Intel Corporation (INTC) Beats Earnings, Falls on Weak Guidance

INTC - Intel Corporation (INTC) Beats Earnings, Falls on Weak Guidance

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Investors could have viewed the glass as half full for Intel Corporation (NASDAQ:INTC) following the release of last quarter’s numbers after the closing bell rang on Tuesday. They just didn’t.

Intel Corporation (INTC) Beats Earnings, Falls on Weak Guidance

Last quarter — the company’s third fiscal quarter of the year — Intel earned 69 cents per share on a GAAP basis, or 80 cents on a non-GAAP basis, on revenue of $15.78 billion — a 9% improvement for the top line.

In the same quarter a year earlier, the technology company earned 64 cents per share of INTC stock on revenue of $14.5 billion. Analysts, however, were collectively expecting sales of $15.56 billion and income of 72 cents per share of INTC. Intel stock fell 4% in after-hours trading following the release of the results.

CEO Brian Krzanich commented:

“It was an outstanding quarter, and we set a number of new records across the business. In addition to strong financials, we delivered exciting new technologies while continuing to align our people and products to our strategy. We’re executing well, and these results show Intel’s continuing transformation to a company that powers the cloud and billions of smart, connected devices.”

Dethroned by Shift in Consumer Tastes

Once the big name in computer processors, the rise of tablets and smartphones and the subsequent deterioration of PC sales have taken a bite out of Intel’s business. INTC didn’t have a small, power-efficient processor that manufacturers could get wholly behind. Its Atom processor was a respectable entry in that race, but simply couldn’t compete with Qualcomm, Inc. (NASDAQ:QCOM) or Samsung Electronics (OTCMKTS:SSNLF).

That’s a big part of the reason Intel has all but abandoned the mobile processor market, though not permanently. It’s diving headfirst into the 5G and Internet of Things (IoT) chipset market, even if it was late getting started. That, however, won’t bear revenue until 2020. The company should serve up something more compelling to INTC shareholders between now and then.

For instance, in August, the company upped its third-quarter revenue guidance from $14.9 billion to $15.6 billion. An unexpected uptick in PC sales was cited as the reason. IT market research outfit Gartner doesn’t see it quite the same way, reporting just last week that PC sales fell 5.7% during the third quarter. Intel delivered on this front, though. Client Computing revenue grew 5% on a year-over-year basis, to $8.9 billion. That was 21% better than Q2’s sales for the Client Computing arm.

It’s possible Intel is gaining market share in the still-shrinking PC market, but if the company is to thrive in the foreseeable future, it’s going to be mostly driven by strong enterprise-level revenue.

Enterprise Is the Future

The data-center arm now contributes roughly half of Intel’s operating profits. Although, its data center revenue come up short of revenue forecasts in each of the prior three quarters, it’s still generated growth, and ramped that growth pace up last quarter.

Data Center Group revenue reached $4.5 billion, up 13% from Q2’s tally, and 10% better than year-ago levels. Its Internet of Things division drove $689 million in sales, which was higher by 20% sequentially, and up 19% versus its year-ago total.

Nevertheless, Intel needs to be smart on this front. Just this week, a consortium that includes Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), International Business Machines Corp. (NYSE:IBM) and several other top technology names was formed with the intent of developing new data center architecture. This hardware will accelerate machine learning and analytics, and could end up serving as competitor to Intel’s data center offering.

Intel also needs to be cost-conscious on the R&D front. Research and development costs along with management and administrative costs were up 5% to $5.1 billion last quarter.

While its data center business will soon be under pressure and the company has abdicated the mobile processor market, it’s not abdicated the mobile market altogether. Its smartphone modem chips were selected as that component in the recently launched iPhone 7 from Apple Inc. (NASDAQ:AAPL), underscoring the idea that Intel’s diverse foundry can create ways to ride the rising tide of smartphones and tablets.

By that same token, Intel is increasingly adding component chips to hardware that isn’t necessarily made by Intel or made for Intel chipsets. It’s going to need to do a lot more of those kinds of deals, however. Edward Jones analyst Bill Kreher accurately pointed out that the iPhone supply deal wasn’t meaningful enough to matter to the bottom line.

Looking ahead,the company guides for Q4 revenue of $15.7 billion. No per-share guidance was offered. Analysts, however, were expecting Intel to report earnings of 76 cents per share of INTC on $15.85 billion.

Both are improvements on the Q4 2015 results, but the disappointing revenue guidance fanned the bearish flames that sent Intel stock lower after the close.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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