Ten Hidden Gems in Intel's Annual Report (INTC, MU, AMD, HPQ, DELL, NVDA, QCOM, BRCM, TXN)

Intel Corporation (NASDAQ: INTC) is among many of the established companies which has filed its annual report or 10-K with the SEC.  These reports are almost always long and boring and unfortunately go unread by most investors.  There are almost always some hidden data points in the annual reports that investors should know but rarely take the time to find.  Not all points are critical and by no means should these all be considered only as bad points.

The Ultra-Mobility Group, the current hot-zone of the processor market… Intel noted, “In 2010, we introduced an Intel Atom processor-based platform that provides significantly lower power consumption compared to previous-generation Intel Atom processor-based platforms. The new platform is designed for a range of computing devices, including high-end smartphones and other mobile handheld products.”

Shrinking its processor technology… Intel noted, “As of December 25, 2010, the majority of our microprocessors were manufactured on 300mm wafers using our 32nm process technology. In the second half of 2011, we expect to begin manufacturing microprocessors using our 22nm process technology.:

Flash alert… Intel’s NAND flash memory products are manufactured by IMFT, a NAND flash memory manufacturing company that it formed with Micron Technology, Inc. (NASDAQ: MU).  As of December 25, 2010, Intel has committed to purchase 49% of the manufactured output of IMFT, and that assembly and test of NAND flash memory products is performed by Micron and other external subcontractors.

Current Customer Concentration… Intel’s current mix is still largely PC and server-oriented.  In 2010, Hewlett-Packard Company (NYSE: HPQ) accounted for 21% of its net revenue (Versus 21% in 2009 and 20% in 2008), and Dell Inc. (NASDAQ: DELL) accounted for 17% of net revenue (versus 17% in 2009 and 18% in 2008).  The company noted that no other customer accounted for more than 10% of its net revenue.  In short, 38% of sales were from just two PC and IT vendors.

FAB versus Fabless competition…. Intel tries to differentiate that it is not a fabless model as a strength over competition from the likes of Broadcom Corporation (NASDAQ: BRCM), NVIDIA Corporation (NASDAQ: NVDA), QUALCOMM Incorporated (NASDAQ: QCOM) and fab-lite against Advanced Micro Devices, Inc. (NYSE: AMD). Competition by segment was broken out as follows:

• PC Client: AMD, QUALCOMM, and VIA;
• Server: AMD, IBM, and Oracle;
• Application Processors (embedded, consumer electronics, and tablets): AMD, Broadcom, Freescale Semiconductor, Inc., MediaTek Inc., NVIDIA, QUALCOMM, Samsung Electronics Co., Ltd., STMicroelectronics N.V., and Texas Instruments Incorporated (NYSE: TXN);
• Mobile Communications Processors (handheld devices): MediaTek, QUALCOMM, ST-Ericsson N.V., and TI

Its recent NVIDIA Corporation settlement…. Intel noted, “In January 2011, we entered into a long-term patent cross-license agreement with NVIDIA…  The agreement also includes settlement of the existing litigation between the companies as well as broad mutual general releases. We agreed to make payments to NVIDIA totaling $1.5 billion over six years.”

Age of officers…. Intel’s “Executive Officers” section shows that Chief Financial Officer Stacy Smith is the ONLY executive officer under the age of 50.  None of the executives are ancient, but the rest are all 53 to 60 years of age.  Generally speaking, this implies that who is running the show at Intel will look very different in just a few years.

Business Risks under RISK FACTORS… Companies generally have to divulge many large and broad scopes of competitive risks and risks to their business.  Of the RISK FACTORS section of the annual report, Intel had some 22 subsections which cover demand, costs, competition, litigation, product mix, global operations, production, resource availability, suppliers, defects, IP, licensing, investing, accounting policies, decision making, climate change, taxes, and more.

Land and facility ownership… Of the total global total facility square footage of 49.1 million square feet, it owned 44.5 million square feet and footnoted that Leases on portions of the land used for these facilities expire on varying dates through 2062.  Why ownership is so important is that it all counts toward tangible book values and insulates companies from rising land prices and rents ahead.

Losses from “Other”…. The other Intel architecture (Other IA) operating segments, including the Embedded and Communications Group (ECG), the Digital Home Group, and the Ultra-Mobility Group was shown to have lost $60 million from some $1.784 billion in revenues in 2010 and it lost money here in 2010, 2009, and 2008.  In short, the major areas of growth anticipated by the market from non-PC sales is currently not yet profitable for the Intel of today.  That will likely change, but definitely worth noting.

Again, this annual report review is not meant to just be critical of a company.  Annual reports have to list these points once a year when they are public companies.  It allows investors (and rivals) to get a look under the hood to see what is driving a company.  We always recommend that investors read annual reports of any company they are considering investing into.  KNOW WHAT YOU ARE BUYING!

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JON C. OGG