Interesting Analysis from The Motley Fool
Intel looks Marvelous
By Phil Weiss (TMF Grape) July 19, 2000
Before we jump into Intel's (Nasdaq: INTC) earnings, there's plenty of action for other Rule Maker companies this
week. Coca-Cola (NYSE: KO) reported second quarter worldwide unit case volume growth of 7% -- ahead of last
month's guidance of 5% to 6% -- on sales of $5.6 billion (check out the conference call;
quote.fool.com.
Microsoft (Nasdaq: MSFT) reported flat fourth quarter sales of $5.8 billion, and net income of $2.4 billion -- including
$1.1 billion in gains from investments. Without the additional gains, income would have fallen below last year's mark of
$2.2 billion. Look for Rule Maker writer Zeke Ashton to take a closer look at Microsoft on Friday and Coke in a later
report.
After the market closed last night, Intel released its second quarter earnings. Based upon what I learned listening to the
conference call, (http://www.intel.com/intel/finance/index.htm?iid=intelhome+roll_IR& )both Intel and the Wise were
pleased with the results, which were solid from a Rule Maker perspective as well. Fool writer Paul Larson covered the
earnings this morning.
Intel Capital
One of the most controversial issues related to Intel's results is the significant contribution of Intel Capital to its bottom
line. In the past, I've taken the view that there's no reason to worry too much about the level of its contribution to Intel's
profits. These are strategic investments that allow Intel to enhance its ability to sell more products and compete in the
marketplace. In that vein, the most significant contributor to the performance of Intel Capital this quarter was the sale of
the vast majority of its shares of Micron Technologies (NYSE: MU) . According to Intel's CFO, Andy Bryant, this stock
was sold because it's no longer viewed as strategic.
While I can't say that a portfolio that holds 450 securities is Rule Makerish in any way, I can say I have some
expectations that the companies we hold in our Maker portfolio will have lots of loose cash to invest -- and I want to see
that they're benefiting from that cash. But, it's also clear that Intel can't be expected to generate $2.3 billion from such
investments on a regular basis.
This is particularly true since the size of Intel's portfolio declined to $7.5 billion from $10.8 billion, which reflects the sale
of assets as well as a decline in equity values. In addition, Intel reported that the unrealized gains in the portfolio declined
by approximately $3.2 billion. So, including such amounts in operating results will lead to more erratic earnings
performance than we expect from our investments. I'll discuss how I approached this issue in the discussion of Net
Margin for the quarter.
I'll prepare an updated Rule Maker Ranker for Intel and post it on our Companies board after I get a chance to review
the second quarter numbers for Advanced Micro Devices (NYSE: AMD) , which will be released after the market
closes tonight. However, based upon Intel's results, I'd be quite surprised if it didn't post another Top Tier score of 50 or
more.
During the conference call, Intel expressed as much optimism about the current quarter and the quarter to come as I can
ever recall. CFO Andy Bryant said Intel is "more confident going into the third quarter than it has been in a long time." In
addition, based upon conversations with customers it's expected that the third quarter results will be linear (i.e., sales
should be relatively smooth during the course of the quarter).
In addition, Paul Otellini, Executive Vice President and General Manager of Intel Architecture Group indicated that he
was very pleased with the second quarter results. Demand was unseasonably strong throughout the quarter. Intel was
able to take advantage of its continued conversion to 0.18-micron microprocessor production, which led to record
shipments during the quarter. Over 50% of the CPUs shipped during the quarter were manufactured via 0.18-micron
manufacturing technology. It is expected that this figure will exceed 90% by year's end.
Still not meeting demand
Intel still isn't able to meet demand. Unfortunately, Intel (and many other companies including some suppliers) failed to
accurately forecast the explosive demand for product driven by the rapid adoption of the Internet and the build out of the
infrastructure required for further Internet transaction growth.
While Intel is better able to meet demand now than it was during the first quarter, it has certainly not been able to
increase its inventory levels as much as it would like. This applies in the case of its distributors, its inventory channel, and
its warehouses. Intel has made significant investments in new facilities this year by purchasing a plant in Colorado Springs
and starting the production of new fabrication plants in both New Mexico and Ireland. As these plants come on line and
the conversion to 0.18-micron manufacturing technology continues to ramp up, it is expected that Intel will be able to
meet demand.
Of course, the downside here is that Intel's failure to meet demand increases the opportunity for AMD to take business.
This is something that could certainly cost Intel in the future. However, the fact that Intel is so much stronger than AMD
financially, as well as the fact that its business is better diversified leads me to believe that Intel will continue to be the
dominant company in this space for the foreseeable future.
In addition, during the conference call Intel expressed its belief that it continues to gain market share. AMD has been
unable to make serious inroads in the commercial marketplace. AMD has been able to make inroads into the consumer
market via arrangements like the one it has with Gateway (NYSE: GTW) , but from what I've read there is still great
resistance by major businesses to use PC's with AMD microprocessors.
Rule Maker criteria
Now let's take a look at Intel's Rule Maker numbers for the quarter. (Click here for the full list of Rule Maker criteria.)
Sales Growth of at least 10% -- Intel was able to grow its sales by an impressive 23% over the year-ago figure. There's
no reason it won't meet our target in the future. The two key business segments for Intel continue to be microprocessors
and flash memory chips (which primarily go into cell phones). Microprocessors for laptop PCs were up 40% year over
year and continue to outpace desktop microprocessor growth.
Flash memory sales during the quarter set a new record in terms of units, average selling prices, and revenues. Intel's
network communications group also continues to perform quite well, as revenues grew by 50% over the year-ago result.
Average selling prices were about even for the quarter and there was relatively little change in overall market distribution
of its products.
Intel did announce that the target date for when it will start recognizing revenue from its 64-bit Itanium processor has
slipped to the fourth quarter. Those revenues will only be from computers using the chip in "pilot systems." The delay is
primarily related to the company's desire to have the chip as bulletproof as possible when it's released.
On a geographic basis, demand in the Americas, Asia Pacific and Japan were all up sequentially while Europe had its
normal seasonal downturn. Japan and Asia Pacific demand has been particularly strong, as the region has emerged from
its recent recession. Internet adoption in those countries is now mirroring that of the U.S. (though on a lagging basis).
Gross Margin of at least 50% -- Despite the fact that Intel took a $200 million charge related to its MTH motherboard
replacement program during the quarter, it was still able to record gross margin for the quarter of 60.4%, an
improvement over the year ago figure of 59.4%. Without the charge (which was appropriately included in operating
results), Intel's gross margin would have been 62.9%, which is a slight increase over the 62.6% reported last quarter.
Guidance for the year is now that gross margin will be 63% plus or minus a couple of points, which is an increase over
the 61% guidance given last quarter.
Net margins of at least 7% -- This is one that I'm sure can be interpreted differently by each investor. I decided to ignore
the interest and other income amounts. For my calculation, I used pro forma operating earnings as provided in the press
release of 2,823 and applied the 31.8% tax rate listed in the press release to this income. This resulted in net income of
$1,925 million and net margin of 23.2%. I performed a similar calculation for last year using the slightly higher tax rate of
32.8% that applied to last year's earnings. This resulted in net income of $1,559 million and net margin of 23.1%.
Cash-to-Debt ratio of at least 1.5 -- Intel now has a cash hoard of $13.6 billion, and it has $385 million of short-term
debt and $870 of long-term debt. That gives it a ratio of 10.9. This is a strong result though it is down from the year ago
figure of 13.2. Intel's business continues to throw off significant cash. Unfortunately, we can't check the Foolish
Cash-King margin until its 10Q is released next month.
Foolish Flow Ratio of no more than 1.25 -- Intel's flow ratio fell to an impressive 0.87, a sharp decrease from the year
ago figure of 1.18. There is a possibility that this number could increase a bit later in the future, as Intel would ultimately
like to replenish its inventory levels a bit. One point of concern here is that accounts receivable growth during the quarter
was greater than sales growth. During the call, Andy Bryant indicated that there were an unusually large amount of sales
($655 million) at the end of the quarter that impacted this result. This also led to an increase in Intel's Days Sales
Outstanding (Accounts Receivable / (Sales/90)) of three days. I'm willing to accept Intel's explanation for this item, but it
is something that I'll check back in on next quarter.
All in all, if you're an investor with a focus on the long-term, while there are a couple of things to keep a watchful eye on,
this was yet another solid quarter for Intel. The company continues to look good when run though our investment criteria.
Phil Weiss (TMFGrape on the boards) |
