March quarter earnings
INTC reported march quarter results after the close on Tuesday. The company earned $.43 a share on record revenues for a first quarter of $10.3 billion. Sales were down 3% quarter on quarter from the $10.6 billion posted during the December 2009 period, or about a third of the typical seasonal decline. Nevertheless, laptop-related revenues were at a quarterly all-time high.
The company said demand was “incredible” and raised its guidance for the rest of the year.
I’m going to write this post in two sections. The first will deal with INTC comments that bear on the state of the world economy or the overall technology industry. The second will deal with INTC-specfic issues.
Part one: general
–During the quarter, INTC saw the first indications of a pickup in corporate buying of PCs. For some time, companies have been swapping out older servers for newer, faster, lower operating cost models. But now they’re starting to replace aging desktops (average age: 5 years) and laptops (4 years).
This isn’t a mass replacement, at least not yet. That won’t come, if it does, until corporations have done enough testing of Windows 7 that they feel comfortable substituting it for the aging XP operating system that most are still using. But it does indicate that corporations feel they have more money to spend.
–INTC is also seeing the first signs of life in “transactional volumes,” that is, sales through distributors to small- and medium-sized businesses.
–Demand was strongest for INTC’s newest 32 nanometer chips. Despite a faster-than-expected rampup of 32nm factories, INTC couldn’t keep up with client orders.
–INTC itself feels good enough that it will be doing net hiring for the first time in five years.
–I think the regional breakdown of sales for the quarter is very revealing.
——————% of total sales q on q sales change
Asia ex Japan 57% -1%
Japan 11% +10%
Americas 18% -9%
Europe 14% -8%
Given INTC’s dominant position in the logic chip business, this chart shows how radically this business depends on Asian demand. The Americas and Europe now comprise less than a third of the total. The Pacific was actually up in slaes for the quarter, which typically shows a seasonal decline of 9% vs. Q4.
INTC expects the corporate tax rate to rise as the year progresses, implying that it expects sales from higher tax-rate places like the US to begin to accelerate.
With a 19% quarter on quarter drop, sales of Atom chips for netbooks experienced an unusually sharp decline–although that might not be the right word for such a new computer market segment.
INTC says that it sees netbooks as a purely individual consumer phenomenon. There is no corporate market. It now comprises about 20% of laptop sales, a figure INTC expects will remain steady.
I see the sales falloff as coming from a combination of several factors: new firms entering the market, a desire by all participants not to miss the big yearend selling season, and uncertainty about the true size of demand. Now that we have a better handle on the last item, netbook producers are adjusting their production plans but will presumably begin reordering during the second quarter.
INTC sees the tablet market as being today where the netbook market was two years ago. It thinks demand for tablets won’t cut into traditional laptop demand but will, like netbooks, be additive. The company says lots of Atom-based tablets are going to be introduced shortly, using both Android and Windows 7 operating systems.
Part two: INTC itself
INTC is surprising itself with the speed and efficiency of its changeover from producing chips with a spacing of 45 nanometers between lines to the newer-smaller-faster 32 nm. At the same time, customers who want to be the first on the block with cutting-edge PC speed are willing to pay high prices for the privilege.
On top of that, while 2009 was the year of the consumer’s return to buying PCs (China in the first half, Europe and the US in the second), 2010 is giving every indication of being the year when corporates finally upgrade their PCs that in IT years (2.5x dog years?) are fast approaching decrepitude.
The first factor means higher than expected operating margins; the second means higher revenues. The two combined are the force behind INTC’s surprisingly good earnings performance in the March quarter.
There’s no reason to think performance won’t get better as the year progresses. If corporations decide to adopt Windows 7 during the second half–a bit faster than might be typical, but XP is getting long in the tooth (no one adopted Vista)–2010 could be a truly memorable year. If not, the earnings party will continue well into 2011.
One probably shouldn’t get too carried away with speculation about how good earnings might be in 2010. Prior to this report, the Wall Street consensus was that INTC would earn about $1.65 a share this year. When the latest round of revisions are in, that figure will probably be a lot closer to $1.80. $2 a share might even be in striking distance, given that INTC’s highly automated factories have a lot of operating leverage. But that would likely require a 20%+ increase in unit sales. And, offsetting some of the resulting gross margin gain, the company has already indicated that it will spend $600 million more than planned on R&D and marketing. That figure would doubtless increase if revenues do.
What really strikes me is how much free cash INTC is currently throwing off. The company had $16.4 billion of cash and near-cash assets at the end of last year. It added $2.4 billion to that total in the first quarter. Absent another dividend increase or an acquisition, INTC is on track to exit the year with a total of $27-$28 billion on the balance sheet. Even after repaying the company’s $2 billion in long-term debt, that would amount to 20% of INTC’s market capitalization.
As I wrote after INTC’s last quarterly earnings report, the present company management seems to understand that the company is mature and is managing it appropriately. One should expect a continuation of the steady dividend increases that have been approved by the board since 2003. Trading at a pe discount to the market and a dividend yield preference as well, INTC seems to me to be part of a group that would include MSFT and WMT (I own this one) that should be very attractive to Baby Boomers.