13 April 2010

INTC: Income Statement Analysis for the March 2010 Quarter

Intel Corporation (NASDAQ: INTC) earned $0.43 per diluted share in the first quarter of fiscal 2010, which ended on 27 March.  Earnings per share were nearly four times the $0.11 Intel made in the first quarter of 2009.

The EPS on a non-GAAP basis was also $0.43.

This post examines Intel's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates.  Our EPS target was $0.39 per share, $0.04 less than the reported and non-GAAP amounts.

The principal sources for the income statement analysis were the earnings announcement, the CFO's commentary [pdf], and the conference call transcript made available by 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 is the foremost manufacturer of integrated circuits for computers, servers, hand-held devices, and communication products   Additional background information about Intel and the business environment in which it is currently operating can be found in 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 $10.3 billion (a record amount for a first quarter) topped the high end of the $9.7 billion, plus or minus $400 million, range Intel identified when announcing fourth quarter results on 14 January 2010.  First-quarter Revenue was 44 percent greater than in the same period of 2009.

Our Revenue target for the quarter was $10.0 billion, which Intel surpassed by 3 percent.

Revenue is typically less in a first quarter than in the fourth quarter of the previous year.  This was true again in the latest quarter, but the 2.6-percent decline was much milder than the 9-percent average of the prior decade.

The Cost of Goods Sold was 36.6 percent of Revenue in the latest quarter, which translates into a Gross Margin of 63.4 percent.  The margin far exceeded the 45.3 percent in 2009's first quarter, but it was 1.3 percent below the record 64.7 percent Gross Margin in the December 2009 quarter.

The Gross Margin exceeded the company's guidance of 61 percent, plus or minus 2 percent.  It also surpassed our 62-percent target. 

Intel said that the Gross Margin exceeded expectations because of higher average selling prices, higher CPU sales, and lower start-up costs.

Intel's guidance for Research and Development and Sales, General, and Administrative was that these two expenses would total $3.0 billion in the first quarter.  They were very close: the actual figure was $3.078 billion.  The R&D expense of $1.564 billion was 4 percent more than our estimate for the first quarter.  Although R&D was 19 percent more than last year, it fell from 18.4 percent of Revenue to 15.2 percent. 

The SG&A expense of $1.514 billion was less than 1 percent greater than our estimate.  Although 26 percent more than in 2009, SG&A as a percentage of Revenue fell from 16.8 percent to 14.7 percent.

Amortization of acquisition-related intangible assets other acquisition costs amounted to only $3 million, compared to Intel's $20 million guidance. 

Subtracting these expenses from Revenue yields Operating Income of $3.45 billion, which far exceeded last year's $650 million.  Better-than-expected Revenue and a more lucrative Gross Margin pushed Operating Income 8.4 percent above our $3.18 billion target.

This was Intel's highest quarterly Operating Income ever.

Intel recorded a $31 million loss on equity investments, whereas we budgeted for $10 million.  Interest and other non-operating income was $29 million, which bettered our $10 million projection.

Pretax income of $3.446 billion beat our $3.2 billion estimate by 7.7 percent.

The effective tax of 29.1 percent is reasonably close to Intel's estimate of the year of 30 percent.

Net Income was $2.442 billion ($0.43 per share), compared to income of $629 million ($0.11 per share) in last year's first quarter.  Our estimate was $2.24 billion ($0.39 per share).

In summary, Intel had an exceptional quarter that surpassed norms for a first quarter, the company's guidance, and our own expectations. 

We conclude with some remarks made by Paul Otellini, Intel president and CEO.  He reminded conference call participants of the tech industry's weakness one year earlier and fears that it would continue.  He then proclaimed that it "has nearly fully recovered." 

He also noted that "demand for our higher end PC products was particularly strong which helped improve margins and profitability" and that "demand for notebooks continues to be excellent."  Since consumers had been leading the IT market forward, it might be even more noteworthy that Intel sees "signs of corporate demand returning which we believe will continue to improve."

Full disclosure: Long INTC at time of writing.

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