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Intel (INTC) Down 2.7% Since Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Intel Corporation (INTC - Free Report) . Shares have lost about 2.7% in that time frame, underperforming the market.

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

Recent Earnings

Intel reported fourth-quarter 2016 non-GAAP earnings of $0.79 per share, which increased almost 4% from the year-ago quarter but declined 1.3% sequentially. Earnings per share (EPS) beat the Zacks Consensus Estimate by $0.04.

The strong year-over-year earnings growth was driven by 9.8% increase in revenues, which totaled $16.37 billion and comfortably surpassed the Zacks Consensus Estimate of nearly $15.80 billion. Revenues increased 3.8% sequentially.

The robust year-over-year revenue growth came on the back of impressive results from the Client Computing, Data Center and Internet-of-Things groups, which contributed to almost 88.7% of total revenue in the reported quarter.

Moreover, Intel’s 2017 capital expenditure forecast exhibits continuing investments on the emerging markets. However, revenue growth is expected to remain flat, which will weigh on profitability.

Segment Revenue Details

Client Computing Group (55.8% 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 4.3% year over year and 2.7% sequentially to $9.13 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 were down 4% sequentially and 7% on a year-over-year basis. PC volumes decreased 4% while notebook volumes were flat compared with the year-ago quarter. Tablet volumes continued to decline in the quarter.

Average selling prices (ASPs) increased 6% and 7% on a sequential and year-over-year basis, respectively. The year-over-year increase came from both PC and notebooks, which were up 2% and 3%, respectively.

Data Center Group (28.5% of revenues) – Revenues increased 8.4% year over year and 2.8% sequentially to $4.67 billion. Data Center volume declined 3% sequentially but gained 3% from the year-ago quarter. ASP increased 6% sequentially and 4% from year-ago quarter.

We believe that growing demand for server chips that are used in the data centers from the cloud-based service providers like Amazon.com, Alphabet and Microsoft is a key catalyst for Intel.

Internet of Things Group (4.4% of revenues) – Revenues jumped 16.2% from the year-ago quarter and 5.4% quarter over quarter to $726 million. The growth was backed by strength in retail, video and transportation applications.

Non-Volatile memory solutions group (5% of revenues) – Revenues jumped 24.8% year over year and 25.7% sequentially to $816 million.

Memory is a commodity-type business, so prices vary widely depending on available supply. Intel is expected to launch data storage products based on 3D XPoint technology in 2017, which is encouraging in our view.

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. Further, XPoint is likely to have broader application.

Intel Security Group (3.4% of revenues) – Revenues grew 7.4% year over year and 2.4% sequentially to $550 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 anticipates realizing a pre-tax gain on the sale of roughly $500 million when the transaction closes in second-quarter 2017.

Programmable solutions group (2.6% of revenues) – The Altera business is now the Programmable Solutions Group, declining 1.2% sequentially and generated $420 million in revenues in the last quarter.

Intel also has a residual segment, which includes results of operations from New Technology Group and other adjustments. The segment reported revenues of $65 million up 10.2% from the year-ago quarter and 47.7% on a sequential basis.

Operating Details

The gross margin for the quarter was 63.1%, which contracted 160 basis points (bps) sequentially and 170 bps year over year, better than guided 63%. The contraction resulted from higher factory start-up costs (primarily on 10 nm), higher product warranty, and IP charges and investments on the Non-Volatile Memory Solutions Group as well as Altera acquisition.

Research & development (R&D) and marketing, general & administrative (MG&A) increased 3.8% year over year and 7.2% sequentially to $5.44 billion, lower than management’s guided range of $5.2 billion. As percentage of revenues, R&D and MG&A declined 190 bps on a year-over-year basis but increased 100 bps sequentially in the quarter.

The operating margin was 29.9%, down 270 bps sequentially but up 20 bps year over year. Segment wise, Client Computing group operating margin were 38.6% up 750 bps on a year-over-year basis and 120 bps sequentially. The massive expansion came on the back of lower investments and declining costs.

Data Center group operating margin was 40.3%, as compared with 50.5% in the year-ago quarter and 46.5% in the previous quarter. The decline can be attributed to higher investments on Broadwell, the first 14-nanometer server product.

Internet of Things group operating margin was 25.1% as compared with 21.3% in the year-ago quarter and 27.7% in the previous quarter.

Intel Security group operating margin expanded 330 bps on a year-over-year basis but declined 270 bps sequentially to 18.7%.

Non-Volatile memory solutions group reported loss of $91 million as compared with profit of $24 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 profit of $80 million in the quarter.

Balance Sheet

Cash, marketable securities and fixed income trading asset balance at quarter end was almost $17.10 billion, down $670 million during the quarter.

Intel has $20.65 billion in long-term debt now as well as $4.63 billion in short-term debt, which has led to a net debt balance of $8.18 billion.

Intel paid dividends of $4.9 billion and used $2.6 billion to repurchase 81 million shares in 2016.

Guidance

Intel guided first-quarter 2017 revenues of around $14.8 billion (+/-$500 million), almost flat sequentially. The non-GAAP gross margin is expected to be around 63% (+/-1%). R&D and MG&A expenses are anticipated to come in at around $5.3 billion.

Operating income is projected to be approximately $4.1 billion, while earnings are anticipated to be 65 cents (+/- 5 cents) per share.

For full-year 2017, management expects revenues to remain flat and gross margin of 63% (+/-2%). R&D and MG&A expenses are anticipated to come in at around $20.5 billion (+/- $400 million).

Operating income is projected to be approximately $17.1 billion, while earnings are anticipated to be $2.80 per share.

Full-year capex is now expected to be $12 billion (+/-$500 million) up $2.4 billion from 2016.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last one month period as none of them issued any earnings estimate revisions.

Intel Corporation Price and Consensus

 

Intel Corporation Price and Consensus | Intel Corporation Quote

VGM Scores

At this time, Intel's stock has a nice Growth Score of 'B', though it is lagging a bit on the momentum front with a 'C'.  The stock was allocated a grade of 'B' on the value side, putting it in the second 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.

Our style scores indicate that the stock is more suitable for value and growth investors than momentum investors.

Outlook

Notably, the stock has a Zacks Rank #4 (Sell). We are expecting a below average return from the stock in the next few months.




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