Tuesday, January 17, 2006

Intel (INTC) Q4 Summary

Looks like a lot of disappointment in results, in outlook both for upcoming quarter and year. Slight market share losses and slight inventory build. Heavy spending!
  • E.P.S. disappointment at 40 cents vs consensus 43 cents vs. yr. ago 33 cents

  • This was despite a very low Q4 effective tax rate of 29.1%.

  • Revenues up 6% at $10.2 billion vs consensus of $10.56 billion
  • Forecast for first quarter revenues is between $9.1 billion and $9.7 billion vs consensus forecast of $10 billion.

  • Forecast gross margins at 59% plus or minus a couple of points which is below fourth quarter level of 61.8%.

  • Inventories built by over $300 million compared to the third quarter.

  • Full year forecast has revenue growth of 6-9% and gross margins of only 57%.

  • Full year spending growth will be +11% not including share based compensation. All in, with R&D, G&A, marketing, and share based compensation, spending will be at $13.1 billion versus $10.8 billion for 2005. Revenue growth of 6-9% versus spending growth of 11% is well outside their plan to keep spending growth in line with revenue growth. R&D spending itself will be at $6.5 billion versus 2005’s $5.1 billion.

More bad news…capital spending will be up too, by about 19%. Capex will be around $6.5 billion. The spending will relate to ramping up their 65 nm technology and investing in even smaller geometries. With tech, it never really ends.

The good news of last year was the return of capital to shareholders. Stock repurchases and cash dividends returned over $12 billion to stockholders. Quarterly average shares outstanding were down nearly 5% from a year ago and 11% from the peak in 1998. The board has approved a 25 percent increase in the quarterly cash dividend to 10 cents per share beginning with a dividend expected to be declared in the first quarter of 2006 and authorized the repurchase of up to $25 billion in shares of common stock under the company’s ongoing stock repurchase program.

My conclusion…the company is fighting a revitalized AMD for market share. Is there a fundamental disadvantage in terms of INTC design architecture? INTC customers had built up inventories of chips in the previous quarter resulting in less demand for the fourth quarter. Heavy R&D spending and heavy capex are the weapons in fighting this market share game. The impact of heavy start up costs will have a negative effect on gross margins.

Looks like increasing capital intensity for the industry overall...not good news for multiples or for free cash flow. This should represent good news for the semiconductor capital equipment industry.

Given the 9 or 10% correction in the stock price after the close, the company is now trading at an EV/EBIT of 10.67 times. The business has recently returned about 20% on invested capital. It appears that we could be returning to numbers a little closer to the 16 to 17% level. Far from a disaster, but there’s enough disappointment relative to analysts expectations that we’ll see a lot of gnashing of teeth at the open.


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