) reported third-quarter earnings of 60 cents per share, beating
the Zacks Consensus Estimate by 7 cents, or 13.2%.
Intel has reported a 4.9% average positive surprise in the
four preceding quarters, so the earnings beat may be considered
strong. The revenue guidance was slightly lower than expected,
sending shares down 1.7% in after-hours trading.
The results were more or less as guided, with the gross margin
surprising to the upside and the tax rate lower than
Intel's reported revenue was $13.48 billion, within the
guidance range of 13.5 billion (+/-$500 million). This was up
5.2% sequentially and 0.2% year over year.
Despite some seasonal strength, overall spending remains
conservative, so channel inventories remain below historical
levels, according to Intel. The overall PC market remains very
weak, with Gartner estimating a PC shipment decline of 8.6% in
the third quarter. Intel's published numbers indicate better
performance, since its declines on both the desktop and notebook
platforms is lower. But the company includes tablets and
convertibles in its units, so quarterly comparisons with Gartner
or IDC may not be proper.
Revenue by Segment
segment generated 62% of revenue in the last quarter, up 3.5%
sequentially and down 2.8% year over year due to the PC market
concerns outlined above. Notebook and desktop volumes together
grew 2% sequentially and dropped 4% year over year. Pricing was a
little more encouraging - flat sequentially and up 1% year over
year. Intel's internal inventories declined only slightly.
Low penetration and a growing per capita income are increasing
the popularity of computing devices in emerging markets,
especially the BRIC countries; however here too, mobile remains a
key factor for Intel's growth.
was the second largest group with a 22% revenue share. Segment
revenue was up 6.2% sequentially and 9.7% year over year. Intel
continues to gain from the growing importance of cloud computing
and its own new products. The segment remains very important to
Intel given its high margins and processing needs, which still
favor Intel's core technology. The company has also launched
lower-end products for the microserver segment, which should help
it protect some market share.
Intel remains very optimistic about the business, saying that
its cloud, high performance computing (HPC) and storage
businesses grew 40%, 27% and 20%, respectively in the last
quarter. As a result, both units and ASPs grew sequentially and
year over year in the last quarter.
The secular growth drivers here are increasing Internet usage
by consumers all over the world and the ongoing move towards
virtualization and cloud computing.
Other Intel Architecture
segment generated 8% of Intel's revenue in the last quarter,
growing 13.3% sequentially and declining 9.3% from last year. The
sequential increase was encouraging and could be the result of
the 21% increase in embedded revenue due to increased uptake in
the communications infrastructure, transportation, the Internet
of Things and retail markets.
Software and Services
segment contributed around 5% of total revenue, up 1.8%
sequentially and 5.6% from last year. In addition to discrete
sales, Intel is taking an integrated approach to McAfee's storage
solutions, with the intention of further differentiating its
segment, which comprises Intel's NAND flash memory products,
generated around 4% of revenue, up 19.2% sequentially and 22.5%
from the year-ago quarter.
The gross margin for the quarter was 62.4%, up 410 basis
points (bps) sequentially and down 87 bps year over year, better
than the guidance of 61% at the mid-point. The sequential
improvement was the result of lower production costs, lower 14nm
startup costs and higher volumes as well as the reclassification
of some costs related to process engineers as R&D costs.
Operating expenses of $4.79 billion were flattish
sequentially. The operating margin was 26.9%, up 568 bps
sequentially and down 163 bps year over year. On a sequential
basis, the higher R&D as a percentage of sales was offset by
the higher gross margin and lower SG&A. All except SG&A
expenses increased as a percentage of sales from the year-ago
The operating margins by segment were as follows-PC Client
38.9% (up 604 bps sequentially), Data Center 47.8% (up 300 bps),
Other Intel Architecture -56.8% (up 775 bps) and Software and
Services -0.8% (up 51 bps). The two primary segments, PC Client
and Data Center, saw operating margins increasing from the
year-ago quarter as well.
Net income was $3.07 billion, or 22.8% of sales, compared to
$2.00 billion, or 15.6% in the previous quarter and $2.97 billion
or 22.1% in the comparable prior-year quarter. The pro forma
calculation in the last quarter excludes restructuring and asset
impairment charges of 2 cents a share.
As a result, the pro forma EPS was 60 cents a share compared
with 39 cents in the previous quarter and 58 cents in the
year-ago quarter. There were no one-time items in either the
previous or year-ago quarters.
Inventories dropped 0.2% sequentially with annualized
inventory turns moving from 4.7X to 4.5X. Days sales outstanding
(DSOs) were flattish at around 25. The cash, marketable
securities and fixed income trading asset balance at quarter-end
was $19.15 billion, up $1.80 billion during the quarter.
Intel has $13.16 billion in long-term debt and $350 million in
short-term debt, resulting in a net cash balance of $5.64
billion. Cash flow from operations was around $6 billion.
Important usages of cash in the last quarter included $2.87
billion on capex, $1.12 billion on dividends and $536 million on
Intel guided to fourth-quarter revenue of around $13.7 billion
(+/-$500 million), up 1.6% sequentially and 1.7% from the Dec
quarter of 2012 (short of the consensus estimate of $14.0
billion). The gross margin is expected to be around 61% (+/-2
percentage points). Total operating expenses are expected to come
in at around $4.7 billion.
Management also expects to provide for depreciation of around
$1.7 billion and intangibles amortization of around $70 million.
Other income/expense and equity investments are not expected to
have an impact on results. Applying the guided annual tax rate of
25%, net income comes to around $2.74 billion or 20.0% of
revenue, which would be down sequentially but up year over
In 2013, the company expects to spend $10.8 billion (+/- $300
million) on capex, which is slightly more conservative than the
previous forecast of $11.0 billion (+/- $500 million).
Intel's third quarter was routine in many ways - its client
business continues to be impacted by PC market cannibalization,
its data center business continues to do well, the rest of the
business remains unremarkable, cost containment remains good and
the product development effort remains more or less on track
(Broadwell pushed out by a quarter due to yield issues that have
now been fixed).
The longer-range concern about ASP pressures remain, although
Intel did well in the last quarter. But as the company ships more
low-ASP Atom processors in a bid to build a position in the
mobile and microserver segments, its margins will definitely come
under pressure. The moving out of process engineering costs to
the R&D line will provide some support.
The fourth-quarter revenue guidance looks above-seasonal,
albeit below our expectations. Intel did mention growing adoption
its chips on mobile platforms, which was encouraging, but
meaningful growth that could offset PC market declines is still
likely some way off.
For now, the company remains the leading producer of
microprocessors for the PC market. Its innovative prowess has
ensured that Intel is well ahead of its closest rival
Advanced Micro Devices
). 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 years.
Intel's focus on the ultra-mobile, ultra-thin computing
segment has been welcomed by
) and Dell, among others. Adoption of new technology is naturally
much slower in an uncertain economy and the Ultrabook's success
has also been limited by a plethora of tablets and growing number
of hybrid devices.
2013 remains a transition year, with Haswell and Bay Trail
getting into a range of devices. Management has stated that Intel
has increased focus on the Atom line and will speed up its
progress to the leading edge and also increasingly integrate
graphics, communications and other components. The concern here
is that its own lowest-end Core processors could be
In the meantime, tablets that run on
) devices will continue to eat into notebooks, which have been
taking share from desktops. Therefore, Intel's core computing
business will remain under pressure.
Intel has a strong position in a declining market, but
continues to display a technology lead and solid execution, which
should help it through the year. Intel shares therefore carry a
Zacks Rank #3 (Hold).
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