Intel (INTC) Beats on Q3 Earnings & Revenues, Hikes '19 View
Management is elated on growing clout of latest high performance Cascade Lake family of Xeon processors 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 witnessing rapid adoption.
In the reported quarter, major cloud vendors, including Amazon Web Services, Alibaba BABA and Google, utilized Cascade Lake family of Xeon processors to deploy complex instances. Moreover, companies like TU Darmstadt and BP opted for 9200 series of highest performance Xeon Scalable platform, to deploy complex workloads.
In the third quarter, Intel’s Optane DC Persistent Memory solution was selected by Oracle to power its latest Exadata platform.
Internet of Things Group or IOTG (5.2%) — Revenues improved 9.4% from the year-ago quarter to $1.005 billion. Growth was driven by strength in transportation and retail applications.
Mobileye revenues (1.2%) of $229 million were up 19.9% on a year-over-year basis primarily driven by growing proliferation of ADAS and new design wins. Mobileye garnered six new design wins in the reported quarter.
Excluding Wind River, which the company divested in second-quarter 2018, IoT businesses, comprising IOTG and Mobileye revenues, are up 18% on a year-to-date basis.
Non-Volatile Memory Solutions Group or NSG (6.7%) — Revenues improved 19.3% year over year to $1.29 billion on momentum in bit growth. However, decline in NAND pricing limited growth.
Programmable Solutions Group or PSG (2.6%) — Revenues improved 2.2% from the year-ago quarter to $507 million on sturdy wireless business. However, weakness in Cloud & Enterprise demand limited growth.
In the reported quarter, Intel shipped the first 10nm process nodes-based Agilex FPGAs.
Intel also has a residual segment, — All Other (0.3%) — which includes results of operations from other adjustments. The segment reported revenues of $67 million, down almost 35% year over year.
Notably, DCG, IOTG, NSG, PSG, Mobileye and All Other business units form the crux of Intel’s data-centric business model. Revenues from data-centric business came in at $9.481 billion (49.4% of total revenues), up 6.2% collectively on a year-over-year basis.
Margins in Detail
Non-GAAP gross margin for the second quarter was 60.4%, contracting 550 bps on a year-over-year basis. Management noted that absence of an anticipated grant pertaining to NAND factory, and better-than-expected NAND revenues had “mixed effects,” which could not be offset by growth DCG revenues.
Non-GAAP research & development (R&D) expenses and marketing, general & administrative (MG&A) expenses declined 7% from the year-ago quarter to $4.7 billion.
Non-GAAP operating margin for the quarter was 35.9%, which contracted almost 380 bps on a year-over-year basis. Management noted that costs pertaining to 10-nm ramp, decline in NAND pricing and lower platform revenues impacted margins negatively. Although tight spending measures and strength in server and client ASPs acted as tailwinds, these factors were unable to mitigate the decline.
Segment Operating Margin Details
Segment operating margin was 33.6%, contracting 470 bps on a year-over-year basis.
CCG operating margin of 44.3% remained flat compared with the year-ago quarter. Decline in CCG revenues limited margin expansion amid reduction in spending driven by exit from 5G smartphone modem business.
DCG operating margin was 48.8%, contracting 140 bps from the year-ago figure.
IOTG operating margin was 30.7%, which contracted 420 bps from the year-ago quarter. IOTG product mix including lower margin products led to 4% decline in operating margin in the quarter.
Mobileye operating income came in at $67 million, up 28.8% year over year.
NSG group reported operating loss of $499 million compared with $160 million operating income in the year-ago quarter, primarily owing to “one-time impacts” which include absence of anticipated grant pertaining to NAND factory.
PSG operating income of $92 million declined 13.2% from the year-ago quarter, primarily owing to unfavorable product mix.
All Other segment reported loss of $942 million compared with a loss of $904 million reported year-ago quarter.
Balance Sheet
As of Sep 28, 2019, cash and cash equivalents, short-term investments and fixed-income trading asset balance was $12.025 billion compared with $11.944 billion in the previous quarter.
The company ended the reported quarter with $23.707 billion in long-term debt and $5.2 billion in short-term debt, which has led to a total-debt balance of $28.907 billion, compared with $28.815 billion total debt in the previous quarter.
Intel noted that it has generated $11.71 billion in free cash flow on a year-to-date basis. The company reported $10.7 billion in cash from operations in the third quarter.
In the third quarter, the company returned approximately $5.9 billion to shareholders, which includes dividends worth $1.4 billion and repurchase of 92 million shares worth $4.5 billion.
Q4 View Holds Promise
Intel guided fourth-quarter 2019 revenues of around $19.2 billion. The Zacks Consensus Estimate is currently pegged at $18.83 billion.
Non-GAAP operating margin is anticipated to be approximately 33.5%.
PC centric part of the business is anticipated to be flat to marginally decline year over year. Meanwhile, NAND pricing growth and recovery in cloud are anticipated to drive Data-centric business up by 6-8%.
Intel is increasing investment in 5G. The company anticipates sale of IMFT facility to Micron MU and 5G smartphone business to Apple AAPL to conclude in the fourth quarter.
Non-GAAP earnings are anticipated to be $1.24 per share. The Zacks Consensus Estimate is currently pegged at $1.20.
Impressive Guidance for 2019
Intel expects to sustain the third-quarter momentum in the fourth quarter. For fiscal 2019, management now expects revenues of $71 billion compared with the previously guided figure of $69.5 billion. The Zacks Consensus Estimate is currently pegged at $69.41 billion.
Gross margin is expected to be approximately 60%, unchanged from the previous guidance due to transition costs related to 10 nm technology and inventory-based adjustments.
Non-GAAP operating margin is now projected to be 32.5%, compared with the previously guided figure of 32%.
Non-GAAP earnings are anticipated to be $4.60 per share compared with $4.40 expected earlier. The Zacks Consensus Estimate is pegged at $4.38.
The company now projects full-year capital expenditure at $16 billion, compared with prior guided figure of $15.5 billion.
Free cash flow is now anticipated at $16 billion for the full year 2019, compared with previously guided figure of $15 billion.
Intel expects to repurchase roughly 20 billion shares over upcoming 15-18 months time period.
Zacks Rank
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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