Intel (INTC) reported June quarter earnings (Q2 2012) after the close Tuesday and provided an outlook for the second half of 2012. Q2 revenue came in at $13.50bn, which slightly missed both Reuter's consensus estimate of $13.56bn and company guidance of $13.6bn +/- $500mn. Revenue was up 4.6% sequentially and 3.6% year over year.
Non-GAAP EPS of 57 cents (GAAP 54 cents) beat consensus estimates of 52 cents, however there was a 2 cent benefit from higher than expected Interest & Other Income, which was $102mn vs guidance of a loss of $20mn. As a result, earnings was inline with consensus.
On the earnings call, management said the core business played out as expected, driven by Enterprise and emerging markets, but was slightly below the guidance mid-point due to softness in the NAND business. Inventory, which ended the quarter at $4.9bn, up 9% sequentially and 22% year over year, was up more than expected due to a faster ramp in Ivy Bridge production, but they expect inventory dollars to be flat in 3Q sequentially with lower DOI. World wide channel inventory is healthy and will continue to be managed below historical averages in 3Q, vs expectations of a replenishment, due to a weaker than expected consumer rebound in Western Europe and the US as well as moderating GDP growth in China and Brazil.
Non-GAAP Gross Margins of 64.4% landed near the high end of the 61-65% guidance range. They were down vs 65.1% last quarter and up vs 61.7% in the year ago quarter. Operating expenses came inline at $4.6bn vs guidance of $4.6bn.
September quarter revenue is expected to be $14.3bn +/- $500mn, below consensus of $14.6bn. This is up 6% sequentially at the mid-point, which is less than historical seasonality of up 8-10%, and up 0.5% year over year. Conservatism in 3Q guidance was attributed to a weaker than expected consumer rebound in Western Europe / US, softness in the NAND business and moderating GDP growth in Brazil and China, offset by world wide enterprise demand that is still growing as expected.
September quarter Non-GAAP Gross margins are expected to be in the range of 62%-66% vs 64.4% last quarter and 64.3% in the year ago quarter. 3Q gross margins are lighter than previously expected by roughly 0.5% to 1% due to charges from the removal of 32nm capacity as well as a larger consumer mix and share gains on the low end. Overall, they are seeing and continue to expect a benign pricing environment. September quarter implied Non-GAAP EPS at the mid-point of guidance is 63 cents (GAAP 60 cents) vs consensus of 65 cents.
FY2012 revenue guidance was reduced from 7-9% year over year to 3-5%. The gross margin range was tightened to 65% +/- a cpl points vs prior 65% +/- a few points. R&D & SG&A spending for the year was brought down by $100mn to $18-$18.4bn as they slow hiring based on the macro, and the tax rate of 28% was unchanged.
FY2012 revenue guidance implies Q4 2012 revenue of $15.46bn, which is slightly below consensus of $15.56bn. Unchanged gross margin guidance and lower operating expenses imply 4Q Non-GAAP EPS of 79 cents (GAAP 76 cents), which is higher than the consensus estimate of 75 cents, despite slightly lower revenue. Implied 4Q guidance assumes close to normal seasonality, with sequential revenue growth of ~8%. This was attributed to coming off a less than seasonal 3Q, lower channel inventory in 3Q and the Windows 8 launch.
Looking at Revenue by geography, Europe came in at $1.65bn, down 7% sequentially and up 5.6% year over year. This compares to historical seasonality of down 8% sequentially. Americas revenue was $2.88bn, up 13% sequentially and down 1% year over year. Asia-Pacific revenue was $7.77bn, up 6% sequentially and 5% year over year. Japan revenue was $1.19bn, down 1% sequentially and up 2% year over year. They are expecting year over year revenue growth in all geographies in 2H.
Looking at Revenue by business unit, PC Client Group revenue (including CPUs and Chipsets for the desktop and laptop markets) was $8.68bn, up 3% sequentially and 4% year over year. Operating Income margin was 39.3% vs 41.2% last quarter and 39.5% in the year ago quarter. They have >140 Ivy Bridge designs, >40 of which are touch enabled and they still expect $699 ultrabooks this fall.
Data Center Group revenue (CPUs, Chipsets and motherboards for the Server, Workstation and Storage Computing markets) was $2.80bn, up 14% sequentially and 15% year over year driven by rich mix and volume growth. Operating Income margin was 49.5% vs 46.6% last quarter and 49.4% in the year ago quarter.
Other Intel Architecture Group revenue (including mobile phone components, embedded CPUs, Netbooks, Tablets, digital home and ultra-mobility products) was $1.11bn, up 3% sequentially and down 20% year over year. Operating Income margin was -30% vs -30% last quarter and -2% in the year ago quarter. 2Q saw the launch of Medfield based phones at Lenovo and Orange and they currently have 20 Windows 8 tablet design wins that are expected later this year.
Software Group revenue (including McAfee and Wind River revenue) was $586mn, up 3% sequentially and 15% year over year. Operating Income margin was 2% vs 1% last quarter and -3% in the year ago quarter.
All in all, Intel's inline June quarter and softer guidance was consistent with what the investment community was expecting. Going forward, Intel Bulls will point to a de-risked and achievable second half, low channel inventory, an increasing mix of low cost Ivy Bridge chips supporting gross margins, solid Enterprise demand, Windows 8 launch and more Medfield products coming to market. Intel Bears will point to Intel's greater than expected inventory build, peak-y gross margins, an aggressive assumption for 4Q seasonality, weakening macro (moderating GDP growth in China/Brazil, Eurozone, US consumer) and plenty of room to miss expectations. It's tough to call market sentiment right now and, as the first large cap tech stock to report, everyone will be looking to see how Intel trades post-print. One thing is clear however, if INTC goes up on this report, it will be very bullish for tech land.