Intel Live Earnings Coverage

Bob Faulkner covers the Intel earnings call in real time.
Author:
Publish date:

First Impressions
The stock has traded up after hours, with revenues coming in just above the high end of guidance, and better gross margins due to a better product mix. (Gross margins came in at 59.3% vs. guidance of 57%.) Intel was adamant on the last conference call that gross margins would fall due to start-up costs associated with new fabrications. These costs did not hit in the Q4 and were expected to depress gross margins in the first quarter.

The rest of the operating expenses were pretty much in line with expectations. Average selling prices (ASPs) were flat, which is a positive, while sales of mobile processor units hit a record. Units were down in chipsets, flash, motherboards, and wireless.

The midpoint of the Q2 guidance puts revenues at $8.9 billion (in line with First Call) and EPS of $0.27 ($0.01 below First Call). Most will disregard this because it's based on gross margins of 56%, and they'll think that INTC is sand-bagging.

Expectations Going Into the Call

First, let me reiterate Intel's guidance from the midquarter update on March 10. Management expected revenues of $9.2 billion to $9.4 billion and gross margins of 57%. The firm also expected operating expenses of $2.5 billion-$2.6 billion with other income of $100 million and a tax rate of 31%. First Call consensus expected revenues of $9.3 billion with EPS of $0.31.

As for Wall Street, analysts were looking for potential upside from gross margins, and an extra week of revenue (14 weeks in the quarter). During the earnings call, inventory will be a big "watch list" item given the

Advanced Micro Devices

(AMD) report, and because of less-than-stellar numbers from Taiwanese motherboard companies. Investors will also be looking at average selling prices in flash and microprocessors, and at how much Intel lost in the communications division. Finally, most analysts expect a sequential decline in gross margins from the fourth quarter, due to the timing of some fabrication start-up expenses.

CFO Comments

The CFO indicated that the fourteenth week in the quarter probably had some benefit on year-over-year growth, but that it's not possible to delineate. Gross margins quarter over quarter were driven by lower costs; sales from inventory previously were withheld (we need to know what this was) and there was no year-end bonus. INTC repossessed 108 million shares at $1.2 billion in the quarter. Inventory is up about 7%; it's believed that the Dec. 31, 2004 levels were too low.

Second-Quarter Outlook Comments

The revenue midpoint was negative 6% vs. historical average of negative 2%, but, given an extra week of revenues, that may be correct. Gross margins were down due to lower revenues, 65nm ramp and product mix. Capex was $5.6 billion, plus or minus $200 million; this was raised due to processor and chipset fabrications running at capacity. Future CEO Paul Otellini says the company is expecting to ship "millions" of dual core processors this year. Mobile parts continue to gain a couple of points per quarter as a percentage of total processors. Mobile parts have higher prices and margins.

No Alarming Inventory Build

With the Q&A starting it is interesting that Otellini's last sentence was about ramping 65nm by calendar year end that will enable cost-effective ramp of dual-core processors. So, dual-core is not very profitable on 90nm at current price plans.

I don't see any "alarming inventory build" anywhere.

Overall a Very Good Quarter

In summary, it was a very good quarter for

Intel

(INTC): better revenues, better margins and better EPS. Some may have some issues with the inventory increase. But the only concern I have is the gain (under 120 bps) in gross margins from the use of previously written down inventory.

There were no big surprises in terms of the Q&A -- it was rather benign.

Bob Faulkner has been in the investment business for 18 years with an exclusive focus on technology stocks. He started as a sell-side analyst with Wood Gundy and Alex. Brown & Sons. In 1990, he moved to the asset management side with portfolio management/analytical positions at 1838 Investment Advisors and Merrill Lynch. Bob has an M.B.A. from Seton Hall and a B.S. from Waynesburg College. Click

here

to contact Bob Faulkner via email.