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Intel Corp. (INTC - Analyst Report) is scheduled to announce its third-quarter fiscal 2012 results on October 16, 2012 and we notice significant downward movements in analyst estimates in the run up to the results.

Prior-Quarter Synopsis

Intel’s second quarter results were 4 cents higher than the Zacks Consensus Estimate, driven by strength in server and software businesses and supported by a moderate PC business.

Revenue in the quarter was $13.5 billion, up sequentially as well as from the year-ago quarter, led by growth in all segments. Intel also stated that the Ivy Bridge ramp-up was faster than expected, reaching 25% of PC volumes in the last quarter. 

While PC inventories were lean, distributor orders remained conservative, mainly due to macro uncertainties and lower sales expectations ahead of the Windows 8 launch from Microsoft Corp. (MSFT - Analyst Report).

Gross margins declined sequentially as well as year over year to 64.4% due to the increase in IvyBridge ramp up costs (22nm), partially offset by a favorable product mix.

Third-Quarter Guidance

Recently, the company lowered its revenue and gross margin expectations for the third quarter of 2012 on account of lower-than-expected demand and a challenging global economy.

The chipmaker now expects sales to be $13.2 billion (plus or minus $300 million), below the previously announced range of $13.8–$14.8 billion. The gross margin outlook has also been lowered to 62% (plus or minus one percentage point), down from the previous expectation of 63% (plus or minus a couple of percentage points).

(Detailed earnings results can be viewed in the blog titled: Intel’s Outlook Overshadows Q2 Beat

Agreement of Analysts

Estimate revisions for the upcoming quarter indicate declining sentiments, with 15 out of 37 analysts making downward revisions in the last 30 days. Also, for fiscal 2012, 22 out of 41 analysts made downward revisions over the same time period.

Analysts, by and large, expect revenue to come in line with the revised guidance of $12.9–13.5 billion and gross margins of 61–63%. They expect most of the weakness in the PC Client segment to be offset by continued growth in Data Center as the company continues to gain share across Server, Storage and Networking.

However, a few analysts expect revenue and earnings to come in below the consensus expectations of $13.2 billion and $0.50, respectively. They continue to believe that the ongoing macro weakness and strong competition from tablets and smartphones will likely hit its core computing market. They believe that a slowdown in Europe and mature markets could be an added concern.

Despite the good top-line numbers, analysts are of the opinion that margins will likely remain under pressure over the next several quarters, as they expect spending on research and development (R&D) to accelerate, given Intel’s focus on multiple areas (core platforms, software, process technology enhancements and the tablet market), which might hurt gross margins.

However, a handful of analysts expect gross margins to benefit from lower factory costs, transition to lower technology node manufacturing, higher shipments and a stronger server business. They believe that the company’s product leadership across server and clients bodes well for margin expansion in the coming quarters.

Magnitude of Estimate Revisions

With the majority of analysts lowering their estimates over the past 30 days, the Zacks Consensus Estimate for the upcoming quarter declined by 3 cents to 50 cents and by 9 cents to $2.14 for fiscal 2012.

Over the 90-day period, the Zacks Consensus Estimate witnessed a significant decline of 15 cents and 31 cents for the third quarter and fiscal 2012, respectively.

The decline clearly echoes the general pessimism surrounding the PC market in 2012. However, market research firm Gartner expects the PC market to recover in 2013.

Recommendation

While Intel remains at the forefront both in terms of process technology and product performance, we expect the company to report in-line third quarter results due to a weak PC market worldwide.

Additionally, though the enterprise segment remains a strong growth area for Intel, management recently stated that Intel is experiencing weak demand in the enterprise PC segment, which has generally been strong for some time now.

We believe that Intel will benefit this year when Microsoft begins selling a new version of its operating system aimed at tablets and other mobile devices. Although Microsoft’s Windows 8 will also be compatible with the ARM architecture, thereby increasing the competition in the server segment, Intel may not be affected much, given the level of its support to system integrators and the broader reach of its products across the world.

However, the weakness in the PC market, consumer spending, distributor inventory levels and increasing competition from ARM-based devices could be the reasons for Intel shares carrying a Zacks #5 Rank, implying a Strong Sell rating for the near term (1–3 months).

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