) reported third quarter earnings of 60 cents per share that beat
the Zacks Consensus Estimate by 10 cents. The Zacks Consensus
dropped a penny since Intel lowered its revenue and gross margin
expectations for the quarter.
The 16.7% surprise was far better than the 5.3% it averaged in
the four preceding quarters. The resultant 2.9% increase in share
prices in after-hours trading nearly made up for the 3.3% decline
during the day.
Intel's reported revenue was $13.5 billion, at the high end of
the revised guidance range of $$13.2 billion (+/-$300 million).
This was down 0.3% sequentially and 5.5% year over year.
Weaker-than-expected PC demand stemming from tablet
cannibalization, restrained consumer buying both due to tighter
budgets (in developed markets) and in anticipation of the Windows
8 Launch from
) and softening enterprise demand combined to generate these
results. Pricing pressure also played a part.
Revenue by Segment
segment generated 64% of revenue in the last quarter. The
flattish sequential comparison was due to a slight increase in
demand in September, compared with softer demand in the first two
months of the quarter. The average selling price (ASP) was a
negative, as traditional computing devices that are currently
powered with Intel's chips were hurt by increasing
cannibalization from tablets.
Units and prices were down 4% each from the year-ago quarter,
impacted by an 8% decline in ASPs for the notebook platform and a
6% decline in volumes for the desktop platform. Low penetration
and a growing per capita income are increasing the popularity of
computing devices in emerging markets, especially the BRIC
countries, which is a longer term driver for Intel.
was the second largest group with a 20% revenue share. Segment
revenue was down 5.3% sequentially and up 5.7% year over year.
The corporate segment was the dampener in the last quarter, with
cloud-related purchases growing 50% from last year and storage
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.
Other Intel Architecture
segment generated around 9% of Intel's revenue in the last
quarter, growing 6.2% sequentially and declining 14.0% from last
Software and Services
segment contributed a little more than 4% of total revenue
(similar to the last quarter). Segment revenue was flat
sequentially and up 8.7% year over 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 generated 3% of revenue, up 27.0% sequentially and 2.5%
from the year-ago quarter.
Revenue by Geography
The Asia/Pacific region remained the largest in the last
quarter, with a 57% contribution, with revenues declining 1.0%
sequentially and 4.4% from a year ago. The Americas was the
second largest region, with a 21% contribution, down 1.1%
sequentially and 5.5% year over year.
Europe came in third with a 13% revenue share, representing a
sequential increase of 7.4% and decline of 2.1% from the third
quarter of 2011. Japan stayed at number four, with an 8%
contribution, representing sequential and year-over-year declines
of 4.9% and 16.1%, respectively.
The pro forma gross margin for the quarter was 64.3%, down 9
basis points (bps) sequentially and 2 bps year over year, better
than the revised guidance of 62% at the mid-point. The sequential
decline, although small, is not a good sign, as it is the result
of lower capacity utilization and weaker pricing.
Operating expenses of $4.6 billion were flat sequentially. The
operating margin was 30.1%, up 13 bps sequentially and down 496
bps year over year. The sequential increase in R&D as a
percentage of sales was small. However, it was up very
significantly from last year. SG&A actually declined
sequentially as a percentage of sales, while increasing slightly
from last year.
The operating margins by segment were as follows-PC Client
38.7% (down 68 bps sequentially), Data Center 45.7% (down 387
bps), Other Intel Architecture -20.0% (up 1,027 bps) and Software
and Services 0.7% (down 171 bps). Operating margins declined
significantly on a year-over-year basis across all segments.
The pro forma net income was $3.1 billion, or 23.1% of sales,
compared to $3.0 billion, or 22.0% in the previous quarter and
$3.6 billion or 25.5% 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 $3.0 billion, or 58 cents a share compared to $2.8
billion, or 54 cents per share in the previous quarter and $3.5
billion, or 65 cents in the year-ago quarter.
Inventories increased 8.5% sequentially and annualized
inventory turns went down from 3.9X to 3.6X. Days sales
outstanding (DSOs) went from 24 to around 27. The cash,
marketable securities and fixed income trading asset balance at
quarter-end was $10.5 billion, down $3.2 billion during the
quarter due to its equity investment in
Intel has $7.1 billion in long-term debt and 56 million in
short-term debt, resulting in a net cash balance of $6.5 billion.
Cash flow from operations was around $3.3 billion. Important
usages of cash in the last quarter included $2.89 billion on
capex, $1.12 billion on dividends, $3.22 billion on acquisitions
and $1.17 billion on share repurchases.
Fourth Quarter Guidance
Intel guided to revenue of around $13.6 billion (+/-$500
million), up 1.1% sequentially and down 2.1% from the December
quarter of 2011 (better than consensus estimates of $13.2
billion). Gross margin on a GAAP basis is expected to be around
57% (+/-2 percentage points), while on a non-GAAP basis, it is
expected to be 58% (+/- 2 percentage points).
Total operating expenses are expected to come in at around
$4.5 billion. Management also expects to provide for depreciation
of around $1.6 billion and intangibles amortization of around $75
million. Other income/expense and equity investments are expected
to be $75 million. Applying the guided annual tax rate of 27%,
net income comes to around $2.5 billion or 18.6% of revenue,
which would be down from both the previous and year-ago
Intel expects to spend $11.3 billion (+/- $300 million) on
capex in 2012.
Intel's top line numbers for the quarter were below-seasonal,
but not too bad considering market conditions. 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 quarters.
Whether Intel's success in these regions is able to offset share
losses to tablets remains in question.
Tablets, particularly from
) are no longer limited to netbook cannibalization, but have
progressed to notebooks, which have for long been taking share
from desktops. Therefore, Intel's core computing business is now
under real pressure. The new Ultrabooks from
Hewlett Packard Company
), Lenovo and others may help and Wintel devices on mobile
platforms may help, but both these are untested, so there will be
an initial amount of uncertainty regarding adoption.
The enterprise segment has for long been a savior for Intel,
but growth rates have slowed down in this segment as well. Intel
should continue to gain from the ongoing move to cloud computing,
but in the immediate future, we see soft demand from the
On the cost front, we see lower utilization rates and pricing
pressure impacting gross margins. We also believe that R&D
investments will remain significant, as Intel strives to maintain
its technology lead.
Therefore, despite its market position, technology lead and
solid execution, we expect the shares to remain under pressure in
the next couple of quarters. Intel shares therefore carry a Zacks
Rank of #5, implying a short-term Strong Sell rating. Our long
term (3-6 month) rating is also Underperform.
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