INTC’s 1Q12: encouraging signs

the results

After the close of trading on April 17th, INTC reported 1Q11 results that were a bit better than the company had guided to three months earlier.  Revenues came in at $12.9 billion, net income at $2.7 billion and eps at $.56 ($.53 on a non-GAAP basis).  This compares with the Wall Street analysts’ consensus of $.50 and $.58 that the company posted in the year-ago quarter.

Quarter on quarter, results were down, as the company felt the full force of the supply disruptions caused by flooding of hard disk drive factories in Thailand.  Basically, INTC customers couldn’t get hard drives to make all the PCs they wanted.  They also didn’t know when production would return to normal.  So they cancelled orders for new microprocessors from INTC and ran down to the bone the microprocessor inventories they had on hand.

Year on year comparisons aren’t straightforward, either.  1Q11 contained 14 weeks, versus a “normal” quarter of 13, like 1Q12 was.  So the yoy revenue comparison, $12.9 billion in 1Q12 vs. $12.8 billion in 1Q11 is considerably better than it looks.  The biggest yoy difference in expense comes in R&D, where this year’s $2.4 billion is much higher than the $1.9 billion INTC laid out in 1Q11.  Had R&D spending been flat yoy, INTC’s net would also have been flat, and eps up slightly (on a lower share count) yoy.  Not bad for a component-constrained quarter that was one week shorter than 1Q11.

details

I reread my post on INTC’s 4Q11 before starting to write this.  I think you should read it, too.  I haven’t changed my thinking.  And otherwise, I’d just be repeating here what I said there.

Three factors are new, though:

–it looks like the hard disk drive shortage is over already, a couple of months earlier than INTC had initially thought.  The company expects 2Q12 sales to be in line with final demand, with inventory restocking by customers only happening in the second half.  My guess is the net result will be a slight uptick (maybe $.05) in full-year eps from my prior guess of $2.75 for 1012, rather than just a reshuffling of the quarters. (Remember, this includes $.15 a share that Thai flooding shifted out of 2011 and into this year.)

–INTC has dropped its tax rate guidance from 29% to 28%, which I take to mean the company is lowering its expectations for the US and raising them for emerging markets.

–INTC is starting to churn out 22nm chips in volume.  At the same time, TSMC is reported to be having trouble with its 28nm manufacturing process.  This should help extend INTC’s performance lead–or close its performance gap–versus competitors who use foundries (meaning just about everyone).

where to from here?

As I wrote three (and six) months ago, at $20 a share I think INTC was a buy simply on the notion that the company wouldn’t fade away within the next two or three years.

At close to $30, the decision is different.  I think you have to believe a lot more–at the very least, that ultrabooks will be a big success.  It would be better, of course, if INTC could make some inroads into ARMH’s franchise in tablets and smartphones, as well.  In both areas, signs are encouraging.

–There are already almost two dozen ultrabook models on the market, with another hundred or so on the way before yearend.  Some will be configured to use the touch features of Windows 8; some will be hybrid devices that can function as tablets as well as traditional PCs. Better still, to my mind, is the fact that ultrabooks are coming from Samsung, Asus and Acer–meaning they’ll be stylish and more reliable than, say, Dell.

Ultrabooks have also gotten a very favorable mention in computer guru (and Mac aficionado) Walter Mossberg’s Spring laptop buyers’ guide in the Wall Street Journal. 

–Rather than waiting for customers to come knocking at its door, INTC created a “reference design”–a detailed blueprint–for the ultrabook and presented it to computer manufacturers.  It’s taking a similar tack with cellphones.  It’s offering its reference smartphone design to carriers to use as their “house brand.”  It’s already signing up customers.

Who knows where this will lead?  But the fact that most carriers are selling iPhones to customers at $400 below their cost should be a powerful motivator to look for cheaper alternatives.

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