Intel Corp (INTC) reported very strong earnings in the fourth quarter, beating the Zacks Consensus Estimate by 5 cents. Shares climbed 3.95% after hours in response to the news.
Revenue
Revenue of $10.3 billion was down 2.6% sequentially but up a whopping 44.1% year over year. This was higher than management’s expectation of around $9.7 billion (+/-$400 million), or down 8.2% sequentially.
The sequential decline was related to seasonality. The year-over-year increase was the highest in over a decade and followed the trend started in the preceding quarter.
Strength was across all product groups and geographies, although Asia was the major driver. New products, resurgent enterprise spending and stronger pricing contributed to the increase in the last quarter.
Inventory in the channel is lean, as sell-through remained strong. Additionally, inventories at Intel’s OEM customers are about flat sequentially and downstream channel inventories are also within normal ranges, according to management.
Atom-based microprocessors and chipsets generated $355 million, which was down 18.9% sequentially, but up 62.1% year over year. The sequential decline was a bit more than normal seasonality, which management attributed to the large number of product introductions from various players in the mobile computing space. Management is optimistic about growth of Atom through 2010, as Intel customers launch new tablet, netbook and notebook models.
Revenue by Segment
At the end of 2009, Intel decided to reorganize its segments, so revenue trends by segment are hard to identify. The company now reports revenue under the PC Client, Data Center, Other Intel Architecture and Other Groups.
The PC Client segment generated 74% of revenue in the last quarter, down 1.1% sequentially and up 43.1% year over year. This segment benefited from improved corporate spending, particularly in Asia.
Data Center was the second largest group with an 18% revenue share. Segment revenue was down 7.6% sequentially and up 48.0% year over year. This business performed in-line with seasonal patterns (an 8-9% sequential decline in data center revenue in the first quarter). The Other Intel Architecture and Other segments generated 4% of revenue each.
Overall, microprocessors and chipsets were down sequentially and up year over year. Microprocessors and chipsets were down 1.6% and 5.4%, respectively, on a sequential basis and up 41.9% and 52.5% on a year-over-year basis. The strength in chipsets is indicative of continued growth in microprocessor revenue in the current quarter compared to the year-ago quarter, with sequential comparisons remaining weak.
Revenue by Geography
All regions except Japan declined on a sequential basis, with the Asia-Pacific region (excluding Japan) dropping 1.3%, the Americas 8.7% and Europe 7.9%. Japan was up 10.9%. All regions were up on a year-over-year basis, with Asia-Pacific up 61.4%, the Americas 26.2%, Europe 10.3% and Japan 54.0%. The four regions contributed 57%, 18%, 14% and 11% of revenue, respectively.
The pro forma gross margin for the quarter was 63.4%, down 132 basis points (bps) sequentially and up 1,808 bps year over year. The increase was driven by higher volumes, better mix, higher ASPs and significantly lower production cost.
Product cost declines were the result of improved loadings and the transition to its 32nm process. These benefits were partially offset by higher new product startup costs. The sequential decline was largely on account of the seasonal decline in volumes.
Operating expenses of $3.1 billion were flattish sequentially. The operating margin was 33.5%, down 215 bps sequentially and up 2,255 bps year over year. The gross margin expansion was the main reason for the sequentially weaker operating margin, since R&D was flattish and MG&A up only slightly as a percentage of sales.
The operating margin by segment was as follows—PC Client 41.0% (down 210 bps sequentially), Data Center 44.6% (down 340 bps), Other Intel Architecture -7.7% (down 1040 bps) and Other -5.7% (up 32 bps). All segment margins were significantly higher on a year-over-year basis.
The pro forma net income was $2.5 billion, or 24.0% of sales, compared to $3.5 billion, or 32.8% in the previous quarter and $878 million or a 12.3% in the prior-year quarter. Including losses on equity investments, the fully diluted GAAP net income was $0.43 per share compared to $0.40 per share in the previous quarter and income of $0.11 in the year-ago quarter.
Balance Sheet
Inventories increased 1.7% sequentially, and annualized inventory turns were essentially flat at around 5.1X. Days sales outstanding (DSOs) went down from 20 to 19. The cash, marketable securities and fixed income trading asset balance at quarter-end was $16.3 billion, up $2.4 billion during the quarter.
Intel has $2.0 billion in long-term debt, and another $1.9 billion in long-term liabilities, yielding a net cash balance of $12.4 billion. Cash flow from operations was around $4 billion. Important usages of cash in the last quarter included $928 million on capex and approximately $870 million on dividends.
Fourth Quarter Guidance
Management guided to revenue of around $10.2 billion (+/-$400 million) in the second quarter, down 1.0% sequentially. The gross margin is expected to be around 64% (+/-2 percentage points). Both unit declines and higher costs related to the ramp of new products are expected to impact the gross margin in the next quarter.
Total operating expenses are expected to come in at around $3.1 billion, interest and other and gain/loss on equity investments are expected to net $0. Management also expects to provide for depreciation of around $1.1 billion.
For 2010, management expects gross margin of 64% (+/-2%), operating expenses $12.4 billion (+/-$100 million), a tax rate of 31% (for each of the next three quarters), depreciation of $4.4 billion (+/-$100 million) and capex $4.8 billion (+/-$100 million).
In Summary
Intel reported another strong quarter that beat analyst expectations. This was in spite of the fact that 10 out of the 40 analysts covering the stock raised their estimates for the March quarter in the last 30 days.
We reiterate our view that the stock will continue to outperform the peer group, based on its strong product pipeline, management execution, cost advantage, pricing strength and the revival in enterprise spending, on which it is largely dependent.
We believe the earnings announcement kicks off a strong season for the semiconductor industry and expect other big players, such as Texas Instruments (TXN) and Advanced Micro Devices (AMD) to report upbeat results.
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