It has been about a month since the last earnings report for Intel Corporation (INTC - Free Report) . Shares have added about 3.2% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is INTC due for a pullback? 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.
Intel delivered first-quarter 2018 non-GAAP earnings of 87 cents per share, which beat the Zacks Consensus Estimate by 16 cents. The figure surged 31.8% from the year-ago quarter but declined 19.4% sequentially.
Strong earnings growth was driven by better-than-expected top-line performance, operating margin expansion and lower effective tax-rate.
Revenues totaled $16.07 billion, up 8.6% year over year but down 5.8% quarter over quarter. The figure surpassed the Zacks Consensus Estimate of $15.03 billion. After adjusting for the McAfee (formerly Intel Security Group) transaction, revenues grew 13%.
Intel adopted new accounting standard that positively impacted the top line by $462 million in incremental revenues.
The year-over-year improvement came on the back of impressive results from the Data Center Group (DCG), Internet-of-Things Group (IOTG), Non-Volatile Memory Solutions (NSG) and Programmable Solutions Group (PSG). These segments along with MobilEye form the crux of Intel’s data-centric business model, which contributed almost 49% of total revenues.
Management stated that data-centric businesses were up 25% collectively, with each business individually growing in double digits.
Segment Revenue Details
Client Computing Group or CCG (51.2% of revenues) — Intel 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 increased 3.1% on a year-over-year basis but decreased 8.2% sequentially to $8.22 billion. Strength in notebook (up 4%), desktop (up 2%) and modem was reflected in year-over-year growth.
Management noted strength in the commercial and gaming business. On a year-over-year basis, PC volumes were flat. Notebook ASP inched up 1%, while Desktop ASP increased 7%.
Intel launched first-ever i9 processors for laptops in the reported quarter. Management stated that the company continues to make progress towards 10-nanometer (nm) process. Volume production is now expected to happen in 2019, instead of the prior expectation of second-half 2018, primarily due to yield issues.
Data Center Group or DCG (32.6% of revenues) — Revenues surged 23.7% year over year but declined 6.2% sequentially to $5.23 billion. Platform volumes increased 16%, while platform ASP was up 7% on a year-over-year basis. Growth was broad-based with strong demand for high-performance products (including Xeon Scalable) drove ASPs.
Per Intel, the cloud service provider revenues advanced 45%. Cloud business surpassed $2 billion in revenues in the reported quarter. Enterprise & Government was up 3%. Commercial service provider revenues grew 33%. Cloud and Commercial service provider were greater than 60% of DCG's revenues.
Intel’s strategy of expanding TAM beyond CPU to adjacent product lines like silicon photonics, fabric, network ASICs, and 3D XPoint memory is bearing fruit. The top line grew 16% from the year-ago quarter.
Internet of Things Group or IOTG (5.2% of revenues) — Revenues jumped 16.5% from the year-ago quarter but declined 4.4% quarter over quarter to $840 million. Growth was driven by strength in retail and video applications.
Intel recently announced that it will divest Wind River, which will help in improving focus on the core IOTG segment.
Non-Volatile Memory Solutions Group or NSG (6.5% of revenues) — Revenues jumped 20.1% year over year and 17% sequentially to $1.04 billion driven by strong demand for data center SSD solutions.
Intel launched its first mainstream Optane SSDs for clients, known as the 800 Series, during the quarter.
Programmable Solutions Group or PSG (3.1% of revenues) — The Altera business is now the Programmable Solutions Group, which increased 17.2% from the year-ago quarter but declined 12.3% sequentially to $498 million.
Strength in data center and embedded products drove top-line growth. PSG's data center segment surged 150% from the year-ago quarter. Management stated that revenues from advanced FPGA products (28, 20 and 14-nm) grew 40% from the year-ago quarter.
Customer base continued to expand as PSG won more customer designs in the quarter. Notably, Microsoft is using Intel's FPGAs to power new Bing intelligent search features using real-time Artificial Intelligence (AI).
Intel also has a residual segment, which now includes results of operations from MobilEye, New Technology Group and other adjustments. The segment reported revenues of $234 million down 59.4% year over year but up 29.3% sequentially.
Mobileye generated $151 million in revenues. The company has started testing autonomous vehicles in Israel and is anticipated to expand trials in other geographies soon. Intel recently won a high-volume design contract from and European premium vehicle manufacturer for its EyeQ5 technology.
The gross margin for the quarter was 62.3%, which contracted 100 basis points (bps) on a year-over-year basis and 260 bps sequentially.
Research & development (R&D) expenses and marketing, general & administrative (MG&A) expenses decreased 3.7% on a year-over-year basis but increased 1.7% sequentially to $5.21 billion.
As percentage of revenues, R&D and MG&A declined 410 bps on a year-over-year basis but increased 240 bps sequentially in the quarter.
Intel stated that total spending declined 6% in the reported quarter.
Segment operating margin was 27.8%, up 330 bps year over year but declined 380 bps sequentially.
CCG operating margin declined 34% from 38% in the year-ago quarter. The drop can be attributed to higher transition costs to 10-nm. On a sequential basis, CCG operating margin contracted 250 bps.
DCG operating margin was 49.7%, significantly up from 35.1% delivered in the year-ago quarter. Operating margin was affected by increased technology development costs and higher spending on AI and adjacency businesses. Sequentially, segment margin contracted 390 bps.
IOTG operating margin was 27% up from 14.6% in the year-ago quarter. Sequentially, segment operating margin contracted 260 bps.
NSG group reported a loss of $81 million as compared with a loss of $129 million in the year-ago quarter. Notably, the segment had an income of $31 million in the previous quarter. The narrower year-over-year loss was primarily due to strong gigabyte demand and unit cost reductions, which partially offset lower ASPs.
Intel stated that the transition to 64 layers 3D NAND is improving cost. The company continues to invest in and expand the Dalian factory.
PSG reported operating income of $97 million, up 5.4% year over year but down 37.8% sequentially.
Mobileye generated operating income of $39 million.
As of Mar 31, 2018, cash, marketable securities and fixed-income trading asset balance was almost $16.20 billion as compared with $14 billion as of Dec 30, 2017.
Intel currently has $24.77 billion in long-term debt as well as $3.84 billion in short-term debt, which has led to a net-debt balance of $12.41 billion.
During the reported quarter, Intel generated approximately $6.3 billion in cash from operations, paid dividends worth $1.4 billion and bought back shares worth $1.9 billion.
Intel guided second-quarter 2018 revenues of around $16.3 billion (+/-$500 million), up 10% year over year. The projected figure is better than the Zacks Consensus Estimate of $15.45 billion.
Gross margin is expected to decline almost 1.5 percentage points on higher 10-nm related costs and adjacency ramp. Spending is expected to fall 3 percentage points.
Non-GAAP operating margin is projected to be approximately 30%. Intel now expects to achieve total spending target of 30% of revenues in 2018, two years ahead of its original target of 2020.
Earnings are anticipated to be 85 cents (+/- 5 cents) per share, up 18% on a year-over-year basis. The Zacks Consensus Estimate is currently pegged at 80 cents.
For 2018, management expects revenues of almost $67.5 billion (+/- $1 billion), better than the Zacks Consensus Estimate of $64.82 billion and up $2.5 billion from previous expectation.
Gross margin is expected to remain unchanged over 2017.
R&D and MG&A expenses are anticipated at around $20.7 billion, up from previous expectation of $20.5 billion. Intel now envisions direct spending to be below 33% (down 200 bps over 2016), approximately 10 bps better than its prior guidance.
Operating margin is projected to be approximately 31%, up from previous guidance of roughly 30%.
Earnings are now anticipated to be $3.85 (+/- 5%) per share, up from previous guidance of $3.55 and better than the Zacks Consensus Estimate of $3.54.
For the data-center group, management still expects revenues to grow in the high-single digits and operating margin greater than the lower end of its long-term guidance range of 40-45% in 2017.
Moreover, Intel expects NSG segment to report profits by the end of 2018.
Intel now expects a full-year tax rate of 13%, 1 point down compared with previous guidance.
Full-year capex is expected to be $14.5 billion (+/-$500 million), up from previous guidance of $14 billion. Net capital deployed, which is capital spending offset by expected prepaid supply agreements in Intel’s memory business, is projected to be $12.5 billion (+/-$500 million).
Free cash flow is now projected to be $14.5 billion, up from previous guidance of $13 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There have been 14 revisions higher for the current quarter. In the past month, the consensus estimate has shifted by 6.8% due to these changes.
At this time, INTC has a strong Growth Score of A, a grade with the same score on the momentum front. Charting a somewhat similar path, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is more suitable for growth and momentum investors than value investors.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, INTC has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.