Dr. Barrett mention that near term visibility is not good
06:33am EST 16-Feb-01 UBS Warburg (US) (Wong, David M. +1 212 713 2649) INTC
Intel Corporation: Webcast with CEO Craig Barrett and Update o... (Part 1 of 2)
Semiconductors UBS Warburg
David Wong, CFA, Ph.D. RESEARCH NOTE
+1 212 713 2649/david.wong@ubsw.com
Sam Lee, Associate Analyst (+1 212 713 3273) February 16, 2001
Calvin Lee, Associate Analyst (+1 212 713 8631)
Intel Corp Rating: Buy
(INTC-$35.81)(1)
Intel Corporation: Webcast with CEO Craig Barrett and Update on Intel
KEY POINTS
* We believe the near term visibility for Intel's processor sales is limited,
however, we think the long-term prospects for microprocessors growth make
Intel a good investment.
* We view Intel's capital expenditures plans of $7.5 billion for 2001
favorably, since this helps position the Company as a leader in 0.13-micron
process with three fabs converted to this technology by the end of this year.
* We think unit crossover of P4 over P3 processors could be as early as Q4 of
2001, and the Brookdale chipset that allows the P4 to use SDRAM should be
available in H2 of 2001.
Key Data Quarterly Earnings Per Share (fiscal year ends
December)
52-Wk Range $75-30 2000A 2001E Prev 2002E Prev
Eq.Mkt.Cap.(MM) $241,001 1Q $0.35 $0.21 $0.35
Sh.Out.(MM) 6,730.0 2Q 0.50 0.24 0.35
Float NA 3Q 0.41 0.37 0.47
Inst.Hldgs. 50.0% 4Q 0.38 0.49 0.55
Av.Dly.Vol.(K) 56,240 Year $1.65 $1.31 $1.69
Curr. Div./Yield $0.08/0.2% FC Cons.: $1.07 $1.36 NA
Sec.Grwth.Rate 15% P/E: 21.7x 27.3x 21.2x
12-mo. Tgt Price $40.00 Revs.(MM): $33,726 $37,100 $42,500
12-mo. Ret. Pot'l 11.9%
Convertible? Yes
EPS estimates exclude goodwill charges.
DEVELOPMENTS IN PROCESSOR BUSINESS
UBS Warburg hosted a Webcast with Intel's President and CEO Craig Barrett. In
this note we summarize comments made by Dr. Barrett, and also amplify some
points based on our own estimates and other discussions with Intel.
Dr. Barrett believes that the long-term secular demand for microprocessors
remains close to historical levels. Some of the drivers of demand for
microprocessors are the proliferation of content on the Internet, new software
applications, handheld devices such as the Palm Pilot used in conjunction with
PCs, and cellular phones with data capabilities used together with PCs. Intel
views the PC, with its rich computing power, as the central processing unit
that communicates with all these electronic devices.
Dr. Barrett mention that near term visibility is not good. We agree with this
is the case for the seasonally weak March quarter. However we believe there is
good investment opportunity in the longer term. UBS Warburg's PC group
estimates PC demand growth at 9% for full year 2001 and 4% for March quarter of
2001. Our projections take into account the estimates from the PC group and
assume relatively flatness in average selling prices and a stronger H2 2001.
Our 2001 revenue estimates for Intel are for 10% year over year growth. This
implies 30% and 20% sequential growth, respectively, in each of the last two
quarters of 2001. In addition to microprocessors, we think Intel's
communications chip business will grow much faster than 10% year over year so
that the overall company can achieve our 10% estimate.
Intel reiterated its capital expenditure plans of $7.5 billion for 2001. We
think Intel is committed to investing during an industry slowdown so that the
Company is well positioned for the subsequent upturn. Intel intends to direct
most of the capital expenditure into aggressively ramping 0.13 um and 300-mm
process technology. Exhibit 1 summarizes when the fab conversions should
occur. The Company plans to convert three fabs to 0.13 um process in 2001, and
five more fabs in 2002. Two of the five fabs in 2002 are expected to implement
300-mm process. The conversion to 0.13 micron technology should occur in the
Q1of 2001 for the first fab, and Q4 for 2002 for the eighth fab. We view this
positively as Intel is leading the shift to advanced processes that will lower
production cost of chips. Furthermore we think the transition to 0.13 micron
technology is very important to profitability of Pentium 4 (P4).
Exhibit 1: Intel's 0.13 micron Process Ramp
Fab Number Conversion to 0.13 micron Process
Technology
F20 Q1 2001
F22, D2 Q3 2001
F17, F24 Q1 2002
D1C Q1 2002 (300 mm as well)
F11X Q3 2002 (300 mm as well)
F12 Q4 2002
Source: Intel
We think third party Asian vendors are working on developing chipsets for the
P4 to work with SDRAM and DDR RAM. The ability of a third party to have a
chipset will depend on Intel granting a license to this party. At the moment,
P4 only ships with RDRAM which is more expensive than SDRAM. Intel expects to
have the Brookdale chipset available in H2 of 2001. One of the features of the
Brookdale chipset is that it allows P4 to operate with SDRAM. While Intel will
not comment on its negotiations with third party vendors, we believe to protect
market share there will no other third part chipset available before the
Brookdale. In the long term, we think Intel will work with third party vendors
to provide chipsets for P4.
In the webcast, Dr. Barrett mentioned ServerWorks as a provider of chipsets for
server based microprocessors. We think the relationship between Intel and
ServerWorks remains good following Broadcom's acquisition of ServerWorks.
UPDATE ON NON-PROCESSOR BUSINESS
When asked about its non-processors business, Intel highlighted network
processors, wireless chips, and high speed transmission chips. We think other
important areas that add value to Intel are its flash, network interface card,
and LAN related chip business. Exhibit 2 shows our revenue estimates for each
of Intel's businesses in the December 2000 quarter.
* We believe Intel's network processor division is a good fit to its core
microprocessor business in that both apply similar capabilities but to
different end markets. Network processors are for communications markets
while microprocessors are primarily for computer markets. Intel has won over
100 design wins with its network processor, and expects revenues for these
chips to ramp beginning late in 2001 and into 2002.
* Intel is the world's largest supplier of flash memory chips. In the December
2000 quarter, we estimate that the flash business had $600 to $800 million in
revenues. Two-thirds of flash revenues for Intel are for cellular phone
applications. Intel recently announced a multi-year $3 billion contract with
Siemens. We believe that Intel's flash contract prices remain firm and that
Intel's ASP for flash has been rising over the last few quarters because of a
continuing shift to higher densities.
* In addition to its flash exposure, Intel's wireless chip business consists of
the original DSP Communications chips, ARM-based processors, and digital
signal processors (DSPs). DSP Communications was acquired by Intel and
provides baseband processors for cellular phones. Intel has developed an
ARM-based embedded processor for mobile and wireless applications. The
Company is currently designing the next generation Strong ARM based embedded
processor called Xscale. Intel has developed the Xscale Microarchitecture
that provides high performance while consuming less power. We think the
Xscale Microarchitecture is very useful in wireless applications where the
characteristics of low power and good performance are highly desirable.
Intel has an alliance with Analog Devices to jointly develop a DSP chip. In
the December 2000 quarter, we estimate the wireless chipset business had $50
to $100 million in revenues. We think the wireless chip business aligns well
with Intel's core competency in high-speed processor design and its presence
in cellular phones through its flash business.
* Intel makes network interface cards for communications in local area
networks. In the December 2000 quarter, we estimate this business had $50 to
$100 million in revenues.
Exhibit 2: Revenue Estimates for Intel's Businesses
Intel Architecture Business Group (IABG)
Business Est. Intel % of Total
Dec. 2000 Q Intel Dec.
Rev. ($) 2000 Q Rev.
Processors 67% to 71%
Computer Chipsets 4% to 6%
Motherboards 4% to 6%
Total (IABG) 6,851 79%
All Other Businesses
Business Est. Intel % of Total
Dec. 2000 Q Intel Dec.
Rev. ($) 2000 Q Rev.
Network Interface Cards Approx. 2%
$200 M
LAN chips $100 M to 1% to 2%
$200 M
Flash memory $600 M to 7% to 9%
$800 M
Wireless chipsets $50 M to 1%
$100 M
Dialogics $80 M to 1%
$100 M
Other $450 M to 5% to 9%
$800 M
Total (All Other Business) 1,851 21%
Total for Intel 8,702 100%
Source: UBS Warburg estimates
OUTLOOK
Our outlook for Intel remains positive for 2001. We believe that the H2 of
2001 will show a recovery in processor sales as P4 units ramp up that will
drive revenue growth. We think that flash memory and wireless chips have
excellent long term potential, however, they present some near term risk
because of weakness in the wireless market. We think there is real value in
Intel stock and we reiterate our Buy rating with $40 price target. |
