wind River acquisition: Approximately $20 million.
  • Impact of equity investments and interest and other: Gain of approximately $20 million.
  • Depreciation: Approximately $1.1 billion.
Although we often use the midpoint of a guidance range, we have decided to use the higher value of $10.0 billion as our target for Intel's first-quarter Revenue.  We made this decision because Intel topped the high end of the range in the fourth quarter of 2009, the economy has been stronger than expected, and at least one prominent analyst has publicly predicted that Intel (and AMD) will exceed expectations in the first quarter because of strong sales of servers.

Our Revenue target is 40 percent greater than the $7.1 billion of Revenue in the weak March 2009 quarter.

The guidance states that Intel expects a Gross Margin of 61 percent, plus or minus 2 percent, which would be very good by historical measures but down from the phenomenal 64.7 percent in the December quarter.  Since we're expecting Revenue to be stronger than expected, we will shade 1 point higher on the Gross Margin.  Our specific target is, therefore, 62 percent.

This percentage would translate into a Cost of Goods Sold (i.e., Cost of Sales) is (1 - 0.62) * $10.0 billion = $3.8 billion.

For R&D and SG&A expenses, the latest guidance is a total expense of $3 billion.  It's not unreasonable to split this amount evenly across R&D and SG&A.

We also need to thrown in a special charge of $20 million for the Wind River acquisition costs.

With these assumptions, the estimated Operating Income for the quarter is $3.18 billion.  Operating Income was a mere $647 million in the year-earlier quarter.

Intel suggested that equity investments, interest and other non-operating income would have a net positive impact of $20 million.  Not that it really matters, but we are assuming a $10 million gain on equity investments and a $10 million gain on interest and other income.

For the income tax rate, we have used Intel's full-year estimate of 30 percent.  This leads to a first-quarter Net Income estimate of $2.24 billion (about $0.39 per share).  In the first quarter of 2009, Net Income was $629 million ($0.11 per share).

Recall that we made no provisions for the Numonyx transaction.

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 and NVDA at time of writing.  No position in any other security mentioned.

No comments:

Post a Comment