Intel (INTC) Q3 Earnings Preview: Data Center Focus, Win 10 Wildcard
Intel Corp INTC is expected to report third-quarter earnings on Oct 13. Back-to-school demand usually plays a big role in this quarter, but before we get into such details, let’s take a look at what the numbers say:
Intel stock currently has a Zacks Rank #3 (Hold), which, given the negative earnings expected surprise prediction (Earnings ESP) of 1.70%, makes surprise prediction difficult. Note that Intel has a good track record of beating estimates however, having exceeded expectations in each of the last four quarters. Management tends to be conservative and usually revises the outlook if there’s any chance of its missing.
ESP is our proprietary system for determining the likelihood of a positive surprise. When positive and in combination with a Zacks Rank of #1 (strong Buy), #2 (Buy) or #3, it is indicative of a positive surprise. Sell-rated stocks or negative ESP stocks are best avoided going into the earnings announcement.
The Details
Intel guided for both revenue and profit growth on a sequential basis although both numbers are expected to remain below year-ago levels. As far as costs are concerned, Intel is seeing increased cost of sales and R&D, the first being hit by the subsidies it’s offering tablet makers to wrest market share and the second by the continued (and necessary) expenditure on innovation and growth.
Mix remains a positive factor given the strength at the data center and sluggishness in PCs, with the impact of IoT and NAND remaining largely positive.
Data Center: This is the biggest driver of Intel’s business at the moment. In the last quarter, Intel identified five areas with prospects:the cloud (driven by consumer services), network virtualization (includes network workload migration to Intel architecture), network function virtualization, SDN and storage. The goal is to generate 15% growth this year and the company appears is on track so far (it needs to grow at least 15% in both the third and fourth quarters to meet this target).
IoT and NAND: These two segments are also growing but together generate around 10% of Intel’s business, so are smaller influencers. Intel is struggling in IoT and growth is coming in below expectations. The fourth quarter will likely be more of an indicator of where this business is going, so management commentary on IoT will be something to look out for. NAND on the other hand is going strong though details remains scarce at this point. The second half should be even stronger due to broader deployment in cloud computing.
Client/PC/Mobile: This is Intel’s largest segment and includes all things client. Although its revenue contribution continues to shrink, the segment still accounts for close to a 60% share.
IDC estimates that PC shipments declined 10.8% in the third quarter, worse than its expectations for a 9.2% decline. Gartner says that PC shipments will be down 7.3% this year and remain flat in 2016.
Intel is doing a good job of getting into as many devices as possible and shipping as many 14nm products as possible, with the corresponding increases in volumes and pricing having a positive effect on its profitability.
As the PC business stabilizes, growth in other areas will begin to tell on results.
Windows 10 and Skylake: Wildcards
Windows 10 will likely be a negative in the third quarter but could begin to change growth prospects in the fourth. In the last quarter, Microsoft MSFT launched the product rather late, so hardware makers couldn’t build enough inventory.
Microsoft also offered it free to some consumers and claims that its new software already runs on 110 million devices. Add to that the fact that some regions like the Middle East are still attempting to work down Windows 8 inventory and enterprises are testing for bugs, etc. before full-scale deployment (probably next year).
Intel launched its 14nm Skylake chips on schedule, but this is unlikely to affect third-quarter results. This will be followed by the 14nm Kaby Lake next year, as Intel has confirmed that it will take more time to shrink it down to the 10nm Cannonlake.
Intel could be losing its process lead and thereby its competitive advantage, as the shrinking of chip geometries is getting increasingly difficult and expensive. Competitor IBM IBM has come up with a 7nm design, which it expects to ship by 2020. It is also working on carbon nanotube technology to shrink sizes further.
Intel has said little about its plans beyond 7nm for its processors but has announced innovation in memory chip design (3D NAND and 3D XPoint), which it developed jointly with Micron MU.
Summing Up
So far Intel maintains very strong growth expectations for the second half despite the pessimism related to the PC market, but it seems to be executing on its plan, which is positive.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
INTEL CORP (INTC): Free Stock Analysis Report
MICROSOFT CORP (MSFT): Free Stock Analysis Report
INTL BUS MACH (IBM): Free Stock Analysis Report
MICRON TECH (MU): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
