Shares of Intel Corporation (INTC) lost over 3% in after hours trading. The chip manufacturer announced its third quarter results on Tuesday after the opening.
Third Quarter Results
Intel reported third quarter revenues of $13.5 billion, down 5.5% on the year. Analysts expected revenues to fall even further, towards $13.2 billion. Gross margins came in at 63.3%, which is up 1.3% above the midpoint of the company's guidance of 62%.
Net income fell 14.3% to $2.97 billion. Earnings per diluted share fell 10.8% to $0.58 per share. Earnings did beat analysts expectations of $0.49 per share.
While third quarter earnings were reasonably good, the near term outlook for the semiconductor market has worsened. Intel has been building inventories to support market growth and adoption of ultrabooks, but demand has been lackluster. Many suppliers, including Intel, fear that the launch of Windows 8 fails to boost industry sales, unlike earlier updates of the operating system.
Investors are worried about the inventories which ballooned to $5.3 billion at the end of the quarter. Inventories rose by $0.4 billion over the quarter, and by $1.2 billion compared to the third quarter last year.
CEO Paul Otellini commented on the results,
Our third-quarter results reflected a continuing tough economic environment. The world of computing is in the midst of a period of breakthrough innovation and creativity. As we look to the fourth quarter, we're pleased with the continued progress in Ultrabooks and phones and excited about the range of Intel-based tablets coming to market.
The main PC Client group division reported a 8.3% decline in revenues to $8.63 billion. Operating income for the group fell 17.4% to $3.34 billion, as the global PC market has worsened in recent months.
Data Center revenues rose 5.6% to $2.65 billion. Operating income fell by 0.9% to $1.21 billion. Other architecture revenues fell 14.0% to $1.18 billion while reporting an operating loss of $235 million.
For the fourth quarter of 2012, Intel guides for revenues of $13.6 billion, plus or minus $500 million. Gross margins are expected to come in between 57 and 58 percent on a non-GAAP basis.
Intel expects to take write-downs of approximately $150 million on amortization of intangibles and equity investments.
Analysts are slightly disappointed with the revenue outlook for the final quarter. On average, they anticipated Intel to guide for $13.7 billion in fourth quarter revenues.
Intel ended its third quarter with $14.4 billion in cash, equivalents and short and long term investments. The company operates with short and long term debt of $7.2 billion, for a net cash position of $7.2 billion.
For the first nine months of 2012, Intel generated revenues of $39.9 billion. The company reported a net income of $8.5 billion, or $1.65 per diluted share. Based on the fourth quarter guidance, Intel is expected to generate revenues of $53-$54 billion. Net income is expected to come in around $11 billion.
Factoring in a three percent drop in after hours trading, the market values Intel at $108 billion. Excluding the net cash position, the operating assets are valued at $101 billion. This values the firm at 1.9 times annual revenues and merely 9 times annual earnings.
Currently, Intel pays a quarterly dividend of $0.22 per share, for an annual dividend yield of 4.0%.
Year to date, shares of Intel have fallen some 10%. Shares started the year at $24 and steadily rose to levels of $29 around May. Shares steadily kept falling over the past months, exchanging hands at $22 at the moment.
Over the past five years, shares have fallen some 10% as well. Shares of Intel hit lows of $13 in the beginning of 2009 and rose back to $29 earlier this year, before falling back to $22 at the moment. Between 2008 and 2012, revenues grew from $37.6 billion to a level around $53.5 billion, estimated in 2012. Net income doubled from $5.3 billion in 2008, to an estimated $11 billion in 2012.
Investors are disappointed with Intel this year. Revenues are stagnating after years of steady growth. Furthermore the sky-high operating margins are showing signs of stress as the PC market is shrinking rapidly. Intel is not the only company facing these pressures. Last week, competitor AMD (AMD) warned for very weak third quarter results, to be released on Thursday.
Despite the near term pressures, the long term prospects for Intel remain good. The company continues to generate decent levels of cash and it returned $1.1 billion in dividends and $1.2 billion in stock repurchases during the quarter.
Intel is a good investment for long term investors. The company operates in a long term growth industry, and is a true world leader. Intel is boosting shareholder returns by providing a dividend payout of 4.0%, continuing to repurchase shares, and operate with a rock-solid balance sheet.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.