Is Intel Stock A Buy Following The Latest Earnings Report

  • Intel has reported mixed Q1 2016 results and issued weak second-quarter guidance.
  • Intel has blamed weak enterprise demand for the weaker than expected performance.
  • Intel still remains optimistic of double-digit growth for DCG which can drive the shares during the second half of the year.

Intel (NASDAQ:INTC) stock was down by as much as 9% in after-market trading after the company delivered mixed Q1 2016 earnings with the company's pivotal Data Center Group performing below expectations. However, the stock price recovered in the subsequent trading session on April 20. Intel reported revenue of $13.8B, good for 8.0% Y/Y growth partly aided by the Altera acquisition, but $30M below the Wall Street consensus. Non-GAAP EPS of $0.54 was up 20% Y/Y and exceeded analysts' consensus by $0.07. GAAP EPS was $0.42, up 2% Y/Y. The healthy earnings were helped by a 130bps Y/Y increase in non-GAAP gross margin to 62.7% and above the guidance mid-point of 62%.

Intel Segment Performance

Intel's segment performance was mixed, with Client Computing delivering a surprise positive growth while the Data Center Group performed below expectations. Further, the company issued light second quarter guidance. Trading in Intel's shares was temporarily halted after the earnings call.

  • Client Computing Group (CCG)-- this segment consists of sales of PCs and mobile CPUs. This is Intel's largest revenue segment accounting for 54% of revenue. CCG revenue was up 2% Y/Y to 7.5B in spite of a very weak PC market. Intel has its Skylake CPU ramp and a positive mix shift to thank for the good performance with the new CPU helping ASP to increase 19% and helping offset a 15% decline in sales volumes. Desktop volume was down 4% with ASP up 6% while notebook volume was down 2% with ASP flat. Intel reported that tablet volume was down 44% but ASP was up significantly. Segment operating profit climbed 34%Y/Y to $1.89B which Intel chalked up to improving mobile margins.
  • Data Center Group (DCG)-- this segment is made up of sales of server and data center chips. Revenue was up 9% Y/Y thanks to strong networking/storage unit growth. That growth benefitted from an extra one week during the quarter and might have been lower. Volume was up 13% but ASP dropped 3%. Intel has been targeting 15% near-term DCG growth so the quarter came in well below expectations. Intel blamed the softness in enterprise for the weaker growth. Meanwhile, the segment's operating profit rose 4% to $1.76B.
  • IoT Group--this is the Internet of Things. Revenue was up 22% to $651M while operating profit climbed 41.3% to $87M.
  • Non-Volatile Memory Solutions Group (NSG)--this segment consists of NAND/NOR flash products. Revenue dropped 6% to $557M with operating loss of $95M compared to operating loss of $72M a year ago.
  • Intel Security Group (ISecG)--McAfee-related revenue. Revenue was up 12% to $537M while operating profit rose to $85M from $15M a year ago.
  • Programmable Solutions Group (PSG)--this consists of FPGA products by Altera. Revenue clocked in at $359M with Intel saying that growth was in the mid-single digit after accounting for $99M in deferred revenue. The segment posted operating loss of $200M due to integration expenses in relation to the acquisition.
  • All Other-New Technology Group (NTG)-- this segment comprises of products designed for drones, wearables, and Intel's perceptual computing efforts. Segment revenue was $50M compared to $76M a year ago with operating loss rising to $994M from $669M in the previous year's comparable quarter.

Light Q2 2016 Guidance

Intel issued light Q2 2016 guidance that came in below Wall Street consensus. The company said it expects Q2 revenue of $13.5B (+/- $500M), below analysts' consensus of $14.16B. The company said that it expects mid-single digit growth for the full-year compared to its previous target of mid-to-high single-digit growth.

In addition to the lower sales guidance, Intel lowered its full-year gross margin guidance from 63% to 62% (+/- 2%).

Intel, however, reiterated its former position on capital expenditure saying that it expects 2016 capex to clock in at $9.5B (+/- $500M).

Massive Job Cuts

In tandem with its first quarter report, Intel announced that it was cutting up to 12k positions (about 11% of its workforce) through a mixture of global site consolidations, re-evaluation of programs, and voluntary/involuntary departures. The company said that most of the layoffs will be effected in the next 60 days.

Intel will take a one-time charge of $1.2B in the second quarter related to the layoffs but said that it expects to reap $1.4B/year worth of cost savings by mid-2017.

Near-Term Weakness Set to Continue

Looking at Intel's latest set of results tells you that the company is still deep in the throes of business model restructuring and product cycle transitions. Intel is gradually moving into an era when data center and Internet of Things will take over from PCs as the company's main growth engines. Although PC's still contribute the lion's share of Intel's revenue, more than 60% of the company's profits now come from non-PC products.

Meanwhile, Intel's decision to pare headcount by a big margin and its relatively lower capex this year, compared to previous years, means the company is keeping a close eye on costs. Intel recently announced a shift in its manufacturing cycles from the traditional tick-tock cycle to longer processes. The company did this ostensibly to lower R&D spending.

Meanwhile, Intel's lowered guidance for the full-year implies that the company does not see the weakness in the enterprise easing off anytime soon. Intel restructuring seems to be working but will take longer than the company and its investors had earlier anticipated.

Right now it appears as if Intel's fortunes will be closely tied to how DCG performs going forward. Interestingly, Intel reiterated its earlier position that it still expects the segment to grow in double-digits:

''And if you take a look at the numbers that Stacy has talked about, they incorporate double-digit growth and it's for exactly those reasons. We believe we have great products that we are introducing with the Broadwell lineup. We have got – we started shipping our first Xeon plus FPGA samples to customers, which was part of our additional gaining more footprint and more performance in certain segments of the Data Center.

We're shipping an Omni-Path Fabric now. Later this year, we will have Silicon Photonics. We've got 3D XPoint starting to be sampled, and will start to ramp later this year. So we're very confident on our Data Center roadmap and we are still absolutely forecasting double-digit growth in that space.''

Intel stock can still rebound during H2 2016 and investors should consider adding to their positions now.

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