Intel (INTC) Q3 Earnings Beat, Stock Down on Weak Sales Mix
Intel INTC reported third-quarter 2020 non-GAAP earnings of $1.11 per share, which beat the Zacks Consensus Estimate by 0.9%. However, the bottom line declined 22% from the year-ago quarter.
Revenues totaled $18.333 billion, surpassing the consensus mark by 0.7%. However, the top line fell 4% on a year-over-year basis.
Although the chipmaker reported better-than-expected third-quarter results and provided encouraging guidance for 2020, unfavorable mix of lower margined chips sales led to more than 10% decline in share price in the pre-market trading on Oct 23.
Notably, Intel stock has declined 10% year to date against industry’s rally of 34%.
Segment Revenue Details
Client Computing Group or CCG (53.7% of total revenues) represents Intel’s PC-centric business. 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 were up 1% on a year-over-year basis to $9.847 billion. Solid notebook demand driven by remote working and online learning trends triggered by COVID-19 contributed to the top line.
Notably, Intel is adding wafer capacity to boost PC unit volumes in a bid to meet market demand. The company expanded capacity by more than 25% in 2020 and currently has three high-volume fabs producing 10 nanometer (nm) products to cater to customer demands.
Moreover, the chipmaker’s third 10 nm manufacturing facility in Arizona, is now completely operational and Intel now projects to ship 30% higher 10 nm product volumes in 2020 "compared with January anticipations."
Notably, Platform revenues increased 5% year over year to $8.762 billion. Adjacencies revenues declined 18% from the year-ago quarter to $1.085 billion. Notably, CCG adjacencies include modem, connected home products, wireless communications and wired connectivity.
While notebook platform volumes increased 25% year over year, desktop platform volumes declined 18%.
PC volumes grew 11% on a year-over-year basis. Further, Notebook’s average selling price (ASP) declined 7% year over year, while Desktop ASP remained flat.
During the reported quarter, the chip maker introduced 11th Gen Intel Core processors (formerly dubbed "Tiger Lake") integrated with Intel Iris Xe graphics. Management noted that more than 150 designs from major PC makers are in development, with 100 designs set to hit shelves by the end of 2020. Markedly, the new processors are based on Intel's 10 nm SuperFin process technology, which offers performance enhancement when compared to a full-node transition.
Intel anticipates strong momentum in its 11th Gen Intel Core processors to aid it in gaining market share.
Intel Corporation Price, Consensus and EPS Surprise
Data Center Group or DCG (32.2%) revenues declined 7% year over year to $5.905 billion on sluggish data center demand across enterprise and government end-markets. Nevertheless, solid demand from Cloud service providers (CSP) limited the decline.
Platform revenues were down 11% year over year to $5.151 billion. Adjacencies rose 34% from the year-ago quarter to $754 million on solid uptake of 5G networking solutions.
DCG Platform unit volumes were up 4% year over year, while ASP declined 15% owing to higher networking SoC volume, and weaker enterprise and government volume.
CSP revenues advanced 15% year over year. Further, revenues from Communication service provider increased 4%. Revenues from Enterprise & Government fell 47%.
Internet of Things Group or IOTG revenues declined 33% from the year-ago quarter to $677 million. The coronavirus crisis-induced weakness in retail, vison and industrial end markets led to year-over-year decline.
Mobileye revenues improved 2% on a year-over-year basis to $234 million, courtesy of increasing proliferation of ADAS and ramp of new IQ programs and improvement in automotive production volumes.
Total Internet of Things revenues (5% of total revenues), comprising IOTG and Mobileye, declined 26.2% year over year to $911 million.
Non-Volatile Memory Solutions Group or NSG (6.3%) revenues declined 11% year over year to $1.153 billion on Optane bit decline. However, improvement in NAND pricing trends, which led to higher ASPs, limited the decline.
Notably, during the fourth quarter, Intel announced that it is selling its NAND memory and storage operations to South Korea-based SK hynix for $9 billion.
The sale includes Intel’s NAND component and wafer business, NAND solid state drives (SSD) business but excludes the chipmaker’s Optane modules business operations. The deal also includes Intel’s Dalian NAND memory manufacturing facility located in China
The NAND business forms a part of Intel’s Non-Volatile memory solutions group (NSG). Selling of non-core operations will help Intel focus on its primary CPU memory chips business. Intel is planning to utilize the proceeds from the sale to augment its business prospects in the fast-emerging markets of 5G networking, Artificial Intelligence (AI), and autonomous edge computing verticals.
Programmable Solutions Group or PSG (2.2%) revenues slumped 19% from the year-ago quarter to $411 million, due to sluggish demand across communications and embedded segments. However, strength across cloud vertical limited decline.
Intel also has a residual segment, All Other (0.6%), which includes results of operations from other adjustments. The segment reported revenues of $106 million, up 58.2% 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 the data-centric businesses were $8.486 billion (46.3% of total revenues), down 10% collectively on a year-over-year basis.
Non-GAAP gross margin in the reported quarter was 54.8%, which contracted 560 basis points (bps) on a year-over-year basis. Management had anticipated non-GAAP gross margin to be 57%.
Decline in data center ASPs, on unfavorable sales mix led to lower-than-expected gross margin levels. The shift of product mix from higher-margined enterprise and government end-markets to cloud and lower PC client ASPs, led by rise in demand for consumer and education PCs, resulted in the downside.
Non-GAAP Research & development (R&D) expenses, and Marketing, General & Administrative (MG&A) expenses decreased 0.8% year over year to $4.655 billion.
Non-GAAP operating income declined 21.7% year over year to $5.396 billion.
Non-GAAP operating margin contracted 650 bps on a year-over-year basis to 29.4%. Management had anticipated non-GAAP gross margin to be 30%. Lower-than-expected gross margin levels negated gains from lower spending.
Segment Operating Margin Details
Segment operating margin was 27.6%, which contracted 600 basis points (bps) on a year-over-year basis.
CCG operating margin was 36%, was "down eight points" on a year-over-year basis. The contraction can be attributed to higher unit costs pertaining to the production ramp up of 10 nm products.
DCG operating margin of 32% was "down 17 points" on a year-over-year basis owing to lower revenue base, unfavorable mix of processors, and sluggishness across enterprise and government end-markets. Also, increasing investments on the production ramp up of 10 nm 5G base station SoCs and “pre-PRQ reserves of Ice Lake server products,” led to the contraction of DCG margins.
IOTG operating income came in at $61 million, down 80% year over year, owing to weakness across retail, vision and industrial end markets.
Mobileye’s operating income of $47 million declined 30% year over year, owing to increasing investments on mobility-as-a-service (MaaS).
NSG group reported operating income of $29 million against operating loss of $499 million in the year-ago quarter. The increase was driven by rise in ASPs and unit cost improvements.
PSG operating income of $40 million slumped 57% from the year-ago quarter on lower revenue base and unfavorable product mix.
All Other segment reported a loss of $575 million compared with a loss of $942 million reported in the year-ago quarter.
As of Sep 26, 2020, cash and cash equivalents, short-term investments and fixed-income trading asset balance were $18.25 billion compared with $13.53 billion as of Jun 27, 2020.
Total debt as of Sep 26, 2020, was $36.56 billion compared with $38.35 billion as of Jun 27, 2020.
In the third quarter, the company paid out dividends worth $1.4 billion.
During the reported quarter, Intel announced that it will repurchase shares worth $10 billion under the accelerated share repurchase (ASR) agreement by utilizing the existing cash resources. Following the final settlements, Intel will have repurchased a total of approximately $17.6 billion in shares as part of the planned $20.0 billion share repurchases announced in October 2019.
Markedly, to enhance its liquidity position, the chipmaker had announced in March that it is suspending stock repurchases temporarily on account of the COVID-19 crisis.
In the third quarter, the company generated $8.2 billion in cash from operations. On a year-to-date basis, the chipmaker generated $25.5 billion in cash from operations and $15.1 billion of free cash flow and paid dividends of $4.2 billion.
For fourth-quarter 2020, Intel expects non-GAAP revenues of $17.4 billion. The Zacks Consensus Estimate is currently pegged at $17.28 billion, suggesting decline of 14.5% year over year.
In the fourth quarter, PC-centric business is anticipated to decline in low-single digits on a year-over-year basis, while data-centric business is projected to decline approximately 25% year-over-year.
Intel anticipates momentum in consumer notebook PCs to continue in the fourth quarter, led by remote working and online trends. Also, increased supply is likely to favor results. Moreover, Mobileye growth is projected to be driven by design win momentum and stabilizing automotive industry. However, sluggish data center demand across enterprise and government end-markets and weakness in data-centric businesses remains a woe.
Non-GAAP gross margin and operating margin is anticipated to be 55% and 26.5%, respectively.
Non-GAAP earnings are likely to be $1.10 per share. The Zacks Consensus Estimate is currently pegged at $1.08.
For 2020, Intel raised guidance. The company now projects revenues of $75.3 billion and non-GAAP earnings per share of $4.90, compared with prior guided figures of $75 billion and $4.85, respectively. The Zacks Consensus Estimate for revenues and earnings is currently pegged at $75.09 billion and $4.86, respectively.
Zacks Rank & Stocks to Consider
Intel currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the broader technology sector are Qorvo QRVO, CDW Corporation CDW, and Avnet AVT. All three stocks flaunt a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Avnet, CDW and Qorvo are set to report quarterly earnings on Oct 28, Nov 2, and Nov 4, respectively.
Long-term earnings growth rate of Avnet, CDW and Qorvo is pegged at 17.88%, 13.1% and 12.35%, respectively.
Biggest Tech Breakthrough in a Generation
Be among the early investors in the new type of device that experts say could impact society as much as the discovery of electricity. Current technology will soon be outdated and replaced by these new devices. In the process, it’s expected to create 22 million jobs and generate $12.3 trillion in activity.
A select few stocks could skyrocket the most as rollout accelerates for this new tech. Early investors could see gains similar to buying Microsoft in the 1990s. Zacks’ just-released special report reveals 8 stocks to watch. The report is only available for a limited time.
See 8 breakthrough stocks now>>
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
Avnet, Inc. (AVT): Free Stock Analysis Report
Intel Corporation (INTC): Free Stock Analysis Report
Qorvo, Inc. (QRVO): Free Stock Analysis Report
CDW Corporation (CDW): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.