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Intel (INTC) Down 15.8% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Intel (INTC - Free Report) . Shares have lost about 15.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Intel due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Intel Q3 Earnings & Revenues Top Estimates

Intel reported third-quarter 2020 non-GAAP earnings of $1.11 per share, which beat the Zacks Consensus Estimate by 0.9%. However, the bottom line declined 22% from the year-ago quarter.

Revenues totaled $18.333 billion, surpassing the consensus mark by 0.7%. However, the top line fell 4% on a year-over-year basis.

Segment Revenue Details

Client Computing Group or CCG (53.7% of total revenues) represents Intel’s PC-centric business. The company bundles PCs, notebooks, 2-in-1s, tablets and other computing devices under the Client segment, which aids comparison with the PC market numbers provided by IDC and Gartner.

Revenues were up 1% on a year-over-year basis to $9.847 billion. Solid notebook demand driven by remote working and online learning trends triggered by COVID-19 contributed to the top line.

Notably, Intel is adding wafer capacity to boost PC unit volumes in a bid to meet market demand. The company expanded capacity by more than 25% in 2020 and currently has three high-volume fabs producing 10 nm products to cater to customer demands.

Moreover, the chipmaker’s third 10 nm manufacturing facility in Arizona, is now completely operational and Intel now projects to ship 30% higher 10 nm product volumes in 2020 compared with January anticipations.

Notably, Platform revenues increased 5% year over year to $8.762 billion. Adjacencies revenues declined 18% from the year-ago quarter to $1.085 billion. Notably, CCG adjacencies include modem, connected home products, wireless communications and wired connectivity.

While notebook platform volumes increased 25% year over year, desktop platform volumes declined 18%.

PC volumes grew 11% on a year-over-year basis. Further, Notebook’s average selling price (ASP) declined 7% year over year, while Desktop ASP remained flat.

During the reported quarter, the chip maker introduced 11th Gen Intel Core processors integrated with Intel Iris Xe graphics (formerly dubbed "Tiger Lake"). Management noted that more than 150 designs from major PC makers are in development, with 100 designs set to hit shelves by the end of 2020. Markedly, the new processors are based on Intel's 10 nm SuperFin process technology, which offers performance enhancement when compared to a full-node transition.

Intel anticipates strong momentum in its 11th Gen Intel Core processors to aid it in gaining market share.

Data Center Group or DCG (32.2%) revenues declined 7% year over year to $5.905 billion on sluggish data center demand across enterprise and government end-markets. Nevertheless, solid demand from Cloud service providers (CSP) limited the decline.

Platform revenues were down 11% year over year to $5.151 billion. Adjacencies rose 34% from the year-ago quarter to $754 million on solid uptake of 5G networking solutions.

DCG Platform unit volumes were up 4% year over year, while ASP declined 15% owing to higher networking SoC volume, and weaker enterprise and government volume.

CSP revenues advanced 15% year over year. Further, revenues from Communication service provider increased 4%. Revenues from Enterprise & Government fell 47%.

Internet of Things Group or IOTG revenues declined 33% from the year-ago quarter to $677 million. The coronavirus crisis-induced weakness in retail, vison and industrial end markets led to year-over-year decline.

Mobileye revenues improved 2% on a year-over-year basis to $234 million, courtesy of increasing proliferation of ADAS and ramp of new IQ programs and improvement in automotive production volumes.

Total Internet of Things revenues (5% of total revenues), comprising IOTG and Mobileye, declined 26.2% year over year to $911 million.

Non-Volatile Memory Solutions Group or NSG (6.3%) revenues declined 11% year over year to $1.153 billion on Optane bit decline. However, improvement in NAND pricing trends, which led to higher ASPs, limited the decline.

Notably, during the fourth quarter, Intel announced that it is selling its NAND memory and storage operations to South Korea-based SK hynix for $9 billion.

The sale includes Intel’s NAND component and wafer business, NAND solid state drives (SSD) business but excludes the chipmaker’s Optane modules business operations. The deal also includes Intel’s Dalian NAND memory manufacturing facility located in China.

The NAND business forms a part of Intel’s Non-Volatile memory solutions group (NSG). Selling of non-core operations will help Intel focus on its primary CPU memory chips business. Intel is planning to utilize the proceeds from the sale to augment its business prospects in the fast-emerging markets of 5G networking, Artificial Intelligence (AI), and autonomous edge computing verticals.

Programmable Solutions Group or PSG (2.2%) revenues slumped 19% from the year-ago quarter to $411 million, due to sluggish demand across communications and embedded segments. However, strength across cloud vertical limited decline.

Intel also has a residual segment, All Other (0.6%), which includes results of operations from other adjustments. The segment reported revenues of $106 million, up 58.2% year over year.

Notably, DCG, IOTG, NSG, PSG, Mobileye and All Other business units form the crux of Intel’s data-centric business model. Revenues from the data-centric businesses were $8.486 billion (46.3% of total revenues), down 10% collectively on a year-over-year basis.

Margins

Non-GAAP gross margin in the reported quarter was 54.8%, which contracted 560 basis points (bps) on a year-over-year basis. Management had anticipated non-GAAP gross margin to be 57%.

Decline in data center ASPs, on unfavorable sales mix led to lower-than-expected gross margin levels. The shift of product mix from higher-margined enterprise and government end-markets to cloud and lower PC client ASPs, led by rise in demand for consumer and education PCs, resulted in the downside.

Non-GAAP Research & development (R&D) expenses, and Marketing, General & Administrative (MG&A) expenses decreased 0.8% year over year to $4.655 billion.

Non-GAAP operating income declined 21.7% year over year to $5.396 billion.

Non-GAAP operating margin contracted 650 bps on a year-over-year basis to 29.4%. Management had anticipated non-GAAP gross margin to be 30%. Lower-than-expected gross margin levels negated gains from lower spending.

Segment Operating Margin Details

Segment operating margin was 27.6%, which contracted 600 basis points (bps) on a year-over-year basis.

CCG operating margin was 36%, was down eight points on a year-over-year basis. The contraction can be attributed to higher unit costs pertaining to the production ramp up of 10 nm products.

DCG operating margin of 32% was down 17 points on a year-over-year basis owing to lower revenue base, unfavorable mix of processors, and sluggishness across enterprise and government end-markets. Also, increasing investments on the production ramp up of 10 nm 5G base station SoCs and “pre-PRQ reserves of Ice Lake server products,” led to the contraction of DCG margins.

IOTG operating income came in at $61 million, down 80% year over year, owing to weakness across retail, vision and industrial end markets.

Mobileye’s operating income of $47 million was down 30% year over year, owing to increasing investments on mobility-as-a-service (MaaS).

NSG group reported operating income of $29 million against operating loss of $499 million in the year-ago quarter. The increase was driven by rise in ASPs and unit cost improvements.

PSG operating income of $40 million slumped 57% from the year-ago quarter on lower revenue base and unfavorable product mix.

All Other segment reported a loss of $575 million compared with a loss of $942 million reported in the year-ago quarter.

Balance Sheet

As of Sep 26, 2020, cash and cash equivalents, short-term investments and fixed-income trading asset balance were $18.25 billion compared with $13.53 billion as of Jun 27, 2020.

Total debt as of Sep 26, 2020, was $36.56 billion compared with $38.35 billion as of Jun 27, 2020.

In the third quarter, the company paid out dividends worth $1.4 billion.

During the reported quarter, Intel announced that it will repurchase shares worth $10 billion under the accelerated share repurchase (ASR) agreement by utilizing the existing cash resources. Following the final settlements, Intel will have repurchased a total of approximately $17.6 billion in shares as part of the planned $20.0 billion share repurchases announced in October 2019.

Markedly, to enhance its liquidity position, the chipmaker had announced in March that it is suspending stock repurchases temporarily on account of the COVID-19 crisis.

In the third quarter, the company generated $8.2 billion in cash from operations. On a year-to-date basis, the chipmaker generated $25.5 billion in cash from operations and $15.1 billion of free cash flow and paid dividends of $4.2 billion.

Guidance

For fourth-quarter 2020, Intel expects non-GAAP revenues of $17.4 billion. In the fourth quarter, PC-centric business is anticipated to decline in low-single digits on a year-over-year basis, while data-centric business is projected to decline approximately 25% year-over-year.

Intel anticipates momentum in consumer notebook PCs to continue in the fourth quarter, led by remote working and online trends. Also, increased supply is likely to favor results. Moreover, Mobileye growth is projected to be driven by design win momentum and stabilizing automotive industry. However, sluggish data center demand across enterprise and government end-markets and weakness in data-centric businesses remains a woe.

Non-GAAP gross margin and operating margin is anticipated to be 55% and 26.5%, respectively.

Non-GAAP earnings are likely to be $1.10 per share.

For 2020, Intel raised guidance. The company now projects revenues of $75.3 billion and non-GAAP earnings per share of $4.90, compared with prior guided figures of $75 billion and $4.85, respectively.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Intel has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Intel has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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