Is Intel value for Israel's money?

Intel building  Photo: Ronen Zvulun, Reuters

Intel will invest NIS 40 billion, but will hire only 1,000 more employees and pay a ridiculously low 5% corporate tax rate.

Intel has chosen to invest NIS 40 billion in Israel. This is a huge investment, following earlier investments amounting to tens of billions of shekels. Yes, Intel loves the Israeli market, the labor force here, the technology, and the generosity - financial benefits and low tax rates.

Intel is a business company. It cannot be accused of Israeli patriotism. What matters to Intel are numbers, and its managers aim at maximizing profit and satisfying Wall Street investors. They have had a hard time recently - the fourth quarter of 2018 was disappointing and the guidance for 2019 was so-so, but the company is still a semiconductor industry power.

Intel's management decided to invest NIS 40 billion here, and this is a cause for celebration. Keep in mind, however, that Intel invests here because it is economically worthwhile for the company. Intel is getting NIS 3.5 billion in support and a 5% marginal tax liability. These are very weighty benefits, especially considering that it undertook to hire only 1,000 more employees.

Yes, only 1,000 employees. That is all, and that raises several questions.

How is it possible that a NIS 40 billion investment, including construction of fabs, production lines, infrastructure, and research and development, requires only 1,000 people? Companies that invest tens of billions usually thousands of people.

You can also look at it like this. Up until now, Intel has invested tens of billions and hired 11,000 employees in Israel. How is that that an additional NIS 40 billion will increase the number of its employees by only 1,000?

Intel pays only 5% tax

The state is granting NIS 3.5 billion for 1,000 employees. That comes to NIS 3.5 million per employee from the state. Isn't that too much? Yes, it is a rough test. After all, Intel's contribution is not confined to directly employing workers. Intel's investment contributes to employment in the area, increases exports, and bolsters tax revenues - actually, tax revenues will not rise (the tax rate on Intel's profits is ridiculous).

Still, judging by the number of employees, it is by no means certain that the state made a good deal.

There are other questions about this huge investment. Do we want to be a large branch of Intel? Israel attracts foreign investment. International companies have been establishing businesses here and expanding them. They will not invest tens of billions, but there is a long list of companies that invest hundreds of millions here. A tour of the office buildings constructed in the central region in recent years reveals dozens of international high-tech companies with new branches here, some of which people have never heard of. Isn't encouraging more international companies with small sums more worthwhile than attracting one company with a large amount?

Intel is a mixture of research and development with manufacturing. A major proportion of its activity in Israeli consists of a type of advanced production. The products of the technology (mainly chips) are advanced, not necessarily the technology itself. So on the one hand, the state is encouraging and supporting Intel's fabs, while on the other hand, local industry is vanishing, because it does not receive support.

Maybe we should think in the opposite direction - encourage local industry with a 5% tax rate, instead of Intel, and keep the factories here that are gradually migrating to other places. Several huge companies (by Israeli standards) have been sold in recent years: Makhteshim Agan/Adama, Frutarom, and Netafim are prominent examples. These companies, together with their know-how, technology, and production, will slowly leave - it is simple economics. If it is not worthwhile producing here, they will not produce here. A 5% tax rate, however, might persuade them to stay.

A 5% tax rate, by the way, is a substantial benefit by any criterion. Intel, which receives tax benefits in various places around the world, pays a 13.5% average tax rate.

A chip giant in search of direction

The report of Intel's investment came a few days after the company released its financial statements. Intel's fourth quarter results were disappointing. Profit grew to $5.9 billion on $18.7 billion revenue, compared with a $5.2 billion profit on $17.1 billion revenue in the fourth quarter of 2017, but the market expected a little more.

Furthermore, Intel's guidance for 2019 was so-so. The company's $71.5 billion revenue projection is only slightly more than its $70.8 billion in 2018. Intel has had trouble taking off in recent years; its growth results mainly from acquisitions.

Intel has been without a permanent CEO for six months (the company's CFO is its acting CEO), and is casting its eyes around for growth engines. The company is in the throes of change, because the industry is changing.

Intel gambled a few years ago on Internet of Things (IoT). This consists of various products and systems in homes and offices (and every possible place) communicating with each other through software and sensors. There is information gathering and an exchange of information between different systems and a variety of uses. For example, you can "talk" with the air-conditioner before you get home, so that it turns on. This sector has become important for Intel and is growing, but revenue in it declined last quarter.

Intel's new engine is Mobileye. Intel acquired Mobileye 18 months ago for $15 billion in a gamble on autonomous vehicles. Intel has IoT, autonomous vehicles, PCs, cloud computing, and data. It has everything, but it is not as far ahead of the competition as it once was.

This is the reason for concern about giving it all of these benefits. What will happen if Intel shrinks a few years from now and tells us, "Thank you, but we're liquidating our activity in a certain sector and laying off the employees." It can happen, but we will not be able to say, "Not  fair" (as they said to Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) when it cut back its activity in Israel). These are the rules of the game in the capitalist world. A business that is unprofitable is shut down. It will not be Intel's fault if and when it lays off employees; it is the state's decision whether to give it such large benefits, instead of spreading them around.

Mobileye: $183 million quarterly revenue

Intel's fourth quarter reports show that Mobileye's sales totaled $183 million, 40% more than in the corresponding quarter of 2017. Intel acquired Mobileye in August 2017. Intel's 2017 reports show that the company generated $210 million revenue in the five months following the acquisition.

Just before the deal, Mobileye's quarterly revenue amounted to $125 million (first quarter of 2017). It is true that the company's revenue has since risen, but the (partial) data indicates that there were mediocre quarters along the way, and that installation has not been that great. Intel did not acquire Mobileye for $183 million quarterly revenue.

The author is a lecturer in accounting, financial statement analysis, and valuations, and a consultant in these areas. This article should not be regarded as advice and/or a recommendation to buy or sell any security. Anyone whose actions are based on the article and/or on its content bears exclusive responsibility for any damage and/or loss caused to him or her.

Published by Globes, Israel business news - en.globes.co.il - on February 3, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Intel building  Photo: Ronen Zvulun, Reuters
Intel building Photo: Ronen Zvulun, Reuters
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