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Intel Q3 Results: No Surprises

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Intel Corp (INTC - Free Report) reported third-quarter earnings of 60 cents per share, beating the Zacks Consensus Estimate by 7 cents, or 13.2%.

Intel has reported a 4.9% average positive surprise in the four preceding quarters, so the earnings beat may be considered strong. The revenue guidance was slightly lower than expected, sending shares down 1.7% in after-hours trading.

The results were more or less as guided, with the gross margin surprising to the upside and the tax rate lower than expected.


Intel’s reported revenue was $13.48 billion, within the guidance range of 13.5 billion (+/-$500 million). This was up 5.2% sequentially and 0.2% year over year.

Despite some seasonal strength, overall spending remains conservative, so channel inventories remain below historical levels, according to Intel. The overall PC market remains very weak, with Gartner estimating a PC shipment decline of 8.6% in the third quarter. Intel’s published numbers indicate better performance, since its declines on both the desktop and notebook platforms is lower. But the company includes tablets and convertibles in its units, so quarterly comparisons with Gartner or IDC may not be proper.

Revenue by Segment

The PC Client segment generated 62% of revenue in the last quarter, up 3.5% sequentially and down 2.8% year over year due to the PC market concerns outlined above. Notebook and desktop volumes together grew 2% sequentially and dropped 4% year over year. Pricing was a little more encouraging – flat sequentially and up 1% year over year. Intel’s internal inventories declined only slightly.

Low penetration and a growing per capita income are increasing the popularity of computing devices in emerging markets, especially the BRIC countries; however here too, mobile remains a key factor for Intel’s growth.

Data Center was the second largest group with a 22% revenue share. Segment revenue was up 6.2% sequentially and 9.7% year over year. Intel continues to gain from the growing importance of cloud computing and its own new products. The segment remains very important to Intel given its high margins and processing needs, which still favor Intel’s core technology. The company has also launched lower-end products for the microserver segment, which should help it protect some market share.

Intel remains very optimistic about the business, saying that its cloud, high performance computing (HPC) and storage businesses grew 40%, 27% and 20%, respectively in the last quarter. As a result, both units and ASPs grew sequentially and year over year in the last quarter.

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 Other Intel Architecture segment generated 8% of Intel’s revenue in the last quarter, growing 13.3% sequentially and declining 9.3% from last year. The sequential increase was encouraging and could be the result of the 21% increase in embedded revenue due to increased uptake in the communications infrastructure, transportation, the Internet of Things and retail markets.

The Software and Services segment contributed around 5% of total revenue, up 1.8% sequentially and 5.6% 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, which comprises Intel’s NAND flash memory products, generated around 4% of revenue, up 19.2% sequentially and 22.5% from the year-ago quarter.


The gross margin for the quarter was 62.4%, up 410 basis points (bps) sequentially and down 87 bps year over year, better than the guidance of 61% at the mid-point. The sequential improvement was the result of lower production costs, lower 14nm startup costs and higher volumes as well as the reclassification of some costs related to process engineers as R&D costs.

Operating expenses of $4.79 billion were flattish sequentially. The operating margin was 26.9%, up 568 bps sequentially and down 163 bps year over year. On a sequential basis, the higher R&D as a percentage of sales was offset by the higher gross margin and lower SG&A. All except SG&A expenses increased as a percentage of sales from the year-ago quarter.

The operating margins by segment were as follows—PC Client 38.9% (up 604 bps sequentially), Data Center 47.8% (up 300 bps), Other Intel Architecture -56.8% (up 775 bps) and Software and Services -0.8% (up 51 bps). The two primary segments, PC Client and Data Center, saw operating margins increasing from the year-ago quarter as well.

Net income was $3.07 billion, or 22.8% of sales, compared to $2.00 billion, or 15.6% in the previous quarter and $2.97 billion or 22.1% in the comparable prior-year quarter. The pro forma calculation in the last quarter excludes restructuring and asset impairment charges of 2 cents a share.

As a result, the pro forma EPS was 60 cents a share compared with 39 cents in the previous quarter and 58 cents in the year-ago quarter. There were no one-time items in either the previous or year-ago quarters.

Balance Sheet

Inventories dropped 0.2% sequentially with annualized inventory turns moving from 4.7X to 4.5X. Days sales outstanding (DSOs) were flattish at around 25. The cash, marketable securities and fixed income trading asset balance at quarter-end was $19.15 billion, up $1.80 billion during the quarter.

Intel has $13.16 billion in long-term debt and $350 million in short-term debt, resulting in a net cash balance of $5.64 billion. Cash flow from operations was around $6 billion. Important usages of cash in the last quarter included $2.87 billion on capex, $1.12 billion on dividends and $536 million on share repurchases.


Intel guided to fourth-quarter revenue of around $13.7 billion (+/-$500 million), up 1.6% sequentially and 1.7% from the Dec quarter of 2012 (short of the consensus estimate of $14.0 billion). The gross margin is expected to be around 61% (+/-2 percentage points). Total operating expenses are expected to come in at around $4.7 billion.

Management also expects to provide for depreciation of around $1.7 billion and intangibles amortization of around $70 million. Other income/expense and equity investments are not expected to have an impact on results. Applying the guided annual tax rate of 25%, net income comes to around $2.74 billion or 20.0% of revenue, which would be down sequentially but up year over year.

In 2013, the company expects to spend $10.8 billion (+/- $300 million) on capex, which is slightly more conservative than the previous forecast of $11.0 billion (+/- $500 million).

Our Take

Intel’s third quarter was routine in many ways – its client business continues to be impacted by PC market cannibalization, its data center business continues to do well, the rest of the business remains unremarkable, cost containment remains good and the product development effort remains more or less on track (Broadwell pushed out by a quarter due to yield issues that have now been fixed).

The longer-range concern about ASP pressures remain, although Intel did well in the last quarter. But as the company ships more low-ASP Atom processors in a bid to build a position in the mobile and microserver segments, its margins will definitely come under pressure. The moving out of process engineering costs to the R&D line will provide some support.

The fourth-quarter revenue guidance looks above-seasonal, albeit below our expectations. Intel did mention growing adoption its chips on mobile platforms, which was encouraging, but meaningful growth that could offset PC market declines is still likely some way off.

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 - Free Report) . 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 years.

Intel’s focus on the ultra-mobile, ultra-thin computing segment has been welcomed by Hewlett Packard (HPQ - Free Report) and Dell, among others. Adoption of new technology is naturally much slower in an uncertain economy and the Ultrabook’s success has also been limited by a plethora of tablets and growing number of hybrid devices.

2013 remains a transition year, with Haswell and Bay Trail getting into a range of devices. Management has stated that Intel has increased focus on the Atom line and will speed up its progress to the leading edge and also increasingly integrate graphics, communications and other components. The concern here is that its own lowest-end Core processors could be cannibalized.

In the meantime, tablets that run on ARM Holdings devices will continue to eat into notebooks, which have been taking share from desktops. Therefore, Intel’s core computing business will remain under pressure.

Intel has a strong position in a declining market, but continues to display a 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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