How Will Altera Acquisition Impact Intel’s Financials?



Intel expects significant synergies from Altera acquisition

As we have already discussed in the earlier part of the series, Intel (INTC) expects approximately 60% of Altera’s buyout value to come from “product synergies” in the data center and the Internet of Things (or IoT) spaces. The remaining 40% of the value is expected to come from “cost and manufacturing synergies.”

To be more specific, Intel expects a reduction in operating expenses. Intel’s CFO, Stacy Smith, indicated that these operating expense savings are likely to come from selling, general, and administrative expenses rather than research and development (or R&D). Intel spent ~21% of its total revenue on R&D in 2014. Its peer Advanced Micro Devices (AMD) spends ~25% of its revenue on R&D.

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According to IHS Technology, and as the chart above shows, Intel continued to be the top supplier in the semiconductor space with 14.1% market share. It was followed by Samsung and Qualcomm (QCOM) with 10.8% and 5.5% of the market share, respectively. Micron (MU) and SK Hynix held 4.6% and 4.5% of the market share, respectively.

Intel stated that it expects the Altera acquisition to be accretive to its non-GAAP (or generally accepted accounting principles) earnings per share and its free cash flow (or FCF) in the first year after closure.

Intel has decent cash reserves

Intel, as of March 28, 2015, reported cash and short-term investments, debt, and FCF (free cash flow) of $14.05 billion, $13.7 billion, and $3.54 billion, respectively. Intel also had ~$8.2 billion in long-term investments.

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Altera’s financial overview

In fiscal 2014, Altera reported revenue and gross margin of $1.9 billion and 66%, respectively. Its net income and cash flow from operations stood at $0.5 billion and $0.7 billion, respectively.

Softness in the PC market forced Intel to diversify its operations

Intel is trying to expand its horizons beyond the flailing personal computer (or PC) market. Through Altera, the company is not only enhancing its expertise and initiatives in the servers, data center, and IoT spaces, but it is also getting exposure to different markets, as Altera’s chips are used in a plethora of markets ranging from communications to consumer electronics. Focusing on these growth segments has helped Intel in reducing its reliance on the PC space in 2015.

If you’re bullish about Intel, you can invest in the Technology Select Sector SPDR Fund (XLK) to gain exposure to Intel. Intel makes up about 3.55% of XLK.


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