13 July 2010

INTC: Income Statement Analysis for the June 2010 Quarter

Intel Corporation (NASDAQ: INTC) earned $0.51 per diluted share (a record amount) on a GAAP basis in fiscal 2010's second quarter, which ended on 26 June.  In the  same quarter of 2009, Intel reported a $0.07 loss per share, in large part because the company paid a $1.5 billion fine for European antitrust violations.

Excluding last year's fine, second quarter earnings rose from $0.18 to $0.51 per share.

This post examines Intel's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates.  The reported EPS amount was $0.09 more than the $0.42 we had forecast for the second quarter.

The principal sources for the income statement analysis were the earnings announcement and the CFO's commentary [pdf].

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.

Before getting into the details, we will take one step back to introduce the subject of today's analysis.

Intel is the foremost manufacturer of integrated circuits for computers, servers, hand-held devices, and communication products.  The company has nine product groups, with PC Client and Data Center being the two largest.  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 in the June quarter rose 34.2 percent, from $8.024 billion last year to $10.765 billion in the last three months.  The reported amount exceeded the high end of the $10.2 billion, plus or minus $400 million, Revenue guidance Intel issued when announcing first quarter results on 13 April 2010.

Revenue in the latest quarter exceeded our $10.3 billion target by 4.5 percent.

The PC Client and Data Center Groups achieved robust Revenue growth rates of 30.7 percent and 42.5 percent, respectively, when compared to 2009's second quarter.  PC Client's Revenue was 72.8 percent of Intel's total Revenue.

Revenue benefited, in Intel's words, as "strength of the enterprise market segment led to a richer than expected mix in both server and PC clients."  The average selling prices (ASP) for Intel's various microprocessors were "up slightly."

Revenue growth was strongest, 48 percent, in the Japan region and weakest, 12 percent, in Europe. Intel announced that its Revenue in all four designated geographies grew faster than normal for a second quarter.

The Cost of Goods Sold in the quarter was $3.53 billion, or 32.8 percent of Revenue.  This ratio translates into a phenomenal (and highest-ever for Intel) Gross Margin of 67.2 percent.  The Gross Margin was only 50.8 percent in last year's second quarter.

The Gross Margin exceeded the company's guidance of 64 percent, plus or minus "a couple" percentage points.  It also surpassed our 64-percent target for the second quarter. 

Intel said that the Gross Margin surpassed expectations because platform revenue was higher, platform unit costs were lower, and other costs of sales were reduced.

Intel's guidance for Research and Development and Sales, General, and Administrative costs in the second quarter was $3.1 billion.  They were close: the actual figure was $3.25 billion.  Greater-than-expected Revenue led to a minor increase in costs. The R&D expense of $1.67 billion was 7.5 percent more than our estimate for the second quarter.  Although R&D was 28 percent more than last year, it fell from 16.2 percent of Revenue to 15.5 percent.

The SG&A expense of $1.58 billion was only 2 percent greater than our estimate. Although 27 percent more than in 2009, SG&A as a percentage of Revenue fell from 15.6 percent to 14.7 percent.

Other operating expenses amounted to only $4 million.  Special items have made the "other" number much larger in some earlier quarters. 

Subtracting the various operating expenses from Revenue yields Operating Income of $3.98 billion.  Better-than-expected Revenue and a higher Gross Margin pushed Operating Income 14.7 percent above our $3.47 billion target for the second quarter.

Intel recorded a $193 million gain on equity investments, whereas we budgeted for a $20 million loss.  The gain reflected profits on the sale of an interest in Numonyx.  Interest and other non-operating income was $11 million, somewhat less than we expected.

The quarter's effective income tax rate of 31 percent matched Intel's guidance of the year, which we had used for our estimates.

Net Income was $2.89 billion ($0.51 per share), compared to a loss of $398 million ($0.07 per share) in last year's second quarter.  Our estimate for the latest quarter was $2.396 billion ($0.42 per share).

In summary, Intel had an exceptional period that surpassed norms for a second quarter, the company's guidance, and our own expectations.  Revenue, the Gross Margin, and investment gains were all strong; costs were kept under control.

Full disclosure: Long INTC at time of writing.

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