Intel Corp (INTC) reported fourth quarter
earnings of 50 cents per share that beat the Zacks Consensus
Estimate by 5 cents. The 11.1% surprise was better than the 8.7% it
averaged in the four preceding quarters. The resultant 5.3% decline
in share prices in after-hours trading more than offset the 2.6%
appreciation during the day, as guidance was not too exciting.
Revenue
Intel’s reported revenue was $13.5 billion, within the guidance
range of $$13.6 billion (+/-$500 million). This was flat
sequentially and down 3.0% year over year.
Weaker-than-expected PC demand stemming from tablet
cannibalization and restrained consumer buying due to tighter
budgets continued in the last quarter. As a result, distributors
worked down inventory of traditional computing devices.
Microsoft’s (MSFT) much-anticipated Windows 8 has
been slow to take off because of the radical changes to the OS.
Revenue by Segment
The PC Client segment generated 63% of revenue
in the last quarter down both sequentially and year over year due
to the PC market concerns outlined above. This impacted volumes,
which were down 4% and 6%, respectively from the previous and
year-ago quarters. The average selling price (ASP) improved 2% on a
sequential basis while remaining flat with the year-ago
quarter.
Intel doesn’t expect further reduction in prices, channel
inventories appear lean and new products are poised to gain
momentum. Therefore, 2013 should shape up better than 2012. 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.
Data Center was the second largest group with a
21% revenue share. Segment revenue was up 6.6% sequentially and
4.2% year over year. Intel continues to gain from the growing
importance of cloud computing and its own new products. As a
result, the company was able to generate ASP growth of 8% on a
sequential basis and 5% on a year-over-year. Economic factors were
responsible for sluggish volumes, although Intel remains well
positioned in both storage and networking.
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
less than 8% of Intel’s revenue in the last quarter, declining
13.5% sequentially and declining 7.0% from last year.
The Software and Services segment contributed
nearly 5% of total revenue, up 8.2% sequentially and 10.0% 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 products.
The Other segment generated around 3% of
revenue, up 20.2% sequentially and 9.2% from the year-ago
quarter.
Intel did not provide additional color on its revenue
distribution by geography.
Margins
The pro forma gross margin for the quarter was 59.0%, down 530
basis points (bps) sequentially and 643 bps year over year, better
than the guidance of 58% at the mid-point. This was because of a
lower utilization rate, Haswell inventory write-down (products that
were not qualified) and lower volumes in the PC Client and Data
Center segments as offset by a slightly higher ASP.
Operating expenses of $4.6 billion were flat sequentially. The
operating margin was 25.0%, down 516 bps sequentially and 964 bps
year over year. The lower gross margin and high R&D as a
percentage of sales impacted both comparisons. SG&A actually
declined slightly on a sequential basis, while increasing slightly
from last year.
The operating margins by segment were as follows: PC Client
33.1% (down 554 bps sequentially), Data Center 47.0% (up 129 bps),
Other Intel Architecture -48.6% (down 2,866 bps) and Software and
Services -5.7% (down 634 bps). Operating margins declined
significantly on a year-over-year basis across all major
segments.
The pro forma net income was $2.5 billion, or 18.9% of sales,
compared to $3.1 billion, or 23.1% in the previous quarter and $3.5
billion or 25.3% 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 $2.5
billion, or 48 cents a share compared to $3.0 billion, or 58 cents
per share in the previous quarter and $3.4 billion, or 64 cents in
the year-ago quarter.
Balance Sheet
Inventories dropped 11.0% sequentially and annualized inventory
turns moving from 3.6X to 4.7X. Days sales outstanding (DSOs) went
from 27 to around 26. The cash, marketable securities and fixed
income trading asset balance at quarter-end was $18.2 billion, up
$7.7 billion during the quarter.
Intel has $13.1 billion in long-term debt and $312 million in
short-term debt, resulting in a net cash balance of $4.7 billion.
Cash flow from operations was around $6.0 billion. Important usages
of cash in the last quarter included $2.50 billion on capex, $1.11
billion on dividends and $1.00 billion on share repurchases.
Guidance
Intel guided to revenue of around $12.7 billion (+/-$500
million), down 5.8% sequentially and 1.6% from the Mar quarter of
2012 (well below consensus estimates of $12.9 billion). The gross
margin is expected to be around 58% (+/-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
$1.7 billion and intangibles amortization of around $75 million.
Other income/expense and equity investments are expected to be -$50
million. Applying the guided annual tax rate of 25%, net income
comes to around $2.0 billion or 16.0% of revenue, which would be
down from both the previous and year-ago quarters.
Intel currently expects the 2013 gross margin to be around 60%,
opex $18.9 billion (+/-$200 million), intangibles amortization $300
million, depreciation $6.8 billion (+/-$100 million) and a tax rate
of 25%.The company expects to spend $13.0 billion (+/- $500
million) on capex.
Our Take
Intel’s top line numbers for the quarter were in line with
normal seasonality and management promised steadier ASPs going
forward helped by new products. However, product ramp-up costs will
impact the gross margin this year and if end market demand doesn’t
improve, utilization will also be a factor.
At the same time, Intel intends to step up product development
spending to maintain its competitive edge. Therefore, the thing to
look for in 2013 is volume. If Intel’s new products are able to
generate much stronger volumes this year, we may see improved
profitability.
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 (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.
Intel has also increased focus on the ultra-mobile, ultra-thin
computing segment with its ultrabook concept that has been welcomed
by Hewlett Packard (HPQ) and Dell
(DELL), among others. Adoption of new technology is naturally much
slower in an uncertain economy and the ultrabook’s success has been
limited accordingly. But 2013 should see some changes as Haswell
ships, possibly bringing Intel’s first major success in the mobile
segment.
Until this happens, tablets from Apple (AAPL)
and others that run on ARM devices will continue to cannibalize on
notebooks, which have been taking share from desktops. Therefore,
Intel’s core computing business will remain under pressure.
The enterprise segment has for long been a savior for Intel, but
growth rates have slowed down in this segment as well. Intel should
however continue to gain from the ongoing move to cloud
computing.
Intel continues to display a strong market position, 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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