Intel Earnings, In-Depth - Analyst Blog

Intel Corp (INTC) reported very strong earnings in the fourth quarter, beating the Zacks Consensus Estimate by 6 cents. Excluding the $1.25 billion fine paid to Advanced Micro Devices (AMD) and other one-time items, earnings were 61 cents a share, or 27 cents higher than the Zacks consensus. Shares climbed 2.5% in response to the news, much stronger than the S&P 500, which were up 0.24% on average.

Revenue

Revenue of $10.6 billion was up 12.6% sequentially and 28.5% year over year. This was higher than management’s expectation of around $10.1 billion (+/-400 million), or down 1.1% sequentially. The year-over-year increase was the highest in over a decade, and came after four quarters of decline. Strength was across all product groups and geographies, although notebooks and servers were the major drivers.

Inventory in the channel is lean, as sell-through remained strong. Additionally, inventories at Intel’s OEM customers are about flat sequentially and down from year-ago levels.

Atom-based microprocessors and chipsets generated $438 million, which was up 46% year over year. However, the product group was down on a sequential basis.

Revenue by Segment

At the end of the year, Intel decided to reorganize its segments, so revenue trends by segment cannot be identified. The company now reports revenue under the PC Client, Data Center, Other Intel Architecture and Other Groups. The PC Client segment generated 73% of revenue in the last quarter, up 9.9% sequentially and 26.2% year over year. Data Center was the second largest group, with a 19% revenue share. Segment revenue increased 20.8% sequentially and 35.7% year over year. The Other Intel Architecture and Other segments generated 4% of revenue each.

Overall, microprocessors and chipsets were up both sequentially and year-over-year. Specifically, microprocessors and chipsets were up 15.0% and 2.9% sequentially and 25.5% and 37.5% year over year. The slow growth in chipsets is not too good and indicative of lower microprocessor revenue in the current quarter.

Revenue by Geography

All regions saw sequential revenue increases, with the Asia-Pacific region (excluding Japan) growing 12.1%, the Americas 14.6%, Europe 14.8% and Japan 8.3%. However, Europe declined 6.4% from the year-ago quarter.

Margins

The pro forma gross margin for the quarter was 64.7%, up 716 basis points (bps) sequentially. The increase was driven by higher volumes, better mix, higher ASPs and significantly lower production cost. Product cost declines were the result of improved loadings and better equipment re-use.

Operating expenses of $3.1 billion were up from the previous quarter’s $2.8 billion. The operating margin was 35.7%, up 739 bps sequentially. The gross margin expansion was the main reason for the higher operating margin, although both MG&A and R&D also contributed, declining as a percentage of sales.

The operating margin by segment was as follows: PC Client 43.1%, Data Center 48.0%, Other Intel Architecture 2.7% and Other -6.0%. All segment margins were significantly higher on both sequential and year-over-year bases.

The pro forma net income was $3.5 billion, or 32.8% of sales, compared to $2.0 billion, or 21.4% in the previous quarter and $1.9 billion or a 23.5% in the prior-year quarter. Including restructuring charges, amortization of intangibles, losses on equity investments and the amount paid to AMD, the fully diluted GAAP income was $0.40 a share compared to $0.33 per share in the previous quarter and income of $0.04 in the year-ago quarter.

Balance Sheet

Inventories increased 17.9% sequentially, mainly due to the company building a 32nm stock. Annualized inventory turns went down from 6.4x to 5.1x. Days sales outstanding (DSOs) were flat at around 20 days. The cash, marketable securities and fixed income trading asset balance at quarter-end was $13.9 billion, up $990 million during the quarter.

Intel has $2.0 billion in long-term debt, and another $1.8 billion in long-term liabilities, yielding a net cash balance of $10.1 billion. Cash flow from operations was over $3 billion. Important usages of cash in the last quarter included $1.25 billion in payment to AMD, $1.1 billion on capex and approximately $800 million on dividends.

Fourth Quarter Guidance

Management guided to revenue of around $9.7 billion (+/-$400 million) in the first quarter, down 8.2% sequentially. Management attributed the decline to seasonality. Both unit declines and higher costs related to the ramp-up of new products are expected to impact the gross margin in the next quarter. Total operating expenses are expected to come in at around $3 billion, amortization of intangibles $20 million and gain on equity investments $20 million.

For 2010, management expects gross margin of 61% (+/-3%), operating expenses $11.8 billion (+/-$100million), a tax rate of 30%, depreciation of $4.4 billion (+/-$100 million) and capex $4.8 billion (+/-$100 million).

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