Intel Corp (INTC) is expected to report third quarter earnings after the bell tomorrow. As things stand now, we feel the company will meet or exceed the mid-point of its guidance of around $14 billion provided on the second quarter earnings conference call.
The key points likely to affect its performance are —
With respect to the top line: Conditions in the PC market appear mixed. While Europe should remain weak, we think there could be some unexpected strength in North America , partly on account of Advanced Micro Devices’ (AMD) supply issues. We hear that AMD was unable to meet demand for Llano, which could have resulted in some share loss to Intel. Intel continues to see particularly strong demand from emerging markets, which are growing as a percentage of sales.
Additionally, Intel continues to benefit on the server side, driven by data center build-outs. Add to that the fact that the third quarter typically gains from back-to-school spending.
Of course, Intel likely continues to lose out to tablets, particularly Apple Inc’s (AAPL) iPads, which are effectively eating into the back-to-school demand for notebooks. Therefore, sales will be below normal seasonal trends, as indicated by the guidance.
The longer-term outlook is also not without challenges. We see growing competition from devices based on technology from ARM Holdings (ARMH). Intel’s own low-power chips are some way off.
Intel did display a significant optimism regarding its ultrabook, but it now appears that consumers are unlikely to mirror this enthusiasm unless the price is lowered from the $1000 initially fixed by the company. Another factor that could impact demand for Intel chips this year is Microsoft’s Windows 8, which is still in the works and not likely to be available until next year.
On the margin side again, the story is a bit mixed. The positives for margins look to be continued mix benefits, as the PC market (client side) remains sluggish and data centers (server side) remain strong. The client business is also seeing negative mix, as some of the higher-end chips are not doing as well as the lower-end (this could also be because of growing emerging market mix or business taken away from AMD). Net-net, it still looks as if Intel will report strong ASPs in the third quarter.
Again, gross margins could come under pressure over the next few quarters, since Intel has been spending heavily on capex, which could be unfavorable without suitable increase in demand. Whether Intel decides to offer foundry services in 2012 remains uncertain right now.
Estimate Revision Trend
The revisions to estimates in the last 30 days are reflective of the issues currently faced by Intel. While we do see a few upward revisions, estimate revisions are showing a downward trend. For instance, there have seen four downward versus two upward revisions for the September quarter and six downward versus no upward revisions for the December quarter.
Annual revisions are also showing a similar trend, with four downward versus three upward revisions for 2011 and six downward versus three upward revisions for 2012.
Magnitude of Revisions
Since Intel is usually covered by a large number of brokers, individual estimate revisions generally do not have a material impact on the Zacks Consensus Estimate. This is evident from the fact that the Zacks Consensus estimate for the September quarter did not change in the last 30 days, while that for the December quarter, fiscal 2011 and fiscal 2012 dropped by 2 cents, 0 cents and 1 cent, respectively.
Recommendation
We remain optimistic about Intel’s market position, R&D prowess and strategic planning, which should steer the company out of the difficult market situation. Consequently, we remain neutral on a long term basis (3-6 months). The Zacks Rank for Intel shares is #3, which is also indicative of a Hold rating in the near term (1-3 months).
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