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Intel (INTC) Beats Q3 Earnings, Q4 Guidance Disappoints

Zacks

Intel Corp INTC reported impressive third-quarter 2016 results. Non-GAAP earnings of 80 cents per share comfortably surpassed the Zacks Consensus Estimate by 7 cents and surged 21.2% from the year-ago quarter.

The strong growth was driven by 9.1% year-over-year increase in revenues, which totaled $15.78 billion and was well ahead of the Zacks Consensus Estimate of $15.55 billion. Additionally, revenues were within management’s revised guidance range of $15.6 billion (+/- $300 million).

The year-over-year growth was driven by robust performance from the Client Computing, Data Center and Internet-of-Things groups, which contributed to almost 90% of total revenues in the reported quarter.

However, Intel’s fourth quarter top-line guidance apparently failed to encourage investors, as shares dropped 5.2% in after-hour trading.

Segment Revenue Details

Client Computing Group (56.4% of revenues) – Intel bundles PCs, notebooks, 2-in-1s, tablets and other computing devices under the Client segment, which actually helps comparison with the PC market numbers provided by IDC and Gartner.

Revenues increased 4.5% year over year and 21.2% sequentially to $8.89 billion. The growth rate was encouraging as it continued to beat PC market trends. We believe Intel is gaining share in the emerging, connected and computing devices market, which is neutralizing declines in the core PC market.

Overall unit volumes surged 17% sequentially but was down 4% on a year-over-year basis. PC volumes decreased 4% while notebook volumes increased 4% from the year-ago quarter. Tablet volumes continued to decline in the quarter.

Average selling prices (ASPs) increased 2% and 6% on a sequential and year-over-year basis, respectively. The year-over-year increase came from the notebooks, which was up 3%, while PC remained flat.

Management at Intel noted strengthening of demand and an inventory-build in the global PC supply-chain.

Data Center Group (28.8% of revenues) – Revenues increased 9.7% year over year and 12.8% sequentially to $4.54 million. The growth rate was much better than 4.5% reported in the previous quarter.

The year-over-year growth was driven by strong cloud revenues, which surged more than 30%, partially offset by 3% decline in the enterprise segment. Communications service providers also went up 16%.

Enterprise segment is anticipated to remain weak going ahead. Moreover, intensifying competition with new entrants like Qualcomm QCOM using ARM designs and companies like Facebook FB and Google trying to second source, perhaps with the help of International Business Machine IBM designs is a concern.

Data Center units increased 13% sequentially and 12% from the year-ago quarter. ASP dipped 1% sequentially and 3% from year-ago quarter.

Management noted that non-CPU adjacencies grew 34% in the quarter. The category includes Intel’s new omni-path high-performance fabric which is leading in performance and gaining customers rapidly.

Internet of Things Group (4.4% of revenues) – Revenues jumped 18.6% from the year-ago quarter and 20.5% quarter over quarter to $689 million. The growth was backed by strength in retail, video and transportation applications.

Non-Volatile memory solutions group (4.1% of revenues) – Revenues fell almost 1% year over year but jumped 17.1% sequentially to $649 million.

Memory is a commodity-type business, so prices vary widely depending on available supply. Management pointed to 3D NAND production at the Dalian factory in China, which is ramping ahead of schedule. Further, 3D XPoint is expected to ship by year-end.

This is encouraging news because these products bring the kind of differentiation to Intel’s memory business that could help it generate stable memory demand and pricing in an otherwise commodity-type market. The goal is to take these technologies to Data Center and enterprise customers, where they will generate solid revenue and profits. XPoint is likely to have broader application.

Intel Security Group (3.4% of revenues) – Revenues grew 6.1% year over year but was flat sequentially at $537 million.

In September, Intel announced that it is divesting a majority stake in the division to alternative asset fund manager TPG. The deal valued at $4.2 billion includes an equity value of approximately $2.2 billion for the security division in addition to net debt of approximately $2 billion.

Intel expects to realize a pre-tax gain on the sale of roughly $500 million when the transaction closes in second-quarter 2017.

Programmable solutions group (2.7% of revenues) – The Altera business is now the Programmable Solutions Group, declining 8.6% sequentially to generate $425 million in revenues in the last quarter. Revenues are up 6% from what Altera generated last year, aided by robust performance from wire line, industrial and broadcasts segment. The company stated that it has started sampling 14nm Stratix 10 product.

Intel also has a residual segment, which includes results of operations from the recently formed New Technology Group and other adjustments. The segment reported revenues of $40 million down a massive 43% from the year-ago quarter but up 10% on a sequential basis.

INTEL CORP Price and EPS Surprise


INTEL CORP Price and EPS Surprise | INTEL CORP Quote

Operating Details

The gross margin for the quarter was 64.8%, which expanded 290 basis points (bps) sequentially and 120 bps year over year, much better than the guided 63% (+/-1%).

Research & development (R&D) and marketing, general & administrative (MG&A) increased almost 5% year over year but slipped 1.5% sequentially to $5.08 billion, lower than the management’s guided range of $5.2 billion. As percentage of revenues, R&D and MG&A declined 130 bps on a year-over-year basis and 590 bps sequentially in the quarter.

The operating margin was 32.6%, up 880 bps sequentially and 250 bps year over year. Segment wise, Client Computing group operating margin were 37.4% as compared with 28.6% in the year-ago quarter and 26% in the previous quarter. The massive expansion was driven by lower investments and declining costs.

Data Center group operating margin was 46.5%, down 500 bps on a year-over-year basis but up 260 bps sequentially. The decline can be attributed to higher investments on Broadwell, the first 14-nanometer server product.

Internet of Things group operating margin was 27.7% as compared with 25.8% in the year-ago quarter and 15.6% in the previous quarter.

Intel Security group operating margin expanded 220 bps year over year and 340 bps sequentially to 21.4%.

Non-Volatile memory solutions group reported loss of $134 million as compared with profits of $51 million in the year-ago quarter primarily attributed to start-up cost for China factory and costs associated with 3D XPoint.

However, Programmable solutions group reported profits of $78 million in the quarter.

Balance Sheet

Cash, marketable securities and fixed income trading asset balance at quarter-end was $17.77 billion, up $80 million during the quarter.

Intel has $24.04 billion in long-term debt now as well as $3.57 billion in short-term debt, which has led to a net debt balance of $9.85 billion.

Guidance

Intel guided to fourth-quarter revenues of around $15.7 billion (+/-$500 million), almost flat sequentially. The non-GAAP gross margin is expected to be around 63% (+/-2%). R&D and MG&A expenses are anticipated to come in at around $5.2 billion.

For full-year 2016, management expects revenues of almost $59 billion and gross margin of 63%. Data Center group revenues are expected to be in the high-single digits for the full-year 2016.

Full-year capex is now expected to be $9.5 billion (+/-$500 million) up $2.2 billion from 2015.

Zacks Rank

Intel shares sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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