The purpose of the model is to establish a baseline for identifying surprises, positive or negative, in the quarterly results the company will report. Estimates for each line of the Income Statement are derived from management's guidance, the company's historical financial results, and other publicly available data.
We begin by reviewing 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.
In fiscal 2009, Intel had Net Income of $4.37 billion ($0.77 per share), down 17 percent from $5.29 billion ($0.92 per share) in the previous year. Revenue slipped 6.5 percent, from $37.6 billion to $35.1 billion.
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 is included in the Dow Jones Industrial Average and the S&P 500. It has a market capitalization of about $120 billion.
The company's business is organized around nine product groups. The two largest groups are PC Client and Data Center. Three other groups, which share similar characteristics, are aggregated for financial data reporting as "Other Intel architecture" operating segments. Four other groups are also combined in an "other" category for financial data reporting.
The PC Client Group sells microprocessors and related products for desktop, notebook, and netbook computers. It also markets wireless connectivity products. PC Client was responsible for $26.2 billion of Revenue in 2009, nearly 75 percent of Intel's total Revenue.
The Data Center Group sells microprocessors and related products for servers, workstations, and storage computing equipment. It also has products for wired network connectivity. The Data Center Group had Revenue of $6.45 billion in 2009, 18 percent of the company's total sales.
Data from the Semiconductor Industry Association indicates that worldwide semiconductor sales dropped precipitously in late 2008 and early 2009, coincident with the broad economic downturn. Sales bottomed out in the first quarter of 2009 and have since recovered at a brisk pace. In March 2010, the latest date for which semiconductor sales data are available from the SIA,
"worldwide semiconductor sales in March were $23.1 billion, an increase of 4.6 percent from February when sales were $22.0 billion. Sales increased by 58.3 percent from March 2009 when sales were $14.6 billion."
//Update - 1 June 2010// The SIA reported on 1 June that worldwide chip sales in April 2010 increased 2.2 percent from March, and these sales were 50.4 percent higher than in April 2009.
Research firm Gartner forecast a nearly 20 percent increase in worldwide revenue from semiconductor sales in 2010. The firm also projected a 22 percent increase in the number of personal computers shipped.
//Update - 4 June 2010// iSuppli reported a 23 percent increase in global PC shipments in the first quarter of 2010, from 66.5 million in 2009 to 81.5 million units.
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 Larrabee technology. This device for high-power graphics would have competed against products made by AMD and NVIDIA. The latest information, reported on AnandTech and elsewhere, suggests that Intel "will not bring a discrete graphics product to market, at least in the short-term."
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.
Intel 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. Our EPS target was $0.39 per share, $0.04 less than the reported and non-GAAP amounts. Readers that want to look back at the March 2010 quarter are referred to our Income Statement and Financial Gauge analyses.
We're now ready to look ahead to Intel's results for the June 2010 quarter.
Intel provides more explicit guidance than most companies. When the company announced its first quarter results on 13 April 2010, it articulated its expectations for the second quarter and the remainder of the year.
- Revenue: $10.2 billion, plus or minus $400 million.
- Gross margin percentage: 64 percent, plus or minus a couple percentage points.
- R&D plus MG&A spending: Approximately $3.1 billion.
- Impact of equity investments and interest and other: approximately zero.
- Depreciation: Approximately $1.1 billion.
- Tax rate: Approximately 31 percent for the second, third and fourth quarters.
When Intel met with investors in Santa Clara on 22 May 2010, CFO Stacy Smith stated that Intel expects "low double digit revenue growth for the next few years." The company also anticipates its Gross Margin will be between 55 and 65 percent for the next few years.
Since Intel has surpassed its Revenue guidance in recent quarters, it's tempting to select a figure near, or even above, $10.6 billion as a target for the June 2010 quarter. However, for seasonal reasons, Revenue can be relatively weak in the second quarter of the year. In the last decade, on average, only about 23 percent of annual Revenue was realized in the second quarter. And, significant Revenue gains from the first to the second quarter are also rare (2009 being an exception).
For these reasons, we have decided to use $10.3 billion as our target for Intel's second-quarter Revenue. This figure is nearly identical to Revenue in the first quarter of the current year, and it is 28 percent greater than the $8.02 billion of Revenue in the weak, but recovering, June 2009 quarter.
Intel's guidance states that it expects a Gross Margin of 64 percent, plus or minus "a couple" percent, which would be very good by historical standards. We will use the 64-percent Gross Margin midpoint as our target for the June quarter.
This percentage would translate into a Cost of Goods Sold (i.e., Cost of Sales) is (1 - 0.64) * $10.3 billion = $3.7 billion.
For R&D and SG&A expenses, the latest guidance is a total expense of $3.1 billion. It's not unreasonable to split this amount evenly across R&D and SG&A.
We will assume an additional special charge of $20 million for Amortization of acquisition-related intangible assets and other acquisition costs.
With these assumptions, the estimated Operating Income for the quarter is $3.47 billion. In the second quarter of 2009, Intel lost money on an Operating basis because of the European fine.
Intel suggested that equity investments, interest and other non-operating income would have no impact. Not that it really matters, but we are assuming a $20 million loss on equity investments and a $20 million gain on interest and other income.
For the income tax rate, we have used Intel's estimate of 31 percent. This leads to a second-quarter Net Income estimate of $2.4 billion (about $0.42 per share). In the second quarter of 2009, Net Income was minus $398 million (minus $0.07 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 and NVDA at time of writing. No position in any other security mentioned.