Intel Sees Revenue Weakness

| About: Intel Corporation (INTC)

After the bell on Tuesday, Intel (INTC) reported its fiscal second quarter earnings. While the quarter was mixed, investors were focusing more on the guidance that the company gave. Now, I had recently described analysts seeing weakness ahead, and stated that analysts were pricing in a cut in Intel's full year revenue guidance today. Well, we got that from the company. Let's see where things stand with the chip giant now.

For the second quarter, Intel reported revenues of $13.5 billion, which was below the $13.56 billion that analysts were expecting. That represented a 3.6% increase over the prior year period, below the 4.1% analysts were looking for. Despite an 8.25% increase in gross margin dollars over the prior year period, Intel's operating income actually fell by 2.62%. That was due to large increases in operating expenses, which I will detail later. A breakdown of revenues by category is below.

Category 2011 2012 Change
PC Client $8,321 $8,684 4.36%
Data Center $2,436 $2,804 15.11%
Other Architecture $1,389 $1,108 -20.23%
Intel Architecture $12,146 $12,596 3.70%
Software & Services $511 $586 14.68%
All Other $375 $319 -14.93%
Total Revenues $13,032 $13,501 3.60%

Net income for the period declined by 4.3% over the prior year period. However, Intel has been buying back billions of dollars of stock. Over the past year, the diluted share count has decreased from 5.44 billion to just under 5.2 billion. That allowed earnings per share to remain at $0.54, the same as last year's period, despite the fall in net income. The $0.54 actually beat analyst estimates by two cents.

So let's first focus on Intel's margins. The following table shows the three primary second quarter margins for Intel over the past few years.

Q2 Margins 2009* 2010 2011 2012
Gross 50.83% 67.21% 60.64% 63.36%
Operating -0.15% 36.98% 30.19% 28.38%
Profit -4.96% 26.82% 22.67% 20.94%

*Intel took a $1.45 billion charge associated with the European Commission Fine. If you exclude the charge, operating margins for the quarter were 17.88% and profit margins were 13.07%.

Intel saw a nice rise in gross margins as the cost of goods sold actually dropped 3.57% over last year's period. However, the company took a lot of extra operating expenses, which really knocked down the operating margins. Research and Development costs were up more than 26.5% over the prior year period, and MGA (marketing, general, admin) expenses were up 11.86%. Intel's bottom line was helped out by $102 million in equity gains and interest, compared to a $4 million loss in the prior year period. However, that was offset by a higher tax rate, which increased from 24.85% to 28.14%.

In terms of the balance sheet over the past year, Intel improved its working capital from $12.748 billion to $15.247 billion. One concern is that the debt (liabilities to assets) ratio increased from 26.28% to 32.58%, and that is up from 20.54% two years ago.

But the main concern for investors was the revenue guidance. For the third quarter, Intel guided to $14.3 billion, plus or minus $500 million. That number is a bit below the $14.6 billion that analysts are currently expecting. For the full year, Intel cut its revenue forecast. The previous guidance was for growth of 7% to 9%, and the new forecast is for 3% to 5% growth. The midpoint of that is a bit below the 4.7% currently expected by analysts. As I stated in my original article, we were expecting to see the forecast knocked down a little, so this seems fairly in line with what analysts have been saying over the past couple of weeks. I personally would have liked to see a 4% to 6% range, so I'm a little disappointed in the number.

Intel blamed the weakness on macroeconomic conditions, and we saw that recently when AMD (AMD) also announced numbers that were much weaker than expected. AMD blamed China and Europe for the weakness, while Intel did not blame any particular reason. But given that 70% of Intel's Q2 revenues came from either Europe or the Asia-Pacific region, I'm guessing they are seeing weakness in those regions. The real difference here though is that Intel is in much better shape. Intel also provides a nice dividend that provides some measure of safety to investors. AMD does not pay a dividend currently.

Intel shares were flat in the after hours, bouncing back and forth a percentage point or two in either direction. The guidance cut wasn't a total surprise, which is why I updated everyone last week. Intel shares are close to 6-months lows, but have found support at the $25 level. Today's news was not a total shock to investors, but I'll wait a week or two before I formally recommend what to do with Intel. Let's see where the stock ends up over the next few days, and how analysts change their estimates before we decide whether today's weakness was already priced in, or if there is more downside in this name.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.