Driven by stronger-than-expected business PC demand, leading PC microprocessor manufacturer Intel (NASDAQ:INTC) raised its Q2 2014 earnings expectations earlier this month. The company now expects Q2 2014 revenue to be around $13.7 billion (+/- $300 million) as compared to its previous range of $13 billion (+/- $500 million). Intel has increased the mid-point of its gross margin range by 1% (from 63% to 64%), driven mostly by higher PC unit sales. R&D plus MG&A spending is expected to be approximately $4.9 billion, $100 million higher than its prior expectation. However, it now anticipates tax rate for the quarter to be 28% instead of 27% due to higher profits in higher tax jurisdictions. Intel will announce the full Q2 2014 earnings on July 15.
The persistent decline in PC shipments, combined with increasing investment in building out its technology, has impacted Intel’s revenue growth as well as bottom-line over the last two years. Q1 2014 marked a strong start for Intel as it saw a 1.5% year-over-year increase in revenue and reported fully-diluted earnings per share of $0.38. A stabilizing PC market, strong growth in data centers and an expanding footprint in the Internet-of-Things market were Intel’s key growth drivers in Q1 2014, offset partially by lower mobile group revenue. (Read: Intel’s Q1’14 Earnings: Expanding Footprint In New Markets, Strong Data Center Performance & Higher PC Market Share Drive Growth)
Stabilizing PC Business; Intel Gained Market Share In Q1 2014
Despite its growing focus on alternate growth markets, Intel continues to derive approximately 70% of its revenue from the PC market, and thus is highly sensitive to any adverse development in the industry. The company is working to reinvent PC computing with new form factor innovation, lower price points, longer battery life and an operating system of choice.
Intel’s PC Client Group revenue declined by 1% year over year in Q1 2014, as compared to 4.4% in total PC shipments, which implies that the company ended up gaining additional market share in the quarter. Its PC Client Group platform unit volume increased 1%, up for the second consecutive quarter. Mobile unit volume was up year over year for the first time since Q2 2012, while desktop units were flat year over year, with all-time record core volume and mix.
Intel claims that it is seeing strengthening consumer demand from emerging markets even though the consumer demand in the rest of the world remains weak. With the higher than anticipated business PC demand in Q2 2014, we expect the company to report another quarter of improving PC sales.
Updated Outlook For Full Year 2014
Intel now expects some revenue growth for 2014 as compared to the previous outlook of approximately flat. Gross margin is estimated to be in the upper half of Intel’s previous range of 61%, driven mostly by expected improvements in unit cost and volume. R&D and MG&A spending for the full year is expected to be $19.2 billion (+/- $200 million), compared to the initial estimate of $18.9 billion, driven mostly by revenue- and profit-dependent items. Higher profits from higher tax jurisdictions has led Intel to increase its effective tax forecast from 27% to 28%.
Our current price of $27 for Intel is at an approximate 10% discount to the current market price. We will update our valuation after the Q2 2014 earnings release on July 15.
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