Inside the numbers with Intel Fayad Abbasi
Intel Corp. NASDAQ:INTC
Technology
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Jan 14 2000
The controversy over Intel's (INTC : Nasdaq) earnings
stems from two line items: amortization of goodwill and
interest and other income. The guidance for amortization
was $185 million while the company actually reported
$241 million. The accusation is that the higher
amortization is a way for Intel to play with their
numbers. The company has made several acquisitions
over the past year (for a detail of the acquisitions for
1999, see the company web page). While it is difficult to
know exactly what the amortization schedule is on
acquisitions, the higher than expected number does not
benefit the company in this quarter. In fact, it
decreases stated earnings. The additional $56 million in
amortization decreases earnings per share (EPS) by
$0.017. Therefore, if anything, we should add about
$0.02 per share to the stated numbers.
It is important to note that amortization of goodwill is
not a cash item. In terms of cash earnings, the numbers
do not matter.
As for interest and other income, guidance was for $280
million. The company actually realized $508 million in
interest and other income. Because of the increase in
realized gains of its investments, known as Intel Capital,
the company realized an additional $228 million, or
$0.068 per share. After tax, that number amounts to
about $0.05 per share.
The net result of these two modifications to earnings
results in EPS of $0.66, or $0.03 per share higher than
expectations of $0.63 and $0.01 higher than the whisper
numbers of $0.65. Either way, Intel had a great quarter.
It is also important to note that gross margins were
higher than guidance as well, at 61.3%. The higher gross
margin number is a welcome for Intel, considering the
pressures on gross margins over the past two years. In
4Q98, gross margins were 58.5%.
Does this matter?
At the end of the day, cash is king. While investors are
valuing Intel based on operational performance, any
additional gains can only help the company. The
additional $228 million from investment gains can help
accelerate investment plans for the company in its
product transition to smaller line width technologies or
can be used to repurchase shares. Both benefit
investors. An accelerated amortization does not impact
cash but can reduce future amortization charges. As a
result, the company is in a better position to absorb
additional company acquisitions, which also benefits
investors. No matter how you approach it, the real
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