It has been about a month since the last earnings report for Intel (NASDAQ:INTC). Shares have added about 1.6% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Intel due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Intel’s Q4 Earnings Beat, DCG Growth Aids Revenues
Intel reported fourth-quarter 2019 non-GAAP earnings of $1.52 per share, which beat the Zacks Consensus Estimate by 22.6%. The figure improved 18.8% from the year-ago quarter and 7% sequentially.
Revenues totaled $20.21 billion, beating the consensus mark by 5.2%. The figure increased 8.8% year over year and 5.3% sequentially.
Notably, during the quarter, Intel completed IMFT and 5G smartphone modem sale.
Segment Revenue Details
Client Computing Group or CCG (49.5% of total revenues) represents Intel’s PC-centric business. The company bundles PCs, notebooks, 2-in-1s, tablets and other computing devices under the Client segment, which aids comparison with the PC market numbers provided by IDC and Gartner.
Revenues were up 1.9% on a year-over-year basis and 3.1% sequentially to $10.01 billion. Higher modem sales and desktop platform volumes drove the top line.
Notably, Platform revenues increased 0.3% year over year and 2.1% sequentially. Adjacencies improved 12.9% from the year-ago quarter and 9.5% on a quarter-over-quarter basis.
PC unit shipments grew 1% on a year-over-year basis. While notebook platform volumes declined 1% year over year, desktop platform volumes increased 7%.
Further, while Notebook’s average selling price (ASP) was unchanged year over year, Desktop ASP decreased 4%.
Intel witnessed strong momentum for its first 10-nanometer (nm) mobile CPU, Ice Lake, with 44 system designs already shipped. The company is planning nine product releases on 10 nm this year, including a next-gen mobile CPU, a 5G base station SOC, an AI inference accelerator, first discrete GPU and Xeon for server, storage and networking.
Notably, in order to meet market demand, Intel is adding 25% wafer capacity across its 14 nm and 10 nm nodes in 2020 to deliver a high-single-digit increase in PC unit volumes.
Additionally, Intel is on track to deliver 10 nm-plus products this year, its first performance upgrade on 10 nm. Moreover, the company is on track to deliver its lead 7 nm product, Ponte Vecchio, at the end of 2021. CPU products are expected to follow in 2022.
Further, the company has already verified 26 Project Athena designs. Management expects 50 more devices across Windows and Chrome to be verified this year.
Data Center Group or DCG (35.7%) revenues improved 18.8% year over year and 13% sequentially to $7.21 billion. Strong mix of high-performance second-gen Xeon Scalable processors and solid demand for Cloud service providers (CSP) led to the upside.
Platform revenues were up 17.8% year over year and 13.2% sequentially. Adjacencies surged 31.8% from the year-ago quarter and 11% on a sequential basis.
DCG Platform unit volumes were up 12% year over year, while ASP rose 5%.
CSP revenues improved 48%. Further, revenues from Communication service provider increased 14% year over year. However, revenues from Enterprise & Government declined 7% from the year-ago quarter.
Intel acquired Habana Labs in the reported quarter, thereby strengthening its AI portfolio for the data center. Management stated that in 2019, the company generated $3.8 billion in AI-based revenues. Additionally, the AI market is expected to be a $25-billion opportunity by 2024.
Moreover, Intel’s third-generation Xeon scalable processor, Cooper Lake, is set to be launched in the first half of 2020.
Internet of Things Group or IOTG (5.7%) revenues improved 16.1% from the year-ago quarter to $1.16 billion. Sequentially, revenues declined 6%.
Mobileye (F:0ME) revenues of $240 million rose 31.1% on a year-over-year basis and 4.8% sequentially. Growth was driven by increasing ADAS adoption. EyeQ revenues grew 41% year over year.
IOTG revenues increased 12.7% year over year but declined 8.5% sequentially. The year-over-year growth was driven by strong retail and transportation end markets.
Non-Volatile Memory Solutions Group or NSG (6%) revenues improved 19.7% year over year to $1.22 billion on momentum in NAND and Optane bit growth. Sequentially, revenues declined 5.7%.
Programmable Solutions Group or PSG (2.5%) revenues decreased 17.5% from the year-ago quarter and 0.4% sequentially to $505 million.
Intel also has a residual segment, All Other (0.5%), which includes results of operations from other adjustments. The segment reported revenues of $104 million, up 116.7% year over year and 55.2% on a quarter-over-quarter basis.
Notably, DCG, IOTG, NSG, PSG, Mobileye and All Other business units form the crux of Intel’s data-centric business model. Revenues from the data-centric businesses came in at $9.44 billion (46.7% of total revenues), up 6% collectively on a year-over-year basis.
Margins
Non-GAAP gross margin in the reported quarter was 60.1%, contracting 190 basis points (bps) on a year-over-year basis and 30 bps sequentially.
Research & development (R&D) expenses decreased 1.4% year over year to $3.38 billion. Sequentially, R&D expenses increased 5.5%.
Marketing, General & Administrative (MG&A) expenses rose 1.4% from the year-ago quarter and 3.8% sequentially to $1.54 billion.
Non-GAAP operating margin was 35.7%, which expanded 40 bps on a year-over-year basis but contracted 20 bps on a quarter-over-quarter basis.
Higher volumes and ASP strength in Intel’s data-centric portfolio and lower spending were partly offset by the ramping up of the company’s 10 nm process and lower NAND prices.
Segment Operating Margin Details
Segment operating margin was 33.6%, contracting 10 bps on a year-over-year basis but remaining flat sequentially.
CCG operating margin of 40.8% expanded 3.5% year over year but declined by the same magnitude sequentially.
DCG operating margin was 48.1%, contracting 220 bps from the year-ago quarter’s figure and 70 bps sequentially.
IOTG operating margin was 32.7%, which expanded 320 bps from the year-ago quarter but shrank 460 bps sequentially.
Mobileye operating income came in at $57 million, up 54.1% year over year but down 14.9% sequentially.
NSG group reported an operating loss of $96 million compared with a loss of $19 million in the year-ago quarter and $499 million in the previous quarter.
PSG operating income of $85 million declined 47.5% from the year-ago quarter and 7.6% sequentially, primarily due to unfavorable product mix.
All Other segment reported a loss of $1.05 billion compared with a loss of $865 million reported in the year-ago quarter and $942 million in the previous quarter.
Balance Sheet
As of Dec 28, 2019, cash and cash equivalents, short-term investments and fixed-income trading asset balance were $13.12 billion compared with $12.03 billion as of Sep 28.
Moreover, total debt as of Dec 28 was $29 billion compared with $28.91 billion as of Sep 28.
In the fourth quarter, the company paid out dividends worth $1.4 billion and repurchased 63 million shares worth $3.5 billion.
Intel returned approximately $19.2 billion to shareholders in 2019.
The company raised dividends by 5% to $1.32 per share.
Key Q4 Developments
Intel inked a partnership with Alibaba (NYSE:BABA) to support both Tokyo and Beijing Olympics building out 5G infrastructure. To this end, the company will be utilizing the Xeon scalable Optane persistent memory and its software.
In November, Intel disclosed its next-gen Movidius vision processing unit, Keem Bay, which is highly optimized for edge inference. The solution delivers power-efficient performance up to four times the performance or six times the performance per watt over comparable competitive solutions.
Moreover, the company established an agreement for REM data harvesting with SAIC Motor. It also signed a partnership with NIO to deploy Mobileye’s self-driving systems as the full-stack solution for NIO’s consumer AV.
Intel continues to accelerate the commercialization of driverless Mobility-as-a-Service with two new partnerships — RATP in Paris and Daegu City in South Korea.
Additionally, during the quarter, Intel showcased a first-of-its-kind cryogenic control chip, Horse Ridge, which will speed up the development of full-stack quantum computing systems.
Guidance
For the first quarter of 2020, Intel expects non-GAAP revenues of $19 billion.
Non-GAAP operating margin is anticipated to be 35%.
Non-GAAP earnings are likely to be $1.304 per share.
For 2020, Intel expects revenues of $73.5 billion.
Intel expects the PC-centric business to be down low-single digits on a year-over-year basis due to a slight decline in the PC total addressable market (TAM). However, revenues from data-centric businesses are expected to grow high-single digits for the full year.
Gross margin is expected to be 59% for the year. Non-GAAP operating margin is projected to be 33%.
Non-GAAP earnings are anticipated to be $5 per share.
The company projects full-year capital expenditure of $17 billion. Free cash flow is anticipated to be $16.5 billion for 2020.
Over the next three to four years, Intel believes it can generate $85 billion in revenues and earnings of $6 per share, driven by the ongoing data revolution.
How Have Estimates Been Moving Since Then?
Fresh estimates followed an upward path over the past two months. The consensus estimate has shifted 25.02% due to these changes.
VGM Scores
Currently, Intel has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Intel has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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