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Intel (INTC), a leading designer and manufacturer of a wide swath of semiconductor and related products, is set to report its Q3 2012 earnings on October 16th. The earnings release will come after the close and the accompanying conference call is scheduled for 5PM. In this article, I hope to provide a one-stop guide for investors and traders looking to position themselves ahead of the report.

The Warning

On September 7th, the company lowered its guidance to the following:

  • $12.9B - $13.5B in revenues against prior expectations of $13.8B - $14.8B.
  • 62% gross margins plus or minus a percentage point versus prior expectations of 63% plus or minus a couple of percentage points.

The company noted that the weakness in the third quarter is due to softness in both the consumer and enterprise PC segments, including emerging markets. Finally, the company noted that it is meeting expectations in the data center.

CapEx, R&D, MG&A, And Depreciation

In the pre-announcement, Intel stated that capital expenditures would come in below the previously guided range of $12.1B - $12.9B as it "accelerates the re-use of equipment at the 14nm node."

On the R&D and MG&A spending side, the full year guidance "remains unchanged" at $4.4B. Finally, depreciation was previously guided at $1.5B and is expected to remain unchanged.

Full Year Guidance Withdrawn

The company had previously guided for the following financial metrics on a full year basis:

  • Gross Margin: 64% plus or minus a couple of percentage points
  • Low single digit revenue growth for the year

These have been withdrawn and will be updated at the October 16th release.

So, What Do Analysts Expect For Q3?

Analysts are modeling $13.2B for Q3 on average, the midpoint of Intel's guidance. The range is fairly narrow at $13.02B - $13.30B. The year ago period saw revenues of $14.23B, so even in the most optimistic scenario, there will still be a nontrivial year-over-year decrease.

On the earnings side, analysts are expecting an average of $0.50/share with the range coming in at $0.47 - $0.54. This is a drastic decrease from the year ago period's $0.65/share.

Now, it is unclear if analysts are modeling in the presence of Intel's share repurchase program, but if Intel bought back a significant number of shares during the quarter, then it may exceed the analyst estimates on the EPS side.

How About Q4?

While Q3 is more or less set in stone at this point, the big thing that's up in the air is Q4. According to analysts, the average estimate is $13.81B with a range of $13.2B - $14.52B. This represents a 0.6% decline year-over-year from the year ago quarter's $13.89B. As Q3 is essentially set in stone, the Q4 guidance will be the critical factor in determining the direction of the stock post-earnings.

A positive surprise, fueled by a sharp uptick in PC sales due to the Windows 8 launch, isn't too remote a possibility. In that case, the investment community will likely still be fairly cautious of any strongly upbeat guidance due to the Q3 warning, but it will help to mitigate the pain from Q3's results.

On the earnings per share side, analysts are modeling $0.55/share on average with a range of $0.45 - $0.63 against the year-ago quarter's $0.64.

Full Year, Then?

Given that Q1 and Q2 results are in, it's worth looking at the best and worst case scenarios for full-year earnings.

In the very worst case, Intel earns $0.47 in Q3 and then $0.45 in Q4, giving full year earnings per share of $2/share. In the "average" case according to analysts, full year earnings come out to $2.12/share. And finally, if everything goes well and dandy, full year earnings hit $2.24/share.

Unfortunately, at a fairly conservative 10x earnings, Intel's fair value range with these estimates comes in at $20.00 - $22.40. However, should Intel demonstrate significant progress in the mobile space with tablet and smartphone chips, it could be rewarded with a slightly more aggressive 11-12x earnings multiple, implying a fair value range of $22 - $26.80. It is unclear if investors would be willing to assign Intel a multiple more in line with other semiconductor peers within the next year.

Key Things To Listen For

In addition to the numbers, management is going to need to explain a number of things to the investment community about its strategy going forward. In particular, the answers to the following questions would be most helpful:

  • How long is weakness in the PC space expected to continue?
  • How does the company see the threat of the Common Platform Alliance, consisting of Samsung, IBM (IBM), and GlobalFoundries on the semiconductor manufacturing side of things, especially with GlobalFoundries' announcement of its 14nm node seeing design tape-outs in 2013?
  • An update on the development of next-generation smartphone solutions in order to fend off competition from Qualcomm (QCOM) and Nvidia (NVDA)
  • Is there credibility to the recent reports that Ultrabooks not selling well? Is the long term mix of Ultrabooks versus standard notebooks going to see the numbers initially promised?
  • Any word on Apple (AAPL) moving away from Intel's "Core" chips in its MacBook products? How would such a move affect the top and bottom lines?

Conclusion

There's a lot of uncertainty in the air when it comes to Intel's future, and this upcoming earnings report will hopefully answer the questions on investors' minds. While Intel is still the world's largest chipmaker with leading edge fabs, strong designs, and many fires lit under it, the risks to the business are now more apparent than ever. Both shorts and longs, take notice - October 16th will be a very important day for Intel.

Source: Intel's Upcoming Q3 Earnings Report: What You Need To Know