Intel Earnings Preview: What To Focus On

Author's Avatar
Oct 13, 2014

The semiconductor maker had it pretty bad on Friday as most of the stocks fell after the warning from Microchip Technology Inc. (MCHP, Financial). Though it might have looked like an overreaction yet, the investors of semiconductor stocks had to face a reasonable depreciation in their investment value because Microchip cut its sales outlook and warned investors that the industry could face a downturn pretty soon. Well, this is a thing of the past and what is done cannot be undone but the important thing to worry about is future. Intel (INTC, Financial), the chip giant which has been gaining momentum and has performed better than expectations in the year, is all set to post its third-quarter earnings on Tuesday.

Before we go ahead and preview Intel’s third-quarter earnings, it is prudent to glance through the guidance given by the company in its Q2 report. After reporting the earnings for Q2, it guided to a revenue of $14.4 billion for the third quarter, plus or minus $500 million. On the gross margin percentage, the company has put forward a guidance of 66 percent, plus or minus a couple of percentage points. Readers may remember that in the second quarter, Intel’s gross margin came in at 64.47%, exceeding the raised guidance of 64%, given by the company. After Intel released its Q3 guidance, investors were particularly happy because it conveniently exceeded analyst estimate of $14.02 billion.

PC group: The indispensable catalyst

Now, coming to talk about the third quarter, the two most important aspects that will impact Intel’s earnings will be PC demand and company’s position in the Internet of Things (IoT) market. We will discuss each of these in order so that the readers can have a better understanding of the things that will impact the chipmaker’s earnings. To start with, the PC group is at the heart of Intel’s operations and even though PC demand might be volatile, the PC group forms approximately half of the giant’s revenue.

A recent report from IDC highlighted that PC shipments were down by 1.7% in Q3, whereas a Gartner reported quoted the decline figure at 0.5%. In either case, the decline percentage is conveniently above analysts' estimate of 4.1%. Therefore, it is a satisfactory news that the PC demand has declined less than expected. Of course, this stabilization in demand has been helped by Microsoft’s announcement to end Windows XP support. As a result of this announcement, the corporate as well as retail migration from Windows XP to Windows 7 has escalated and has helped the PC demand in its own minimal way. The fact that Intel is powering every PC device, from smallest energy-efficient embedded machines to heavy supercomputers, reflects its dominance on the PC industry

On top of the stronghold established by Intel, its anticipated entry into the tablet markets will set the ball rolling. Also, the company believes that the macro situation is improving in 2014 as the industry accepts innovative form factors including Ultrabooks, Convertibles and Detachables. Basically, the lower decline in the PC demand as well as Intel’s entry into tablet market should favourably impact the company’s topline. As per media reports, Intel is on track to ship 40 million tablets in 2014 and this could increase the company’s share to 15% globally in the tablet market. So, it seems reasonably good in this area.

IoT: A big opportunity

Now, the second big aspect that will impact Intel’s earnings and more than its earnings, it will impact Intel’s outlook in the year and investor confidence in the company. Keen on becoming one of the first entrants in what is expected to be the next big wave to hit the tech industry, Intel is already making its moves. In the second quarter, Intel’s revenue from the Internet of Things Group came in at approximately $539 million, up 12 percent sequentially and up 24 percent year over year. In recent news that reinforces Intel’s IoT push, GE announced a partnership with the company to line up support to sell its new big data software system, Predix. GE, which has generated more than $1bn in revenue from industrial Internet services, said it would use Intel's chips and servers to enable all the components and connections.

Further, in August 2014, Intel signed a definite agreement to acquire LSI’s Axxia networking business and related assets from Singapore-based Avago, a vendor of analog semiconductor devices, for $650 million in an all-cash deal. The deal can aid Intel’s foray into the IoT market and other emerging technologies. Additionally, Intel has been investing in a wide range of start-ups in the wearables space, and has also tied up with some fashion houses to market wearable gear as a fashion accessory rather than just a device that monitors your health (and more). Hence, this shows that Intel is pushing for strengthening its position in the massive IoT market.

Takeaway

Intel had a strong Q2, and that was made possible due to the stabilizing PC demand and the improving prospects in the IoT market. Besides these two, the data center group has also shown robust performance in the past and has built a strong momentum. Also, the foray into tablet market is proving beneficial to the company. All in all, investors can expect a healthy news from the company and find reasons to celebrate.