Business context and reporting period
Intel Corporation’s unaudited Form 10-Q covers the quarter ended September 25, 2010, and the first nine months of 2010. Comparisons are with the corresponding 2009 periods unless otherwise stated. Intel reported record third-quarter revenue and operating income; growth was led by microprocessor demand, while consumer demand in mature markets weakened.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | First nine months 2010 | First nine months 2009 |
|---|---|---|---|---|
| Revenue | $11.102 billion | $9.389 billion | $32.166 billion | $24.558 billion |
| Gross margin | $7.321 billion; 65.9% | $5.404 billion; 57.6% | $21.085 billion; 65.6% | $12.721 billion; 51.8% |
| Operating income | $4.136 billion | $2.579 billion | $11.565 billion | $3.214 billion |
| Net income | $2.955 billion | $1.856 billion | $8.284 billion | $2.087 billion |
| Diluted EPS | $0.52 | $0.33 | $1.45 | $0.37 |
- Revenue increased 18% year over year in Q3 and 31% for the first nine months. Q3 operating margin was 37.3%; the nine-month operating margin was 36.0%.
- Q3 gross margin percentage was down from 67.2% in Q2 2010, primarily due to write-offs of unqualified next-generation processor inventory. Year-over-year margin improvement reflected higher revenue, lower platform unit costs, and prior-year excess-capacity charges.
- Operating cash flow was $11.142 billion for the first nine months, versus $7.765 billion in 2009. Investing activities used $7.567 billion, including $3.338 billion for property and equipment; financing activities used $2.045 billion. Cash and cash equivalents ended the period at $5.517 billion.
- Cash, short-term investments, and marketable debt instruments in trading assets totaled $20.328 billion. Total short- and long-term debt was $2.332 billion; debt was 4.9% of stockholders’ equity. Current assets were $29.499 billion and current liabilities $8.837 billion.
- Dividends paid were $2.624 billion in the first nine months. Intel made no repurchases under its authorized program during that period; $5.7 billion remained authorized.
Material changes versus the prior comparable period
- Q3 revenue rose 18% year over year, with record microprocessor unit sales, driven by corporate demand and emerging markets. Microprocessor average selling prices were flat sequentially. PC Client Group revenue rose 14% year over year and Data Center Group revenue rose 30%.
- For the first nine months, revenue increased across all reported regions, led by Japan (+40%) and Asia-Pacific (+38%). PC Client Group revenue rose 28%; Data Center Group revenue rose 39%.
- Q3 operating income increased 60% year over year, while nine-month operating income more than tripled. Comparisons benefited from the absence of 2009 restructuring costs and, for the nine-month period, the prior-year $1.447 billion European Commission fine and $1.1 billion of excess-capacity charges.
- R&D increased 17% in Q3 and 21% year to date, reflecting higher staffing, compensation, and development costs. Nine-month marketing, general and administrative expense declined 12%, mainly because the 2009 period included the EC fine.
- Q3 equity-method investment gains included $181 million related to SMART Technologies’ IPO and share sale. Nine-month equity-method gains also included a $91 million gain on the sale of Numonyx. These transactions contributed to reported earnings and are not recurring operating revenue.
Guidance, outlook, management commentary, risks and contingencies
- For Q4 2010, management forecast revenue of $11.4 billion, plus or minus $400 million; gross margin of 67%, plus or minus a couple of percentage points; depreciation of about $1.1 billion; and R&D plus marketing, general and administrative expenses of about $3.2 billion. The forecast tax rate was about 31%, with an estimated net gain of about $20 million from specified investment and other items.
- For full-year 2010, capital spending guidance was $5.2 billion, plus or minus $200 million. Intel expected Q4 revenue growth to remain below seasonal trends because of weakness in consumer markets in Europe and North America and customer inventory reductions ahead of new processor launches. Management expected Q4 gross margin to improve slightly, subject to higher platform costs, startup costs, and factory transitions.
- Intel expected to ship 32-nanometer products based on its second-generation Intel Core processor microarchitecture later in Q4. It was accelerating upgrades to older-generation factories while preparing for the product launch.
- Intel agreed to acquire McAfee for approximately $7.68 billion and Infineon’s Wireless Solutions business for approximately $1.4 billion, both subject to regulatory approval and other closing conditions. Management said its liquidity was sufficient for expected business needs over the next 12 months, including potential acquisitions.
- Legal matters include competition proceedings and private litigation. The FTC settlement was publicly approved November 2, 2010; Intel said it disagreed with the allegations and did not expect compliance changes to materially affect its financial position, results, or cash flows. Intel had paid the $1.447 billion EC fine and appealed the decision; a General Court decision was expected in 2012.
- Lehman demanded at least $417 million in October 2010 in connection with a disputed 2008 share-purchase contract; Intel said it would defend its position. Intel cautioned that legal outcomes are uncertain and that adverse rulings could result in substantial payments, injunctions, or other business restrictions.
- Key risks include volatile product demand and customer inventories, intense competition and rapid technology change, manufacturing yields and capacity utilization, product mix and inventory write-offs, global supply and operating risks, investment impairments, taxes, acquisitions, and legal or regulatory outcomes. Management identified estimates for private investments, long-lived assets, taxes, and inventory as particularly judgmental.
Important facts for investors to verify
- Whether Q4 revenue and gross-margin guidance was achieved, especially given softer consumer demand and inventory reductions.
- How much of reported earnings growth was supported by core operations versus SMART and Numonyx gains and favorable prior-year comparisons.
- Closing, financing, integration, and regulatory status of the McAfee and Infineon transactions and their impact on cash, margins, and capital allocation.
- Developments in FTC compliance, the EC appeal, other competition cases, and the Lehman demand, including any estimated financial exposure.
- Inventory levels, factory utilization, product qualification and launch progress, and whether capital spending remained within the stated full-year range.