08 December 2010

INTC: Look Ahead to December 2010 Quarterly Results

This post describes our model of Intel Corporation's (NASDAQ: INTC) Income Statement for fiscal 2010's fourth quarter, which will end on 25 December 2010.

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.

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.  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.

Intel's next generation of microprocessors, known as Sandy Bridge, is expected early in 2011.  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).  Sandy Bridge, which includes a CPU and a Graphics Processing Unit, could raise the stakes in Intel's rivalry with NVIDIA (NASDAQ: NVDA).

For devices such as smartphones, where low power consumption is vital, Intel processors are have been eclipsed by those built to the ARM Architecture by companies such as Qualcomm (NASDAQ: QCOM).  ARM chips are inside most smartphone and tablets, including those sold by Apple (NASDAQ: AAPL).

Intel has made two recent acquisitions that could significantly affect the company's future product line and competitive position.  The larger deal, announced on 19 August 2010, is the acquisition of McAfee (NYSE:MFE), a maker of security software, for $7.7 billion.  The company believes that combining McAfee's security expertise with Intel's hardware designs will have long-term benefits.  Intel management has stated that security has joined "energy-efficient performance" and "Internet conductivity" as the three "pillars" that support computing today. 

The second transaction, which was publicized on 30 August, is related to the Internet pillar.  Intel agreed to purchase Infineon’s (ETR: IFXA) Wireless Solutions Business for about $1.4 billion in cash.  Intel believes this deal, which includes Infineon's ARM-based offerings, will strengthen its product line in the mobile computing market.

Research firm Gartner has trimmed its forecast for the number of personal computers shipped in 2010 from 22 percent more than in 2009 to 14 percent.

In August 2010, Intel settled antitrust charges brought by the Federal Trade Commission by agreeing to "specific behaviors, practices and mechanisms that will govern Intel's sales conduct for the next ten years."  The settlement follows a $1.447 billion fine in May 2009 by the European Commission for antitrust violations and a $1.25 billion payment to AMD to settle an antitrust complaint AMD filed in 2004. 

Intel earned $0.52 per diluted share on a GAAP basis in the September-ending third quarter of fiscal 2010, up 57 percent from $0.33 in the same three months of last year.

Readers that want to look back at the September 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 December 2010 quarter.

The starting point is the guidance Intel provided on 12 October 2010 when it announced third quarter results.
  • Revenue: $11.4 billion, plus or minus $400 million.
  • Gross margin: 67 percent, plus or minus a couple percentage points.
  • R&D plus MG&A spending: Approximately $3.2 billion.
  • Impact of equity investments and interest and other: Approximately $20 million gain.
  • Depreciation: Approximately $1.1 billion.
  • Tax rate: Approximately 31 percent.
  • Full-year capital spending: $5.2 billion, plus or minus $200 million.
We often choose a target for Intel's quarterly Revenue that is closer to the top than the bottom of the guidance range.  However, for the December 2010 quarter, we will change gears and select a number below the midpoint.  We suspect softness in the PC market, which has been widely reported and which may be due to competition from tablets and smartphones, will have a mildly negative effect on Intel's Revenue.

Our $11.25 billion target is 6 percent greater than Intel's $10.6 billion of Revenue in the December 2009 quarter.

Intel's guidance states that it expects a Gross Margin of 67 percent, plus or minus two percent.  This would be very good by historical standards.  We will be a tad more conservative and look for the Gross Margin to be 66.5 percent.  Our figure translates into a Cost of Goods Sold (i.e., Cost of Sales) of (1 - 0.665) * $11.25 billion = $3.77 billion.

For R&D and SG&A expenses, the latest guidance is a total expense of $3.2 billion.  If the normal pattern holds true, the R&D expense will be slightly greater than the SG&A expense.

We will assume an additional special charge of $10 million for Amortization of acquisition-related intangible assets and other acquisition costs.

With these assumptions, the estimated Operating Income for the quarter is $4.27 billion.  This amount is 71 percent greater than Operating Income of $2.58 billion in the fourth quarter of 2009.

Intel suggested that equity investments, interest and other non-operating income would amount to $20 million. 

For the income tax rate, we have used Intel's figure of 31 percent.  This leads to a third-quarter Net Income estimate of $2.96 billion (about $0.52 per share).  In the fourth quarter of 2009, Net Income was $1.86 billion ($0.33 per share).

Note that our model does not include any acquisition charges.

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.

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