Seeking Alpha

Intel issues solid guidance, adds $20B to buyback

  • Intel (NASDAQ:INTC) expects Q3 revenue of $13.9B-$14.9B, a range largely above a $14.02B consensus.
  • The chip giant is adding $20B to its buyback program. $2.1B was spent on buybacks in Q2, up from just $545M in Q1. Intel plans to spend $4B in Q3.
  • Q2 gross margin was 64.5%, +490 bps Q/Q and +620 bps Y/Y, and above a revised guidance midpoint of 64%. GM is expected to rise to 66% (+/- 2%) in Q3.
  • Full-year revenue is now expected to grow 5% Y/Y; consensus is for 3.5% growth. Full-year GM is expected to come in at 63% (+/- a few percentage points).
  • Full-year capex guidance remains at $10.5B-$11.5B. R&D/MG&A spend guidance has been hiked by $100M to $19.1B-$19.5B.
  • INTC +3.5% AH. Q1 results, PR, CFO comments (.pdf)
Comments (42)
  • db313706
    , contributor
    Comments (213) | Send Message
     
    Some terrific news for the most part...

     

    I think I'd be happier with the reinstatement of an annual dividend increase over a 20B allocation for buybacks. Depends at what stage in the game you're at, but with my investing horizon at 30+ years I'd like to see my YoC improve.
    15 Jul 2014, 04:22 PM Reply Like
  • jameskm03
    , contributor
    Comments (110) | Send Message
     
    If your INTC though a 20B buyback means you have fewer shares in the future to pay dividends on and thus it's easier to raise it in the future. I wish they would have bought back $20B worth when the stock was sub $25 and not past $30 though.
    15 Jul 2014, 04:29 PM Reply Like
  • Stock Market Mike
    , contributor
    Comments (2377) | Send Message
     
    Sub $20. $19.50/share was a steal, but that's when buybacks were slowest. Go figure. Just like toppy stock markets, buybacks accelerate when the share price is no longer a bargain.

     

    They should've done a token dividend increase a few quarters ago to maintain their dividend increase streak.

     

    -Mike
    15 Jul 2014, 04:33 PM Reply Like
  • db313706
    , contributor
    Comments (213) | Send Message
     
    I see your logic jameskm03, you make a valid point. I too wish that these buybacks, if that is the currently preferred method of increasing EPS, were more properly timed.

     

    Hopefully they maintain the stabilization efforts and prosper long term.

     

    Long INTC.
    15 Jul 2014, 04:44 PM Reply Like
  • techy46
    , contributor
    Comments (6456) | Send Message
     
    $20 billion in buybacks would be 12% of the outstanding shares at $33 PS. That should equate to a future price of $36-40 if the can earn $2.40 a share in 2016 and beyond.
    15 Jul 2014, 07:03 PM Reply Like
  • Archman Investor
    , contributor
    Comments (2518) | Send Message
     
    They waste shareholder money buying back shares because they know things are not as good as people are lead to believe. If things were good that money would be going into Capex & increased dividends. As many of the large cap, mature companies do they buy back shares to "manage" EPS earnings.

     

    I expect INTC to warn in the next quarter or two as they typically do when they just can't lie anymore (as they have done numerous times in the past), then watch the stock tank. So the buyback essentially goes to waste anyway buying back shares at an inflated price.

     

    But that's what you get for investing in a company that is a long forgotten former bull market winner from yesteryear.
    15 Jul 2014, 09:12 PM Reply Like
  • dectra
    , contributor
    Comments (490) | Send Message
     
    Arch,

     

    I don't believe in your premise that buying back shares is some sort of 'cover' by INTC that they "know things are not as good as people believe".....likely it's just the opposite: They know things YOU don't know about their stock and the items they have in the pipeline.

     

    You clearly don't like INTC, so why are you even commenting?
    16 Jul 2014, 08:30 AM Reply Like
  • Archman Investor
    , contributor
    Comments (2518) | Send Message
     
    dectra:
    Over the past 2 decades of investing I have made it a practice of asking questions and not assuming anything. Have I always been right or wrong? Sometimes both.

     

    Better to think beyond the typical Wall St. / company party line.

     

    It is no coincidence than the biggest companies out there are the ones who are involved in the most buybacks. Why? Because when you split your shares multiple times to appease the media and investors under the guise of making shares more affordable to the little guy you then have a reason to spend shareholder money to "manage" earnings. (GE has been doing it for years. It is no secret companies can do this)

     

    Everyone knows that buybacks increase EPS. Need more of an EPS boost in a quarter to match analysts estimates? Easy, buy back more stock & "beat by a penny".

     

    One thing I have seen INTC do over and over again: present a rosy picture only to warn a couple of quarters later.

     

    I really have no opinion on whether I "like" INTC. It is a company and a stock. Like is an emotional feeling and I have no emotional feeling for a company or a stock. I comment because I can (I mean it is a free country still...I think) and because I just like to question things. Nothing more so no reason to be offended.

     

    If I had to guess I would guess that your portfolio is comprised of mostly of:
    INTC, MSFT, CSCO, AAPL, WMT, KO, PG, JNJ, XOM, or stocks that essentially in the end mimic the S&P 500 and perhaps 10% left for some speculative bets. Maybe some excess cash too? Am I close?
    16 Jul 2014, 08:57 AM Reply Like
  • Jacob09481
    , contributor
    Comments (22) | Send Message
     
    I liked $INTC's buyback when it was in the low $20s, not as much a fan of it in the low $30s, but even that's not too bad if it's going to $35-$40 within the next year or two. I am concerned about buying back just to hit EPS targets, (see $IBM), but I don't think we're there yet.

     

    Long, but cautious.
    16 Jul 2014, 09:55 AM Reply Like
  • Econdad
    , contributor
    Comments (18) | Send Message
     
    I think we can look to rising demand in the PC market, where there had been very sluggish and even retreating numbers for the past 6-8 quarters, as to why numbers were better. The "science" of financial projections on companies of this size with component prices and demands that fluctuate, is tricky. Also, increasing dividends looks different on a balance sheet than Increased buyback. Maybe INTC would like to keep that capital incase it needs to use said stock as leverage or to buy another company? Disclosure: I am long INTC
    16 Jul 2014, 10:20 AM Reply Like
  • dectra
    , contributor
    Comments (490) | Send Message
     
    Sorry to say, Arch, you're not even close.....I'm more 'energy centric' with a solid financial component. I like INTC because it brings a needed tech aspect to the portfolio, along with a solid div.

     

    INTC
    EPD
    GE
    APU
    SYF
    D
    PNY
    USB

     

    If you have so little faith in INTC, as noted in your post, why do you own it? Perhaps Cisco or some other tech company would suit your needs?
    15 Aug 2014, 07:15 AM Reply Like
  • Exquisite Decay
    , contributor
    Comments (176) | Send Message
     
    My concern with any buyback is that it is used to truly reduce the outstanding shares. Intel has had the recent habit of issuing shares to executives so that the overall share count has stayed flat to a slight increase.
    15 Jul 2014, 04:30 PM Reply Like
  • Stock Market Mike
    , contributor
    Comments (2377) | Send Message
     
    Yes. When the share count rises with a $2b buyback, the annual executive pay is in fact far greater than it first appears.

     

    -Mike
    15 Jul 2014, 04:34 PM Reply Like
  • ReligiousWacko
    , contributor
    Comments (1292) | Send Message
     
    That's what stood out for me as well .. how the fff do you spend $2.1 billion on share repurchase and have MORE shares out than previous year.
    15 Jul 2014, 04:34 PM Reply Like
  • Marc Rouleau
    , contributor
    Comments (94) | Send Message
     
    It's common for companies to issue shares to pay for acquisitions. Intel acquires other companies regularly. I wonder how much of the share count growth comes from acquisitions (which we hope would be accretive to per share value).
    15 Jul 2014, 05:10 PM Reply Like
  • ReligiousWacko
    , contributor
    Comments (1292) | Send Message
     
    merouleau,
    If a company stock is cheap, management should not use stock to pay for acquisitions. Either pay cash or in this ZIRP environment, take on debt.
    15 Jul 2014, 05:25 PM Reply Like
  • Retired Securities Attorney
    , contributor
    Comments (2748) | Send Message
     
    merouleau,

     

    Intel uses cash to acquire companies, not stock - at least since 2009 when I started following them.
    15 Jul 2014, 07:27 PM Reply Like
  • techy46
    , contributor
    Comments (6456) | Send Message
     
    Intel's management is now mostly three generation and the stock options are much more modest then those granted Andy, Gordon and many of the original officers. It's the same story as MSFT with Ballmer and Gates each still owning a little north of 300 million shares.
    15 Jul 2014, 11:15 PM Reply Like
  • Marc Rouleau
    , contributor
    Comments (94) | Send Message
     
    Thanks for the information, RSA. I notice in the "Supplemental Financial and Other Information" section of the quarterly results that there are a number of seemingly relevant figures. First, some dollar figures (in millions):

     

    Share-based compensation: $303
    Stock repurchase program: $(2,081)
    Proceeds from sales of shares to employees & excess tax benefit: $584

     

    I suppose the $303 is the difference between strike and exercise for executive option grants as well as the modest price support offered to all employees via the ESPP? And the $584 is what the executives pay to exercise options as well as what the employees pay for ESPP purchases?

     

    Also, I imagine the buyback cost of $(2,081) is reduced by the $584 for a net buyback cost of $(1,497)?

     

    Next, some share counts (in millions):

     

    Weighted average common shares outstanding - basic (Q1): 4,974
    Weighted average common shares outstanding - basic (Q2): 4,981
    Dilutive effect of employee equity incentive plans: 68
    Dilutive effect of convertible debt: 74
    Shares repurchased: 76
    Weighted average common shares outstanding - diluted (Q1): 5,117
    Weighted average common shares outstanding - diluted (Q2): 5,123

     

    I think that the dilutive effects are pending and that we can deduce the number of shares created by option exercises, ESPP purchases, and bond conversions by applying shares repurchased to the difference in non-diluted (basic) shares outstanding:

     

    4,981 Q2 shares - 4,974 Q1 shares + 76 Q2 shares repurchased = 83 Q2 actual dilution

     

    If this speculation is correct, Intel spent far less than $2.1B on stock-based executive compensation. Instead, it's $303M minus the up to 15% discount that the rank and file employees received via the ESPP.

     

    Hopefully someone who really knows this stuff can confirm and/or correct this analysis and answer these questions:

     

    1. How should we understand the $1.5B net buyback cost? Since shares outstanding didn't change significantly, what source of dilution did that money cover?

     

    2. How can we understand the cost of Q2 bond conversions?
    15 Jul 2014, 11:23 PM Reply Like
  • Retired Securities Attorney
    , contributor
    Comments (2748) | Send Message
     
    merouleau

     

    >>1. How should we understand the $1.5B net buyback cost? Since shares outstanding didn't change significantly, what source of dilution did that money cover?<<

     

    Intel's unstated policy is to buy back enough stock to balance out the stock issued through management's exercise of stock options. Intel has done this for many years.

     

    >>2. How can we understand the cost of Q2 bond conversions?<<

     

    See Note 17: Earnings Per Share to the latest 10-Q here: http://1.usa.gov/1jzKwKf

     

    It says:

     

    "Potentially dilutive common shares from employee incentive plans are determined by applying the treasury stock method to the assumed exercise of outstanding stock options, the assumed vesting of outstanding restricted stock units, and the assumed issuance of common stock under the stock purchase plan. Potentially dilutive common shares are determined by applying the if-converted method for our 2005 junior subordinated convertible debentures. However, as our 2009 junior subordinated convertible debentures (2009 debentures) require settlement of the principal amount of the debt in cash upon conversion, with the conversion premium paid in cash or stock at our option, potentially dilutive common shares are determined by applying the treasury stock method.

     

    During the first three months of 2014, we excluded 33 million outstanding stock options and restricted stock units from the computation of diluted earnings per common share because these would have been antidilutive (62 million for the first three months of 2013). These options could potentially be included in the diluted earnings per common share calculation in the future if the average market value of the common shares increases and is greater than the exercise price of these options.

     

    In the first three months of 2014, we included our 2009 debentures in the calculation of diluted earnings per common share because the average market price was above the conversion price. In the first three months of 2013, we excluded the 2009 debentures from the calculation of diluted earnings per common share because these would have been antidilutive. We could potentially exclude the 2009 debentures again in the future if the average market price is below the conversion price."
    16 Jul 2014, 11:40 AM Reply Like
  • Marc Rouleau
    , contributor
    Comments (94) | Send Message
     
    Thanks, RSA, but I'm still confused by the large difference between the $303M for share-based compensation and the $1,497M of net buyback cost. Presumably my assumptions about the relationships of these figures ...

     

    Share-based compensation: $303
    Stock repurchase program: $(2,081)
    Proceeds from sales of shares to employees & excess tax benefit: $584

     

    ... is incorrect. Any ideas?
    16 Jul 2014, 01:05 PM Reply Like
  • Retired Securities Attorney
    , contributor
    Comments (2748) | Send Message
     
    merouleau,

     

    >>Thanks, RSA, but I'm still confused by the large difference between the $303M for share-based compensation and the $1,497M of net buyback cost.<<

     

    The net buy-back cost of the stock repurchase program is not related to share based compensation. They are independent of each other.

     

    That makes sense since the company can buy back any amount of shares in the open market that it wishes to regardless of whether or not it gives employees any stock options or restricted stock. The reverse is also true. The company can give employees any amount of stock options or restricted stock grants regardless of whether or not it buys back any stock in the open market.

     

    As for how the share-based compensation cost number is calculated -- that's complicated. Most large CPA firms have an accountant who specializes in calculating that number.

     

    The methodology can be found in the 10-K here: http://1.usa.gov/1oIRxKJ

     

    on page 60

     

    "Employee Equity Incentive Plans

     

    We have employee equity incentive plans, which are described more fully in “Note 19: Employee Equity Incentive Plans.” We use the straight-line attribution method to recognize share-based compensation over the service period of the award. Upon exercise, cancellation, forfeiture, or expiration of stock options, or upon vesting or forfeiture of restricted stock units (RSUs), we eliminate deferred tax assets for options and restricted stock units with multiple vesting dates for each vesting period on a first-in, first-out basis as if each vesting period were a separate award."

     

    and on page 90

     

    "Share-Based Compensation

     

    Share-based compensation recognized in 2013 was $1.1 billion ($1.1 billion in 2012 and $1.1 billion in 2011).
    On a quarterly basis, we assess changes to our estimate of expected equity award forfeitures based on our review of recent forfeiture activity and expected future employee turnover. We recognize the effect of adjustments made to the forfeiture rates, if any, in the period that we change the forfeiture estimate. The effect of forfeiture adjustments in 2013, 2012, and 2011 was not significant.
    The total share-based compensation cost capitalized as part of inventory as of December 28, 2013, was $38 million ($41 million as of December 29, 2012 and $38 million as of December 31, 2011). During 2013, the tax benefit that we realized for the tax deduction from share-based awards totaled $385 million ($510 million in 2012 and $327 million in 2011).
    We estimate the fair value of restricted stock unit awards with time-based vesting using the value of our common stock on the date of grant, reduced by the present value of dividends expected to be paid on our common stock prior to vesting. We estimate the fair value of market-based restricted stock units using a Monte Carlo simulation model on the date of grant. We based the weighted average estimated value of restricted stock unit grants, as well as the weighted average assumptions that we used in calculating the fair value, on estimates at the date of grant, for each period as follows:..."

     

    I hope that helps somewhat.
    16 Jul 2014, 03:17 PM Reply Like
  • Marc Rouleau
    , contributor
    Comments (94) | Send Message
     
    RSA, thanks for the additional color. This statement of yours makes sense generally ...

     

    RSA> The net buy-back cost of the stock repurchase program is not related to share based compensation. They are independent of each other.

     

    ... but I thought these three numbers might be at least roughly relatable given a fourth fact, the change in basic shares outstanding (which in this instance was close to zero). I thought surely there must be SOME way to relate dollar figures for the various share-related items to changes in the number of basic shares outstanding ... but I guess not.

     

    Thanks again.
    16 Jul 2014, 09:23 PM Reply Like
  • Retired Securities Attorney
    , contributor
    Comments (2748) | Send Message
     
    You're welcome, merouleau.
    16 Jul 2014, 11:49 PM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (5754) | Send Message
     
    Patience rewarded :)

     

    Long INTC
    15 Jul 2014, 04:43 PM Reply Like
  • bjnflicks
    , contributor
    Comments (2696) | Send Message
     
    Nice beat for INTC, but compare their PE of 18 to AAPL's of 11 ex cash and see it is time to take the profits on stocks like INTC and MSFT and plough them into grossly undervalued superior growth story AAPL.

     

    Wall St is gradually waking up to the fact AAPl is a trillion dollar company selling at 45% off. And that upside is bolstered by the humongus buyback program which is something of an insurance policy against any major dips.

     

    INTC and MSFT are more or less overvalued and the PC market is not a growth story despite some slight recovery, mostly due to how cheap many PC's there are available these days. HP's game plan seems to be to have the cheapest prices on the planet in order to grab market share and force competitors out of the space. These kinds of price cuts may account for any growth at all in PC sales. In fact I can't stand Windows 8 and I bought two of them for under $400. large laptops.

     

    EVen more so for grossly overvalued stocks like GOOG and FB. GOOG may actually be shrinking now but has not corrected from its lofty 30 PE despite the disaterous Motorola 9 billion loss, sliding ad revenues and the defection of troubled Samsung, plus the fact that Android has fallen way bebind IOS and is hemmoraging premium customers to AAPL. And I still have no idea why FB deserves such a high multiple when they literally give it all away for free and 90% of their customers are low income, children or absent. Data-mining only I guess, but is that worth 65 billion?

     

    AAPL is the only major tech company with real sustainable profit margin growth and dominance and they five times the profits of an INTC. In fact by this time next year they will have 200 billion in cash if they don't buy a major company.

     

    MSFT is about to lay off thousands and restructure. The stock is up 50% recently though no one can tell us how they ever expect to return to glory growth days by simply going to "the cloud". In fact they too may be shrinking, and both MSFT and GOOG are very vulnerable to AAPL's moves in the near future. as reportedly AAPL is developing its own next gen search engine and is planning a huge push into video and gaming meaning the Xbox is vulnerable.

     

    I have been an INTC stockholder in the past and respect the company but the recent run up seems like too much. In other words, time to take profits before everyone else does,
    15 Jul 2014, 05:04 PM Reply Like
  • techy46
    , contributor
    Comments (6456) | Send Message
     
    How do get PE of 15? If they earn $2.10 and are at $33 their PE is 15.7.
    15 Jul 2014, 07:05 PM Reply Like
  • Bruce Burnworth
    , contributor
    , INTC PRO Alerts subscriber
    Comments (2185) | Send Message
     
    techy46 I think you meant: "How do you get PE of 18? If they earn $2.10 and are at $32 their PE is 15.2."
    15 Jul 2014, 09:31 PM Reply Like
  • techy46
    , contributor
    Comments (6456) | Send Message
     
    Oops, guess I pulled the trigger to quick, thanks for the proofing.
    15 Jul 2014, 11:17 PM Reply Like
  • bjnflicks
    , contributor
    Comments (2696) | Send Message
     
    Big news for Apple and IBM after hours, both popping on new alliance to use IOS for IBM enterprise clients. So much for Windows and Intc's gains in enterprise.
    15 Jul 2014, 05:13 PM Reply Like
  • techy46
    , contributor
    Comments (6456) | Send Message
     
    Nothing wrong with a iDevice and iOS as an enterprise client on a Windows network. But I'd rather be administering Windows clients on Windows servers.
    15 Jul 2014, 07:07 PM Reply Like
  • Ashraf Eassa
    , contributor
    Comments (9157) | Send Message
     
    Very nice quarter!
    15 Jul 2014, 05:19 PM Reply Like
  • capellini
    , contributor
    Comments (50) | Send Message
     
    Please come back to SA, INTC discussion has not been the same since you left. I read your articles on MF, but nobody comments, unlike the knowledgeable folks here that used to put 50-100 comments on all your articles.
    15 Jul 2014, 06:29 PM Reply Like
  • BoomChikaBoom
    , contributor
    Comments (116) | Send Message
     
    Hi capellini,

     

    I follow AE and enjoy his work, but I'm unfamiliar with him leaving. Would you please point me to a link that describes the situation?

     

    Thanks and Cheers

     

    BTW, long INTC, AAPL
    15 Jul 2014, 08:34 PM Reply Like
  • Just Some Guy
    , contributor
    Comments (649) | Send Message
     
    Good news, but stock is over $33 after hours, and I might just want to do a short-term sell on the news here, maybe sell some $30 covered calls.
    15 Jul 2014, 05:39 PM Reply Like
  • techy46
    , contributor
    Comments (6456) | Send Message
     
    Great news which confirms that Intel's strategy is working and the hit from tablet contra revenue is not a huge burden. Now we have to look for confirmation that 14nm is on schedule. The back to school season will be offered a boat load of inexpensive notebooks and all-in-1s. The next two quarters should be much easier then the last two if the overall economy cooperates. Intel $36-40 by June, 2015.
    15 Jul 2014, 07:16 PM Reply Like
  • Bruce Burnworth
    , contributor
    , INTC PRO Alerts subscriber
    Comments (2185) | Send Message
     
    techy46 -

     

    Intel Reports Second-Quarter Revenue of $13.8 Billion: ". . . we hit an important qualification milestone for our upcoming 14nm Broadwell product, and expect the first systems to be on shelves during the holidays."
    15 Jul 2014, 09:24 PM Reply Like
  • techy46
    , contributor
    Comments (6456) | Send Message
     
    Bruce - I saw that but was wanting a little more color as they say.
    15 Jul 2014, 11:19 PM Reply Like
  • cvanthof85
    , contributor
    Comments (5) | Send Message
     
    I also noticed that the share count remained steady despite a $2B buyback. The fact that cash actually went down by nearly $2B without a drop in shares is a major warning sign. Also, targeting $4B in buy backs this quarter despite being at all time highs? Sure they still bring in lots of cash, but it's dropping. I'm not saying you need to hoard cash like Apple, but their balance sheet doesn't look nearly as pristine as it was a few years ago.

     

    In addition, they only anticipate 5% revenue growth this year during a corporate refresh cycle so I hardly see how that justifies the earnings multiple they have until they show they can actually gain some decent traction in a new market. A company as large as Intel needs a whale of an opportunity to grow in any meaningful sense. This doesn't add up to me.

     

    I agree with the folks above that it might be a good idea to take gains off the table. I could very easily see this stock reversing direction tomorrow once traders realize Intel has run its course for the time being. It's hard to see sentiment improving anymore than it already has as I don't see any good news that could come out that hasn't already been factored in.
    15 Jul 2014, 08:52 PM Reply Like
  • Dale Mackey
    , contributor
    Comments (111) | Send Message
     
    sold 1/4 of INTC position in the aftermarket.. my typical trade @ 50% gain
    15 Jul 2014, 10:34 PM Reply Like
  • techy46
    , contributor
    Comments (6456) | Send Message
     
    Good move, you never lose taking some off the table. I did that with all my 2015 and 2016 Jan $20 calls on the run to $30 and built positions in 2015 and 2016 Jan $22 and $25. I'm leaving some in $22's even at 88% gain as of today but will probably increase both $25 positions that have averages below $5.
    15 Jul 2014, 11:24 PM Reply Like
  • Anyoption
    , contributor
    Comments (510) | Send Message
     
    I'm not bearish on INTC by any means, but would like to see some growth in the mobile segment to put me a little more at ease with the buyback. A large part of the PC surge was due to MSFT ending XP support, so who knows how long that momentum will last. That being said, INTC has a few other things up their sleeve so I'm not overly worried. I'm just also not overly optimistic. http://seekingalpha.co...
    16 Jul 2014, 07:04 AM Reply Like
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