Intel: Mixed Report, But Getting Better

| About: Intel Corporation (INTC)


Intel missed on Q1 revenues, beat EPS by a penny.

Q2 revenue guidance slightly ahead, potential EPS number much better.

Full year revenue forecast unchanged, GM% up, operating expenses up.

Overall, Tuesday's report doesn't really change the Intel picture.

Things are getting better, but progress will take time.

After the bell on Tuesday afternoon, chip giant Intel (NASDAQ:INTC) reported its fiscal first quarter results. Expectations were high going into this report, as PC sales did better in Q1 than most were expecting. Intel's stock also rose into this report, fueling expectations of a strong report. Well, Intel's report was a bit mixed, with a mixture of both good and not so good numbers. Today, I'll breakdown Intel's results. For those that missed it, here was my preview for Intel's results.

Q1 results:

When it comes to Q1, results were a bit mixed. Intel reported revenues of $12.764 billion, a little below the $12.81 billion analysts were looking for. Earnings per share came in at $0.38 per share, beating analyst estimates by a penny. With PC sales doing better than expected, the buy side and independents were looking for a bit more, $12.86 billion in revenues and $0.39 in EPS. Intel missed both of those numbers for Q1.

Here were the positives from the Q1 report:

  • Gross margins of 59.75% beat midpoint forecast for 59%.
  • Restructuring and asset impairment charges of $137 million lower than $200 million forecast.
  • Impact of equity investments and interest was a positive $160 million, beating forecast for positive $25 million.
  • EPS beat by a penny.

Here were the negatives from the Q1 report:

  • Revenues were a little light, especially given PC strength.
  • R&D plus MG&A spending of $4.883 billion higher than $4.8 billion forecast for quarter.
  • Tax rate of 27.70% higher than 27% forecast for year.
  • Diluted share count of 5.117 billion, compared to 5.080 billion in year ago period.

For every good item, there was an equal negative. Revenues were a little weak, but gross margins were good. Operating expenses were a little high, but "other income" items were better than expected. The tax rate was a little high, EPS beat, and the share count rose again thanks to the buyback slowing down since the start of 2013.

Q2 guidance:

Intel provided the following guidance for Q2:

  • Revenue: $13.0 billion, plus or minus $500 million.
  • Gross margin percentage: 63 percent, plus or minus a couple of percentage points.
  • R&D plus MG&A spending: approximately $4.8 billion.
  • Restructuring and asset impairment charges: approximately $100 million.
  • Amortization of acquisition-related intangibles: approximately $75 million.
  • Impact of equity investments and interest and other: approximately $75 million.
  • Depreciation: approximately $1.9 billion.

The revenue forecast is slightly ahead of the $12.96 billion analysts were looking for. Since Q1 didn't blow out like some were calling for, it's not surprising that guidance is where it is. The gross margin number is excellent, and is likely part of the reason why the full year GM% number was raised. More on that later. As I detailed in my preview, restructuring expenses would go quarter to quarter. Intel had less than expected restructuring expenses in Q1, and added some more for Q2. Using the rest of year tax rate and Q1 share count, I get approximately $0.47 in EPS for Intel's Q2. That's four cents ahead of where analysts are, so that is good. In terms of the buy-side and independents, expectations called for $13.1 billion and $0.46, so Intel was mixed there.

2014 guidance:

Intel gave the following updated forecast for 2014:

  • Revenue: approximately flat, unchanged from prior expectations.
  • Gross margin percentage: 61 percent, plus or minus a few percentage points, 1 percentage point higher than prior expectations.
  • R&D plus MG&A spending: $18.9 billion, plus or minus $200 million, higher than prior expectations of $18.6 billion.
  • Amortization of acquisition-related intangibles: approximately $300 million, unchanged from prior expectations.
  • Depreciation: approximately $7.4 billion, unchanged from prior expectations.
  • Tax rate: approximately 27 percent for each of the remaining quarters of the year.
  • Full-year capital spending: $11.0 billion, plus or minus $500 million, unchanged from prior expectations.

Intel basically did what I expected. The company kept the revenue forecast as is, since in past years the forecast was not changed until the Q2 report. Analysts were looking for 0.8% revenue growth for the year, so Intel's forecast for approximately flat revenues is still a little light. The gross margin raise is nice, although it is partly offset by the $300 million rise in R&D plus MG&A spending. The rest of the forecast remains the same.

Balance sheet / capital return items:

The following table shows some key balance sheet numbers at the end of Q1, compared against last year's Q1 and Q4. Dollar values are in millions.

*Liabilities to assets ratio.

The company's cash position did decline by about a billion in Q1, mostly due to capital spending. Intel had approximately $11 billion of that cash outside the US, although some of those foreign funds could be repatriated without extra taxes. At the moment, Intel has a very strong balance sheet and I don't think anybody is worrying about the slight declines in some financial ratios. Inventories dipped by about $409 million, which makes sense given how new products will ramp up over the next few quarters.

Last year, Intel did not release its 10-Q filing until about two weeks after earnings, so some of the cash flow data is not available yet. However, Intel stated that $3.5 billion in cash from operations was generated, down from $4.3 billion in the year ago period. Capital spending was up about $500 million from the year ago period. That means free cash flow dropped a bit, which may have an impact on a potential dividend raise this year. I'll discuss that in more depth once we get all the numbers from the 10-Q. Intel bought back $545 million worth of stock in Q1, a little more than the $533 million bought back in the year ago period. Intel slowed down the buyback in 2013, which is why the diluted share count is starting to rise a bit. Unless Intel speeds the buyback up a bit, the share count will continue to rise, and that will pressure EPS.

Intel, the stock:

Expecting a strong report thanks to better than expected PC sales declines in Q1, Intel shares have been off to the races lately. You can see this in the chart below.

(Source: Yahoo! Finance)

After the bell, Intel traded up 40 cents in the after-hours session to $27.17. Most of the after-hours trading took place at prices that would represent a 52-week high for Intel. Investors seemed to cheer the strong gross margin forecast, which will most likely lead to EPS estimates rising in the coming weeks. On the flip side, many were looking for much better revenues and a potential yearly guidance raise for revenues, and that did not happen.

I said in my earnings article preview that I would recommend a short position on Intel going into earnings if the stock hit $28. While that didn't happen, the stock is getting closer to that point now. At this point, I don't think Tuesday's report really changed the situation. It wasn't good enough to really shoot Intel higher, but it wasn't enough to knock down the stock either.

The recent trading range for Intel was mostly $23 to $27. Going forward, I think the majority of the range will be between $25 and $28. The PC industry seems to be doing better than expected, and Intel is starting to really push into mobile. I wouldn't necessarily run in and buy Intel yet, as I would wait for it to come down. At this point, it looks like $24 to $26 would be the best buying range, with $28 to $30 probably being a point to short.

Final thoughts:

Intel reported a mixed report on Tuesday. Q1 revenues were a little light, which is surprising considering how Q1 PC sales fared. On the bottom line, earnings per share beat by a penny. Q2 revenue guidance was fair, and strong gross margin guidance led to a yearly gross margin forecast raise. Intel also left its revenue forecast unchanged, and increased its operating expense forecast a bit. The stock rose in the after-hours, continuing the recent rally. However, this was not the super strong report many were looking for. I do think the Intel trading range can be raised. I wouldn't run in and buy Intel just yet, but I wouldn't short it either until it got a bit higher. In the end, current investors can hold for the dividend yield, but Tuesday's report didn't really change the overall picture just yet. Things are getting better for the chip giant, but it will take some more time for progress to be fully realized. I'll be back in a couple of weeks with my next Intel article, which will look at dividend raise prospects once the 10-Q is filed.

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.

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