Intel Corp
(
INTC
) reported first quarter earnings of 56 cents per share that beat
the Zacks Consensus Estimate by 4 cents. The nearly-8% surprise was
more or less in line with the 8%+ average in the four preceding
quarters (note that estimates dropped a penny in the last 7 days).
Intel's commentary was also not overly exciting, so shares barely
moved in response.
Revenue
Intel's reported revenue was $13.5 billion, in line with
management's guidance range of $$13.6 billion (+/-$500 million).
This was up 4.6% sequentially and 3.6% year over year.
While PC inventories are lean, distributor orders remain
conservative, mainly due to macro uncertainties and lower sales
expectations ahead of the Windows 8 Launch from
Microsoft
(
MSFT
). Intel stated that the Ivy Bridge ramp was faster than expected,
reaching 25% of PC volumes in the last quarter.
Intel's longer-term strategy is playing out, with data center
and enterprise remaining strong drivers. The emerging BRIC
countries also continue to grow strongly, making up for the
weakness in mature markets.
Revenue by Segment
The
PC Client
segment generated 64% of revenue in the last quarter, up 2.8%
sequentially and 4.4% year over year. Overall, enterprise remained
the driver of growth, while consumer remained soft, which resulted
in a better mix of business. Low penetration and a growing per
capita income are increasing the popularity of computing devices in
emerging markets, especially the BRIC countries.
Data Center
was the second largest group with a 21% revenue share. Segment
revenue was up 14.3% sequentially and 15.1% year over year, as
expected. The strength in the last quarter was largely on account
of Romley (Sandy Bridge for servers), since customers had deferred
purchases in the last quarter prior to its launch.
The secular growth drivers here are increasing Internet usage by
consumers all over the world, and the ongoing move towards
virtualization and cloud computing. The high performance computing
(HPC) segment is the fastest-growing segment within Intel's data
center business.
The
Other Intel Architecture
segment generated around 8% of Intel's revenue in the last quarter,
growing 3.1% sequentially and declining 20.2% from last year.
The
Software and Services
revenue contributed a little more than 4% of total revenue (similar
to the last quarter). This was the first quarter that the
year-over-year comp did not benefit from the acquisition. In
addition to discrete sales, Intel is taking an integrated approach
to McAfee's storage solutions, with the intention of further
differentiating its products. This helped the very strong growth in
each of the last five quarters.
The
Other
segment generated 2% of revenue, down 10.4% sequentially and 14.9%
from the year-ago quarter.
Revenue by Geography
The Asia/Pacific market remained the largest in the last
quarter, with a 58% contribution, with revenues growing 5.5%
sequentially and 5.2% from a year ago. The Americas was the second
largest region, with a 21% contribution, up 12.9% sequentially and
down 0.9% year over year. Europe came in third with a 12% revenue
share, representing a sequential decline of 7.1% and an increase of
5.6% from the second quarter of 2011. Japan stayed at number four,
with a 9% contribution, representing a sequential decline of 1.2%
and a year-over-year increase of 2.1%.
Margins
The pro forma gross margin for the quarter was 64.4%, down 69
basis points (bps) sequentially and up 273 bps year over year,
better than guidance of 62% at the mid-point. The sequential
decline was related to the increase in Ivy Bridge ramp up costs
(22nm). Of course, the positive mix related to higher enterprise
and data center business and soft consumer sales in mature markets
continued to work in its favor, while the strength in emerging
markets remains an offsetting factor.
Operating expenses of $4.6 billion were up 6.2% from the first
quarter. The operating margin was 30.0%, down 120 bps sequentially
and 181 bps year over year. Both R&D and SG&A were flattish
as a percentage of sales from the previous quarter. While R&D
increased significantly from last year, the increase in SG&A
was not so much. Intel expects to contain hiring costs through the
rest of the year, which is expected to maintain spending at these
levels.
The operating margins by segment were as follows-PC Client 39.3%
(down 188 bps sequentially), Data Center 49.5% (up 294 bps), Other
Intel Architecture -30.2% (down 121 bps) and Software and Services
2.4% (up 116 bps). The Software and Services margin was up 513 bps
from the year-ago quarter, Data Center was up 11 bps, while other
segment margins declined.
The pro forma net income was $3.0 billion, or 22.0% of sales,
compared to $2.9 billion, or 22.3% in the previous quarter and $3.1
billion or 23.9% in the comparable prior-year quarter. One-time
items included intangibles amortization expenses on a tax-adjusted
basis.
Accordingly, the fully diluted GAAP net income was $2.8 billion,
or 54 cents a share compared to $2.7 billion, or 53 cents per share
in the previous quarter and $3.0 billion, or 54 cents in the
year-ago quarter.
Balance Sheet
Inventories increased 9.2% sequentially and annualized inventory
turns were flat at 4.0X. Days sales outstanding (DSOs) went from 29
back to around 24. The cash, marketable securities and fixed income
trading asset balance at quarter-end was $13.6 billion, down $105
million during the quarter. Intel has $7.1 billion in long-term
debt and 92 million in short-term debt, resulting in a net cash
balance of $6.5 billion.
Cash flow from operations was around $5 billion. Important
usages of cash in the last quarter included $2.66 billion on capex,
$1.06 billion on dividends, $282 million on acquisitions and $41
million on share repurchases.
Third Quarter Guidance
Intel guided to revenue of around $14.3 billion (+/-$500
million), up 5.9% sequentially and flat with the September quarter
of 2011 (slightly short of consensus estimates of $14.6 billion).
Gross margin on a GAAP basis is expected to be around 63% (+/-2
percentage points), while on a non-GAAP basis, it is expected to be
64% (+/- 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 $80
million. Other income/expense and equity investments are expected
to be nil. Applying the guided annual tax rate of 28%, net income
comes to around $3.3 billion or 22.9% of revenue, which would be up
sequentially, while declining year over year.
Guidance for 2012
For the year, Intel guided to a revenue increase of 3-5% from
2011, with the GAAP gross margin at 64% (+/- 2 percentage points)
and non GAAP gross margin at 65% (+/- 2 percentage points) and
operating expenses of $18.2 billion (+/- 200 million). The gross
margin guidance was maintained while the operating margin guidance
lowered by a $100 million from previous expectations. The full year
tax rate is expected to be 28%, depreciation $6.3 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. The
enterprise segment remains a strong growth area 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 new Windows platform. One thing to note
here is the relatively low inventory levels at distributors that
are the result of uncertain economic conditions.
Intel also remains totally focused on the mobile segment, which
has the potential of eating into its core computing business. While
Intel's ultrabook concept is still a far cry from
Apple's
(
AAPL
) iPad, we may expect some growth this year, with all the new
devices from
Hewlett Packard Company
(
HPQ
),
Dell
(
DELL
), Lenovo and so forth.
Although Microsoft's Windows 8 (to launch later this year) will
also be compatible with ARM architecture, Intel is likely to be one
of the major beneficiaries, given the level of its support and the
broader reach of its products across the world. We think Intel's
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.
The concerns related to the economy, consumer spending and
distributor inventory levels are relatively near-term issues and
the reasons behind the Zacks #4 Rank (Sell). We also think the
company's fate in the mobile segment is currently hanging in
balance, as initial pickup of ultrabooks was slower than expected
(likely because of the many new tablets and Windows 8
anticipation).
However, we note that Intel has grown revenues at strong
double-digit rates in each of the last two fiscal years despite the
fact that it is the leading player in a market going through
significant ups and downs. Intel's initiatives, such as the recent
investment in
ASML Holding
(
ASML
) to reduce die costs by 30-40%, are the reasons for its technology
leadership. We think that strategic planning and resources are
things to consider when investing in a company such as Intel. We
remain Neutral on a long term (3-6 month) basis.
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