The world's largest semiconductor company Intel Inc (INTC) reported its 3rd quarter results yesterday. The company successfully exceeded its very conservative expectations from the quarter. Investors reacted badly to the earnings release and the stock is down 3%. The results indicate a weaker than anticipated Microsoft (MSFT) Windows 8 triggered bounce back for the PC industry. We are revising our previous buy stance on Intel to hold, based on the reasons that follow.
INTC had revised its 3Q 2012 outlook on 7th September, instigating a 4% decline in stock price. The company gave a revenue guidance of $12.9-$13.5 billion with a gross margin in the 61%-63% range. After accounting for the revised guidance, analysts were expecting revenues of $13.2 billion for the same period and an EPS of $0.49. The 3rd quarter results were announced yesterday and the stock fell almost 4% in after hours trading. The company reported revenues of $13.5 billion for the quarter with an EPS of $0.58; a 2% beat of revenues.
$ in billion except EPS
Intel also disclosed its outlook for the upcoming quarter. The company expects revenues of $13.6 billion for the quarter, an improvement of $100 million over the current quarter. The alarm for investors is the huge reduction in the Gross Margin outlook, to 58% from the current 64.3%, a decrease of approximately 6 percentage points. This was the primary reason behind the decline in stock price.
We are focusing on Non-GAAP results to remove any impact of amortization related expenses from McAfee Inc. and Infineon wireless acquisitions. The revenue for the current quarter was flat QoQ but showed a 5% dip YoY. The gross margins were almost flat compared to the previous quarter (64.3% current as opposed to 64.4% last quarter). However, there was a slight YoY improvement with a figure of 63.3% for GM. Operating income remained flat at $4.1 as compared to the previous quarter. Net Income and EPS improved over 2Q2012 by 4.8% and 5.3%, respectively.
Segment analysis reveals that, sequentially, the volume in the PC client Platform segment was up 1%, but when compared YoY, it was down 3%. The average selling prices are a better indicator of the slowdown in the PC industry. The selling prices in the PC client segment were down 1% sequentially and 3% YoY. The price in the Notebook Platform showed a YoY decrease of 8% and Desktop volume decreased by approx. 3%. The Windows 8 launch is just around the corner and can act as a major catalyst in increasing prices and demand in this segment.
The increased growth in handheld devices has been troublesome for the PC client platform but it has been of benefit to the data center platform. Handheld devices are more reliant on cloud computing solutions because of their limited data storage capability. Therefore the handheld devices revolution has been beneficial to the data center platform, which contributes 21% to the company revenues. As compared to the last quarter, volumes increased by 1% and prices decreased by 7%. Compared to the same quarter last year, this segment showed a 4% increase in unit volume and 1% increase in selling price.
The most prominent smartphone carrying the Intel chip is Motorola's Droid. The reviews are positive but it remains to be seen if they can bring in more sales. Qualcomm (QCOM) is currently the leader in the mobile semiconductor industry. If we compare gross margins of both companies, GM of Intel is much higher (62% of QCOM vs. 64% of Intel). This is because the mobile semiconductor industry is already saturated, with companies like QCOM enjoying first mover advantage. Moreover, PC semiconductor vendors are more visible compared to smartphone semiconductor companies. Therefore smartphone manufacturers (such as Apple (AAPL) enjoy more bargaining power, which results in reduced margins for semiconductor manufacturers.
The success of the Intel Inside campaign in the smartphone industry remains open to speculation. Even if the technology giant is able to obtain a market share in the smartphone industry, the impact it would have on its overall gross margins remains uncertain. We believe INTC investors should look at how the Surface Tablet fares, as it is using Intel's hardware. It will be a huge boost for Intel if it is given logo real estate on the product. The disappointing quarter results are a negative signal for growth prompted by Windows 8 and therefore we are revising our previous buy stance to hold. It remains a good dividend play as INTC has a dividend yield of 4%, almost double the industry average.