Is Intel Set To Disappoint On Earnings?

Apr.15.13 | About: Intel Corporation (INTC)

Intel (NASDAQ:INTC) is set to deliver its Q1 earnings report to Wall Street after the market close on April 16. The chip giant has long served as a bellwether for the health of the PC sector but considering the continued migration to tablets and other mobile devices, the results for this quarter might not look good.

Depending on which report you want to believe, global PC shipments have dropped between 11-14% in the first quarter of this year and that will undoubtedly affect Intel's bottom line. The company is in a bit of a tricky situation because so much of its business plan is PC dependent. Businesses are still heavily reliant on the PC and that should support bottom line revenue but Intel has by and large failed to make significant headway into the smartphone and tablet space. The company is developing a new line of chips that is designed to bring improved performance to tablets but the jury is still out as to what kind of penetration Intel can make into that market.

In the first quarter of 2012, Intel reported earnings of 53 cents per share on revenue of $12.9 billion. This quarter, analysts are looking for earnings of 40 cents per share on revenue of $12.6 billion. The company is also expected to provide revenue guidance for the upcoming quarter of $12.9 billion. Given recent news and results, it appears that Intel is far more likely to deliver an earnings disappointment than a surprise on Tuesday.

Specifically, here are four issues that I think will either affect Intel's upcoming earnings report or be affected by it.

Revenues and margins are continuing to drop

As mentioned above, overall revenues are in a state of decline while gross margins have similarly shown a year-over-year drop. Analysts have already revised their expectations for earnings downward and they very well may need to do it again following Tuesday's announcement. It was expected a few months ago that Intel would guide for a small percentage gain in revenue for 2013 but the general consensus now is for flat revenue growth for the full year.

On Tuesday, we should get a sense of just how significantly the decline in demand for PCs is affecting the company's current bottom line but also an indication of how Intel is positioning itself to create non-PC related revenue streams going forward. The tablet-based chip line is one positive sign as is the continued growth in the company's data center unit. If the company demonstrates potential on these fronts, there could be reason for optimism.

New CEO announcement

Current CEO Paul Otellini announced last year that he will be stepping down at this year's annual meeting. Intel has yet to announce Otellini's successor but it's suspected that the spot will be filled within the next month or so.

This will be especially important because the new CEO could provide the vision for how the company feels it can address its current positioning problems as well as where future revenue streams will come from. I wouldn't expect a massive change of course with a new CEO but it could provide some solid clues as to where the company is headed.

What's happening with the capital expenditure plan?

Last quarter, Intel announced a $13 billion capital spending plan aimed at making inroads to the mobile market. The street will be anxious to hear what kind of progress is being made and if the effort is yielding any results.

The company realizes that getting into the mobile space will take capital and time so I wouldn't expect anything less than management reiterating the desire to move forward with its plans. If the company announces that it is scaling back its capital expenditure plan, it could be viewed that the company is failing to make the progress that it was hoping for and could serve as a further weight on future earnings results.

The dividend yield

Intel has served as one of the best-yielding technology investments there is and income investors have long been drawn to that yield. Management has raised the dividend payout every few quarters for the past decade. Those days might soon be a thing of the past.

If the company announces flat revenue growth, it's possible that the days of regular dividend increases could be over. After all, it becomes difficult to increase dividend payouts if there's not adequate revenue and cash flow to support it. I'd suspect that Intel will decide that committing to capital expenditures designed to improve its mobile market position would be a better use of cash than returning it to shareholders in the form of dividends. That's not to say that the dividend is at risk of being cut, just that we may be looking at a steady dividend for the foreseeable future.

I don't believe that Intel is yet at risk of losing its market position but the company needs to begin making some progress in the mobile space. This quarter's earnings report should give us a good idea if it's heading in that direction or if it's heading down the long road to irrelevancy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.