Intel Corp (INTC: 21.53 +0.52 +2.48%) reported another stellar quarter, beating the Zacks Consensus Estimate by 8 cents. The earnings beat was the result of record revenue, gross margin, operating profit and EPS in the last quarter. Shares climbed 7.04% after hours in response to the news.Revenue
Revenue of $10.8 billion grew 4.5% sequentially and 34.2% year over year. Revenue bettered the Zacks Consensus by 5% and was over management’s original expectation of around $10.2 billion (+/-$400 million).
The year-over-year increase was for the third straight quarter, confirming that the technology turnaround will be sustained. The sequential strength was driven by better-than-seasonal performance in every region that Intel operates. Increased use of the Internet, new products, continued strength on the consumer side of the business, broad-based recovery on the enterprise side and stronger pricing contributed to the revenue beat in the last quarter.
Atom-based microprocessors and chipsets generated $412 million, which was up 16.0% sequentially and 13.4% year over year. Intel shipped a dual core version of Atom in the last quarter, which increased demand for the product. Atom remains a good choice for notebooks, netbooks and the new-age tablets, since it can be configured to run Windows, Android, Chrome and MeeGo. Overall, demand for Atom remains steady, particularly since the inventory correction in the last quarter. Therefore, management expects sustained growth through the year.
Inventory in the channel remains lean, partly on account of strong sell-through and partly due to softer orders by channel partners that feared currency-related softness later in the year.
Revenue by Segment
From the beginning of the current fiscal year, Intel decided to reorganize its segments, so it 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 2.2% sequentially and 30.7% year over year. This segment benefited from more broad-based demand from small business owners, larger enterprise refreshes and consumer purchases.
Data Center was the second largest group, with a 20% revenue share. Segment revenue was up 13.0% sequentially and 42.5% year over year. Cloud computing and transfer of data to the Internet are the secular drivers for this segment. Additionally, shorter-term demand continues to be driven by the cost savings and higher capacity of new equipment.
The Other Intel Architecture and Other segments generated 4% of revenue each, both growing strongly from the previous and year-ago quarters.
Overall, microprocessors increased 6.5% sequentially and 37.7% from the Jun 2009 quarter. Chipsets were softer, declining 3.8% sequentially and increasing 17.2% year over year. Chipset growth generally precedes microprocessor growth. Therefore, current trends seem to indicate that there will be sequential slowdown in microprocessor revenue in the current quarter, although revenue will be up strongly from the year-ago quarter.
Revenue by Geography
All regions except Europe declined on a sequential basis, with the Asia/Pacific region (excluding Japan) growing 4.0%, Japan 2.8% and the Americas 14.0%. Europe was down 7.8%. All regions were up on a year-over-year basis, with Asia/Pacific up 39.9%, the Americas 28.0%, Europe 12.2% and Japan 48.2%. The four regions contributed 57%, 20%, 12% and 11% of revenue, respectively.
Margins
The pro forma gross margin for the quarter was 67.2%, up 381 basis points (bps) sequentially and 1,637 bps year over year. The increase was driven by higher better mix, higher ASPs, volumes and significantly lower production cost. Product cost declines were the result of improved loadings and the transition to the 32nm process.
Operating expenses of $3.3 billion were up slightly from the first quarter. The operating margin was 37.0%, up 351 bps sequentially and up 1,385 bps year over year. The gross margin expansion was the main reason for the sequentially stronger operating margin, since MG&A was flattish and R&D up only slightly as a percentage of sales.
The pro forma net income was $2.9 billion, or 26.9% of sales, compared to $2.4 billion, or 23.6% in the previous quarter and $1.5 billion or a 18.4% in the prior-year quarter. There were no one-time items in the last quarter. Accordingly, the fully diluted GAAP net income was $0.51 a share compared to $0.43 per share in the previous quarter and loss of $0.07 in the year-ago quarter.
Balance Sheet
Inventories increased 12.0% sequentially and annualized inventory turns went down from 5.1X to 4.2X. Management stated that internal inventories were being built up in anticipation of significantly stronger demand in the back half of the year, and that more than 100% of the build related to 32 nm products.
Days sales outstanding (DSOs) went up from 19 to around 21. The cash, marketable securities and fixed income trading asset balance at quarter-end was $18.3 billion, up $2.0 billion during the quarter.
Intel has $2.0 billion in long-term debt, and another $1.9 billion in long-term liabilities, yielding a net cash balance of $16.2 billion. Cash flow from operations was around $3.5 billion. Important usages of cash in the last quarter included $1 billion on capex and approximately $900 million on dividends.
Fourth Quarter Guidance
Management guided to revenue of around $11.6 billion (+/-$400 million) in the third quarter, up 7.8% sequentially. The gross margin is expected to around 67% (+/-2 percentage points). Total operating expenses are expected to come in at around $3.2 billion. Management also expects to provide for depreciation of around $1.1 billion.
For 2010, management expects gross margin of 66% (+/-2%), operating expenses $12.7 billion (+/-$100 million), a tax rate of 32% (up from previous expectations of 31%), depreciation of $4.4 billion (+/-$100 million) and capex of $5.5 billion (+/- $200 million), up from $4.8 billion (+/-$100 million).
In Summary
Intel reported another strong quarter that beat analyst expectations. We come away with a few observations.
Intel reported another strong quarter that beat analyst expectations. We come away with a few observations.
First, cloud computing and transfer of data to the Internet are impacting Intel’s results sooner than we expected. Second, the enterprise refresh cycle is also happening sooner than expected. Third, there appears to be no letup in demand for consumer computing gadgets. Fourth, concerns regarding Europe are not unduly impacting results, with Intel on-track to easily beat its PC market growth estimate of around 20% for the year.
We are also compelled to comment on management’s excellent execution, which keeps the company on track to deliver 32nm products ahead of the rest of the industry. This, along with strong demand for newer, higher-margin products are driving earnings growth for Intel.Despite all these positives, we believe the shares will remain under pressure due to the situation in Europe, Intel’s much publicized legal troubles with graphics partner NVIDIA Corp (NVDA: 10.9593 +0.0393 +0.36%) and increasing competition from a resurgent Advanced Micro Devices (AMD: 7.43 -0.09 -1.20%). We have therefore allotted a Zacks rank of #3 to Intel shares.
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