Improved Comps Could Lift Intel After Q1 2016 Earnings

  • Intel is due to report Q1 2016 earnings on Apr. 19, 2016 after market close.
  • Intel is expected to report improved top line growth due to the launch of new products and the Altera acquisition.
  • This trend is expected to gain momentum in the coming quarters which could provide significant momentum for Intel stock.

Giant semiconductor chip manufacturer Intel (NASDAQ:INTC) is due to report Q1 2016 earnings on Apr. 19, 2016 after market close. The consensus amongst Wall Street is for Intel to report revenue of $13.93B, good for 8.8% Y/Y growth and EPS of $0.49, up 19.5% Y/Y. Intel's own guidance points to a revenue of $14.1B (10.2% Y/Y growth) and, 62% gross margin (down 100 basis points Q/Q). Meanwhile, there is an earnings whisper that Intel might post EPS of $0.53 and thus beat analysts' consensus estimate.

Intel has managed to beat EPS estimates in four consecutive quarters. During the fourth quarter, Intel beat the top line by $110M and EPS by $0.11.

Intel Earnings Surprise History

Quarter End
Per Share
EPS* Forecast
Dec2015 01/14/2016 0.74 0.63 17.46
Sep2015 10/13/2015 0.64 0.59 8.47
Jun2015 07/15/2015 0.55 0.5 10
Mar2015 04/14/2015 0.41 0.4 2.5

Source: NASDAQ

Data Center Group and 3D NAND in Focus

New Intel president Murthy Renduchintala has been overseeing new changes at the company. Starting with the upcoming earnings report, Intel will revise its presentation and reporting structure into the following units:

  • Client Computing Group (CCG)--PC chip sales
  • Data Center Group (DCG)--Server and data center chips
  • Non-Volatile Memory Solutions Group (NSG)--3D NAND
  • Intel Security Group(ISecG)--McAfee-related revenue
  • Programmable Solutions Group (PSG)--Altera's FPGA products
  • All Other

Intel has essentially done away with the Services and Software Group and introduced PSG and ISecG which will give investors a peek into the performance of McAfee, a company it acquired back in 2011.

Investors will note that Intel's top line is set to record considerable improvement in 2016. Intel has projected that full-year revenue will increase in the mid-to-high single digits in 2016 compared to -1% growth posted in 2015. Meanwhile, the company has projected first-quarter revenue to grow 10% compared to Q1 2015 when revenue was flat Y/Y.

Intel's considerable improvement in comps will mainly be driven by its new PSG segment courtesy of its Altera acquisition which the company closed early in the year. Altera is expected to add 3%-4% to Intel's top line growth in 2016.

Meanwhile, Intel will start shipping its first 3D XPoint products, that the company developed jointly with Micron (NASDAQ:MU), in the current year. Intel will first ship the new product under the Optane brand by integrating it into its SSD products. Intel will later manufacture DDR4-style 3D XPoint products into the future Skylake Xeon E5 server chips.

3D XPoint could offer a significant boost to Intel's DCG segment which is closely watched by investors. DCG is a high-margin segment and one that Intel has been investing in heavily to help offset ongoing weakness in its client computing division, its largest revenue segment.

Intel's DCG has, however, been facing a worrying slowdown. The division grew 11% Y/Y in 2015, to $16B (29% of total) compared to 20%+ growth in previous years. Intel blamed the slowdown on macro weaknesses which weighed on enterprise demand, the primary customers for this segment. DCG is expected to record better growth in 2016 partly due to 3D XPoint and partly due to improving macro economic factors.

During the upcoming earnings call, DCG is likely to see a small improvement which could pick up momentum as the quarters roll on.

Battered Client Computing Group

Intel's Client Computing Group is the company's largest segment, contributing 59% to Intel's top line. CCG segment has posted revenue declines for many quarters, though the declines have been moderating lately. Gartner recently reported that global PC shipments during the first quarter slowed down to their lowest level since 2007 after slipping below 65M units. Shipments declined 9.6% Y/Y to 64.8M shipped units. The growing popularity of smartphones, economic slowdown in China, and a strong dollar was blamed for the malaise. Intel's PC group tends to closely track the broader market so investors should not expect any major positive surprises here.

Investor Takeaway

Intel will report earnings under its new structure for the first time during Q1 2016 earnings call. Investors will be watching to see if DCG and NSG will post good growth to offset the unrelenting weakness in the PC group. Intel stock has been range-bound for months. But the upcoming report might prove enough to give it new upward momentum.

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