Intel’s December 2009 quarter–exceptionally strong

INTC’s results

INTC reported results for its December 2009 quarter after the market closed last Thursday.

Revenues of $10.6 billion exceeded the high end of the company’s guidance and came within a whisker of equalling its December 2007 high-water mark.  Earnings per share of $.40 exceeded both consensus estimates of $.30 and the 2007 level of $.38.  Gross margin of 65% was an all-time record.

Ex charges for settling an intellectual property licensing suit with AMD, Intel earned $.55 for the quarter.

These are extremely impressive figures.

Intel also upped its guidance for first-quarter 2010 revenue from $9.4 billion to $9.7 billion and suggested that it expected 10%+ revenue growth for full year 2010.  This expectation, which I think is conservative, would imply earnings per share for the company in the $1.60-$1.70 range.

The details:

Strength was primarily in consumer demand.  The Americas and Asia-Pacific, up 15%  and 12% quarter on quarter respectively, were the stars.  Japan, up 8%, and Europe, +15%, lagged slightly behind their historical patterns.  Overall, quarter on quarter growth was about 2x the seasonal norm.

Among product categories, notebooks showed the sharpest growth.  Servers were also strong, with demand shifting to the higher (and more profitable) end.

Atom chips for netbooks became a $1.4 billion business for INTC during 2009.  Quarter on quarter growth was only 6%, suggesting (to me, anyway) that demand is starting to flatten out.  INTC made two interesting remarks about Atom, however:

1.  the company has studied the buyers of Atom-driven devices carefully and has detected virtually no cannibalization of traditional notebooks to date.

2.  until recently, typical buyers have been in the developed world and have wanted a second, simple, light device–often to replace a traditional laptop while traveling.  During the December quarter, however, 25% of purchases have been by telecom operators, for to give to customers purchasing a cell data contract.  INTC expects that this kind of purchase will quickly become mainstream, especially in the developing world.

Sell-through has matched sell-in closely.  INTC can see very clearly what is happening in customer businesses representing about 70% of sales.  While there was some inventory buildup from sub-normal levels during the quarter, as far as INTC can see, its results accurately represent end-user demand (rather than stockpiling by distributors or OEMs).

INTC now only expects a modest uptick in sales to corporations during 2010, as users replace the aging Windows XP with Windows 7.  This seems to me to be a change from the company’s prior belief that the shift would be rapid, because XP is so old and the costs of maintaining now-antiquated four-and five-year old PCs are so high.  Slow adoption would be the norm, as corporate data center managers wait for the bugs in new MSFT software to be found and fixed before they shift from an older system.  Likely?  See below.

After five years of slimming down, the company is starting to expand staff again.

My thoughts

I’m not an INTC expert, so take some of what I say with a grain of salt.

The current management of the company impresses me much more than I had expected when I started monitoring INTC a few months ago.  I still have a lot to learn, but I no longer consider it the corporate dinosaur I thought it has been for the past ten years or more.

INTC has somehow made the shift from an older generation of chips made with spacing between parts of 45 billionths of a meter to newer ones with 32 nanometer spacing, while spending less than its depreciation.  True, INTC is reclassifying some expenditures as research and development, but I find this still a startling achievement.

According to MarketWatch, the consensus earnings estimate for INTC for 2010 is $1.53 a share.  That’s a lot too low, I think.  If corporate PC purchases exceed INTC’s now-modest projection, even my $1.70 could prove low.  It may well be that the largest companies, citing security issues, will move with customary caution, but my guess is that smaller concerns won’t wait.

In response to an analyst’s question on the conference call, INTC pointed out that its strongest growth has been coming from emerging markets for years.  Who wasn’t aware of this? –at least one professional tech analyst covering INTC, implying that the scope for positive earnings surprise may be larger than I would have imagined.

Yes, there are warts.  The fourth-quarter tax rate is very low.  More important, it’s not clear to me how INTC will fare in an increasingly smartphone, e-reader world.  But at 12x this year’s earnings and a 3% prospective dividend yield, it doesn’t seem to me that there’s a lot of downside risk.  And if the management is as smart as I suspect it may be, INTC may well adapt to a new operating environment more easily than most expect.

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