This week I am reviewing the transcript of Intel's 1st quarter earnings call which they did last week. The transcript is from Seeking Alpha's website. My comments are in blue.
Comments:
The pandemic increased the amount of computers people owned by 10%. These computers will soon need to be replaced.
More computers to be replaced equals more potential sales for Intel.
Comments:
Intel believes they will have the best chips on the market by 2025 which is only 1.5 years away. I have already owned the company for 1.5 years. The next 1.5 - 2 years will go fast.
Intel product release schedule:
-Intel 4: 2nd half 2023
-Intel 3: 1st half 2024
-20A: 2025
-18A: 2025
Comments:
Mobileye is going strong. According to their 10K, the company's revenue increased an average 39% each year from 2020 to 2022. They also have positive free cash flow.
Good thing Intel did not sell all their shares of Mobileye. They still own 94% of the company. As Mobileye continues to grow, Intel can sell their remaining shares to raise cash if needed.
Intel also gained market share in the PC segment this quarter. This is a good sign because they were losing to AMD for so long. Compared to Q1 2022, AMD's PC sales declined by 65% this quarter. Intel's PC segment declined by 38%. If Intel continues to improve, I can see them reclaiming the hearts and mind of investors. They already dominate the PC market, increasing their market share will improve the way investors view them.
Comments:
It will be interesting to see how investors value Intel when their manufacturing business, Intel Foundry Services (IFS), has its own profit and loss statement. If IFS becomes a major player in the chip industry, Intel will own 2 fast growing businesses- Mobileye and Intel Foundry Services. The P&L for these businesses will be available for investors to analyze, and if they are doing well, investors might apply a high P/E ratio to their earnings. The value of these 2 businesses can significantly boost Intel's value.
Comments:
I often ignore non-GAAP numbers because Management Teams use them to paint a rosier picture of their business.
Intel's GAAP gross margin was 34.2% but they used the non-GAAP margin of 38.4% throughout their call. Their GAAP earnings was -$0.66 per share and non-GAAP -$0.04. Using non-GAAP numbers is Management's attempt to ignore the impact their past decisions are having on the company's current numbers.
Comments:
I am confused why they moved Foundry Automotive out of IFS and into the "all other revenue" segment. The automotive business is supposed to be a major category so why not include it in IFS?
Comments:
Intel has a few tailwinds to their business.
Because of the pandemic, more people have computers that will need to be replaced soon.
More computing power and chips will be needed in the future since more people are using AI technology through platforms like ChatGPT and Stable Diffusion.
Chip designers are uncomfortable relying on TSMC to manufacture their chips so they will likely use Intel to diversify their business.
Intel is manufacturing less products because they want retailers to deplete their current inventory. By making less products, their factories are not running at full capacity and their fixed costs are being spread over fewer units. This means their products now cost more to produce than in the past. This will make some of their future sales less profitable because their Cost of Goods Sold will be higher.
Comments:
Intel is shipping 20% less than the market demands for their products. AMD is also undershipping their products.
Intel has ~$13B of inventory on their Balance Sheet. This is much higher than in 2019, before the pandemic, when they had $8.7B. Their current inventory is extremely high considering they already sold some of their businesses and they still have more inventory than in 2019.
Comments:
Intel expects their 18A to be similar in costs to foreign manufacturers. The CHIPS ACT can make this possible.
Comments:
Intel says their gross margins will be in the 40% range by the end of this year but I am ignoring this projection for now because their expense structure is in flux.
The new products they are releasing will require Intel to spend a lot of money upfront. Some of this money will be planned, and some will be unplanned.
The higher costs embedded in their inventory because they are not operating at full capacity will depress their future margins.
There is a possible recession on the horizon.
All these factors make it difficult to rely on their margin projections.
CONCLUSION
Intel has a lot of opportunities ahead of them. They appear to be on track with their product release schedule, and their Foundry business remains a strong prospect for growth.
I am seeing more investors soften their harsh tone towards the company, and their minds are opening to the possibility of Intel becoming successful. The light is beginning to shine through.
“If you will seek God and plead with the Almighty for mercy, if you are pure and upright, surely then he will rouse himself for you and restore your rightful habitation. And though your beginning was small, your latter days will be very great.”
Job 8:5-7 ESV
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