Intel (INTC) Up 5.5% Since Last Earnings Report: Can It Continue?

It has been about a month since the las t earnings report for Intel (INTC). Shares have added about 5.5% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Intel due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recen t earnings report in order to get a better handle on the important drivers.

Intel Q4 Earnings Beat Estimates, Revenues Miss

Intel delivered fourth-quarter 2018 non-GAAP earnings of $1.28 per share, which beat the Zacks Consensus Estimate by 6 cents. The figure improved18.5% from the year-ago quarter but declined 8.6% sequentially.

Year-over-year earnings growth can be attributed to improvement in revenues, higher ASPs (or average selling price), lower share count due to aggressive share repurchase and lower effective tax-rate. Further, rising demand witnessed in company's higher performance products, both in data center and client domains acted as a catalyst.

Revenues totaled $18.657 billion, up 9.4% year over year but declined 2.6% on a quarter-over-quarter basis. The year-over-year improvement came on the back of growth witnessed in both data-centric and PC-centric businesses.

However, the figure lagged the Zacks Consensus Estimate of $19.010 billion. Weakness in demand from China, declining trend in PC shipments, softness in NAND flash pricing trends, lackluster modem business, and constrained supply impacted results.

2018 at a Glance

For full year 2018, Intel report ed revenues of $70.848 billion, which lagged the Zacks Consensus Estimate of $71.20 billion.

However, the figure improved 12.9% on a year over year basis, driven by growth of 9% and 20% in PC-centric and data-centric business (after adjusting for McAfee), respectively.

Non-GAAP operating income increased 24.7% to $24.55 billion on the back of strong execution across all the businesses and disciplined spending.

Earnings surged 32.4% to $4.58 per share, which was also ahead of the Zacks Consensus Estimate of $4.53.

Fourth-Quarter Segment Revenue Details

Client Computing Group or CCG (52.6% 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 a record 9.7% on a year-over-year basis but declined 4% sequentially to reach $9.822 billion. Year-over-year growth in notebook (up 8%) and desktop (up 3%) drove segment results. The figure lagged the Zacks Consensus Estimate for CCG which was pegged at $9.841 billion.

Management noted strength in the commercial and gaming business. However, PC volumes declined 2% on a year-over-year basis. Meanwhile Notebook ASP and Desktop ASP increased 6% and 13%, respectively.

Although the company gained modem share, weaker smartphone demand, sluggishness in demand from China and softness in NAND pricing negatively impacted modem demand.

Management intends to unveil Intel XMN 8165 5G, the company's first 5G modem in around second half of 2019.

Additionally, the company recently introduced new 9th Gen Intel Core processors.

The company also unveiled 10nm-based Ice Lake PC processor. Notably, management anticipates it to hit the shelves of its OEM partners' PC systems by holiday season of 2019.

Data Center Group or DCG (32.5% of revenues) - Revenues improved 8.7% year over year but declined 1.1% sequentially to $6.07 billion. Platform volumes increased 10%, while platform ASP was up 1% on a year-over-year basis.

Growth was broad-based with strong demand for high-performance products, including Xeon Scalable wherein Xeon ASPs were up 5% year over year.

Per Intel, the cloud service provider (CSP) revenues advanced 24%. Enterprise & Government declined 5% from the year-ago quarter primarily owing to weaker demand in China.

Commercial service provider revenues grew 12% as customers are increasingly adopting Intel architecture to virtualize and transform networks.

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. However, in the reported quarter, non-CPU adjacencies declined 2% from the year-ago quarter. Management attributes the decline to notable "large one-time deals" which did not get repeated in the quarter under review.

The company commenced shipping of the latest high performance Cascade Lake family of Xeon processors integrated with deep learning (DL) tools to accelerate artificial intelligence (AI) processes.

Intel's Optane DC Persistent Memory solution which has already been selected by the likes of Google, Microsoft and Alibaba, is also witnessing rapid adoption.

Internet of Things Group or IOTG (4.4% of revenues) - Revenues declined 7.2% from the year-ago quarter and decreased 11.2% quarter over quarter to $816 million.

Excluding Wind River, which the company divested in the second quarter of 2018, the segment revenues were up 4% from the year-ago quarter. Tight supply constraints impacted segment results.

Non-Volatile Memory Solutions Group or NSG (5.9% of revenues) - Revenues surged 24.5% year over year and inched 2.4% sequentially to $1.107 billion driven by strong demand for data center SSD solutions and Optane drives.

Notably, Intel offers Optane SSDs for clients and 3D NAND technologies, which aids customers in driving innovation in solid-state drives (SSDs) and other memory products.

Management noted improvement in shift of company's data center and client SSDs to 64-layer 3D NAND, which in turn is improving cost per gigabyte.

Programmable Solutions Group or PSG (3.3% of revenues) - The Altera and eSAIC business is now the Programmable Solutions Group. It increased 7.7% from the year-ago quarter and surged 23.4% sequentially to $612 million.

Robust performance of data center and communications end markets, and strength in embedded products drove top-line growth. PSG's data center segment surged 50% from the year-ago quarter. Management stated that revenues from advanced FPGA products (including 20 and 14-nm) soared 70% from the year-ago quarter.

Intel also has a residual segment, - All Other (1.2% of revenues) - which includes results of operations from MobilEye, New Technology Group and other adjustments. The segmen t report ed revenues of $231 million, up 27.6% year over year but declined 21.4% sequentially.

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 were up 9% collectively, primarily due to strength in cloud and communication service provider domains.

Mobileye revenues of $183 million were up approximately 43% on a year-over-year basis primarily driven by strength in its ADAS and autonomous driving platforms-based solutions.

Mobileye garnered eight new design wins from notable U.S. and global auto companies in the reported quarter, taking the total to 28 new wins in fiscal 2018. Management noted that Mobileye accomplished 78 vehicle model launches.


Non-GAAP gross margin for the third quarter was 61.7%, contracting 320 basis points (bps) on a year-over-year basis. Further, the figure contracted 420 bps sequentially.

Non-GAAP operating margin for the quarter was 35.1% which expanded 10 bps on a year-over-year basis but contracted 460 bps sequentially.

Non-GAAP research & development (R&D) expenses and marketing, general & administrative (MG&A) expenses declined 2.8% from the year-ago quarter to $4.95 billion.

As percentage of revenues, R&D and MG&A declined 330 bps on a year-over-year basis but expanded 30 bps sequentially.

Segment Operating Margin Details

Segment operating margin was 33.4%, expanding 150 bps on a year-over-year basis but contracting 500 bps sequentially.

CCG operating margin of 37.3% expanded 90 bps from the year-ago quarter primarily attributed to higher ASPs. On a sequential basis, CCG operating margin contracted 700 bps.

DCG operating margin was 50.3%, contracting 330 bps from the year-ago figure. Sequentially, segment margin expanded 10 bps.

IOTG operating margin was 23.2%, up from 34.9% in the previous quarter. The figure contracted 640 bps from the year-ago quarter.

NSG group reported loss of $19 million against operating income of $31 million reported year-ago and $160 million in the previous quarter.

PSG operating margin was 26.5%, contracting 100 bps from the year-ago quarter but expanding 510 bps sequentially.

All Other segment reported loss of $828 million compared with loss of $1.27billion reported year-ago quarter and $852 million in the previous quarter.

Balance Sheet

As of Dec 31, 2018, cash and cash equivalents, short-term investments and fixed-income trading asset balance was almost $11.65 billion compared with $13.19 billion as of Sep 29, 2018.

The company ended the reported quarter with almost $25.1 billion in long-term debt and $1.26 billion in short-term debt, which has led to a total-debt balance of approximately $26.36 billion.

In fiscal 2018, Intel generated approximately $14.3 billion in free cash flow, paid dividends worth $5.5 billion and bought back shares worth $10.7 billion. The company reported $29.4 billion in cash from operations.

Intel also raised quarterly cash dividend payout by 5% annually. The company's board has approved a quarterly dividend payment of $0.315 per share to be paid on Mar 1, 2019.

Tepid Outlook for Q1

Intel guided first-quarter 2019 revenues of around $16 billion, excluding impact from Wind River divestiture.

Non-GAAP operating margin is anticipated to be approximately 29%. Management cites an anticipated decline in gross margin owing to 10 nm ramp and growth in adjacencies to impact operating margin in the first quarter.

PC centric part of the business is expected to up in low-single digits primarily due to higher modem share. Meanwhile Data-centric business is anticipated to be down in low-single digits owing to softness in NAND pricing and sluggishness in data center demand.

Non-GAAP earnings are anticipated to be 87 cents per share.

Guidance for 2019

For fiscal 2019, management expects revenues of almost $71.5 billion, up 1% year over year.

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. Operating margin is projected to be roughly 34%.

Non-GAAP earnings are anticipated to be $4.60 per share.

Intel expects the tax rate for 2019 to be approximately 13.5%.Full-year capital expenditure is expected to be $15.5 billion. Management anticipates an increase in logic spending and reduction in spending on memory business. Free cash flow is expected to be $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 -14.09% due to these changes.

VGM Scores

At this time, Intel has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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.


Estimates have been broadly trending downward for the stock, and the magnitude of this revision 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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