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Why Is Intel (INTC) Up 5.5% Since Last Earnings Report?

It has been about a month since the last 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 recent earnings report in order to get a better handle on the important catalysts.

Intel Q1 Earnings Top Estimates, Robust DCG Growth Aids Revenues

Intel reported first-quarter 2020 non-GAAP earnings of $1.45 per share, which beat the Zacks Consensus Estimate by 13.28%. The figure improved 63% from the year-ago quarter.

Revenues totaled $19.83 billion, beating the consensus mark by 5.73%. The figure improved 23% year over year.

Segment Revenue Details

Client Computing Group or CCG (49.3% 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 14% on a year-over-year basis to $9.775 billion. Higher modem sales and notebook demand amid increased supply drove the top line.

Notably, Platform revenues increased 11% year over year. Modem/Adjacencies improved 40% from the year-ago quarter.

While notebook platform volumes increased 22% year over year, desktop platform volumes declined 4%.

PC volumes grew 13% on a year-over-year basis. Further, while Notebook’s average selling price (ASP) declined 3% year over year, Desktop ASP improved 4%.

Intel anticipates strong momentum for its first 10-nanometer (nm) mobile CPU, Ice Lake, in the first half.

Notably, Intel is adding wafer capacity across its 14 nm and 10 nm nodes in 2020 to boost PC unit volumes in a bid to meet market demand.

Moreover, the company is on track to deliver its lead 7 nm product, Ponte Vecchio, at the end of 2021.

Data Center Group or DCG (35.3%) revenues improved 43% year over year to $6.993 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 43% year over year. Adjacencies surged 35% from the year-ago quarter.

DCG Platform unit volumes were up 27% year over year, while ASP rose 13%.

CSP revenues advanced 53% year over year. Further, revenues from Communication service provider increased 33%. Revenues from Enterprise & Government grew 34%.

Internet of Things Group or IOTG revenues declined 3% from the year-ago quarter to $883 million. The coronavirus crisis-induced weakness in retail and industrial end markets led to year-over-year decline.

Mobileye revenues of $254 million rose 22% on a year-over-year basis. Growth was driven by increasing ADAS adoption and ramp of new IQ programs. However, lower automotive production due to lockdowns, limited revenue growth.

Total Internet of Things revenues (5.7%of total revenues), comprising IOTG and Mobileye, increased 1.6% year over year to $1.14 billion.

Non-Volatile Memory Solutions Group or NSG (6.7%) revenues surged 46% year over year to $1.34 billion on improvement in pricing trends and Optane bit growth.

Programmable Solutions Group or PSG (2.6%) revenues grew 7% from the year-ago quarter to $519 million, driven by strength across cloud and enterprise verticals.

Intel also has a residual segment, All Other (0.3%), which includes results of operations from other adjustments. The segment reported revenues of $66 million, up 24.5% 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 came in at $10.05 billion (50.7% of total revenues), up 34% collectively on a year-over-year basis.

Margins

Non-GAAP gross margin in the reported quarter was 62.1%, which expanded around 370 basis points (bps) on a year-over-year basis. The expansion was driven by robust growth in platform revenues.

Non-GAAP Research & development (R&D) expenses, and Marketing, General & Administrative (MG&A) expenses decreased 2% year over year to $4.8 billion.

Non-GAAP operating income surged 67% year over year to $7.5 billion.

Non-GAAP operating margin was 38%, compared with the year-ago quarter’s figure of 28%. Positive impact of higher gross margin and lower spending were offset by loss in ICAP and effect of higher tax rate.

Segment Operating Margin Details

Segment operating margin was 35.5%, expanded950 basis points (bps) on a year-over-year basis.

CCG operating margin of 43.2% expanded 740 bps year over year.

DCG operating margin was 49.9%, compared with the year-ago quarter’s figure of 37.6%.

IOTG operating margin was 27.5%, which contracted 10 bps from the year-ago quarter, owing to weakness across retail and industrial end markets.

Mobileye operating income came in at $88 million, up 29.4% year over year.

NSG group reported an operating loss of $66 million compared with a loss of $297 million in the year-ago quarter.

PSG operating income of $97 million improved 9% from the year-ago quarter.

All Other segment reported a loss of $1.04 billion compared with a loss of $850 million reported in the year-ago quarter.

Balance Sheet

As of Mar 28, 2020, cash and cash equivalents, short-term investments and fixed-income trading asset balance were $20.8 billion compared with $13.12 billion as of Dec 28, 2019.

Total debt as of Mar 28, 2020, was $39.92 billion compared with $29 billion as of Dec 28, 2019. The company issued debt to boost liquidity.

In the first quarter, the company paid out dividends worth $1.41 billion and repurchased 71 million shares worth $4.23 billion.

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. However, the company will continue its dividend payment plans. Notably, in October 2019, Intel had announced plans to repurchase shares worth $20 billion over the next 15-18 months. The company noted that prior to the stock buyback suspension announcement; it had repurchased shares worth $7.6 billion in fourth-quarter 2019 and first-quarter 2020.

Guidance

For second-quarter 2020, Intel expects non-GAAP revenues of $18.5 billion.

In the second quarter, momentum in Notebook demand is expected to continue as more people are working and learning from home in the wake of coronavirus crisis-induced lockdowns.

Non-GAAP gross margin and operating margin is anticipated to be 56% and 30%, respectively.

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

For 2020, Intel has not provided any guidance, citing business uncertainty and “limited visibility” pertaining to coronavirus crisis.

The company had earlier projected revenues of $73.5 billion and non-GAAP earnings per share to be $5.

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.

Intel anticipates decline in the PC total addressable market (TAM) in the second half, as weakness in economy is likely to offset the spike in coronavirus-led demand.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -11.7% due to these changes.

VGM Scores

Currently, Intel has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. 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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