Intel Corp. (INTC) reported very strong earnings in the third quarter, beating the Zacks Consensus Estimate by 6 cents. Revenue beat the consensus by 3.9%.


Revenue of $9.4 billion was up 17.0% sequentially and down 8.1% year over year. This was higher than management’s expectation of around $8.5 billion, or up 5.9% sequentially. Management stated that this was the strongest third quarter sequential growth the company has seen in 30 years.

Strength was across all segments, particularly in the consumer end-market. Management stated that inventory in the channel was slightly below normal levels, driving strong sell-through. Additionally, management believes that its large OEM customers have their inventories at roughly half the levels of the peak levels at the end of last year.

Atom-based microprocessors and chipsets generated $450 million, which was up 24% from the second quarter.


The Digital Enterprise Group generated 52.3% of revenue, a sequential increase of 14.1%. (The segment was down 7.6% year over year.) The sequential increase was driven by Nehalem processors, which were released toward the end of the first quarter. Nehalem is replacing older generation server processors. The Mobility Group generated 44.0% of revenue, a sequential increase of 18.7% and year-over-year decline of 11.7%.

Overall, microprocessors and chipsets were up sequentially but down year-over-year. Specifically, microprocessors and chipsets were up 13.8% and 23.9% sequentially, and down 8.8% and 11.6% year over year. The Digital Enterprise Group generated an operating margin of 30.8%, a sequential increase of 947 bps, while the Mobility Group generated 32.7%, a 961 bp increase.

The Asia-Pacific region (excluding Japan) grew 20.7% sequentially, with particular strength in China. The Americas grew 7.3% and Europe 15.2%. Japan was very strong in the last quarter, increasing 20.0%. The U.S. was very strong, as was Asia, while Europe was better than normal seasonality.

Operating Results

The pro forma gross margin for the quarter was 57.6%, up 672 basis points sequentially. The increase was driven by higher volumes, significantly lower cost of operation and increased yields, partially offset by ASP pressures related to the increasing percentage of consumer-related revenue.

Product cost declines were the result of improved loadings, better equipment re-use and much-improved yields. This resulted in better-than-expected costs of new products, enabling the company to significantly expand margins even in a difficult economic environment.

Operating expenses of $2.8 billion were up from the previous quarter’s $2.2 billion. The operating margin was 28.3%, up 510 bps sequentially. The gross margin expansion was the main reason for the higher operating margin, although both MG&A and R&D also contributed, declining as a percentage of sales.

The pro forma net income was $2.0 billion, or 21.4% of sales, compared to $1.5 billion, or 19.2% in the previous quarter and $2.7 billion or a 26.5% in the prior-year quarter. Including restructuring charges, amortization of intangibles and losses on equity investments, the fully diluted GAAP income was 33 cents per share compared to -7 cents in the previous quarter, and income of 35 cents per share in the year-ago quarter. The main reason for the GAAP loss of 7 cents in the second quarter was due to a $1.45 billion fine imposed by the European Commission.

Balance Sheet

Inventories declined 11.2% sequentially, with annualized inventory turns increasing from 5.6x to 6.4x. Days sales outstanding (DSOs) were down from 22 to nearly 20 days. The cash, marketable securities and fixed income trading asset balance at quarter-end was $12.9 billion, up $1.3 billion during the quarter.

Intel has $2.2 billion in long-term debt, and another $2.0 billion in long-term liabilities, yielding a net debt balance of $8.7 billion. Cash flow from operations was approximately $4 billion. Important usages of cash in the last quarter included $1.45 billion in payments toward the EC fine, the WindRiver acquisition, $944 million on capex, approximately $800 million on dividends and share repurchases or approximately $1.7 billion. The company raised an additional $2 billion of convertible debt.

Fourth Quarter Guidance

Management guided to revenue of around $10.1 billion (+/-400 million), down 1.1% sequentially. The gross margin is expected to be in 62%, +/- 3 percentage points, total operating expenses around $2.9 billion, restructuring and asset impairment charges around $40 million and amortization of intangibles $20 million. The tax rate for the quarter is expected to be 26% and depreciation $1.2 million. Management intends to start volume production at the 30nm process this quarter.

Full-year capital spending is expected to be around $4.5 billion +/-$100 million (down from $5.2 billion in 2008). Management did not provide any other guidance for the year. However, previous guidance was for opex of $10.6-10.8 million and depreciation of $4.8 billion +/-$100 million.
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