Jul 28, 2017

Intel (INTC) Tops Q2 Earnings Estimates, Raises FY17 Outlook

Intel Corp (INTC - Free Report) reported second-quarter 2017 non-GAAP earnings of 72 cents per share, which surged 22% from the year-ago quarter but declined 8.9% sequentially. Earnings per share (EPS) beat the Zacks Consensus Estimate by 4 cents.


The strong year-over-year earnings growth was driven by 9.1% increase in revenues, which totaled $14.76 billion and beat the Zacks Consensus Estimate of $14.41 billion. Revenues were almost flat sequentially. After adjusting for the Intel Security Group (ISecG) transaction, revenues grew 14%.

The robust year-over-year revenue growth came on the back of impressive results from the Non-volatile memory solutions group, Client Computing and Internet-of-Things groups, which contributed to almost 66.4% of total revenue.

Earnings also benefited from improving unit costs with 14-nm ramp and gains from a sale of a portion of the company's equity investments in ASML.

Intel Corporation Price, Consensus and EPS Surprise

Intel revised its 2017 revenue and EPS outlook based on double-digit growth expectation from data-centric businesses, which accounts for more than 40% of total revenue. Further, anticipated improvement in cost structure and lower spending, primarily due to improving operational efficiency will aid in expansion of margins going forward. Additionally, aggressive share buyback will boost the bottom line in 2017.

Intel has lost 1.4% of its value year to date versus the 14.8% growth of its industry. Despite intensifying competition in the data center chip market from the likes of Advanced Micro Devices (AMD - Free Report) , we expect that these aforesaid factors will help Intel's stock to rebound in the rest of 2017.

Segment Revenue Details

Client Computing Group (55.6% of revenues) – Intel bundles PCs, notebooks, 2-in-1s, tablets and other computing devices under the Client segment, which helps comparison with the PC market numbers provided by IDC and Gartner.

Revenues increased 11.9% year over year and 3% sequentially to almost $8.21 billion. The growth rate was encouraging as it continued to beat PC market trends. Despite some modest improvements in the PC consumption, management continues to expect a mid-single digit TAM decline for the full year.

The company launched new Intel Core X-series processor family including a new Core i9 Extreme Edition processor during the quarter. Intel also began shipping its next-gen4G LTE modem (7480) to customers. Intel is also expected to ship its first 10-nm product near the end of the year.

On a year-over-year basis, platform volumes increased 3%, while platform ASP was up 8%. Desktop platform volumes and ASP were down 1% each. Notebook platform volumes were up 1% and notebook platform ASP was up 6%. Sequentially, platform volumes increased 6%, while platform ASP decreased 2%.

Data Center Group (29.6% of revenues) – Revenues increased 8.6% year over year and 3.3% sequentially to $4.37 billion. Platform volumes increased 7%, while platform ASP was up 1% on a year-over-year basis. Sequentially, platform volumes were up 5% but platform ASP fell 1%.

Per Intel, the cloud service provider revenues advanced 35%. Enterprise was down 11%, while non-CPU adjacencies grew 12% across all of the segments. Commercial service provider revenues grew 17%. Cloud and Commercial service provider now comprise nearly 60% of DCG's revenues.

Intel is on track to deliver end-to-end solutions that address the needs of the 5G market. The company noted that it is participating in five ongoing trials with global service providers, while15 more are in the pipeline.

Recently, the company launched Xeon Scalable (formerly known as Skylake) which is more than 1.6 times faster than the prior-generation product. The new platform accelerates inference throughput for High Performance Computing (HPC), Virtual Reality (VR) and Artificial Intelligence (AI). Notably, the company has already delivered 500,000 units of Xeon Scalable to over 30 customers.

We expect Xeon Scalable to gain strong traction from cloud-based service providers like Amazon.com (AMZN - Free Report) and Alphabet, which will be a key catalyst for Intel.

By 2021, management expects the data center to be a $65 billion opportunity. Intel currently addresses almost 40% of the market. Hence, there is substantial growth prospect as the company develops expertise in adjacencies like Ethernet, Silicon Photonics and 3D XPoint memory.

Internet of Things Group (4.9% of revenues) – Revenues jumped 25.9% from the year-ago quarter but remained almost flat quarter over quarter to $720 million. The growth was backed by strength in industrial, retail, video and transportation applications.

Intel plans to close the acquisition of Israel-based Mobileye, an autonomous vehicle technology provider, in the third quarter of 2017. The deal will help the company to penetrate the $70 billion autonomous driving systems, data and services market.

Non-Volatile memory solutions group (5.9% of revenues) – Revenues jumped 57.8% year over year and 0.9% sequentially to $874 million. Top-line grew from strong demand for data center SSD solutions.

During the quarter, Intel announced the availability of the industry's first, 64-layer 3D NAND SSDs. The company shipped more than 200,000 units of Optane memory in the quarter.

Intel stated that more than 50 data center customers are currently testing Optane SSDs, which will be shipped this year. Management also noted that Optane DIMMs will be available next year.

Intel stated that NAND returned to profitability in the second-quarter, which was ahead of its expectations. Management now anticipates the segment to remain profitable for the rest of the year. Intel also now expects the entire NSG segment to be profitable for the full year of 2018 versus its prior end of 2018 target.

Programmable solutions group (3% of revenues) – The Altera business is now the Programmable Solutions Group, which decreased 5.4% from the year-ago quarter but increased 3.5% sequentially to $440 million.

Intel believes that the segment remains on track to grow mid-single digit for the full year, with broad reacceleration in the second half across all markets.

Microsoft (MSFT - Free Report) is deploying Intel FPGAs to develop the industry's fastest public cloud network and acceleration of deep neural networks. This presents significant growth opportunity for the company.

Moreover, Audi selected Intel's Cyclone V SoC FPGA technology for the Level 3 autonomous driving system in its upcoming A8. The company is also witnessing strong adoption of 14-nm Stratix 10 FPGAs.

Intel also has a residual segment, which now includes results of operations from Internet Security Group, New Technology Group and other adjustments. The segment reported revenues of $144 million down 75% on both year-over-year and sequential basis.    

Operating Details

The gross margin for the quarter was 63%, which contracted 690 basis points (bps) sequentially but expanded 110 bps year over year, in line with management guidance.

Research & development (R&D) and marketing, general & administrative (MG&A) remained almost flat on a year-over-year basis but decreased 5.7% sequentially to $5.13 billion, higher than management's guided figure of $5.20 billion. As percentage of revenues, R&D and MG&A declined 330 bps on a year-over-year basis and 200 bps sequentially in the quarter.

The operating margin was 28.2%, down 490 bps sequentially but increased 450 bps year over year. Segment wise, Client Computing group operating margin were 36.8% as compared with 26% in the year-ago quarter. The massive expansion came on the back of lower investments and declining costs (14 nm). However, on a sequential basis, Client Computing group operating margin contracted 120 bps.

Data Center group operating margin was 38% significantly down from 43.8% in the year-ago quarter. Operating margin was impacted by increased technology development costs and higher spending on AI and adjacency businesses. Sequentially, segment margin expanded 290 bps.

Internet of Things group operating margin expanded 370 bps year over year and 470 bps sequentially. Higher volumes and ASPs were partially offset by continued investment in automotive.

Non-Volatile memory solutions group reported loss of $110 million as compared with loss of $224 million in the year-ago quarter and $129 million in the previous quarter. The loss was primarily due to costs associated with 3D XPoint and start-up costs for the company's memory capacity enhancement project.

Balance Sheet

Cash, marketable securities and fixed income trading asset balance at quarter end was almost $17.30 billion, up $200 million from the previous quarter.

Intel currently has $20.65 billion in long-term debt as well as $4.63 billion in short-term debt, which has led to a net debt balance of $8.18 billion.

During the reported quarter, Intel generated approximately $4.7 billion in cash from operations, paid dividends worth $1.3 billion and bought back shares worth $1.3 billion.

Intel received approximately $900 million cash from the divestiture of its portion in Intel Security.


Intel guided third-quarter 2017 revenues of around $15.7 billion (+/-$500 million), almost flat sequentially and up 3% year over year excluding Intel Security Group business. The projected figure is better than the Zacks Consensus Estimate of $15.35 billion.

The non-GAAP gross margin is expected to be around 63% (+/-2%), flat sequentially. R&D and MG&A expenses are anticipated to come in at around $5.1 billion.

Non-GAAP operating income is projected to be approximately $4.8 billion, while EPS is anticipated to be 80 cents (+/- 5 cents), up 15% on a year-over-year basis. The Zacks Consensus Estimate is currently pegged at 74 cents.

For fiscal 2017, management expects revenues of almost $61.3 billion (+/- $500 million), better than the Zacks Consensus Estimate of $60.19 billion and up $1.3 billion from previous expectation.

Gross margin is anticipated to be 63% (+/-2%), which remains unchanged from the previous expectation.

R&D and MG&A expenses are anticipated to come in at around $20.7 billion, up from previous expectation of $20.5 billion. Intel now expects direct spending to be below 34% (down 160 bps over 2016), approximately 50 bps better than its prior guidance.

Over the long term, the company targets operating expense of 30% of total revenue, which it expects to reach by 2020.

Operating income is projected to be approximately $17.9 billion (up from $17.3 billion), while EPS is now anticipated to be $3.00 (+/- 5%) up from previous guidance of $2.85 and better than the Zacks Consensus Estimate of $2.86.

For the data center group, management expects revenues to grow in the high single digits and operating margin to touch the lower end of its long-term guidance range of 40–45% in 2017. The company expects product costs to improve due to the transition from 22 to 14 nm, which is likely boost margins.

Moreover, Intel expects the memory segment to report profits by the end of 2018.

Intel expects Mobileye to contribute approximately $200 million of revenues, $100 million of operating income and 2 cents of EPS in the second half of 2017.

Full-year capex is still expected to be $12 billion (+/-$500 million) up $2.4 billion from 2016.