Intel (INTC) reported its Q4 and FY 2012 results Thursday, and Friday the stock has been hammered, down nearly 7% as of this writing. This sharp decline in Intel's share price is being associated with several factors, including: weak Q1 2013 guidance, higher than expected 2013 capex spending, and doubts about its FY 2013 revenue guidance.
The focus of this article will be the highlights from the CFO commentary for Q4 2012:
First, let us look at the numbers for FY 2012 compared to FY 2011:
Revenue: $53.3B, down 1%
Gross margin: 62.1%, flat from 62.5%
Operating income: $14.6B, down 16%
Net income: $11.0B , down 15%
Earnings per share: $2.13, down 11%
We can see that 2012 was not as good a year for Intel as 2011. Below is a quote from the CFO commentary about the FY 2012 results:
"2012 revenue of $53.3B was down 1% from a year ago and below the expectations we had at the start of the year. Worldwide GDP growth was significantly less than we had thought entering the year and the PC market segment was impacted by the growth of tablets. Our PC Client Group revenue was down 3% from a year ago. The Data Center Group revenue grew 6% year over year as a richer mix of products and significant growth in the internet cloud segment of our business was partially offset by weakness in the enterprise server market segment. Gross margin for the year was 62.1%, at the top end of our historical gross margin range for the 3rd year in a row. Spending as a percent of revenue was up to 34.1 percent in 2012 as a result of increasing R&D investments across Ultrabooks, the data center, smartphones, tablets, and manufacturing. Operating profit was $14.6B and net income was $11.0B, with earnings per share of $2.13."
Intel blames slower than expected GDP growth, declining PC growth, and the rise of the tablet for the slowdown in revenue for 2012. Of these trends, only the global GDP growth is expected to improve in 2013. A bright spot for Intel was the increase in revenues from the cloud. R&D spending was $10.1B, up 22% from 2011. This increase in R&D has resulted in lower profits for Intel.
Next, let us look at fourth quarter 2012 results compared with Q4 2011:
Revenue: $13.5B, down 3%
Gross margin: 58.0%, down 6.5 points
Operating income: $3.2B, down 31%
Net income: $2.5B, down 27%
Earnings per share: $0.48, down 25%
We can see that Intel saw some serious declines in profitability in Q4. Below is a quote from the CFO commentary about the Q4 2012 results:
"Q4 revenue of $13.5B was down 3% year over year. Relative to historical seasonal growth in the fourth quarter, revenue was impacted by softness in PC demand and continued reduction of inventories across the supply chain as OEMs reduce inventory on older generation products. Gross margin dropped from the third quarter to 58% The drop from the third quarter was driven primarily by the aggressive tactical actions we took to reduce inventory levels and to redirect space and equipment to our 14nm process technology resulting in excess capacity charges. Our inventories decreased almost $600M from the third quarter as a result of these actions. Separately, we started production on our next generation micro-architecture product, code-named Haswell, which we expect to qualify for sale in the first quarter. This production prior to qualification for sale resulted in an increase in inventory write-offs. Operating income was $3.2B and net income was $2.5B, with earnings per share of $0.48."
Again, Intel blames weak PC sales for its woes. Added to this are inventory write-offs and supply chain issues. Intel also mentions its Haswell project and expects it to launch in Q1 2013. Excess capacity charges also caused a -3.5% decline in gross margins for the quarter.
Back on my earlier article on Intel, I focused on Intel's strong cash flow and its strong record of buying back stock. For FY 2012, Intel repurchased $4.8 billion in stock and paid out $4.4B in dividends, for a total shareholder return of $9.2 billion. With a current market cap of around $105 billion, Intel has provided its shareholders 9% net shareholder payout (buybacks plus dividends).
Intel's FY 2013 outlook is actually fairly bullish. Intel projects that FY revenues will grow in the low single digits, and gross margin to be 60%. However, it also projects capital spending to be $13.0B plus or minus $500M, $2.0B higher than 2012. The increase in capital spending is primarily driven by the start of construction of a 450mm development factory. R&D and MG&A spending is expected to be approximately $18.9B, up 5% from 2012.
- Revenue: low single-digit percentage increase.
- Gross margin percentage: 60 percent, plus or minus a few percentage points.
- R&D plus MG&A spending: $18.9 billion, plus or minus $200 million.
- Amortization of acquisition-related intangibles: approximately $300 million.
- Depreciation: $6.8 billion, plus or minus $100 million.
- Impact of equity investments and interest and other: net gain of approximately $100 million.
- Tax Rate: approximately 25 percent.
- Full-year capital spending: $13.0 billion, plus or minus $500 million."
I must admit that as a holder of Intel, I am not pleased with the recent quarter or its FY 2013 outlook. The revenue estimates for FY 2013 seem rather high considering that PC sales are still declining and tablets are still on the rise. Netbooks are pretty much dead and Windows 8 has failed to spark PC demand. Intel does generate large cash flows. However, it also needs large amounts of cash for capital spending and R&D. The estimated $13 billion in capex spending for 2013 is a massive figure, and I expect that Intel will have fewer cash flows per quarter in 2013 than in 2012 due to this.
I bought Intel for its dividend and potential dividend growth. I do not see another reason or major catalyst to own Intel at the moment. I do like that Intel is buying back large amounts of stock. However, the large increase in capex makes me feel that a dividend increase in 2013 would be rather modest. Intel is now probably one of my lower conviction holdings. While it is currently cheap, I would not buy any more shares at the moment. Intel may very well retest its lows of last year and once again trade below $20.
Disclosure: I am long INTC.