05 June 2011

INTC: Look Ahead to June 2011 Quarterly Results

This post describes our model of Intel's (NASDAQ: INTC) Income Statement for fiscal 2011's second quarter, which will end on 2 July 2011.

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 Corporation is designs and fabricates integrated circuits for computers, servers, hand-held devices, and communication products.  In the 1970’s, Intel developed the x86 microprocessor architecture, which evolved into the foundation for the central processing units that run most personal computers and servers. 
With a market value of approximately $120 billion on a fully diluted basis, Intel is included in the Dow Jones Industrial Average and the S&P 500Fortune lists Intel as the most admired semiconductor company.

In fiscal 2010, Intel's Net Income rose to $11.7 billion from $4.4 billion the previous year.  Revenue increased from $35.1 billion to $43.6 billion.

This month, Intel announced a 16 percent increase in the company’s quarterly cash dividend to $0.21 per share.  This hike was the Intel’s second dividend increase in six months.

Intel's business is organized into nine product groups.  The two largest groups, by far, 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 $31.6 billion of Revenue in 2010, 72.4 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 fast-growing Data Center Group had Revenue of $8.7 billion in 2010, 20 percent of the company's total sales.

Intel has long been top seller of personal computer microprocessors and related devices, with credible competition provided by the scrappy Advanced Micro Devices (NYSE: AMD).  

The popularity of smartphones and tablets poses a new, serious competitive threat to Intel.  These mobile-computing devices are most often controlled by power-efficient chips designed by ARM Holdings (NASDAQ: ARMH) and its many licensees, which include Samsung, NVIDIA's (NASDAQ: NVDA), and Qualcomm (NASDAQ: QCOM).  Microsoft’s (NASDAQ: MSFT) decision to make the next version of Windows compatible with ARM processors could open up the desktop CPU market to additional competitors.
Intel hopes to thwart this challenge with new “3-D” transistors that have performance and power-consumption benefits.

During the fourteen-week first quarter of fiscal 2011, Intel earned $3.16 billion ($0.56 per diluted share) on a GAAP basis, up from $0.43 per share in the same quarter of the previous year.  Revenue rose from $10.3 billion to $12.85 billion.

Reported earnings exceeded our $0.46 EPS estimate due to much better than expected Revenue growth, good cost control, and a lower tax rate.

We're now ready to look ahead to Intel's results for the June 2011 quarter.

The starting point is Intel’s own guidance or "business outlook."

Intel announced that it expects Revenue of $12.8 billion, plus or minus $500 million, in the the second quarter.  We typically choose a value near the top of the guidance range when setting a Revenue target for Intel.  This approach accounts for the natural tendency of companies to be conservative, so they can later exceed Wall Street expectations.

For the current quarter, however, we are concerned about global weakness in the demand for personal computers.  As a result, we will look for Revenue of only $12.9 billion in June quarter.

This Revenue target is 19.8 percent greater than Intel's $10.765 billion of Revenue in the June 2010 quarter.

Intel's guidance for Gross Margin is 61 percent of Revenue, plus or minus a couple percentage point.  The midpoint is a reasonable expectation for the Gross Margin.  When combined with our Revenue target, this percentage translates into a Cost of Goods Sold (i.e., Cost of Sales) of (1 - 0.61) * $12.9 billion = $5.0 billion. 

For R&D and SG&A expenses, Intel expects a total expense of $3.9 billion. Using historical data, we've allocated $2.0 billion to R&D and $1.9 billion to SG&A.

We will assume an additional special charge of $75 million for Amortization of acquisition-related intangible assets and other acquisition costs.

These assumptions lead to a $3.89 billion estimate for Operating Income in the June quarter.  This figure is 2.2 percent less than actual Operating Income of $3.98 billion in year-earlier period.

Intel advised that equity investments, interest and other non-operating income would amount to a net gain of $50 million. 

For the income tax rate, we have used Intel's prediction of 29 percent.  This leads to a second-quarter Net Income estimate of $2.8 billion (about $0.50 per share).  In the June 2010 quarter, Net Income was $2.9 billion ($0.51 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, MSFT, and NVDA at time of writing.  No position in any other security mentioned.