During the after-hours of Thursday, Intel (INTC) announced its quarterly results which disappointed the investors. The company's net income missed the estimates slightly ($0.51 vs. $0.52) and the revenues beat the estimates slightly ($13.83 billion vs. $13.72 billion). These results were pretty much in line with the analyst expectations; however, the company's guidance for 2014 bothered some investors, causing a minor sell-off in the after-hours.
When we look at the full year, Intel's revenue was down from $53.3 billion to $52.7 billion, a drop of one percent. The company's gross margin was down from 62.1% to 59.8%, which represents a drop of 2.3%. As a result of this drop in the gross margin, the company's operating income was down 16% (down from $14.6 billion to $12.3 billion). Furthermore, Intel's net income was down 13% compared to 2012 (down from $11.0 billion to $9.6 billion, which comes down to $1.89 per share (down from $2.13 per share). Keep in mind that while Intel's net income fell by 13%, its net earnings per share only fell by 11% because the company reduced its share count through buybacks during the year.
Even though on full-year basis the company posted declines across the board, it showed some improvements when we compare the fourth quarter of 2013 with the fourth quarter of 2012. Intel's revenue was up 3%, gross margin was up 4%, operating income was up 12%, net income and earnings per share were both up by 6% in the fourth quarter of 2013 compared to the fourth quarter of 2012.
During the year, Intel's balance sheet continued to improve as the company is pretty profitable despite lack of growth. By the end of 2012, Intel's cash, short term investments and trading assets totaled $18.16 billion. This figure rose to $20.01 billion during the year of 2013. The company's total assets rose from $84.35 billion to $92.35 while the debt levels were pretty flat year-over-year. Intel's short-term debt fell from $312 million to $281 million while the long-term debt rose slightly from $13.14 billion to $13.17 billion. Intel's book value rose nicely from $51.20 billion to $58.26 billion during this period.
In the fourth quarter, Intel spent about $4.4 billion to repurchase 22 million shares, and the company still has another $3.2 billion in its budget to spend on share repurchases.
When we look at Intel's business units, 3 business units saw growth and 2 business units saw shrinkage during the year. Intel's Data Center Group's revenues rose from $10.51 billion to $11.24 billion, the company's Software and Services segment saw its revenues rise from $2.38 billion to $2.50 billion and "all other" segment category saw its revenues rose from $1.57 billion to $1.84 billion. Unfortunately, the company's largest business segment, PC Client Group, saw its revenues decline from $34.50 billion to $33.04 billion and "Intel Architecture" segment saw its revenues fall from $4.38 billion to $4.09 billion. Apart from PC Client Group and Data Center Group, almost all of Intel's business segments reported operating loss for the full-year of 2013. The company's PC Client Group posted an operating profit of $11.83 billion and the Data Center Group's operating profit was $5.16 billion. The rest of the business segments posted a total loss of $4.7 billion from their operations.
In the fourth quarter of 2013, Intel's PC volumes rose by 3% compared to the third quarter, as well as compared to the fourth quarter of the previous year. Notebooks saw their volumes fall by 4% while their average price also fell by 4%. Similarly, desktop volumes fell by 2% and, on a positive note, the average desktop price rose by 6%.
The most of the disappointment for the investors came from Intel's guidance for the year of 2014. The company expects its revenues to stay flat, which was already expected by most analysts covering the stock. On the other hand, the analysts didn't expect the company to predict a gross margin of 60% and many investors were hoping for 62-63% (around 2012 levels) because this would show that 2013's relatively low margins were temporary. The company expects to spend about $18.6 billion on research, development, mergers and acquisitions, which is in line with 2012 and 2013's numbers (in 2012, the company spent $18.2 billion on these items followed by $18.7 billion in 2013). Intel expects its tax rate to be closer to 27% in 2014, compared to 24% in 2013. In the first quarter of 2014, Intel expects $12.8 billion (from $12.3 billion to $13.3 billion) in revenues and 59% in gross margins.
In 2014, the drop in PC sales is likely to stabilize. If we see another year of PC sales drop in 2014, this will mark the third drop year in a row. Some analysts expect PC sales to drop slightly while others expect it to stay flat year-over-year. Since Intel still relies on the PC market heavily for its revenues, the company will have to keep a close eye on the PC sales.
This might turn out to be another year without any growth for Intel, but the company might not see much of a decline either. I am sure, the company will be highly profitable and solidly cash-flow positive, and it will be able to return plenty of money to the investors in terms of dividends and buybacks. Intel is mostly good for investors that are already retired and hoping to collect income. There is a high chance that Intel's share price might not move that much in either direction for the most of 2014. Fundamentally, the company is cheap; however, investors don't have very high expectations from this company in terms of growth anytime soon. If Intel ends up surprising the investors by returning to growth, most of this growth will probably come outside of the PC market.
Excluding cash and highly liquid short term investments, Intel currently trades for about 9 times its annual earnings. This also shows that the investors don't expect much of a growth from the company for the foreseeable future. In my opinion, those investors who want to bet on recovery of the PC market can put their money in Microsoft (MSFT) instead of Intel. Microsoft is able to show growth almost every year despite the weaknesses in the PC market, as the company has several business segments that are highly profitable with strong growth potential. Unless you are retired and collecting income, there might not be much to see in Intel for the time being.