Intel Corporation (INTC) has posted results that indicate that it was able to cope with the problems arising out of the shortage of hard disks and the possible slowdown in the personal computer markets as a whole. The competition to Intel comes from companies such as AMD (AMD), Nvidia (NVDA), Qualcomm (QCOM) as well as smaller companies such as VIA Technologies (2388) from Taiwan. Intel reported revenues of $12.9 billion which is down 7% sequentially from the preceding quarter and net income declined by 19% to $2.7 billion. The Asia-Pacific region continues to contribute approximately 57% of total revenues.
The outlook for the second quarter is expected to be much more positive with estimated revenues of $13.6 billion because of the launch of new products such as Windows 8. The softness in the markets of the developed countries is expected the offset by increased demand from developing countries. Gross margin is expected to be between 62% and 63% as against 64% in the first quarter. This is because of the cost impact of increased Ivy Bridge production which will result in increased unit costs. Intel has high expectations of Ivy Bridge which is expected to account for nearly 25% of microprocessor production during this quarter and over 50% by the end of the year.
A $300 million fund has been set up for improvements in Ultrabooks which did not perform as well as expected in 2011. The company has launched its largest advertising campaign in some years and has 21 designs available with more than another 100 in the pipeline. Ultrabooks are expected to account for 40% of notebooks for consumers by the end of the year and the result could be an increase in market share in this segment for Intel. Similar laptops are expected from Hewlett-Packard (HPQ) and Dell (DELL) as well as other PC manufacturers.
The major issue that Intel has to resolve is its success in selling chips for mobile devices particularly tablets and smart phones. Some progress has been made in the area of smart phones with arrangements with Lenovo (LNVGY.PK) and Motorola (MSI), the announcement of designs for Orange and ZTE (ZTCOF.PK) as well as the strategic initiative with Visa (V) for mobile payments systems. With support from Google (GOOG) for the Android operating platform and the new Windows 8 operating system from Microsoft (MSFT), demand is bound to be strong and Intel is in a good position to cash in. Intel has also introduced a new version of its Xeon chip which is used in the servers used in cloud computing data centers. Cloud computing and associated security is anticipated to be one of the fastest growing areas in information technology and is being used by many large companies to allow their employees to access the computing systems through computers and smart phones.
In a separate announcement, Intel announced that it was raising its quarterly cash dividend by 7% to 22.5 cents per share which works out to an annualized payment of $.90 per share. This results in a dividend yield of over 3%. This is the third increase in the dividend over the past 18 months and, over the past 10 years, dividend is increased every year. Since the inception, it is estimated that dividends and stock buybacks have returned the impressive number of over $110 billion to the stockholders. In spite of large capital expenditures over the last few years, the free cash flow payout ratio has stayed in the region of 40% and the dividend is amply covered leaving plenty of scope for future increases. In my opinion, investors can confidently look forward to dividend growth in the region of 15% to 20% annually.
Because of the incredible success of Apple (AAPL) in particular, many of us tend to forget that Intel and Microsoft still dominate the personal computing world. It is true that the emergence of smart phones and tablets has raised major questions about the future of personal computing and has produced a new competitive threat to Intel in the form of ARM Holdings (ARMH) whose processors are used in many popular mobile devices. I personally believe that though Intel's bread-and-butter PC business may be under some threat, the developments have created new opportunities for the company. Lest we forget, Intel is one of the few high-tech companies that have the scale and the financial resources to make huge investments in research and development. By using the most advanced manufacturing techniques, it is also able to keep per-unit production costs lower than in any other rival.
There is good reason to believe that the x86 ecosystem which Intel dominates will continue to be important though somewhat weaker. Even though Microsoft has departed from past practice so that Windows 8 will run on both x86 and ARM processors to make it compatible with tablets, Intel will have an advantage when it comes to users running legacy systems and software who require support for the older software that they use.The x86 ecosystem is also expected to dominate servers used for cloud competing because heavy duty processing will shift from personal computers to the cloud servers and the performance of these servers will be even more critical. Tablets or mobile devices can be used to access the data from the servers.
Because of the rapid shift in technology, Intel should still be considered a growth company and this growth should continue without sacrificing operating margins which one would be the envy of any other company. The acquisition of McAfee and Infineon will provide a powerful impetus to the communication and networking businesses. I also expect that developing markets will continue to fuel growth as they shift and adjust to the new technologies. When you factor in the growth prospects and the dividend yield, there is a powerful case for investment. I consider Intel a "stick back and relax" dividend stock to hold for the long term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.