Intel Corp (INTC) reported first quarter
earnings of 54 cents per share that beat the Zacks Consensus
Estimate by 4 cents. The 8% surprise was below the 12%+ average in
the four preceding quarters. Therefore, investors were not
impressed, sending shares down 3.13% in after-hours trading.
The quarter’s performance was largely driven by
better-than-expected revenue (due to less-than-expected impact from
HDD shortages).
Revenue
Intel’s reported revenue was $12.9 billion, slightly better than
management’s guidance range of $$12.8 billion (+/-$500 million).
This was down 7.1% sequentiallyand flat year over year. As
indicated by the HDD suppliers Western Digital
(WDC) and Seagate (STX), as well as PC companies
Hewlett Packard Company (HPQ) and Dell
Inc (DELL), the floods in Thailand impacted PC demand,
which led to the below-seasonal performance.
Distributors reduced inventories even as Intel grew internal
inventories. However, this may not be a negative given that the
company is ramping production for Ivy Bridge.
Intel’s longer-term strategy is playing out, with data center
and enterprise continuing to show additional opportunity in both
mature and emerging markets and PC consumption in the BRIC
countries continuing to grow strongly (up double-digits from last
year). Long-cycle wins in the embedded segment are adding to the
core business.
Revenue by Segment
The PC Client segment generated 65% of revenue
in the last quarter, down 6.6% sequentially and 2.0% year over
year. Overall, enterprise remained the driver of growth, while
consumer remained soft. Intel highlighted the strength in emerging
markets, especially the BRIC countries. Low penetration and a
growing per capita income are increasing the popularity of
computing devices in these regions.
Data Center was the second largest group with a
19% revenue share. Segment revenue was down 9.7% sequentially and
0.4% year over year. This segment has witnessed very strong
year-over-year growth in the last few quarters.
The lull in the last quarter was because of customers deferring
orders in the first part of the quarter in anticipation of Romley
(Sandy Bridge for servers), where production volumes have already
doubled Nehalem (at the same point in the cycle). The secular
growth drivers here are increasing Internet usage by consumers all
over the world, and the ongoing move towards virtualization and
cloud computing. Intel has been seeing a strengthening of the
storage and networking areas and the company currently continues to
expect these products to gather momentum.
The Other Intel Architecture segment generated
around 8% of Intel’s revenue in the last quarter, declining 2.2%
sequentially and 6.4% from last year.
The Software and Services revenue went from $24
million in the March 2011 quarter and $571 million in the last
quarter. The increase from the year-ago quarter was mainly due to
the addition of McAfee in corporate results in the second quarter
of 2011 and Intel stated that McAfee had its strongest first
quarter in terms of bookings. In addition to discrete sales, Intel
is taking an integrated approach to McAfee’s storage solutions,
with the intention of further differentiating its products.
The Other segment generated 3% of revenue, down
20.2% sequentially and 4.6% from the year-ago quarter.
Revenue by Geography
The Asia/Pacific market remained the largest in the last quarter
with a 57% contribution. While revenues were down 8.1%
sequentially, they were up 1.5% from a year ago. The Americas was
the second largest region, with a 20% contribution, down 3.9%
sequentially and 6.0% year over year. Europe came in third with a
14% revenue share, representing a sequential decline of 8.0% and an
increase of 8.1% from the first quarter of 2011. Japan stayed at
number four, with a 9% contribution, representing sequential and
year-over-year declines of 5.6% and 1.5%.
Margins
The pro forma gross margin for the quarter was 65.1%, down 35
basis points (bps) sequentially and up 267 bps year over year,
better than guidance of 64% at the mid-point. The gross margin
continued to benefit from a positive mix related to higher
enterprise and data center business and dwindling consumer sales in
mature markets. However, costs related to the 22nm production for
Ivy Bridge will hit in the next quarter.
Intel currently expects these costs to peak in the second
quarter and then come down in the second half of the year.
Therefore, gross margins may be expected to follow the same
pattern. The enterprise business and growth in data centers will be
additional positives, this will continue to be offset by strength
in emerging markets.
Operating expenses of $4.4 billion were up 2.2% from the fourth
quarter. The operating margin was 31.2%, down 341 bps sequentially
and 249 bps year over year. Both R&D and SG&A increased
significantly from as a percentage of sales from the both the
previous and year-ago quarters. Intel expects selling costs to
increase further in the next quarter due to increased promotional
activity related to ultrabooks.
The operating margins by segment were as follows—PC Client 41.2%
(down 247 bps sequentially), Data Center 46.6% (down 688 bps),
Other Intel Architecture -29.0% (up 446 bps) and Software and
Services 1.2% (down 154 bps). The PC Client segment expanded
operating margins by 12 bps from the year-ago quarter, while Data
Center margins contracted 300 bps.
The pro forma net income was $2.9 billion, or 22.3% of sales,
compared to $3.5 billion, or 25.3% in the previous quarter and $3.3
billion or 25.6% in the prior-year quarter. One-time items included
intangibles amortization expenses on a tax-adjusted basis.
Accordingly, the fully diluted GAAP net income was $2.7 billion, or
53 cents a share compared to $3.4 billion, or 64 cents per share in
the previous quarter and $3.2 billion, or 56 cents in the year-ago
quarter.
Balance Sheet
Inventories increased 9.6% sequentially and annualized inventory
turns went from 4.7X to 4.0X. Days sales outstanding (DSOs) went
from 24 to around 29. The cash, marketable securities and fixed
income trading asset balance at quarter-end was $13.8 billion, down
$1.08 billion during the quarter.
Intel has $7.1 billion in long-term debt and 362 million in
short-term debt, resulting in a net cash balance of $6.3 billion.
Cash flow from operations was around $3 billion. Important usages
of cash in the last quarter included $2.97 billion on capex, $1.05
billion on dividends and $1.5 billion on share repurchases.
Second Quarter Guidance
Intel guided to revenue of around $13.6 billion (+/-$500
million), up 5.4% sequentially and 4.4% from the June quarter of
2011 (slightly better than consensus estimates). Gross margin on a
GAAP basis is expected to be around 62% (+/-2 percentage points),
while on a non-GAAP basis, it is expected to be 63% (+/- 2
percentage points).
Total operating expenses are expected to come in at around $4.6
billion. Management also expects to provide for depreciation of
around $1.6 billion and intangibles amortization of around $180
million. Other income/expense is expected to be a net loss of $20
million. Applying the guided annual tax rate of 28%, net income
comes to around $2.8 billion or 20.9% of revenue, which would be
down both sequentially and year over year.
Guidance for 2012
For the year, Intel guided to a gross margin of 64% (+/- 2
percentage points), non GAAP gross margin of 65% (+/- 2 percentage
points) and operating expenses of $18.3 billion (+/- 200 million).
The full year tax rate is expected to be 28%, depreciation $6.4
billion (+/- $100 million) and capex $12.5 billion (+/- $400
million).
Our Take
Intel’s top line numbers for the quarter were good, if not
excellent. The company remains the leading producer of
microprocessors for the PC market and there do not appear to be any
near-term challenges to this position. Its innovative prowess has
ensured that Intel is well ahead of its closest rival
Advanced Micro Devices (AMD). Therefore what
affects it mainly is the market itself.
Intel’s strategy has been correct here and the company has
positioned itself strongly in emerging markets, from where most of
the growth is expected to originate in the next few quarters.
Growth rates in the next quarter will also benefit from supply
chain issues getting resolved. The enterprise segment remains a
strong point for Intel and there should be continued growth here in
both emerging and mature markets.
Additionally, the PC client business will see the usual jump in
response to Microsoft’s (MSFT) new Windows
platform. The data center business should pick up very strongly in
the next quarter, due to Romley becoming more widely available.
Intel also remains totally focused on the mobile segment, which
has the potential of eating into its core computing business. While
the new ultrabook is still a far cry from Apple’s
(AAPL) iPad, new players are entering the market every day.
Although Microsoft’s Windows 8 (to launch later this year) will
also be compatible with ARM architecture, Intel is likely to be the
bigger beneficiary, given the level of its support and the broader
reach of its products across the world.
The company intends to tap opportunities in China (on the road
to becoming the largest cell phone market). We think its consistent
focus on emerging markets will be a key to its growth in the next
few quarters.
All that being said, Intel has yet to prove itself in the mobile
segment (mainly tablets and smartphones), which continues to weigh
on investor sentiments. The fact that ARM devices are also getting
into the server segment is also a concern.
However, while the server impact could take a couple of years
and Intel could have something to counter this threat by then,
Intel really needs to buck up its mobile strategy. Failing to do
this will see its revenues dwindling, as tablets continue to
cannibalize its core computing market.
Another thing that investors could be concerned about is Intel’s
margins, which will be impacted by the 22nm ramp and increased
spending on ultrabook marketing. However, this is not a big concern
in our view and Intel should more than make up in the back half of
the year.
Intel shares are currently ranked #2 by Zacks, which translates
to a Buy recommendation in the next 1-3 months. We remain Neutral
on a long term (3-6 month) basis.
APPLE INC (AAPL): Free Stock Analysis Report
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DELL INC (DELL): Free Stock Analysis Report
HEWLETT PACKARD (HPQ): Free Stock Analysis Report
INTEL CORP (INTC): Free Stock Analysis Report
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WESTERN DIGITAL (WDC): Free Stock Analysis Report
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