YOU HAVE TO READ THAT ONE
12:43pm EDT 23-Aug-00 Salomon Smith Barney (Jonathan Joseph 415-955-4998) INTC
INTC: Rediscovering the Microprocessor Market
SALOMON SMITH BARNEY
Intel Corporation (INTC)
INTC: Rediscovering the Microprocessor Market 1M (Buy, Medium
Risk)
Mkt Cap:
$505,342.8 mil.
August 23, 2000 SUMMARY
* As expected, the tone of the Forum is upbeat, with
SEMICONDUCTORS CEO Craig Barrett declaring the "PC is not yet
Jonathan Joseph dead," something they would not have said a year
415-955-4998 ago. Offline, management is looking for a very
jonathan.joseph@ssmb.com strong Q3, with solid prospects for Q4, and growing
Edward Sun visibility into early 2001.
415-951-1830 * If anything, the tone set at this twice-yearly
edward.j.sun@ssmb.com Developer Forum is one of Intel opening up the
standards to allow the market to
choose---particularly in the case of Rambus,
chipsets, and 64-bit architectures---rather than
dogmatically dictating winners and losers. This is a
plus.
* The company would not confirm Japanese press
reports that the Pentium 4 is being released in
September with prices of $795 for the 1.3GHz part
and $895 for the 1.4GHz part, followed by price cuts
in November. We anticipate P4 volumes will remain
low until 2H 2001.
FUNDAMENTALS
P/E (12/00E) 41.9x
P/E (12/01E) 37.0x
TEV/EBITDA (12/00E) NA
TEV/EBITDA (12/01E) NA
Book Value/Share (12/00E) $5.23
Price/Book Value 13.8x
Dividend/Yield (12/00E) $0.06/0.1%
Revenue (12/00E) $35,251.0 mil.
Proj. Long-Term EPS Growth 25%
ROE (12/00E) NA
Long-Term Debt to Capital(a) 2.3%
INTC is in the S&P 500(R) Index.
(a) Data as of most recent quarter
SHARE DATA . RECOMMENDATION
Price (8/22/00) $72.13 Current Rating 1M
52-Week Range $73.34-$32.56 Prior Rating 1M
Shares Outstanding(a) 7,006.0 mil. Current Target Price $88.00
Convertible No Previous Target Price $88.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
12/99A Actual $0.29A $0.26A $0.28A $0.35A $1.16A
12/00E Current $0.36A $0.50A $0.43E $0.44E $1.72E
Previous $0.36A $0.50A $0.43E $0.44E $1.72E
12/01E Current $0.44E $0.48E $0.51E $0.52E $1.95E
Previous $0.44E $0.48E $0.51E $0.52E $1.95E
12/02E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 12/00E $1.72; 12/01E $1.86; 12/02E NA
SUMMARY (CONT.)
* Lots of chatter at the conference about the Itanium, the IA-64 processor
aimed at the high-end server market. Despite the fact that small production
volumes will not be shipped until Q1, the company wants to show the
architecture is moving forward, with demos of 15 software packages, among 350
applications being developed by ISVs (independent software developers).
INTEL ONCE AGAIN A MICROPROCESSOR COMPANY
It has been stunning to see how far Intel has gone to show investors that it is
not stuck in the mature microprocessor market but is in fact now an Internet IC
company. In fact, at the last analyst meeting there was not a single meaningful
presentation on microprocessors, which make up about 77% of the company's
revenues. Granted, the Forum is not for "spin," it is to generate real
revenues, and as such should more closely mirror the company's primary product
lines. Even so, Barrett yesterday went to great lengths to stress
microprocessors are the "core business," and yes, other product lines are
growing faster, but will not likely make processors a "minority (revenue
stream) for five to ten years". Outside of this being a different audience, we
think the reasons for this refocus are two:
* The microprocessor market continues to look strong. Intel's processor
expectations have been surpassed for the last several quarters, which is why
it was caught short of capacity in 1H (despite today's WSJ article, Xeon
supply is not a show-stopper). The company is geared up to report one of the
strongest, if not the strongest, Q3 ever. We are forecasting 36.4 million
units shipped this quarter, up 8% from Q2; actual shipments may well come in
at double digit growth rates. In addition, Q4 will also probably be strong,
though the sequential unit growth may not exceed Q3. We are currently
forecasting 26% unit growth for 2000, which may prove low. Even so, that
number outperforms most market researcher forecasts by a wide margin. Why?
Because growth in Asia, particularly China and Japan, is running well ahead
of plan.
* The product roadmap is coming together. Following well-publicized snafus
like the 820 chipset and delays in Timna and Itanium, Intel seems confident
its processor product roadmap is solidly back on track. At the conference the
company demonstrated a 2GHz P4 ("Moore's law is still alive," said the Intel
person doing the demo; it was 18 months ago that the company introduced a
1GHz P3), announced a 1GHz Xeon, and is moving forward on Itanium (formerly
the Merced) and Timna (which is a processor integrated with graphics and
chipset, targeted at the low end). In addition, it is opening up its support
to memory standards other than Rambus.
INTEL WENT A BRIDGE TOO FAR WITH RDRAM
Ten years ago, Intel had little notion of getting all the industry "ducks"
lined up to shorten introduction times for new processor families. Then, the PC
market began to explode and proliferate around the world. In the early 1990s it
found itself getting into the motherboard business and later the chipset
business to speed up the adoption of next-generation processors. It sponsored
the PCI bus interface and USB (universal serial bus) as standards to improve
performance. It promoted synchronous DRAM, including the 60MHz and 100MHz
versions. Then it began to force Rambus DRAM onto the community, which became a
bridge too far.
Though elegant on paper, RDRAM has never panned out in the real world:
performance is only in-line with less arcane technologies and the price is
still running 3x SDRAM. Intel has since pulled back from its sole support of
RDRAM, and is wisely opening up to several different standards, including PC133
and DDR (double data rate) SDRAM. It will allow the "market to decide," which
is what the market does anyway. But it is not stopping with RDRAM, Intel is
apparently considering licensing future chipset know-how to other vendors,
particularly the Taiwanese, to help proliferate increasingly complex
motherboard configurations. Given that the number of SKUs are going up rapidly,
open chipset standards make sense. Finally, the company is opening up its IA-64
to get more software developers to support the new product family.
PENTIUM 4 SOON TO SHIP IN SMALL VOLUMES
It is our understanding that P4 (formerly known as Willamette) will not ship in
production volumes until Q4, and probably will not amount to meaningful
revenues until 2H of next year. Even so, there are some Japanese press reports
that the P4 will be shipped as early as next month, with a prices of $795 for
the 1.3GHz part and $895 for the 1.4GHz part. These will be followed by price
cuts to $625 and $795, respectively, in November, according to the report.
Intel's response is that no such list exists. Whatever. The important point is
the P-IV is a screamer---it easily has bandwidth to 2GHz. Compared to the P-
III, the 20-stage pipeline that is 2x longer, the ALU (arithmetic logic unit)
executes integer instructions 2x faster, the 400MHz system bus is 3x faster,
and the decode cache system is more efficient. Unfortunately, SDRAM chipsets
will not likely be available until Q1/Q2 of 2001.
ITANIUM ACTIVITY BUILDING
The buzz surrounding the introduction of the Itanium in small production
volumes in Q1 continues to build. This is a radically new architecture for
Intel, with a VLIW (very long instruction word) core that will run both x86 and
HP PA-RISC code. Two important points to make:
* Marketing to establish a critical mass of support is key to the success of
any new product. Intel realizes, better than anyone, that success in the
microprocessor market is as much about marketing as technology. Intel is
marketing the hell out of this product, which will help make it the processor
of critical mass, just as the x86 architecture was. The company has opened 30
development centers, is instituting "plug fests" to bring ISVs together, and
has shipped 6,000 prototype boards amounting to 30,000 processors across the
prospective customer base. In addition, there are 15 software applications
running at the show with 350 software packages under development.
* Performance should be prominently benchmarked, mostly because it helps in
establishing no. 1 above. Intel is pretty good at this. Not that you might
care, but running the RSA-1024 decryption algorithm (used in decrypting
Internet URLs) Intel believes its Itanium is 10x faster than the UltraSPARC
III, which is a little controversial because that Sun Micro product has been
slow in coming to market. Evidently, in certain linear equations when
measured using the Linpack 1000 benchmark (a virtual household name among
about 100 astrophysicists), the Itanium is running at 2 Gigaflops/sec., the
fastest processor on earth. But do not look for the Itanium to come to
Junior's desktop soon. Both Intel and Microsoft stress, if the program takes
a keystroke to execute (like the MS Office suite), it does not need Itanium.
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