Computer processor maker Intel (NASDAQ:INTC) reported results in line with analyst expectations in Q3 FY2022 quarter, with revenue down 20% year on year to $15.3 billion. However, guidance for the next quarter was less impressive, coming in at $14.5 billion at the midpoint, being 11.7% below analyst estimates. Intel made a GAAP profit of $1.01 billion, down on its profit of $6.82 billion, in the same quarter last year.
Intel (INTC) Q3 FY2022 Highlights:
- Revenue: $15.3 billion vs analyst estimates of $15.3 billion (small beat)
- EPS (non-GAAP): $0.59 vs analyst estimates of $0.33 (79.2% beat)
- Revenue guidance for Q4 2022 is $14.5 billion at the midpoint, below analyst estimates of $16.4 billion
- Free cash flow was negative $6.3 billion, compared to negative free cash flow of $6.38 billion in previous quarter
- Inventory Days Outstanding: 133, up from 114 previous quarter
- Gross Margin (GAAP): 42.6%, down from 55.9% same quarter last year
Inventor of the x86 processor that powered decades of technological innovation in PCs, data centers, and numerous other markets, Intel (NASDAQ: INTC) is the leading manufacturer of computer processors and graphics chips.
Founded in 1970 by Gordon Moore, Robert Noyce, and Andy Grove, Intel’s first business was actually focused on building memory chips,dynamic random-access memory (DRAM). The company had a near monopoly in the late 1970s, before Japanese competitors crushed Intel on pricing, prompting one the great pivots in tech history when it switched its focus to computer processors and was selected by IBM to provide the processor for the first PC in 1981. Intel’s x86 processor architecture subsequently became the industry standard for PCs, transforming the company into the dominant provider of chips used in PCs and data centers for decades.
Once revered for both its R&D and manufacturing prowess, Intel failed to diversify into growing end markets such as smartphones, 4G/LTE, and GPUs because it didn’t want to get into these (at the time) smaller and less profitable end markets - especially when it had a near monopoly in the highly profitable CPU business.
Over the past decade, Intel’s manufacturing edge first stagnated, and today trails rivals TSMC and Samsung, reducing its pricing power and margins. Intel faces ongoing challenges as its former x86 strongholds in PCs and datacenters are threatened by GPUs and ARM-based alternatives.
Processors and Graphics Chips
Chips need to keep getting smaller in order to advance on Moore’s law, and that is proving increasingly more complicated and expensive to achieve with time. That has caused most digital chip makers to become “fabless” designers, rather than manufacturers, instead relying on contracted foundries like TSMC to manufacture their designs. This has benefitted the digital chip makers’ free cash flow margins, as exiting the manufacturing business has removed large cash expenses from their business models.
Intel's revenue growth over the last three years has been unimpressive, averaging 0.25% annually. Last year the quarterly revenue declined from $19.1 billion to $15.3 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).
Despite Intel revenues beating analyst estimates, this was a slow quarter with 20.1% YoY revenue decline.
Intel's looks headed into the trough of the semi cycle, as it is guiding to revenue declines of 29.3% YoY next quarter, and analysts are estimating 4.23% declines over the next twelve months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.
This quarter, Intel’s inventory days came in at 133, 30 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.
Intel's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 42.6% in Q3, down 13.4 percentage points year on year.
Despite declining over the past year, Intel still retains industry average gross margins, averaging 45.7%, pointing to a good competitive offering, decent cost controls, and only modest pricing pressure.
Intel reported an operating margin of 10.7% in Q3, down 16.3 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.
Operating margins have been trending down over the last year, averaging 16.9%. However, Intel's margins are inline with the semiconductor industry's norm, as it continues to appropriately manage its operating expenses.
Earnings, Cash & Competitive Moat
Analysts covering the company are expecting earnings per share to grow 7.46% over the next twelve months, although estimates are likely to change post earnings.
Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Intel's free cash flow came in at -$6.31 billion in Q3, down 207% year on year.
Intel didn't produce any free cash flow in the last year, so shareholders will want to see that improve in the short term.
Intel’s average return on invested capital (ROIC) over the last 5 years of 21.4% implies it has a strong competitive position and is able to invest in profitable growth over the long term.
Key Takeaways from Intel's Q3 Results
Since it has still been burning cash over the last twelve months it is worth keeping an eye on Intel’s balance sheet, but we note that with a market capitalization of $111 billion and more than $22.5 billion in cash, the company has the capacity to continue to prioritise growth over profitability.
We were impressed by how strongly Intel outperformed analysts’ EPS expectations this quarter. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that Intel's revenue guidance for the full year missed analysts' expectations and that inventory levels increased. Overall, it seems to us that this was a complicated quarter for Intel. The company is up 1.41% on the results and currently trades at $26.59 per share.
Is Now The Time?
When considering Intel, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in the case of Intel we will be cheering from the sidelines. Its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there. And while its high return on invested capital suggests it is well run and in a strong position for profit growth, unfortunately growth is coming at a cost of significant cash burn.
Intel's price to earnings ratio based on the next twelve months is 10.8x. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.
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