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Why Is Intel (INTC) Down 22.6% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Intel (INTC). Shares have lost about 22.6% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Intel Beats on Q1 Earnings & Revenues Top, View Tepid

Intel delivered first-quarter 2019 non-GAAP earnings of 89 cents per share, which beat the Zacks Consensus Estimate by a couple of cents. The figure rose 2.3% from the year-ago quarter but declined 30.5% sequentially.

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

Revenues totaled $16.061billion, beating the Zacks Consensus Estimate of $16.01 billion. However, revenues were marginally below the year ago reported figure of $16.066 billion and declined 13.9% on a quarter-over-quarter basis.

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 decline.

First-Quarter Segment Revenue Details

Client Computing Group or CCG (53.5% 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 increased 4.5% on a year-over-year basis to reach $8.586 billion. Year-over-year growth in notebook (up 5%) drove segment results, which was offset partially by a decline of 3% in desktop revenues.

Management noted strength in the commercial, modem and gaming business. However, PC volumes declined 7% on a year-over-year basis. Meanwhile, Notebook ASP and Desktop ASP increased 13% and 7%, 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.

Intel has opted out of 5G smartphone modem business. The company will not roll out Intel XMN 8165 5G, which was its first 5G modem, scheduled for release around second half of 2019. Further, the company is evaluating prospects in 5G for IoT and data center.

Data Center Group or DCG (30.5% of revenues) — Revenues declined 6.3% year over year to $4.902 billion. Platform volumes declined 8%, while ASP was up 1% 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.

Per Intel, the cloud service provider (CSP) revenues improved 5%. However, revenues from Enterprise & Government, and Commercial service provider declined 21% and 4%, respectively, from the year-ago quarter primarily owing to weaker demand in China.

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. Moreover, in the reported quarter, non-CPU adjacencies improved 2% from the year-ago quarter on the back of strength in silicon photonics and network ASICs.

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 (10.6% of revenues) — Revenues increased 8.3% from the year-ago quarter to $910 million.

Excluding Wind River, which the company divested in the second quarter of 2018, the segment revenues were up 19% 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.

Non-Volatile Memory Solutions Group or NSG (5.9% of revenues) — Revenues declined 12% year over year to $915 million. The decline is primarily owing 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 2.4% from the year-ago quarter to $486 million.

Revenues from Cloud & Enterprise end market declined 55% year over year. This overshadowed robust performance of communications end markets, and strength in embedded products. Management stated that revenues from both advanced FPGA and wireless products surged 30% from the year-ago quarter.

Intel also has a residual segment, — All Other (0.3% of revenues) — which includes results of operations from other adjustments. The segment reported revenues of $53 million, down 36.1% 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 5% collectively on a year-over-year basis.

Mobileye revenues of $209 million were up 38.4% on a year-over-year basis primarily driven by strength in its ADAS and autonomous driving platform-based solutions. Mobileye garnered eight new ADAS design wins from notable global auto companies, which includes first deal win from India, in the reported quarter.

Margins

Non-GAAP gross margin for the third quarter was 58.3%, contracting 400 bps on a year-over-year basis. Further, the figure contracted 340 bps sequentially.

Non-GAAP research & development (R&D) expenses and marketing, general & administrative (MG&A) expenses declined 7% from the year-ago quarter to $4.9 billion.

As percentage of revenues, non-GAAP R&D and MG&A expenses contracted 190 bps on a year-over-year basis to 30.5%.

Non-GAAP operating margin for the quarter was 28% which contracted almost 200 bps on a year-over-year basis and 700 bps sequentially. Management noted that costs pertaining to 10-nm ramp and NAND inventory impacted margins negatively. Although tight spending measures, strength in Platform ASP and improving product mix acted as tailwinds, these factors couldn’t negate the decline.

Segment Operating Margin Details

Segment operating margin was almost 26%, contracting 180 bps on a year-over-year basis but contracting 740 bps sequentially.

CCG operating margin of 35.8% expanded 180 bps from the year-ago quarter primarily on the back of higher ASPs. The figure was lower than the margin of 37.3% reported in the prior quarter.

DCG operating margin was 37.6%, compared with year-ago figure of 49.7% and previous quarter’s reported figure of 50.3%.

IOTG operating margin was 27.6%, up from 23.2% in the previous quarter. The figure expanded 60 bps from the year-ago quarter.

NSG group reported loss of $297 million compared with a loss of $81 million reported in the year-ago quarter and loss of $19 million in the previous quarter.

PSG operating income of $89 million declined 8.2% from the year-ago quarter.

All Other segment reported loss of $850 million compared with a loss of $1.18 billion reported year-ago quarter. Mobileye operating income of $68 million, compared with year-ago figure of $10 million.

Balance Sheet

As of Mar 30, 2019, cash and cash equivalents, short-term investments and fixed-income trading asset balance was almost $12.03 billion compared with $11.65 billion as of Dec 29, 2018.

The company ended the reported quarter with $25.74 billion in long-term debt and $2.75 billion in short-term debt, which has led to a total-debt balance of approximately $28.49 billion.

Intel noted that it has generated approximately $1.6 billion in free cash flow on a year-to-date basis. The company reported $5 billion in cash from operations in the first quarter.

Management noted the investment of $3.3 billion to expand 14-nm capacity and ramp of 10-nm.

In the first quarter, the company returned $3.9 billion to shareholders, which includes dividends worth $1.4 billion and repurchase of 49 million shares worth $2.5 billion. Notably, the company has hiked quarterly cash dividend payout by 5% annually.

Tepid Outlook for Q2

Intel guided second-quarter 2019 revenues of around $15.6 billion, excluding impact from noteworthy transactions that are likely to closed post Apr 25, 2019.

Non-GAAP operating margin is anticipated to be approximately 29%. Management cites an anticipated decline owing to challenges pertaining to NAND pricing declines, and lower platform revenues, and expenses related to 4G modem ramp.

PC centric part of the business is anticipated to be down in high-single digits primarily due to deteriorating ASPs including products with lower core count. Meanwhile Data-centric business is anticipated to be down in high-single digits owing to softness in NAND pricing and sluggishness in data center demand. Management anticipates DCG segment to be flat sequentially.

Non-GAAP earnings are anticipated to be 89 cents per share, down 14% year over year.

Guidance for 2019

For fiscal 2019, management now expects revenues of $69 billion, down 3% year over year compared with the previously guided figure of $71.5 billion.

Gross margin is expected to decline primarily 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%, compared with previously guided figure of 34%.

Non-GAAP earnings are anticipated to be $4.35 per share compared with $4.60 expected earlier.

Intel now expects the tax rate for 2019 to be 12% compared with previous prediction of 13.5% owing to anticipated decline in pretax income. The company continues to project full-year capital expenditure at $15.5 billion. Free cash flow is now expected to be $15 billion compared with previous projection of $16 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -11.82% due to these changes.

VGM Scores

Currently, Intel has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Intel has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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