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Intel is a company headquartered out of Santa Clara, California, that produces semiconductors, chipsets and microprocessors for computers, tablets, and smartphones. They were first incorporated in 1968 and later re-incorporated in 1989 (Intel Inc., 2011). Intels primary consumers are component designers and manufacturers such as Apple and HP and their products can be found in many market segments such as in smartphones, automobiles, medical devices, and data centers (Intel Inc., 2011). As of the end of 2011, they had just over 100,000 employees worldwide with approximately 55% of those working in the United States. (Intel Inc., 2011).
Intels primary customer base is original equipment manufacturers (e.g., Dell and Hewlett-Packard) that utilize their chipsets in laptops and desktops for consumer and business use. During 2011, Hewlett-Packard provided 19% of Intels net revenue and Hewlett-Packard provided 15% of Intels revenue. No other customer accounted for more than 10% of their revenue, showing that they have a broad customer base and that even if one company were to reduce product requests, they would not have a huge financial impact. Other customers include original design manufacturers (e.g., Compal Electronics) and distributer/reseller markets. Their resale market includes thousands of indirect customers whom purchase boxed processors and sell them in direct to consumer retail outlets. Their core products are: Phone Components, McAffee software, Wind River Software Group, Non-volatile memory solutions, and PC processing components (Intel Inc., 2011). A more simple way of viewing their business is by breaking down their operating segments: PC Client Group, Data Center Group, Architecture and Operating Segments, Software and Services, and Other, with the 66% of their revenue stemming from the PC Client Group (Intel Inc., 2011).
The PC Client group is the segment of business most consumers recognize. It is through this segment that they produce the chipsets that drive notebook and desktop computers. Superbowl fans may have seen the Intel Inside commercials marketing their Xeon and Core i7 processors, but what most consumers dont know is how these chips work. In short, Intels semiconductors are used in the development of microprocessors which incorporate all of the functions that a CPU (central processing unit) performs on a single integrated circuit. They receive digital data (binary in form: 0s and 1s) and process it according to the instructions in the code, thus allowing computers and mobile devices to work. Intel was the creator of the first microprocessor in the world (Intel, Intel company information, n.d.) and according to a recent report retains 80.3% of the global market share (Worldwide PC microprocessor, 2012). Their largest, and some might say only, competitor in the microprocessor space is AMD which holds 19.6% market share (Worldwide PC microprocessor, 2012). PC Client Group Data Center Group Other Intel Architecture Operating Segments Intel Mobile Communications Intelligent Systems Group Netbook and Tablet Group Ultra Mobility Group Software and Services Operating Segments McAfee Wind River Software Group Software and Services Group All Other Non-volatile Memory Solutions Group David Berglund Accounting 601 Kalina Company Financial Analysis Intel
Intels second largest segment (delivering 19% of revenue), the Data Center Group, focuses on delivering high-performance chips that power server, workstation, and storage platforms. These data centers serve as the backbone of networked computing, powering the internet and cloud computing. Intel has an even stronger foothold in the data center market, maintaining 94.5% penetration with AMD as its next largest rival carrying just 5.5% of the market (Worldwide PC microprocessor, 2012). As will be discussed in future sections, these sectors provide a strong hedge against the mobile push in the market because they help power cloud computing.
The Other Intel Architecture Operating Segments are focused on delivering products in the mobile space, including tablets, netbooks, and smartphones. While this is one of the smaller segemnts of intel from a revenue perspective, it has the greatest room for growth; one of Intels key objectives according to their 10-k is to expand their technological reach into new market segments such as smartphones, tablets, and car dashboards (Intel Inc., 2011).
Finally, the Software and Services Operating Segment develops software that can be run on the platforms created by the PC Client Group and the Data Center Group with the goal of creating an ecosystem that is optimized for Intel products. This integrated model delivers high-performance and speed while maintaining security between all interconnected nodes. A major acquisition took place in this segment during 2011 when Intel purchased McAfee Inc. on February 28 th for $6.6 billion in cash and $48 million in share-based awards (Intel Inc, 2011). One other main acquisitions for Intel in 2011 was also in this segment, with a total of $2.1 billion spent to purchase Wireless Solutions business from Infeon Technologies (Darling, 2011). Section 2 Five challenges facing Intel 1. Move to smaller devices and cloud computing As microprocessors become increasingly powerful, the growing trend is towards consumers using only their laptop and/or smartphone for most tasks instead of the larger and more powerful desktop machines. The factors limiting this movement are the energy efficiency of microchips, memory storage cost, and input/output modules (keyboard and monitors) that do not lend themselves to document creation. This substitution of smartphones for desktops will continue to progress as input methods evolve (e.g., vocal inputs such as Siri on the iPhone) and with the growth of cloud-based storage. The cloud-strategy is great for consumers as they are able to push their costs into networked drives and processors, letting the relatively cheap devices in their hand simply connect to these superpowered hubs.
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However, this effort to enter the mobile space is not as simple as marketing Intels current products into these avenues because the microprocessors used in mobile environments are vastly different than those in laptop and desktop computers. Microchips in the mobile space require very high energy efficiency, which is something Intel chips have traditionally lacked. Intel has long been known for developing super-fast chips that are able to process large chunks of data for business and industrial use. Intels latest mobile line, based on the ATOM processor, has failed to attract significant customers in part due to their late entry into the field and also because of their paltry battery life (McWilliams, 2012).
To be successful in developing chips for tablets and smartphones Intel will need to shift their production lines from high-powered processors to low-powered processors capable of being used by smaller devices. A major hurdle exists however, because Apple (the leader in mobile technology) has thus far dominated the market with their products running custom designed ARM chips. To take a strong foothold, would require utilization of other mobile leaders such as Nokia (currently using Ericsson) or for Operating systems such as Windows Mobile to require the Intel chips. However, stockholders shouldnt necessarily start selling Intel stock based on this weakness. Intel still retains a strong foothold over the data center processors, so even as processing of data is shifted to the cloud, Intel will continue to derive profits no matter the product in the consumers hand. 2. Apple Apple poses a threat to the whole electronics industry. Their knack for finding the next big thing is a major reason why competitors in all of Information Technology need to maintain strong Research and Development budgets ($2.4B in 2011). While Apple only makes up about 10% of the PC market, their movement into the smartphone market and tablet market allowed them to bring in $26.74 B in Q1 of 2011, with over 50% of profits stemming from the iPhone (Apple, 2011) and in Q2 2012 they had 75% of revenue from iPad and iPhone sales (Apple, 2012). Apple and Intel have had a somewhat precarious relationship, starting in 2005 when they began running Intel on its Macintosh Tiger operating system. At that time, Steve Jobs stated Our goal is to provide our customers with the best personal computers in the world, and looking ahead Intel has the strongest processor roadmap by far (Apple, 2005).
While Apple does use Intel chips for its laptop and desktop PCs, its mobile chipmaker is ARM. Recent trends in mobile devices have shown that ARM-based processors make up 73% of the market (Poeter, 2012). Intels x86 chips (their mobile chips) command the lions share of the laptop market, but Apples A5X chip is ARM-based and with every iPhone/iPad sold, Intel loses a small piece of the market.
Intel is hoping for a renewed push into the mobile space with its system on a chip (SoC) that will be able to run Googles Android mobile operating system. The problem is that ultra-low powered ARM-based chips are already on the market and Intels first SoC products wont be available until mid 2012 (Shah, 2012). The two primary reasons for this are the ultra-low power requirements of ARM-based chips as well as the customizability of ARM-based chips for Manufacturer Gartner Nokia 2S.4% Samsung 19.4% Apple 7.4% ZTE 4.u% Lu S.6% 0theis Su.2% /LKLU +LHKJGH !LSVW :F): David Berglund Accounting 601 Kalina Company Financial Analysis Intel
specific devices (e.g., iPhones). The question for Intel is how long it will take before they realize that the mobile market isnt just shoving their high-powered chips into phones, but rather architecting chips that are highly flexible and can run on limited power.
3. R&D Risk Intel is deeply committed to R&D and their per-year expenditure proves it with $8.4B in 2011 (Intel Inc., 2011). High operating expenses due to Research and Development are expected in IT and they have done a great deal with that investment, however, if future R&D does not align with the consumer purchasing patterns, Intel could have a difficult time responding to the mercurial change in consumer demands. Because there are very high up front R&D costs, one could say that the first processor costs millions of dollars, and the next 1 million cost pennies on the dollar because of the resources involved in their creation. In short, Intel must hope that the efforts to get the factories running end up exciting customers, or theyll have millions of dollars of silicon dust sitting on shelves.
Being agile in the microchip industry is nearly impossible. Luckily, Intel can predict with near 100% likelihood that one thing will remain constant: consumers will demand more speed year after year. One of the co-founders of Intel, Gordon Moore, boldly predicted in 1965 that the number of components in integrated circuits would double every two years. Moores Law, as it has come to be called, has proven accurate and is widely used to set targets for semiconductor research and development. This heavy push towards innovation has recently moved towards three dimensional processing (including Tri-Gate and Hi- k metal gate transistors) that Intel believes can be utilized in new products and form factors (Intel Inc., 2011). As consumers demand increased efficiency, scalability, and security Intel plans to continue using a tick-tock product delivery model where every two years a new microarchitecture model is produced and off cycle products provide moderate improvements (Intel Inc., 2011).
The next major tick will occur in 2012 with the delivery of their 22 nanometer 3D microchips (an improvement from the 2D 32nm models). This focus on keeping par with Moores Law places a great deal of risk on the R&D segment of Intel. If one of Intels research initiatives fails, or doesnt stay in alignment with the competition, they risk up to $8.4 B of operating expenses. This risk is tempered somewhat by the fact that the only major competitor in their market is AMD, but if consumer expectations move away from their form factors (e.g., a major shift to TV computing) they risk spending R&D on processors that consumers dont want. Any loss of revenue or a potential translation of products into real goods would ruin their next generation of sales. 4. NVIDIA/AMD NVIDIA and AMD are major competitors to Intel as they both create graphics processor units (GPUs). With a combined market share of 49.5% they take on the same power as Intel who has 2011 8&u Lxpense (ln mllllons) l8M $6,238 Coogle $3,162 uell $2,400 Apple $2,429 PewleLL-ackard $3,234 lnLel $8,330 David Berglund Accounting 601 Kalina Company Financial Analysis Intel
49% of the market (which includes Intels integrated graphics solutions). If you only include discrete GPU processors, AMD and NVIDIA make up nearly 100% of the total market (Goodhead, 2011). Initially, AMD held on to the low-end market for laptop and desktop graphic processors, but once Intel began encroaching on their space, AMD began developing high- powered units that could compete with Intels integrated chips.
A major change in the GPU industry was AMDs purchase of ATI who develops graphics cards and graphics processors for high-end PCs. These cards are used primarily for gaming and video production applications, but can be used for any computer process that requires graphical response. Intels motherboards and chipsets are only compatible with Intel processors, except for ATIs graphic cards, so Intels hopes to gain control in the graphic-intense market have become increasingly difficult. However, because the cost of processors only constitute 10%-20% so any changes in price would have a nominal impact on sales of processors.
If Intel were to attempt to restrict its processors compatibility to not work with AMD GPUs, Nvidia video cards could be used, while AMD would no longer be supported. On the other hand, if AMD tried to restrict its compatibility, it would cede its ATI base to use AMD processors.
Lastly, as one of the two major manufacturers of GPUs, Nvidia is in a unique place to enter the processor market with its new Tegra platform, a low-powered system on a chip combining a CPU, GPU, and memory controller into one small package. The Tegra platform has improved NVIDIAs revenue, which came close to $4B last year (NVidia Inc., 2012). It has strong brand recognition after its first successful Tegra launch in 2009 and since then, it has continued to expand into the mobile market with companies such as Microsoft, Dell, Samsung and Google all developing products on the Tegra SoC (NVidia Tegra, 2012). These product advancements show that the threat to Intel remains strong until Intels integrated graphics cards are able to compete with the discrete Tegra line of processors (Niu, 2012). One AMD spokesman told PCMAG (the largest computing magazine) that Intel has a powerful core, but just a bare minimum of graphics and that's not good enough (Poeter, 2011, May 6). NVIDIAs threat to Intels bottom line remains nominal, however, as most consumers do not need the graphics performance of a GPU when running any app on a mobile device and even on laptops the most common computing tasks such as web browsing, email, and word processing can be performed with a relatively low- powered chip. 5. Developers All of the work Intel has done developing blazing fast processors and SoCs is essentially for naught if developers do not write code to support them on applications people use. With the +HLXYZIU =N[L\ZV]ZW :FFA David Berglund Accounting 601 Kalina Company Financial Analysis Intel
latest 22-nanometer microchips, Intel will have a performance lead on AMD by several months, but mobile OS developers will still have to decide if spending time learning the functional requirements of the system to develop new software is a smart investment when they are already writing code for ARM-based chips (the far-and-away leaders in the mobile space).
For the most part, software developers need to choose the platform on which they want their software to run: ARM or Intel. There isnt a simple code translation they can use to get their apps running on any device. The option, really, is to stop writing code for ARM products (i.e. the iPad and iPhone) in hopes that the increased performance brought by 22-nanometer chips will tempt consumers to the software. If developers believe that the increase in Intels speed is only temporary (again, possibly a few months), why wouldnt they just wait for ARM chips to get up to speed instead of risking Intels product successes in a market where it is still unproven (Poeter, 2011, May 6)? That being said, cross-platform development isnt impossible, as seen by Dalvik, a cross-platform OS built on Google Androids Ice-cream Sandwich that is capable of being run on either Intels x86 or ARM devices.
One of the biggest hopes for Intel is that the new multi-platform Windows 8 OS will be a hit with consumers. It is capable of running on tablets or phones and developers are already starting to showcase the new apps they plan to build. It is clear then, that even as Intel pushes its R&D arm to deliver faster and smaller chips for mobile products, its competitors will continue to move forward as well forcing developers to decide which platform they believe will prevail. Section 3 Ethical issues facing the company
Ethics can be viewed under numerous lenses, among which are External/Internal Communications and Standards, Environmental Initiatives, and Anti-Competitive Behavior. 1. External/Internal Communications and Standards In 1994, Intel faced a major crisis when Professor Thomas R Nicely from Lynchburg College uncovered a floating-point error in its wildly successful Pentium processor. There was an error occurring on certain division operations causing the eighth significant digit to be incorrect (Williams, 1997). While this is an incredibly small rounding error, and one not likely to ever be an issue for most consumers, it was Intels response and cover-up that caused a huge backlash against Intel. Intel responded by saying that nontechnical people would never find it to be a problem (Williams, 1997).
After Professor Nicely attempted to inform Intel of this error and was brushed off (over several months of effort on Nicelys part), the trade publication Electrical Engineering Times wrote an article describing the errors. At that time, Intel remarked that it was aware of the issue and had been working on finding a solution they could push out to computers through patches. Soon after, major news outlets began reporting the issue including CNN, the New York Times and the Boston Globe. Then CEO Andy Grove decided against a mass recall and instead required consumers to request and be approved for a replacement chip. David Berglund Accounting 601 Kalina Company Financial Analysis Intel
Many articles at the time were written on Intels poor crisis management and public relations, but few on the ethical ramifications of this event (Williams, 1997). This is somewhat surprising seeing as though Grove was quoted as saying Finally we decided, this is the right thing to do, both morally and ethically, clearly showing Intels understanding of the ethical imperatives it had compromised (Markoff, 1994).
According to Intels Code of Conduct, their framework for ethics is built on three key elements: a mission statement, clearly defined shared values, and its code of conduct (Intel, 2012a). The mission statement doesnt speak to ethics per say, but does make it clear that customers, shareholders and employees are put first in managements eyes. The unwritten assumption here is that if Intel is able to consider these groups in any transaction or endeavor, their outcome will be ethically sound.
Viewing the crisis Intel faced in 1994 through the lens of todays information glut, it is clear that Intel would have been pushed to act much more quickly than they did, taking over two months to recognize their mistake and compensate consumers fairly. With ready information access via Twitter and Facebook, businesses must be prepared at all times to respond to customer complaints. This response must be both swift and equitable or they risk a major public relations crisis like Intel faced in the winter of 1994. In the world of information technology, mistakes are inevitable, but with Intels framework of mission, values and code of ethics, they should be more prepared to respond appropriately to future processor flaws. 2. Environmental Initiatives Environmental awareness for companies is one of the most important components of an ethical foundation with sustainability and green efforts being ever-popular buzzwords in the media. In 2012 the EPA ranked Intel number one on its list of Green Power Partners after it increased its use of renewable resources (including solar and wind) from 1.4 billion to 2.5 billion kilowatt hours (Green, 2012). This is comparable to the energy output of 195,000 American homes clearly a major energy reduction and a strong reason for their award (U.S. Environmental Protection Agency, 2011). These investments in renewable energy have paid off for Intel, reducing energy costs on average by $23 million since 2001 (Green, 2012).
In 2010 Intel was in the number four spot in Newsweeks Green Rankings for U.S. Companies, but its ranking fell in 2011 to number 47 even though it has been the largest purchaser of green power in the US for the third straight year (From Newsweek, 2011). The EPA views Intel as a leader in environmental stewardship as well, providing them with the Green Power Leadership Award 2010, Partner of the Year 2008, Partner of the Year 2009, and Partner of the Year 2011 (U.S. Environmental Protection Agency, Green power partnership, n.d.). This should come as no surprise, seeing as though 87.8% of their power is deemed Green Power. Their ability to meet and exceed intensity-based reduction with a reduction of 49.1% per unit of production since 2004 has come at fairly steep cost. Intel has spent more than $45M on energy saving technology Intel Nission Statement:
Belight oui customeis, employees, anu shaieholueis by ielentlessly ueliveiing the platfoim anu technology auvancements that become essential to the way we woik anu live.
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while saving upwards of 790 million kWH of energy in the process (U.S. Environmental Protection Agency, 2012).
Intel President and CEO Paul Otellini says, Our renewable purchase is just one part of a multi- faceted approach to protect the environment, and one that we hope spurs additional development and demand for renewable energy (Intel Inc., 2008). In addition, Sustainable Business further honored Intel for their work in Aggressively Reducing Emissions showing the high-regard they receive from major environmental organizations (SustainableBusiness.com, 2012).
Intel is continuing to move forward and invest in clean technology through smaller entrepreneurial start-up companies focused on green-tech. Included in their list of recent acquisitions or funded clean-tech firms such as an energy management provider (CPower), home energy monitoring (iControl), and low-power computing (Powervation) (Intel Inc., 2009). Intels investment arm is also overseeing a $3.5B clean-tech investment fund through which it plans to continue finding and supporting young green entrepreneurs (Kanellos, 2010). 3. Anti-Competitive Behavior In 2009 Intel faced major heat from the FTC when it was charged with anticompetitive tactics and that it engaged in a deliberate campaign to hamstring competitive threats to its monopoly (U.S. Federal Trade Commission, 2009). This case was settled in 2010 when Intel was required to restructure its intellectual property agreements with AMD and NVidia, offer licensing of its components to competitors, maintain an open interface (PCI Express Card) for competitor GPU units and was banned from creating future exclusivity agreements with other chipmakers.
This was just one of several anti-competitive suits it faced over the last decade and while it likely paid off from a financial perspective, its name was still brought through the mud for several years. Other antitrust charges it faced and lost include a 2009 EU fine of $1.45B, $1.25B fine paid to Intel, and in 2011 it paid $1.5B to NVidia (Mick, 2012).
The last of the open charges was New York States case against Intel from 2009 that charged Intel with anticompetitive tactics, specifically using illegal tactics to stifle AMD in the processor market (Hill, 2009). These charges were cleared in February of 2012 with Intel facing a nominal $6.5M fine. Whether or not Intel will be able to move forward without additional claims of anticompetitive behavior or intellectual property infractions will be seen, but it is unlikely. In the interim, Intel continues to claim that they compete lawfully and that [their] marketing, business, IP, and other challenged practices benefit [their] customers and [their] stockholders and plan to continue vigorously defending future charges that might come up (Intel Inc., 2012b). Section 4 Financial Analysis 1
To analyze Intel, you must first realize the broader markets in which it lives. The DJIA is slowly making its way back to where it was five years ago when the markets began unraveling and from
1 All numbeis, unless state otheiwise, aie in millions of uollais. David Berglund Accounting 601 Kalina Company Financial Analysis Intel
the three-year mark, the DJIA is up almost 61%. A major grouping of stocks watched closely by financial analysts is the technology sector where Intel sits at the top of most reports. That sector can then be broken down into multiple smaller buckets, of which is the Broad Line Semiconductor grouping that also includes AMD, NVIDIA, and Texas Instruments. This is commonly tracked on Wall Street via the Philadelphia Semiconductor Sector (ticker: SOX), an index composed of companies within the industry. While the global markets continue to be uncertain and unstable, the semiconductor industry is on a financial uptick after several quarters of lower sequential sales - due in large part to the natural disasters that affected supply chains in Thailand and Japan (Rubin, 2012).
Intel has been at the forefront of this market, outperforming its primary rival AMD and dominating the rest of the field. Intels net income for 2011 was $12,942M, a strong 13% improvement from its net income of $11,464M in 2010. An even more impressive increase is the 196% improvement from 2009, where Intels net income was $4,369M. These numbers compare favorably to AMD who brought in a relatively meager $491M in net income during 2011.
Intels fundamental business strategy is based on product differentiation and successfully producing cutting edge products. To meet that end, it invests heavily in itself through Research and Development expenditure (as discussed in section 2.3). Its success in creating and selling top of the line semiconductors and microprocessors is evident through its 2011 net profit margin of 23.97%. The only other company in the field with such strong numbers is the up and coming ARM Holdings with a 2011 net profit margin of 22.90% (Google, 2012a).
From a quarterly perspective, Intels 2011 Q4 net income was $3,360M, a reduction of 3% over its Q3 net income of $2,954M. The earnings report for Intels Q1 2012 results came on April 17, 2012 and they showed first quarter net income of $2.7B which is down 19% from Q4s $3.4B. CEO Paul Otellini remarked The first quarter was a solid start to what's expected to be another growth year for Intel. He heralded the major release of several technologies for Q2 including the first Intel- based smartphones, the 22nm tri-gate Ivy Bridge chipset, and the best server product ever which are hoped to provide strong numbers in the upcoming quarters (Intel Inc., 2012b).
AMD reported a net loss of -$177M for Q4, a substantial 282% reduction over its Q3 earnings ($97M) due, in large part, to weaker than expected sales from the graphics segment. As predicted by AMD leadership,
2011 2010 2009 After Tax Net Income $12,942 $11,464 $4,369 Revenue $53,999 $43,623 $35,127 Net Profit Margin 23.97% 26.28% 12.44%
2011 2010 Difference Net income $12,942 $11,464 $1,478 Total assets $71,119 $63,186 $7,933 Average Total Assets $67,152.50
AMD announced a major step back with a $590M net loss in Q1 of 2012. Based on these numbers, it is clear that despite the economic instability of America, Intel has been able to produce strong numbers while AMD has not. This financial outcome could be a predictor of things to come. In addition, business leaders may want to hedge their finances by bolstering the growing mobile segment as GPU unit sales slow down.
Intels total assets for 2011 were $71,119M, a 13% improvement over its 2010 total assets of $63,186M. The quarterly improvement was a less profound improvement of 7% with the Q3 total assets reported at $70,551M and Q2 total assets of $66,089M. AMD did not fare as well over this time period with its negative net income bringing its total assets down from $5,236M in Q3 to $4,954M in Q4, a 5.4% decrease over the period. Based on these figures, Intels ROI over 2010-2011 was 19%, approximately double AMDs ROI of 10% over the same period. From a quarterly basis, Intels Q4 ROI was 5% and AMDs Q4 ROI was -3.47%, again showing Intel commanding the semiconductor market not just based on market penetration but also from a profitability perspective as well.
In terms of liquidity, Intels quick ratio of 1.81 is slightly higher than AMDs 1.55. Similar to most companies, Intels primary source of liquidity is cash generated from operations and with a solid cash reserve of $5,065M, inventory valuation of $4,096M (FIFO basis) and a current ratio of 2.15 there is little risk of Intel defaulting on its obligations.
Quick Ratio Comparison: Intel
Total current assets 25,872 Inventories
- 4,096
21,776 Total current liabilities 12,028 Quick Ratio 1.81 Current Ratio 2.15
AMD
Total current assets 3,229 Inventories - 476
2,753 Total current liabilities 1,774 Quick Ratio 1.55 Current Ratio 1.82
Intels 2011 Return on Equity Ratio is 27%, slightly lower than AMDs ROE of 38%, but above other companies in the semiconductor and microprocessor field who average 11.25% ROE according to Google Finances related-company calculations (Intel Inc., 2012). Intel had a $4M reduction in SE over the 2011 period while AMDs SE increased by 57%. The 27% ROE is a slight improvement over its 25.6% ROE for 2010 and a huge jump over its 2009 ROE of 10.8% (Standard and Poors, 2012).
Q4 2011 Q3 2011 Difference Net income $3,360 $3,468 ($108) Total assets $71,119 $70,551 $568 Average total Assets $68,320
ROI: 5%
David Berglund Accounting 601 Kalina Company Financial Analysis Intel
Return on Equity Comparison: Intel Stockholder Equity AMD Stockholder Equity As of: 12/31/11 12/25/10 As of: 12/31/11 12/25/10
45,911 49,430 1,590 1,013
Net Income 12,942
Net Income 491 Ave SE 47,671
Ave SE 1,302 Return on Equity: 0.27
Return on Equity: 0.38
Another important financial comparison to make between Intel and AMD is Research and Development investment as a percentage of both operating and net income. These ratios are valuable when analyzing tech companies who require the ability to successfully deliver new products year after year. In both cases, Intels percentages are far and away lower than AMDs even though Intel had such large R&D costs. This was due primarily to the vast difference in income that the two companies achieved in 2011. It is important to realize that revenues typically realized from R&D take several years due to the time it takes to bring chips to market. Intel has done a great job keeping their R&D as a percent of net revenue around 15% over the last three years while improving revenue in each of the successive years. While we dont have the numbers on what segments of the business Intel is spending their R&D budgets on, based on the numbers we can see that Intel has been much more successful in converting their sizable R&D investment into future sales.
Intel AMD Research and Development Expense $8,350 $1,453 Operating Income $17,477 $368 Net Income $12,942 $491 R&D as % of Operating income 48% 395% R&D as % of Net Income 65% 296% Section 5 Conclusion
By and large Intel is in a favorable position in comparison to other companies in its industry. It dominates almost all the major markets and its raw size is able to discourage future competition. Intel has demonstrated proficiency capitalizing on new product development stemming from a robust R&D arm and operational capability and has a wide berth of platforms through which is can bring in revenue. As is the case for all tech companies, there is the potential for future litigation costs related to intellectual property and patents but Intel has been able to put all of the major anti-trust litigation behind them.
Intel also has a strong balance sheet and high income per year, putting it in a strong competitive position despite the challenges of entering the mobile niche markets. A vertical analysis of their balance sheet (figure 10) reveals only modest fluctuations over time, with the greatest changes over time being the gradual shift in assets from mostly non-current to current. Intels income 2011 2010 2009 R&D Expense $ 8,350 $ 6,576 $ 5,653 Net Revenue $ 53,999 $ 43,623 $ 35,127 R&D as Percent of Net Revenue 15% 15% 16% David Berglund Accounting 601 Kalina Company Financial Analysis Intel
statement shows a slight uptick in cost of sales as a percent of net revenue (figure 11), but it is still down from its 2008 numbers. As Intel looks forward, it can surely see a growing PC market stemming where consumers will likely increase their purchases of PCs as the new Windows 8 operating system rolls out shortly. Additionally, there is the potential for massive growth in revenue if it can successfully enter the fast-moving mobile space. Even through the global economic slowdown and rapid technological movement of processing power to the cloud, they have been able to (mostly) shift their product focus to smaller and lighter chips that are in high demand with consumers. Their ability to continue winning over the mobile markets (including consumers, developers, and
From an investors standpoint, Intels stock price of $27.76 is a very strong improvement over its $21.94 price one year ago. Financial analysts are divided from a buy/hold/sell standpoint and it is no wonder, given Intels potential for huge rewards as well as the risk it is taking entering the mobile market. My recommendation would be buy, based on Intels strong brand image and reputation for delivering strong and stable processors that will allow them to convince phone and tablet makers to incorporate its chips in future products. Furthermore, I believe that the larger economic landscape will continue to improve, allowing consumers to have more disposable income, thus increasing sales of tech products. If Intel is able to continue navigating the turbulent post-PC market as well as their bread and butter PC chips, they will surely find their stock price higher still.
David Berglund Accounting 601 Kalina Company Financial Analysis Intel
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Advanced Micro Devices Inc. (2011). 10-K Annual Report 2011. Retrieved from SEC EDGAR website http://www.sec.gov/edgar.shtml
Apple Inc. (2005). Apple to use Intel microprocessors beginning in 2006. Retrieved from http://www.apple.com/pr/library/2005/06/06Apple-to-Use-Intel-Microprocessors- Beginning-in-2006.html
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Darling, P. (2011, January 31). Intel completes acquisition of Infineons wireless solutions business. Retrieved from http://newsroom.intel.com/community/intel_newsroom/blog/2011/01/31/intel-completes- acquisition-of-infineon-s-wireless-solutions-business
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Note: David Berglund has followed this industry for several years so certain pieces of knowledge were gleaned from first-hand experience and personal research. David Berglund Accounting 601 Kalina Company Financial Analysis Intel
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Figure 1: INTEL 2011 2010 2009
2010-2011 Difference
Net income $12,942 $11,464 $4,369
$1,478
Total assets $71,119 $63,186 $53,095
$7,933
Average Total Assets $67,152.50
ROI: 19%
Figure 2:
AMD 2011 2010 2009
2010-2011 Difference Net income $491 $471 $293
$20 Total assets $4,954 $4,964 $9,078
-$10 Average Total Assets $4,959
ROI: 10%
Figure 3:
Figure 4:
Figure 5:
Intel ROI Q1 2011 Q2 2011 Q3 2011 Q4 2011 Net income $3,160 $2,954 $3,468 $3,360 Total assets
$66,089 $70,551 $71,119 Ave total assets (Q4) $70,835
ROI Q4: 4.74%
Q1 2011 Q2 2011 Q3 2011 Q4 2011 Net income $510 $61 $97 $(177) Total assets $5,209 $5,224 $5,236 $4,954 Ave total assets (Q4) $5,095