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Intel (INTC) earnings are coming up tonight — and lots of investors will be watching. The earnings release will give investors a better idea of how sustainable the company’s growth rates are.
Consensus expectations for Q1’19 revenue/earnings are $16.02 billion and $0.87 dil. EPS, respectively. Analysts are anticipating Intel’s revenue to decline by –0.3% this quarter, and to grow by 0.4% overall in FY’19. Some of the difficulties tied to Intel’s earnings results has everything to do with the weakening PC market.
PC shipments are expected to decline by -4.3% in Q1’19 according to Gartner and IDC forecasts. There’s a chance that back-half PC shipments recover modestly, which would boost back half growth expectations (which is seasonally strong due to Christmas shopping and Cyber Monday). Despite seasonal drivers and the anticipated launch of 10nm Ice Lake chips this year, competition is expected to steepen versus AMD’s 7nm Ryzen 3 series CPUs.
Despite all the negatives associated with a weak cyclical PC market, on-going competition with AMD, and analyst revisions to estimates… the stock has continued to trend higher from $42 to $58. This is an immense move in Intel terms, as the stock isn’t this volatile.
Some of this was owed to the fact that Intel announced an exit from the mobile modem business (saving money), indications of layoffs across various facilities (saving more money), and also the broad stock market rally since December of 2018. Given the defensive characteristic of Intel with a 2.14% dividend yield and 12x earnings multiple (current metrics) it’s not surprising that fear-induced investors piled back into Intel year-to-date.
At this point, a decent year equals “less bad of a year”. If they do less bad than expected, it will turn into a very good year for Intel shareholders. It’s hard to mess-up in an aggressive equity environment where stocks in general are trending higher taking along laggards and winners to new highs. Also, the efforts to shed itself of non-performing business units like mobile modems could be instrumental to improving profitability, which we will glean more insights on, when Intel reports earnings.
That being the case, Steven Milunovich from UBS forecasted his cost savings estimate from Intel exiting the modem business on April 17th:
INTC finally announced it is exiting the business of developing 5G modems for smartphones, though it will continue to ship to AAPL this Fall (our view). We estimate ~$2.6B in iPhone modem revenue which would go away by F2021; on an OP basis, given our assumption that OpM could be -10%, getting out of the business is ~100-150bps accretive to EPS.
So, if Milunovich is accurate on his assessment that EPS accretion is limited to 1% to 1.5% the impact will be minimal. Intel won’t lose -$260 million from modems this year (though more concrete details will be announced on Intel’s earnings call). Improving profitability is a key priority, but the bigger narrative tied to Intel’s Q1’19 earnings may have very little to do with cost adjustment, but rather by how much Intel can surprise on pricing and cost savings.
Susquehanna analyst Christopher Rolland cited pricing as a potential positive in a report on April 17th:
Intel’s desktop processor ASPs increase as core i7/i9 mix up. Core i7 processors were found in 48% of desktops in Q1’19, up +1% quarter on quarter, while core i9 processors were found in 4% of Intel-based desktops (up +1.5% quarter on quarter). In aggregate, Intel-based PCs have CPU ASPs of $281, up +3.7% quarter on quarter. Standalone processors may also point to an Intel shortage. We note that the number of available standalone Intel processors, particularly lower-end core i3/i5 SKUs, has decreased quarter on quarter, perhaps yet another indicators of Intel’s supply shortages.
Rolland goes onto mention that Intel’s desktop ASPs in Q1’19 was $281 versus $261 for Q1’18, implying that while PC shipments declined by 4%, the pricing of Intel’s CPUs improved by +7.6% (off-setting the decline in shipments). Furthermore, Intel’s Notebook ASPs were estimated at $317 in Q1’19 versus $321 in Q1’18, according to Susquehanna.
The -1.2% drop in pricing from prior-year in Notebooks is representative of half the PC market, whereas desktop PCs resemble the other half. Based on these figures, Intel will report 2.72% revenue growth in the desktop category, whereas Notebook revenue will decline by -5% (this corresponds with PC shipment unit declines and loss of market share in Notebook to AMD.
When looking strictly at client computing group, Intel is on track to report a -2.28% decline in revenue assuming (global shipments fell by 4%, notebook pricing fell 1.2% and desktop pricing improved 7.6%). This implies that Intel will report client computing revenue of $8.01 billion in Q1’19 versus Q1’18 revenue of $8.2 billion.
Also, I’m anticipating the Data-Centric business to grow by 9% y/y in Q1’19 translating to $8.22 billion revenue, respectively. The data-centric business has been a growth category (for as long as I can remember) with investment into corporate IT and cloud continuing to trend higher from numerous surveys (hence the datacenter narrative is still intact).
When combining my estimates for client computing revenue of $8.01 billion and Data-Centric revenue of $8.22 billion, Intel will report $16.23 billion revenue versus consensus expectations of $16.02 billion revenue. Currently, the highest revenue estimate is $16.34 billion among sell-side analysts, so if Intel were to report results at the high-end of the revenue range the narrative might shift to something more constructive and the stock could rally (on less bad news equaling good news).
This doesn’t mean Intel’s the most attractive opportunity in the segment. Intel shareholders who have weathered some difficult storms could experience some short-term relief. Quarterly results could surprise on top-line, which is way more important in this current environment. Given all the negative reports tied to PC shipments, loss of market share to AMD and tanking NAND prices a revenue surprise would be extremely helpful. Concerns relating to these areas will need to be addressed (eventually), which could be explored further on management’s earnings call following Thursday’s session close.
Disclosure: The author has no position in Intel stock.
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