It has been about a month since the last earnings report for Intel (INTC Quick QuoteINTC - Free Report) . Shares have lost about 13.8% 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 the most recent earnings report in order to get a better handle on the important drivers.

Intel’s Q2 Earnings Surpasses Estimates, Inks Deal With Apple

Intel delivered second-quarter 2019 non-GAAP earnings of $1.06 per share, which beat the Zacks Consensus Estimate of 89 cents. The figure rose 2% from the year-ago quarter and 19.1% sequentially.

Year-over-year earnings growth can be attributed to improvement in revenues, higher IoT ASPs (average selling price), lower share count on account of aggressive share repurchase, and McAfee dividend.

Revenues totaled $16.505 billion, beating the Zacks Consensus Estimate of $15.602 billion and increased 2.8% on a quarter-over-quarter basis. However, revenues were down 3% year over year.

Weakness in demand from China, softness in NAND flash pricing trends, expenses pertaining to 10-nanometer (nm) ramp and constrained supply negatively impacted top-line performance. Further, sluggish data center demand from enterprise and government end markets led to year-over-year decline.

Nonetheless, better-than-expected PC demand particularly in the commercial segment drove the sequentially increase.

Intel to Sell 5G Smartphone Modem Business to Apple

Intel has found a buyer for its failed 5G smartphone modem business in none other than Apple. The company recently announced that Apple will acquire Intel’s smartphone-modem chip business for approximately $1 billion.

Subject to customary closing conditions, the deal is expected to conclude in the fourth quarter of 2019. Notably, around 2,200 of Intel employees will join Apple, along with intellectual property, equipment and leases.

Markedly, earlier WSJ had revealed that Intel is incurring loss of $1 billion annually on its modem operations. Consequently, this news comes as a breather for Intel’s investors.

Second-Quarter Segment Revenue Details

Client Computing Group or CCG (53.6% 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 improved 1% on a year-over-year basis to reach $8.841 billion. The increase can primarily be attributed to robust product mix, better-than-expected demand in commercial PCs and modems.

Management also noted strength in the commercial, modem and gaming business. However, notebook platform volumes declined 2% year over year, while desktop platform volumes declined 11%.

However, PC units declined 5% on a year-over-year basis. Meanwhile, Notebook ASP and Desktop ASP increased 3% and 5%, respectively.

The company also noted that its 10nm-based Ice Lake PC processor remains on track. Notably, management anticipates it to hit the shelves of its OEM partners’ PC systems by holiday season of 2019.

Data Center Group or DCG (30.2% of revenues) — Revenues declined 10% year over year to $4.983 billion. Platform volumes declined 12%, while ASP was up 2% on a year-over-year basis.

Growth was broad-based with strong demand for high-performance products, including Xeon Scalable with strength in Xeon ASPs (which was up double-digit year over year).

Per Intel, the cloud service provider (CSP) revenues declined 1%. Moreover, revenues from Enterprise & Government slumped 31% from the year-ago quarter primarily owing to weaker demand in China. However, revenues from Communication service provider increased 3% year over year.

Intel’s strategy of expanding TAM beyond CPU to adjacent product lines like silicon photonics, fabric, network ASICs, and 3D XPoint memory bodes well in the longer haul.

Intel recently made a slew of announcements at COMPUTEX 2019. The chief attraction of the event was demonstration of the much-awaited 10th generation core processor by Gregory Bryant from the company’s Client Computing Group (CCG). The new 10th Gen CPUs are powered with robust performance features, enhancing productivity of mainstream laptops.

Management is banking on strength in Intel’s latest high performance Cascade Lake family of Xeon processors (having core count of 56) integrated with deep learning (DL) tools to accelerate AI processes. Further, the processors are integrated with Intel’s Optane DC Persistent Memory solution, which is also witnessing rapid adoption.

Internet of Things Group or IOTG (5.9% of revenues) — Revenues improved 12% from the year-ago quarter to $986 million.

Excluding Wind River, which the company divested in the second quarter of 2018, the segment revenues were up 23% from the year-ago quarter. Favorable product mix including higher core products positively impacted results in the quarter. Growth was driven by strength in video and industrial applications.

Mobileye revenues of $201 million were up 16% on a year-over-year basis primarily driven by strength in its ADAS and autonomous driving platform-based solutions. Mobileye garnered 20 new ADAS design wins from notable global auto companies.

Non-Volatile Memory Solutions Group or NSG (5.7% of revenues) — Revenues declined 13% year over year to $940 million. The decline can primarily be attributed to softness in NAND pricing, which is likely to be a headwind through 2019.

Programmable Solutions Group or PSG (3% of revenues) — The Altera and eSAIC business is part of the Programmable Solutions Group. PSG revenues declined 5% from the year-ago quarter to $489 million.

Weakness in Cloud & Enterprise demand impacted the segment. Management stated that revenues from advanced FPGA products which included 28nm and 14nm process nodes surged 15% from the year-ago quarter.

Intel also has a residual segment, — All Other (0.4% of revenues) — which includes results of operations from other adjustments. The segment reported revenues of $65 million, up 80.6% year over year.

Notably, 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 declined 7% collectively on a year-over-year basis and came in at $7.7 billion.

Margins

Non-GAAP gross margin for the second quarter was 61.6%, contracting 140 bps on a year-over-year basis.

Non-GAAP research & development (R&D) expenses and marketing, general & administrative (MG&A) expenses declined 1% from the year-ago quarter to $5 billion.

Non-GAAP operating margin for the quarter was 31.1% which contracted almost 190 bps on a year-over-year basis. Management noted that costs pertaining to 10-nm ramp, NAND pricing and lower revenues impacted margins negatively. Although tight spending measures, strength in Platform ASP and improving product mix acted as tailwinds, these factors were unable to mitigate the decline.

Segment Operating Margin Details

Segment operating margin was almost 27.9%, contracting 320 bps on a year-over-year basis.

CCG operating margin of 42% expanded 500 bps from the year-ago quarter primarily on the back higher ASPs, robust revenue growth and product mix and lower cost of sales.

DCG operating margin was 36%, compared with year-ago figure of 49%, primarily on account of higher investment pertaining to 10-nm transition.

IOTG operating margin was 1.8%, which expanded 40 bps from the year-ago quarter, primarily due to robust demand for higher-performance products.

Mobileye operating income of $53 million, compared with year-ago figure of $44 million.

NSG group reported a loss of $284 million compared with a loss of $65 million in the year-ago quarter, primary owing to softness in ASP.

PSG operating income of $52 million declined 49% from the year-ago quarter, primarily owing to lower revenue base, unfavorable product mix and increased cost of 10nm ramp.

All Other segment reported loss of $1.035 billion compared with a loss of $1.021 billion reported year-ago quarter.

Balance Sheet

As of Jun 29, 2019, cash and cash equivalents, short-term investments and fixed-income trading asset balance was almost $11.94 billion compared with $12.03 billion in the previous quarter.

The company ended the reported quarter with $25.089 billion in long-term debt and $3.726 billion in short-term debt, which has led to a total-debt balance of approximately $28.815 billion, compared with $28.49 billion total debt in the previous quarter

Intel noted that it has generated approximately $5.7 billion in free cash flow on a year-to-date basis. The company reported $7.6 billion in cash from operations in the second quarter.

In the second quarter, the company returned $4.46 billion to shareholders, which includes dividends worth $1.41 billion and repurchase of 67 million shares worth $3 billion.

Outlook for Q3

Intel guided third-quarter 2019 revenues of around $18 billion, excluding impact from sell of its smartphone modem business.

Non-GAAP operating margin is anticipated to be approximately 35%.

PC centric part of the business is anticipated to be down in mid-single digits primarily due to deteriorating ASPs including products with lower core count. Meanwhile, Data-centric business is also anticipated to be down in mid-single digits owing to softness in NAND pricing and sluggishness in data center demand.

Non-GAAP earnings are anticipated to be $1.24 per share, down 14% year over year.

Guidance for 2019

For fiscal 2019, management now expects revenues of $69.5 billion compared with the previously guided figure of $69 billion.

Gross margin is expected to be approximately 60%. Unchanged from the previous guidance due to growth in the adjacent businesses and transition costs related to 10 nm technology partially offset by increased focus on limiting operational expenses. Non-GAAP operating margin is projected to be 32%, unchanged from the previous guidance.

Non-GAAP earnings are anticipated to be $4.40 per share compared with $4.35 expected earlier.

The company continues to project full-year capital expenditure at $15.5 billion. Free cash flow remains unchanged at $15 billion for the full year 2019.

How Have Estimates Been Moving Since Then?

Estimates review followed an upward path over the past two months. The consensus estimate has shifted 8.06% due to these changes.

VGM Scores

At this time, Intel has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Following the exact same course, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Intel has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.