Intel Beats, Investors Unmoved – Analyst Blog

Intel Corp. (INTC) gave another stellar performance in its third quarter, beating the Zacks Consensus Estimate by 2 cents. The improvement was the result of stronger-than-expected revenues, which came in just short of the original guidance and in the middle of the revised guidance range. Investor response, however, was lukewarm, and shares climbed a mere 0.76% in after-hours in response to the news.

 

 

Intel’s double-digit growth trajectory continued for the fourth straight quarter, although the growth rate dropped off considerably. Revenue of $11.1 billion grew 3.1% sequentially and 18.2% year over year, compared to the revised guidance of around $11 billion, ±$200 million. Increased use of the Internet, new products, broad-based recovery on the enterprise side and continued strength in several emerging geographies contributed to the revenue increase.

 

After providing information on Atom-based revenue in the last eight quarters, management did not disclose the number for the last quarter. The only thing provided was rhetoric about Atom’s success in new platforms such as Google TV, and a statement regarding the maturing of the netbook market, which would pull down the Atom-based revenue slightly. That said, Atom remains a good choice for notebooks, netbooks and the new-age tablets, since it can be configured to run Windows, Android, Chrome and MeeGo.

 

Inventory in the channel remains lean and internal inventories only increased slightly in the last quarter.

 

 

From the beginning of the current fiscal year, Intel decided to reorganize its segments, so it now reports revenue under the PC Client, Data Center, Other Intel Architecture and Other Groups.

 

The PC Client segment generated 73% of revenues in the last quarter, up 2.8% sequentially and 14.2% year over year. The results were driven by stronger microprocessor sales, particularly in the mobile segment.

 

Data Center was the second largest group with a 20% revenue share. Segment revenue was up 3.4% sequentially and 30.4% year over year. Cloud computing and transfer of data to the Internet are the secular drivers for this segment. Additionally, shorter term demand continues to be driven by the cost savings and higher capacity of new equipment.

 

The Other Intel Architecture segment started edging towards a 5% revenue share, with the embedded business seeing improvements in both units and ASPs. As a result, revenues increased 18.7% sequentially and 46.4% from a year ago. The Other segment generated 3% of revenues, declining sequentially, but increasing from the year-ago quarter.

 

Overall, microprocessors increased 2.5% sequentially and 23.6% from the September 2009 quarter. Both sequential and year-over-year growth rates dropped off from the previous quarter. Chipsets were softer, growing 4.4% sequentially and declining 2.2% year over year. Chipset growth generally precedes microprocessor growth. Therefore, current trends seem to indicate that the sequential slowdown in microprocessor revenue will continue in the current quarter.

 

 

As expected, Europe and North America were impacted by softness in the consumer PC market, offset to an extent by strength in China and other emerging markets.

 

All regions except Japan declined on a sequential basis, with the Asia-Pacific region (excluding Japan) growing 3.9%, Japan flat (0.0%), the Americas up 3.1% and Europe up 2.5%. All regions except Europe were up double-digits on a year-over-year basis, with the Asia-Pacific up 20.3%, Americas 22.9%, and Japan 23.4%. Europe was flattish (down 0.2%). The Asia-Pacific, Americas, Europe and Japan contributed 58%, 20%, 12% and 10% of revenues, respectively.

 

 

Pro forma gross margin for the quarter was 65.9%, down 127 basis points (bps) sequentially and up 839 bps year over year. The sequential decline was most likely due to strength in some lower-margin regions. However, the core business continues to benefit from the steady demand in the enterprise segment.

 

Operating expenses of $3.2 billion were down slightly from the second quarter. The operating margin was 37.3%, up 27 bps sequentially and 902 bps year over year. There was a nice decline in MG&A expenses as a percentage of sales, which offset the gross margin decline. R&D was flattish both sequentially and in comparison to the year-ago quarter.

 

The operating margins by segment were as follows: PC Client 42.7% (down 106 bps sequentially), Data Center 48.9% (down 138 bps), Other Intel Architecture 0.0% (up 432 bps) and Other -11.9% (down 642 bps). All segments grew substantially (over 10 percentage points) from a year ago.

 

Pro forma net income was $3.0 billion, or 26.7% of sales, compared to $2.9 billion, or 26.9% in the previous quarter and $1.9 billion or a 20.6% in the prior-year quarter. There were no one-time items (other than a small amount of intangibles amortization expense, which did not impact the EPS in the last quarter). Accordingly, the fully diluted GAAP net income was 52 cents a share compared to 51 cents per share in the previous quarter and 33 cents in the year-ago quarter.

 

 

Inventories increased 2.3% sequentially and annualized inventory turns went from 4.2x to 4.4x. Management stated that internal inventories were in line with expected demand in the quarter. Days sales outstanding (DSO) went up from 21 to around 24. The cash, marketable securities and fixed income trading asset balance at quarter-end was $20.8 billion, up $2.4 billion during the quarter.

 

Intel has $2.0 billion in long-term debt, and another $2.0 billion in long-term liabilities, yielding a net cash balance of $16.7 billion. Cash flow from operations was over $3.5 billion. Important usages of cash in the last quarter included $1.4 billion on capex and $877 million on dividends. Intel did not repurchase any shares in the last quarter, and still has $5.7 billion remaining under the current authorization plan.

 

 

Management guided to revenues of around $11.4 billion (±$400 million) in the fourth quarter, up 2.7% sequentially. The gross margin is expected to around 67% (±2 percentage points). Total operating expenses are expected to come in at around $3.2 billion. Management also expects to provide for depreciation of around $1.1 billion. Other income/expense is expected to net a gain of around $20 million. Applying the guided tax rate of 31%, net income comes to $3.1 billion, or 27% of revenue, which would be up both sequentially and year over year.

 

The full year capex expectation was lowered slightly from $5.5 billion (±$200 million) to 5.2 billion (±$200 million).

 

 

Although management continues to sound optimistic, we observe more cautious expectations. For one, the PC market growth forecast was lowered to 18% from 20% provided during the last earnings conference call. Second, management stated that the netbook market was maturing, although last earnings, they showed optimism about continued strength in all consumer markets. Third, although management downplayed the cannibalization effect (from iPad), they did not deny that there was some impact on spending for other mobile computing devices.

 

We were encouraged by a few things, such as the fact that Europe somehow held its own as well as the ongoing strength in the data center business, which increased 50% sequentially and 200% from a year ago. Additionally, Intel appears on track to achieving a 24% revenue growth rate in 2010, well ahead of the 18% projected growth in its primary end market. While this is indicative of share gains, we have to wait until year-end when the numbers come in.

 

Despite all these positives, we believe the shares will not see much upside, since there seems to be a lack of catalysts that could drive the shares higher. Intel therefore carries a Zacks #3 Rank.