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Intel (INTC) Beats on Q3 Earnings & Revenues, Ups '18 View

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Intel (INTC - Free Report) delivered third-quarter 2018 non-GAAP earnings of $1.40 per share, which beat the Zacks Consensus Estimate by 25 cents. The figure surged 45.8% from the year-ago quarter and 33.3% sequentially.

Strong earnings growth was driven by better-than-expected top-line performance, operating margin expansion and lower effective tax-rate.

Revenues totaled $19.163 billion, up 18.7% year over year and 13% quarter over quarter. The figure comfortably surpassed the Zacks Consensus Estimate of $18.115 billion.

The year-over-year improvement came on the back of impressive results from both data-centric and PC-centric businesses.

Shares were up more than 5% in after-hour trading. Intel’s stock has returned 4.8% in the past year, against the industry's decline of 0.5%.

Segment Revenue Details

Client Computing Group or CCG (53.4% of revenues) — Intel’s PC-centric business is represented by this segment. 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 increased a record 15.5% on a year-over-year basis and 17.3% sequentially to $10.23 billion. Strength in notebook (up 13%), desktop (up 9%) and modem was reflected in year-over-year growth. The Zacks Consensus Estimate for CCG was pegged at $9.289 billion.

Management noted strength in the commercial and gaming business. On a year-over-year basis, PC volumes were up a record 6%. Notebook ASP was up 4%, while Desktop ASP increased 10%.

Additionally, the company introduced new 8th Gen Intel Core processors in the reported quarter in a bid to offer an ultra-portable laptop experience. Intel’s dominance in CPU market is anticipated to improve with the new processors for sleek laptops. The new CPUs are likely to pave the way for ultra-thin PCs.

The company also introduced the Intel Core i9-9900K gaming processor.

Data Center Group or DCG (32% of revenues) — Revenues surged 25.9% year over year and soared 10.6% sequentially to $6.14 billion. Platform volumes increased 15%, while platform ASP was up 10% on a year-over-year basis. Growth was broad-based with strong demand for high-performance products (including Xeon Scalable) driving ASPs.

Per Intel, the cloud service provider revenues advanced 50%. Cloud business grew 50% on the back of diversified customer base. Enterprise & Government inched up 1%. Commercial service provider revenues grew 30%. Cloud and Commercial service provider were greater than 66% 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. Non-CPU adjacencies grew 14% from the year-ago quarter.

The company’s first Optane DC Persistent Memory has been selected by the likes of Alphabet’s (GOOGL - Free Report) Google, Microsoft (MSFT - Free Report) and Alibaba (BABA - Free Report) .

Further, Intel Xeon Scalable noted 95 new performance records globally as robust adoption continues. Taboola and Rolls-Royce remain notable customer wins for Xeon.

Internet of Things Group or IOTG (4.8% of revenues) — Revenues jumped 8.2% from the year-ago quarter and improved 4.4% quarter over quarter to $919 million. Growth was driven by strength in retail and video applications.

Excluding Wind River, which the company divested in the previous quarter, the segment revenues were up 19% from the year-ago quarter on broad based strength in business strength.

Non-Volatile Memory Solutions Group or NSG (5.6% of revenues) — Revenues surged 21.3% year over year and inched 0.2% sequentially to $1.08 billion driven by strong demand for data center SSD solutions and Optane drives.

Intel offers Optane SSDs for clients and 3D NAND technologies, which helps in driving innovation in solid-state drives (SSDs) and other memory products.

Management noted that 50% of company’s data center and client SSDs have shifted to 64-layer 3D NAND, which is improving cost per gigabyte.

Programmable Solutions Group or PSG (2.6% of revenues) — The Altera and eSAIC business is now the Programmable Solutions Group. It increased 5.8% from the year-ago quarter but declined 4.1% sequentially to $496 million.

Strength in data center and embedded products drove top-line growth. PSG's data center segment surged 45% from the year-ago quarter. Management stated that revenues from advanced FPGA products (28, 20 and 14-nm) grew 55% from the year-ago quarter.

Intel strengthened its PSG product portfolio with eASIC buyout, by introducing the new Programmable Acceleration Card (“PAC”) with Intel Stratix 10 SX FPGA.

Intel also has a residual segment, — All Other (1.5% of revenues) — which includes results of operations from MobilEye, New Technology Group and other adjustments. The segment reported revenues of $294 million, up 45.5% year over year and up 40.7% sequentially.

DCG, IOTG, NSG, PSG and All Other business units form the crux of Intel’s data-centric business model. Management stated that data-centric businesses were up 22% collectively, primarily due to strength in cloud and communication service provider domains.

Mobileye revenues of $191 million were up approximately 50% on a year-over-year basis primarily driven by strength in its ADAS and autonomous driving platforms-based solutions. Mobileye garnered eight new design wins from notable US and global automaker companies in the quarter under review, taking the total to 20 on a year-to-date basis.

Intel Corporation Price, Consensus and EPS Surprise

Intel Corporation Price, Consensus and EPS Surprise | Intel Corporation Quote


Non-GAAP gross margin for the third quarter was 65.9%, expanding 190 basis points (bps) on a year-over-year basis and 290 bps sequentially.

Non-GAAP operating margin for the quarter was 39.7% which expanded 510 bps, registering the company’s highest operating margin since 2011.

Non-GAAP research & development (R&D) expenses and marketing, general & administrative (MG&A) expenses increased 5.8% on a year-over-year basis to $5.03 billion.

As percentage of revenues, R&D and MG&A declined 320 bps on a year-over-year basis in the quarter under review.

Segment Operating Margin Details

Segment operating margin was 38.3%, up 650 bps year over year and 530 bps sequentially.

CCG operating margin was 44.3%, up from 40.6% in the year-ago quarter. The increase can be attributed to strong product mix and higher ASPs on the back of customer preference. On a sequential basis, CCG operating margin expanded 720 bps.

DCG operating margin was 50.2%, up from 46.2% delivered in the year-ago quarter. Sequentially, segment margin expanded 120 bps.

IOTG operating margin was 34.9%, up from 17.2% in the year-ago quarter. Sequentially, segment operating margin expanded 730 bps.

NSG group reported operating income of $160 million comparing favorably with a loss of $52 million in the year-ago quarter. Notably, the segment had reported loss of $65 million in the previous quarter. The narrower year-over-year loss was primarily owing to strong gigabyte demand and unit cost reductions, which partially offset lower ASPs.

PSG reported operating income of $106 million, down 6.2% year over year but up 5% sequentially.

All Other segment reported loss of $852 million compared with loss of $921 million reported year-ago and $977 million in the previous quarter.

Balance Sheet

As of Sep 29, 2018, cash and cash equivalents, short-term investments and fixed-income trading asset balance was almost $13.19 billion compared with $12.22 billion as of Jun 30, 2018.

Intel currently has $24.82 billion in long-term debt as well as $3.05 billion in short-term debt, which has led to a net-debt balance of $27.87 billion.

During the reported quarter, Intel generated approximately $8.8 billion in cash from operations, paid dividends worth $1.4 billion and bought back 50 million shares worth $2.7 billion.

Intel reported free cash flow of $11.24 billion for the nine months ended Sep 29, 2018.

Outlook for Q4

Intel guided fourth-quarter 2018 revenues of around $19 billion, up 11% year over year. The projected figure is better than the Zacks Consensus Estimate of $18.37 billion.

Gross margin is anticipated to come in at 62%. Non-GAAP operating margin is anticipated to be approximately 34.5%.

Earnings are anticipated to be $1.22 per share, up 13% on a year-over-year basis. The Zacks Consensus Estimate is currently pegged at $1.10.

Intel projects DCG revenues to come in at approximately $6.3 billion. Owing to supply constraints, IoTG revenue are anticipated to decline 15% on a sequential basis.

Revised 2018 Guidance

For 2018, management expects revenues of almost $71.2 billion higher than the Zacks Consensus Estimate of $69.51 billion and up $1.7 billion from previous expectation. The company anticipates data-centric and PC-centric businesses to grow 20% and 9%, respectively, on a year-over-year basis.

Intel now expects to achieve total spending target of 29% of revenues in 2018. Operating margin is projected to be approximately 34.5%, up from previous guidance of roughly 32%.

Earnings are now anticipated to be around $4.53 per share, up 38 cents from previous guidance and better than the Zacks Consensus Estimate of $4.16.

Management expects data-centric business to grow year over year by approximately 20% and PC-centric business by 9%. Intel anticipates NSG segment to be at break-even for 2018 owing to a tough NAND pricing environment and investments in 3D XPoint technology.

Intel now expects a full-year tax rate of 12%, down by 0.5% when compared with previous guidance.

Full-year capex is expected to be $15.5 billion, up from previous guidance of $15 billion. Net capital deployed, which is capital spending offset by expected prepaid supply agreements in Intel’s memory business, is projected to be $14 billion.

Free cash flow is now projected to be $15.5 billion, up from previous guidance of $15 billion.

Zacks Rank

Currently, Intel carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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