INTC: Looking Ahead to 2Q Results

When we last looked at INTC, after the end of the first quarter, we didn't see many reasons for optimism. Revenue, Net Income, and CFO had all declined on a year-over-year basis. ROIC was down substantially, and operating expenses were up.

Yet, in a move we certainly didn't anticipate, Intel's stock price shot up 24 percent in the second quarter from $19.13 to $23.74. Since the broader market only advanced 5.8 percent over this period, investors were clearly anticipating rosier time ahead for Intel. The improved stock performance might be due favorable reviews given to Intel's newest products and predictions that Intel will regain market share from steadfast competitor Advanced Micro Devices (AMD).

Revenue in each of the last five quarters was less than the revenue in the year-earlier quarter. However, the steepness of the declines has been softening. At this point, we're comfortable believing the revenue trend will reverse with a modest quarter-over-quarter increase. Intel, in their Business Outlook for the second quarter, indicated that they expect revenue to be between $8.2 to $8.8 billion. The midpoint, $8.5 billion, would equate to a 6-percent gain over the year-earlier quarter. Year-over-year revenues would still be down 4 percent. The $8.5 billion figure would represent 24 percent of revenues in the last year, which approximates Intel's average for second quarters. Professional analysts have also centered their aim on or about the midpoint value; their revenue predictions average $8.52 billion, with the estimates varying between $8.34 and $8.64 billion.

In the face of intense competition, Intel's gross margin has dropped from percentages in the high 50's to an even 50 percent. Intel signaled that the gross margin in the second quarter would be 48 percent, plus or minus a couple of percentage points. On this score, we decided to give them the benefit of the doubt and assume the gross margin would hit the nice round number of 50 percent. Given our revenue prediction, this would equate to a cost of goods sold of $4.25 billion.

Extrapolating from the recent past, we're assuming R&D and SG&A expenses will each be about 16 percent of revenue, or $1.36 billion for each expense. If we make provisions for an additional $84 million of operating charges, which is the average value for the last 10 quarters, the estimated Operating Income turns out to be $1.446 billion.

If we use historic averages for gains on investment, net interest, and other income, we get a predicted level of Income before Taxes of $1.672 billion.

Effective income tax rates don't normally change dramatically from quarter to quarter, but the resolution of a dispute with the IRS allowed Intel to reverse $300 million of previously accrued taxes. This caused the first quarter tax rate to plunge below 13 percent. For the tax rate in the second quarter, we'll use a more normal 31 percent, which is what Intel itself estimated.

With all these assumptions, Net income in the second would be $1.154 billion ($0.20/share), up from 885 million in the year-earlier quarter. Analysts are assuming $0.19.

($M)		2Q-2007 (predicted)	2Q-2006 (actual)
Revenue		8500	8009
Op expenses
	CGS	4250	3838
	R&D	1360	1496
	SG&A	1360	1593
	Other	84	10
Op income		1446	1072
Other income
	Investments	20	37
	Interest, etc.	207	144
Pretax income		1672	1253
Income tax		518	368
Net income		1154	885
		0.20/sh	0.15/sh