Replies to post #2089 on Intel Corp (INTC)

[wbmw]

Dew, Re: Your contention that the $637 high-end Banias will have a COGS of only $60 – and hence a gross margin of 90.6% (577/637) -- strikes me as naïve.

I don't think naive is the right word. You are simply not familiar with the great degree of margins that the microprocessor business entails. The system is great, but not perfect. Under Intel's model, the cost of keeping up with manufacturing innovations is immense. R&D is huge as well. And even though the high end skus can get 90% GMs (thanks for the correct equations once again), the volume of high end skus is very small, due to pricing and market demand. Pricing is usually a function of how well a CPU can bin out in frequency, so the system works pretty well.

1.6GHz Banias chips will probably make up 5-10% of Intel's Banias shipments, thus they charge a higher price to keep demand to those levels. The "sweet spot" will be more like 1.4GHz, which is priced quite a bit lower, but will still have a GM of 234/294 = 80%. Then again, Intel also gives volume deals with their largest customers, while the prices listed are in lots of 1,000. Thus, a 1.4GHz "high volume" Banias will probably cost Intel's larger customers much less than $294.

Banias will do great for Intel's profitability, but it may not impact their GMs much more than the current mobile line already has. Intel's mobile margins are already large with the Pentium 4-M, but the Pentium III-M margins were even greater. Banias will likely bring GMs up to Pentium III-M levels.

I understand if you find this hard to believe, but it goes to show you why INTC stock can be valued as high as it has been in the past. Any company able to outperform the rest of the industry in GMs by so much is entitled to a high valuation. I'm sure more of the regulars on this board can confirm the fundamentals behind Intel's valuations. High margins is just one of the benefits INTC has had for a long time.

wbmw

[Elmer Phud]

DewDiligence -

Your contention that the $637 high-end Banias will have a COGS of only $60 – and hence a gross margin of 90.6% (577/637) -- strikes me as naïve. Regards, Dew

I've got to jump in here. The fact is that the $60 cost is unrealistically high unless you are amortizing a heap of R&D. Based on die size the cost will be well below $30 and probably below $25.

EP

[Windsock]

Re:"My approach is to look at the financial statements of INTC,"

You have totally the wrong approach for determing the contribution of the Banias processor.

Look at Revenue less Cost of Goods to determine the the CASH contribution of the Banias processor. The G&A change is trivial and the R&D cost was expensed yesterday. It is a cloud nine exercise to determine what R&D costs to attribute to the Banias processor anyway.

The cost of a 300 mm wafer is about $2500. The die size will produce about 300 plus good die per wafer. So you end up with about $8 per die. Test-assembly and packaging is about another $15 to maybe $20 for a toal COG of about $30 on the high end. Actual COG is certainly much lower. As Elmer said, probably less than $25.

The CASH contribution of the Banias processor will be very, very good. And Intel manages their business to preserve CASH per Andy Byant in the recent Webcast. And they do that very well.

[usuck ani knowit]

Dew, I'm with you.
The hay-day of mega margins is over, as everything going forward "looks so good on paper".
You know what they say about people who assume (chuckle)