Intel Rewards Its Shareholders

| About: Intel Corporation (INTC)


Intel beat on top and bottom line for Q2.

Q3 and full year guidance better than expected.

Company sped up buyback in Q2 and will continue strong buyback.

$20 billion added to the buyback.

After the bell on Tuesday, chip giant Intel (NASDAQ:INTC) announced a lot of great news. While we already knew that Q2 would be quite strong, investors wanted to see how PC sales would really be doing. Intel needed to follow through, and the company surely did. Today, I'll discuss Intel's report and the big capital return news.

Q2 results:

Intel reported Q2 revenues of $13.83 billion, which beat analyst estimates of $13.69 billion. Intel's raised guidance midpoint was for $13.7 billion, plus or minus $300 million, so Intel came in nicely above the midpoint. You would hope so, given the late in the quarter guidance raise. Here's a breakdown of the company's revenues, taken from the above Q2 press release:

  • PC Client Group revenue of $8.7 billion, up 9 percent sequentially and up 6 percent year over year.
  • Data Center Group revenue of $3.5 billion, up 14 percent sequentially and up 19 percent year over year.
  • Internet of Things Group revenue of $539 million, up 12 percent sequentially and up 24 percent year over year.
  • Mobile and Communications Group revenue of $51 million, down 67 percent sequentially and down 83 percent year over year.
  • Software and services operating segments revenue of $548 million, down 1 percent sequentially and up 3 percent year over year.

Gross margins came in at 64.47%, above Intel's raised guidance midpoint for 64%. R&D plus MG&A spending came in at $4.92 billion, a little more than the $4.9 billion the company was expecting. The other item to note was that the company's tax rate came in at 28.71% versus a 28% forecast. On the bottom line, the company came in at $0.55 per share, which beat estimates by three cents. Intel also stated that it was on track to meet its 40 million unit tablet goal for 2014.

Q3 / full year guidance:

Intel detailed the following Q3 guidance:

  • Revenue: $14.4 billion, plus or minus $500 million.
  • Gross margin percentage: 66 percent, plus or minus a couple of percentage points.
  • R&D plus MG&A spending: approximately $4.9 billion.
  • Restructuring charges: approximately $20 million.
  • Amortization of acquisition-related intangibles: approximately $65 million.
  • Impact of equity investments and interest and other: approximately zero.
  • Depreciation: approximately $1.9 billion.
  • Tax rate: approximately 28 percent.

This was strong revenue guidance, as analysts were looking for $14.02 billion. The gross margin number also appears to be very strong. Intel should be well ahead of the $0.56 analysts were looking for in EPS. With a big sequential jump in revenues and gross margins, this makes sense. Intel should also see a boost to EPS from the buyback in Q3. More on that in the next section.

When it comes to full year guidance, this was Intel's update:

  • Revenue: growth of approximately 5 percent, slightly higher than prior expectations.
  • Gross margin percentage: 63 percent, plus or minus a few percentage points, in line with prior expectations.
  • R&D plus MG&A spending: $19.3 billion, plus or minus $200 million, higher than prior expectations of $19.2 billion.
  • Amortization of acquisition-related intangibles: approximately $300 million, unchanged from prior expectations.
  • Depreciation: approximately $7.4 billion, unchanged from prior expectations.
  • Tax rate: each of the remaining quarters of 2014 is still expected to be approximately 28 percent, unchanged from prior expectations.
  • Full-year capital spending: $11.0 billion, plus or minus $500 million, unchanged from prior expectations.

It is interesting to see Intel provide a number for revenue guidance. As I discussed in my most recent Intel article, the company in recent years has used words instead of numbers. Even when the company raised guidance, it said it expected "some revenue growth for the year." The 5% number comes in above analyst expectations, as analysts were looking for 3.5% growth. Given the strong gross margin forecast for Q3, some investors may have been expecting a little higher number than 63% for the year. The only negative is that operating expense guidance is a little more than the previous forecast. With this guidance, Intel could come in around $2.10 or more in earnings, which would be more than the $2.03 currently forecast.

Big capital return plans:

A couple of weeks ago, I detailed how we might soon get a big announcement from Intel on the capital return plan. Intel was likely to finish its buyback within the next year, and so I stated that a buyback announcement could come at any time. Well, Intel decided to raise the buyback by $20 billion.

Intel's press release shows $2.081 billion spent on the buyback in Q2, which was well above the $500-$550 million per quarter or so the company was running at since the start of 2013. Additionally, Intel expects to buy back $4 billion worth of shares in the third quarter. The company has finally stepped up the buyback, which should reverse the recent slight rise in the share count. The only negative here is that the buyback is accelerating after shares have started to run. The last trade in the after-hours was over $33, more than 50% above the 52-week low of $21.89. Intel shares closed out the end of Q2 at $30.90.

The next logical question is about the dividend. Intel has not raised the dividend since 2012, and investors are hoping for a raise this year. Earlier in the year, business conditions weren't as great, and with Intel above its 40% free cash flow payout target, a raise looked unlikely. With improved results, investors are starting to wonder about a raise. With a heavy buyback being targeted, it will be interesting to see what the company does with the dividend at the next declaration in a week or so. My next Intel article in early August will look at the dividend in more detail.

Final thoughts:

Intel announced a very strong Q2, and issued guidance that came in above expectations. The PC business is doing quite well, and the company is on track to meet its tablet shipment goal. The company did raise the buyback, accelerated it a bit in Q2, and will buy back even more shares in Q3. The past few years for Intel were a bit lousy, but the most recent news is something that everyone can celebrate.

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

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.