(INTC) Intel Tops Expectations – Guides In Line

Intel Corp (INTC) reported fourth quarter earnings of 67 cents per share that beat the Zacks Consensus Estimate by 6 cents. The surprise was driven by strength in the server segment, a richer mix of business, lower-than-expected taxes and helped by the fact that estimates dropped 9 cents over the past two months.


Intel’s reported revenue was $13.9 billion, within management’s guidance range of $$14.0 billion (+/-$500 million). Revenue for the quarter dropped 2.4% sequentially, while increasing 21.2% year over year. As indicated by the HDD suppliers Western Digital (WDC) and Seagate (STX), as well as PC companies Hewlett Packard Company (HPQ) and Dell Inc (DELL), the floods in Thailand had a significant impact on the PC market toward the end of the year.

Distributors reduced inventories and Intel saw its own internal inventories nosing up. Since this is one of Intel’s largest markets, the company saw its shipments affected. However, the data center and embedded businesses continued to grow.

Intel’s longer-term strategy is playing out, with data center contining to show additional opportunity, long-cycle wins in the embedded segment gathering momentum and emerging markets displaying strong growth trends.

Revenue by Segment

The PC Client segment generated 65% of revenue in the last quarter, down 3.9% sequentially and up 12.7% year over year. Overall, enterprise remained the driver of growth, while consumer remained soft. Intel highlighted the strength in emerging markets, stating that China, India and Indonesia were up 15%, 22% and 37%, respectively for the year. Low penetration and a growing per capita income are making computing devices more popular in these regions.

With enterprise growth and Sandy Bridge (40% of revenue for the year) remaining strong drivers of its business, the company continues to see a richer mix. This will of course be somewhat offset by the strength in emerging markets, where two out of three incremental PCs are being sold, according to Intel.

DataCenter was the second largest group with a 20% revenue share. Segment revenue was up 8.2% sequentially and 7.7% year over year. This segment has witnessed very strong double-digit year-over-year growth in seven of the last eight quarters and although the growth rate has been dropping off, there is every reason to believe that it will grow into one of the most important drivers of Intel’s business.

The secular growth drivers here are increasing Internet usage by consumers all over the world, and the ongoing move towards virtualization and cloud computing. Intel has been seeing a strengthening of the storage and networking areas and the company currently expects these products to gather momentum. Additionally, Romley (Sandy Bridge for servers) has started shipping, so this will also add to growth.

The Other Intel Architecture segment generated around 8% of Intel’s revenue in the last quarter, declining 19.8% sequentially, but growing 121.1% from last year.

The Software and Services revenue went from $75 million in the December 2010 quarter and $541 million in the September 2011 quarter to $578 million in the last quarter. The increase from the year-ago quarter was mainly due to the addition of McAfee in corporate results. 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 4% of revenue, up 6.8% sequentially and 47.4% from the year-ago quarter.

Revenue by Geography

The Asia/Pacific market remained the largest in the last quarter with a 58% contribution. While revenues were flattish sequentially, they were up 23.1% from a year ago. The Americas was the second largest region, with a 19% contribution, down 11.9% sequentially and up 15.7% year over year.

Europe came in third with a 14% revenue share, representing sequential and year-over-year increases of 6.5% and 22.1%, respectively. Japan stayed at number four, with a 9% contribution, representing a decline of 5.4% from the previous quarter and an increase of 20.1% from the fourth quarter of 2010.


The pro forma gross margin for the quarter was 65.4%, up 114 basis points (bps) sequentially and 81 bps year over year, better than guided. The gross margin has picked up over the last two quarters, due to the richer mix of higher-ASP devices being sold. With 22nm devices expected to gain momentum this year, there will be further cost efficiencies going forward. The enterprise business should remain a positive factor, although this will continue to be offset by strength in emerging markets.

Operating expenses of $4.3 billion were up 3.0% from the third quarter. The operating margin was 34.6%, down 48 bps sequentially and 55 bps year over year. Intel stepped up R&D spending, which accounted for the decline from both the previous and year-ago quarters. All other expenses declined as a percentage of sales.

The operating margins by segment were as follows — PC Client 43.7% (up 106 bps sequentially), Data Center 53.4% (up 483 bps), Other Intel Architecture -33.5% (down 2,325 bps) and Software and Services 2.8% (down 56 bps). Operating margins in the Data Center and PC Client segments were down 140 bps and 306 bps, respectively, from the year-ago quarter.

The pro forma net income was $3.5 billion, or 25.3% of sales, compared to $3.7 billion, or 25.8% in the previous quarter and $3.2 billion or 27.7% in the prior-year quarter. One time-items included intangibles amortization expenses on a tax-adjusted basis. Accordingly, the fully diluted GAAP net income was $3.4 billion, or 64 cents a share compared to $3.5 billion, or 65 cents per share in the previous quarter and $3.2 billion, or 56 cents in the year-ago quarter.

Balance Sheet

Inventories increased 3.5% sequentially and annualized inventory turns went from 5.1X to 4.7X. Days sales outstanding (DSOs) were flattish at around 24. The cash, marketable securities and fixed income trading asset balance at quarter-end was $14.8 billion, down $361 million during the quarter.

Intel has $7.1 billion in long-term debt and 247 million in short-term debt, resulting in a net cash balance of $7.5 billion. Cash flow from operations was over $6 billion. Important usages of cash in the last quarter included $2.8 billion on capex, $1.07 billion on dividends and $4.1 billion on share repurchases.

First Quarter Guidance

Intel guided to revenue of around $12.8 billion (+/-$500 million), down 7.8% sequentially and 0.4% from the March quarter of 2011 (in-line with consensus estimates. 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 $4.4 billion.

Management also expects to provide for depreciation of around $1.5 billion and intangibles amortization of around $75 million. Other income/expense is not expected to impact results. Applying the guided annual tax rate of 29%, net income comes to around $2.7 billion or 21.0% of revenue, which would be down both sequentially and year over year.

Guidance for 2011

For the year, Intel guided to a gross margin of 64% (+/- 2 percentage points), non GAAP gross margin of 65% (+/- 2 percentage points) and operating expenses of $28.4 billion (+/- 200 million). The full year tax rate is expected to be 29%, depreciation $5.2 billion (+/- $100 million) and capex $6.5 billion (+/- $100 million). Intel stepped up capex in 2011 in order to bring the fourth high volume facility online to drive 22nm production. Therefore capex for 2012 is relatively lower in comparison.

Our Take

Intel reported moderate fourth quarter results and a below-seasonal outlook, tempered by PC market issues. Segment performance for the last quarter was not too different from what we had expected.

We reiterate that the low-power devices currently selling like hot cakes are more dependent than ever on strong server chips. Additionally, data centers are upgrading and Intel’s powerful devices are the obvious choice. With its tick-tock strategy, Intel has managed to stay way ahead of the competition so far. While competing technology from ARM Holdings (ARMH) is likely to make life more difficult for Intel going forward, the chip giant has not been napping.

Intel remains well positioned in the server segment and its superior process technology should help it lower prices while maintaining similar profits. The growth of cloud computing is expanding this market and resulting in new opportunities for storage and networking products. The PC side, while impacted by HDD shortage, continues to do moderately well for Intel given its strong position in most emerging markets.

Intel is also remains totally focused on the mobile segment, which has the potential of eating into its core computing business. While the newly launched ultrabook is still a far cry from Apple’s (AAPL) iPad, new designs from new players are entering the market every day. Although Microsoft’s (MSFT) Windows 8 (to launch later this year) will also be compatible with ARM architecture, Intel is likely to be the bigger beneficiary, given the level of its support and the broader reach of its products across the world.

Intel’s Medfield-based phones are entering the market as we speak and the company intends to tap opportunities in China (on the road to becoming the largest cell phone market). We think the company’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 and this continues to weigh on investor sentiments. Moreover, the HDD supply chain is still in the process of correcting itself, which will impact revenue in the current quarter.

Since the guidance appears to be exactly in line with the Zacks Consensus Estimate for the first quarter, we think there will be positive revisions going forward, which would raise the Zacks Rank from the current #4 (short-term Sell rating).

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