Technology

Why Is Intel (INTC) Down 18.4% Since Last Earnings Report?

A month has gone by since the last earnings report for Intel (INTC). Shares have lost about 18.4% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Intel Q2 Earnings Top Estimates, DCG Growth Aids Revenues

Intel reported second-quarter 2020 non-GAAP earnings of $1.23 per share, which beat the Zacks Consensus Estimate by 10.8%. The bottom line improved 16% from the year-ago quarter.

Revenues totaled $19.728 billion, beating the consensus mark by 6.4%. The top line increased 20% year over year.

Segment Revenue Details

Client Computing Group or CCG (48.1% 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 7% on a year-over-year basis to $9.496 billion. Higher wi-fi and modem sales and solid notebook demand drove the top line despite weakness in desktop volumes.

Notably, Platform revenues increased 4% year over year to $8.229 billion. Adjacencies revenues improved 38% from the year-ago quarter to $1.267 billion. Notably, CCG adjacencies include modem, connected home products, wireless communications and wired connectivity.

While notebook platform volumes increased 14% year over year, desktop platform volumes declined 14%.

PC volumes grew 2% on a year-over-year basis. Further, Notebook’s average selling price (ASP) improved 3% year over year, while Desktop ASP increased 3%.

Intel anticipates strong momentum in its first 10-nanometer (nm) mobile CPU — Ice Lake.

Notably, Intel is adding wafer capacity to boost PC unit volumes in a bid to meet market demand.

Data Center Group or DCG (36.1%) revenues improved 43% year over year to $7.117 billion. Strong mix of high-performance second-gen Xeon Scalable processors, and solid demand for Cloud service providers (CSP) and networking solutions led to the upside.

Platform revenues were up 36% year over year to $6.181 billion. Adjacencies soared 118% from the year-ago quarter to $936 million on solid uptake of 5G networking solutions.

DCG Platform unit volumes were up 29% year over year, while ASP rose 5%.

CSP revenues advanced 47% year over year. Further, revenues from Communication service provider increased 44%. Revenues from Enterprise & Government grew 34%.

Internet of Things Group or IOTG revenues declined 32% from the year-ago quarter to $670 million. The coronavirus crisis-induced weakness in retail, vison and industrial end markets led to year-over-year decline.

Mobileye revenues of $146 million fell 27% on a year-over-year basis, on account of lower automotive production due to lockdowns. However, increasing proliferation of ADAS and ramp of new IQ programs limited revenue decline.

Total Internet of Things revenues (4.1% of total revenues), comprising IOTG and Mobileye, declined 31.3% year over year to $816 million.

Non-Volatile Memory Solutions Group or NSG (8.4%) revenues surged 76.5% year over year to $1.659 billion on improvement in NAND pricing trends, which led to higher ASPs, and Optane bit growth.

Programmable Solutions Group or PSG (2.5%) revenues grew 2.5% from the year-ago quarter to $501 million, driven by strength across cloud vertical. However, sluggish demand across communications and embedded segments hindered growth.

Intel also has a residual segment, All Other (0.7%), which includes results of operations from other adjustments. The segment reported revenues of $139 million, up 113.8% 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 $10.232 billion (51.9% of total revenues), up 34% collectively on a year-over-year basis.

Margins

Non-GAAP gross margin in the reported quarter was 54.8%, which contracted 680 basis points (bps) on a year-over-year basis. Increase in product costs and unfavorable sales mix including rapid adoption of margin dilutive 5G ASIC products led to the decline.

Non-GAAP Research & development (R&D) expenses, and Marketing, General & Administrative (MG&A) expenses decreased 5% year over year to $4.751 billion.

Non-GAAP operating income surged 18% year over year to $6.058 billion.

Non-GAAP operating margin contracted 40 bps on a year-over-year basis to 30.7%. Negative impact of lower gross margin offset gains from lower spending.

Segment Operating Margin Details

Segment operating margin was 28.9%, expanded 90 basis points (bps) on a year-over-year basis.

CCG operating margin was 30%, compared with the year-ago quarter’s 42.3%. The contraction can be attributed to the ramp up of 10 nm products and the pre-PRQ reserves ahead of launch of Tiger Lake processors in the third quarter. These factors more than offset gains from higher CCG revenue base.

DCG operating margin of 43.5% expanded 740 bps year over year driven by higher revenue base and solid mix of high-end compute products.

IOTG operating income came in at $70 million, compared with operating income of $294 million in the year-ago quarter, owing to weakness across retail, vision and industrial end markets.

Mobileye operating loss of $4 million against operating income of $53 million in the year-ago quarter.

NSG group reported operating income of $322 million against operating loss of $284 million in the year-ago quarter.

PSG operating income of $80 million improved 53.8% from the year-ago quarter.

All Other segment reported a loss of $712 million compared with a loss of $1.035 billion reported in the year-ago quarter.

Balance Sheet

As of Jun 27, 2020, cash and cash equivalents, short-term investments and fixed-income trading asset balance were $13.53 billion compared with $20.8 billion as of Mar 28, 2020.

Total debt as of Jun 27, 2020, was $38.35 billion compared with $39.92 billion as of Mar 28, 2020.

In the second quarter, the company paid out dividends worth $1.41 billion. The company did not make any share repurchases during the reported quarter.

Markedly, on Mar 24, Intel filed 8K with the SEC, announcing that it is suspending stock repurchases temporarily on account of the COVID-19 crisis. Notably, in October 2019, Intel had announced plans to repurchase shares worth $20 billion over the next 15-18 months. The company has shares worth $19.7 billion remaining for repurchase as of Jun 27, 2020.

Guidance

For third-quarter 2020, Intel expects non-GAAP revenues of $18.2 billion, suggesting decline of 5% year over year.

In the third quarter, both data-centric and PC-centric businesses are anticipated to decline in mid-single digits on a year-over-year basis.

The company anticipates decline in the PC total addressable market (TAM) in the third quarter, as softness in desktop demand and weakness in economy is likely to offset spike in coronavirus-led demand.

Non-GAAP gross margin and operating margin is anticipated to be 57% and 30%, respectively. Gross margin is expected to be affected by accelerated ramp up of 10 nm products and decline in platform revenues that more than offset gains from improvement in NAND pricing.

Non-GAAP earnings are likely to be $1.10 per share.

For 2020, Intel now projects revenues of $75 billion and non-GAAP earnings per share to be $4.85.

Markedly, the company had earlier withdrawn guidance, citing business uncertainty and “limited visibility” pertaining to coronavirus crisis.

Coronavirus crisis-led robust demand across mobile compute, cloud, and network infrastructure for 5G, verticals is a tailwind.

However, impending global recession is likely to weigh on IOTG end markets, especially retail and industrial. Further, lower automotive production due to lockdowns is a concern for Mobileye. Also, sluggish data center demand across enterprise and government end-markets remains a woe. Moreover, 7 nm delay is a headwind.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -5.1% due to these changes.

VGM Scores

Currently, Intel has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. 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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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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