All: Article about .25 micron P/2 adds revenue to Q3
marketinvestor.com
Intel: Pentium II Cycle
10:25am EDT 16-Jul-97
Orders reasonably good. Intel reported a microprocessor book-to-bill ratio of greater
than 1.0, although July appears seasonally weak ahead of the August price cuts.
Those cuts should amount to about 35% across the board and should put
PentiumMMX pricing right on top of Pentium Classic pricing. Analysts believe a
number of major OEMs have already gained preferential pricing. Despite the price
cutting, most indications analysts get from PC makers is that demand remains
relatively firm. There is, however, a strong regional difference. Europe and Asia-Pacific
sales last quarter declined 24% and 12%, respectively, compared to an aggregate
decline of about 8%. The U.S. market, about 44% of the total, rose 2% in the quarter
while Japan rose 9%. Analysts would expect these regional patterns to hold at least
into the September quarter.
Manufacturing doing well. Analysts believe manufacturing yields on the new 0.25
micron process are exceeding managements expectations. Earlier, the company
suggested its 0.25 micron PentiumMMX, known as Tillamook, would be shipping for
revenue in the September quarter. In fact, it began shipping in the June quarter. This
leads us to believe the 0.25 micron Pentium II, known as Deschutes, which was
unofficially expected to ship in the fourth quarter, could begin revenue shipments in
the September quarter. This is important because analysts see the Deschutes, which
has a significantly reduced die size relative to the first generation, will allow Intel to
begin pricing the product into the $2,500 and below PC market, and perhaps even
lower. Analysts firmly believe 1998 is the year of the Pentium II. The Deschutes is
necessary to make that happen.
Q3 guidance in line with analysts' outlook. Seasonally, the September quarter is
tough to predict. This quarter is exacerbated by continuing short- term confusion over
mix and pricing. Price cuts will likely impact revenue growth in the quarter, but the
company will attempt to offset the price impact with higher unit shipments and by
shifting the market into higher performance/high priced products, like the
PentiumMMX-233 and the Pentium II. As analysts expected, the company is guiding
analysts to a flat to up quarter, which implies analysts' estimate 3% revenue gain in the
quarter to $6.1 billion.
Gross margins not a big worry. Gross margins in the quarter fell from about 64% to
61%, slightly lower than analysts' estimate of 62%. The company is guiding analysts
to 60-62% gross margins for the year, which would imply sequentially down margins to
about 60% this quarter. Three primary factors should buoy margins in the quarter: (1) a
slight gain in revenues, which should absorb more fixed costs, (2) no repeat this
quarter of a Q2 one-time inventory charge against older Pentium classics the company
could not sell, (3) a generally lower depreciation outlook, which was revised downward
from $2.5 billion to $2.2 billion, a savings of about $0.15 per share aftertax for the year.
Price cutting should be largely offset by better ongoing yields. Analysts are
forecasting gross margins of 60%-plus for the next several quarters, and do not see
them dipping unexpectedly below 60%. This in fact, is one area of potential upside
surprise. Nevertheless, the product mix trending in 1998 toward a greater number of
Pentium II motherboards and lower-margined Pentium II modules, which will have
on-board cache, will result in gross margins averaging about 58.5% next year, analysts
estimate. History has shown that the stock price can go up on falling gross margins,
so long as gross profits continue to rise.
Operating expenses lower, non-operating income higher. In aggregate, operating
expenses were about 1.4-percentage points below analysts' estimate, which added
about $0.03 to the bottom line. The company is forecasting operating expenses will rise
4-6% this quarter, though in the past several years it has not come anywhere near to
spending what it had suggested. Indeed, largely because Intel saw its revenues fall off
early in the quarter, management was able to contain expenses through the quarter,
which stayed amazingly flat. Non- operating income, as mentioned, reached $212
million, well above analysts' $170 million estimate, impacting earnings positively by
about $0.02 per share. The company is guiding analysts to $140 million in
non-operating income, though this too seems low by recent historical patterns.
Balance sheet weakens slightly. Finished goods inventories rose about $105 million in
the quarter, and this after taking a charge against excess Pentium inventories.
Analysts figure the company could still be holding several million Pentium Classics in
inventory that it has not yet been able to sell, which it will try to unload this quarter.
Inventories are still in line with previous norms. The company generated about $1.8
billion in cash in the quarter, most of which it used for a stock repurchase program. In
the quarter, the company repurchased 13 million shares at an average price of about
$73 for a total of $945 million. Intel is one of the great stock buy-back plays of all time:
in the 1990s, the company has spent $5.6 billion to repurchase nearly 200 million
shares of stock.
Only relative valuations compelling. With INTC only a few percent below its all-time
high, the valuation is not that compelling. The current price/book value, according to
StockVal, is 8.1x, just below its all-time high of 8.6x, while its price/sales of 6.1x is only
marginally below its all time high of 6.9x. INTC is most attractive on a relative basis: at
16.5x 1998 consensus estimates, even with warts, Intel looks much more attractive than
Coke at 36.2x.
-Henry |
