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Intel (INTC) Q3 Earnings Top on Robust Data-Centric Growth
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Intel Corp. (INTC - Free Report) reported third-quarter 2017 non-GAAP earnings of $1.01 per share, which beat the Zacks Consensus Estimate by 21 cents. The figure surged 26.3% from the year-ago quarter and 40.3% sequentially.
The strong earnings growth was driven by better-than-expected top-line performance and operating margin expansion. Moreover, Intel Channel Alliance Program (ICAP) contributed 13 cents to quarterly earnings.
Revenues totaled$16.15 billion, up 2.4% year over year and 9.4% quarter over quarter. The figure beat the Zacks Consensus Estimate of $15.71 billion. After adjusting for the McAfee (formerly Intel Security Group) transaction, revenues grew 6%.
The top-line growth came on the back of impressive results from the Data Center Group, Internet-of-Things Group, Non-Volatile Memory Solutions and Programmable Solutions Group, which contributed almost 44% of total revenues. These segments form the crux of Intel’s data-centric business model.
Intel revised its 2017 outlook based on double-digit growth expectation from data-centric businesses. Further, anticipated improvement in cost structure and lower spending, primarily due to improving operational efficiency will aid in expansion of margins.
Shares were up more than 2% in after-hours trading. Intel’s stock has returned 14.3% year to date, substantially underperforming the 34.3% rally of the industry.
Segment Revenue Details
Client Computing Group (54.9% of revenues) – Intel 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 remained almost flat on a year-over-year basis but increased 7.9% sequentially to $8.86 billion. The flat year-over-year perpermance reflected declining PC total addressable market (TAM).
The company launched the new 8th Generation Core processor (Coffee Lake), which includes Intel’s first six-core desktop central processing unit (CPU). Management claims Coffee Lake to be its best gaming processor to date, with up to 50% better performance than competitive offerings in the market.
Intel stated that it remains on track to ship first low-volume 10-nanometer (nm) part by the end of this year. Initial ramp is scheduled for the first half of 2018, while both high volume and system are anticipated to be available in the second half of 2018.
During the quarter, Intel shipped its first modem in the auto industry. Modem revenues surged 37% on a year-over-year basis.
On a year-over-year basis, platform volumes decreased 7%, while platform average selling price (ASP) was up 7%. Desktop platform volumes were down 6%, while Notebook platform volumes were up 1%.
Data Center Group (30.2% of revenues) – Revenues increased 7.4% year over year and 11.6% sequentially to $4.88 billion. Platform volumes increased 4%, while platform ASP was up 2% on a year-over-year basis. Sequentially, platform volumes were up 10%.
Per Intel, the cloud service provider revenues advanced 24%. Enterprise & Government was down 6%. Commercial service provider revenues grew 9%. Cloud and Commercial service provider comprise nearly 60% of DCG's revenues.
The company shipped Xeon Scalable (formerly known as Skylake) to more than 200 original equipment manufacturer (OEM) systems in the quarter.
Internet of Things Group (5.3% of revenues) – Revenues jumped 23.2% from the year-ago quarter and 17.9% quarter over quarter to $849 million. The growth was backed by strength in industrial, retail and video applications.
Intel closed the acquisition of Israel-based Mobileye, an autonomous vehicle technology provider, during the quarter. The deal will help the company to penetrate the $70-billion autonomous driving systems, data and services market.
Management noted that in 2017, Mobileye has won 14 Advanced Driver Assistance Systems (ADAS) designs across 14 automakers, much better than the 12 wins the company recorded in full-year 2016.
The company has been a supplier to Alphabet’s Waymo self-driving car unit, which it revealed during the quarter. Intel has also formed Automotive Edge Computing Consortium in the quarter.
Non-Volatile Memory Solutions Group (5.5% of revenues) – Revenues jumped 37.3% year over year and 1.9% sequentially to $891 million. Fab 68, Intel’s Dalian factory, continued to beat both ramp rate and yield goal. The factory accounted for more than half of the company’s supply in the quarter where more than 70% of the total bits were 3D NAND.
During the quarter, Intel shipped the industry's first 64-layer data center SSDs and have a strong pipeline for Optane designs.
Programmable Solutions Group (2.9% of revenues) – The Altera business is now the Programmable Solutions Group, which increased 10.4% from the year-ago quarter and 6.6% sequentially to $469 million. Strength in advanced products, data center, automotive and military drove top-line growth.
Notably, Microsoft Corporation (MSFT - Free Report) is deploying Intel FPGAs to develop the industry's fastest public cloud network and acceleration of deep neural networks. During the quarter, the company announced that it would use Intel’s 14-nm Stratix 10 FPGAs for its accelerated deep-learning platform (Project Brainwave).
Chinese e-commerce giant Alibaba Inc (BABA - Free Report) also selected Intel FPGA’s in its Cloud.
Moreover, Audi is using Intel’s Cyclone V SoC FPGA technology for the Level 3 autonomous driving system in its upcoming A8.
Intel also launched Movidius Myriad X, the world's first vision processing unit with a dedicated neural compute engine to deliver artificial intelligence (AI) capabilities to the edge in a low-power, high-performance package. The company also delivered a 17-qubit superconducting test chip for quantum computing to its research partner, QuTech in the quarter.
Going forward, Intel is set to launch Nervana neural network processor. The company has worked with Facebook Inc to launch this new AI hardware in the market.
Intel also has a residual segment, which now includes results of operations from MobilEye, New Technology Group and other adjustments. The segment reported revenues of $202 million down 65.2% year over year but up 40.3% sequentially. Mobileye generated $82 million in revenues.
Operating Details
The gross margin for the quarter was 63.9%, which contracted 80 basis points (bps) on a year-over-year basis but expanded 100 bps sequentially, better than management’s guidance.
Research & development (R&D) expenses and marketing, general & administrative (MG&A) expenses decreased 2.6% on a year-over-year basis and 5.2% sequentially to $4.78 billion, lower than management’s guided figure of $5.10 billion. As percentage of revenues, R&D and MG&A declined 260 bps on a year-over-year basis and 520 bps sequentially in the quarter.
Intel stated that total spending declined 6% in the reported quarter.
The operating margin was 34.4%, up 180 bps year over year and 610 bps sequentially. Segment margin expanded 340 bps on a year-over-year basis and 580 bps sequentially.
Client Computing Group operating margin was 40.6% as compared with 37.4% in the year-ago quarter. The massive expansion came on the back of lower investments and declining costs (14 nm). On a sequential basis, Client Computing group operating margin expanded 380 bps.
Data Center group operating margin was 46.2%, down 20 bps from the year-ago quarter. Operating margin was affected by increased technology development costs and higher spending on AI and adjacency businesses. Sequentially, segment margin expanded 820 bps.
Internet of Things group operating margin was 17.2% down from 27.7% in the year-ago quarter. Sequentially, segment operating margin contracted 210 bps.
Non-Volatile memory solutions group reported loss of $52 million as compared with a loss of $134 million in the year-ago quarter and $110 million in the previous quarter. The loss was primarily due to costs associated with 3D XPoint and start-up costs for the company’s memory capacity enhancement project.
Programmable Solutions Group reported operating income of $113 million, up almost 45% year over year and 16.5% sequentially.
Mobileye generated operating income of $39 million.
Balance Sheet
Cash, marketable securities and fixed-income trading asset balance at quarter end was almost $17.50 billion.
Intel currently has $20.65 billion in long-term debt as well as $4.63 billion in short-term debt, which has led to a net-debt balance of $8.18 billion.
During the reported quarter, Intel generated approximately $6.3 billion in cash from operations, paid dividends worth $1.3 billion and bought back shares worth $1.1 billion.
Intel also signed long-term NAND supply agreements, which provided more than $2 billion in prepayments through 2018. This significantly helped in free cash flow improvement.
Intel received $924 million cash from the divestiture of its portion in McAfee. In the quarter, McAfee repaid the promissory notes of $2.2 billion and issued a dividend of $735 million.
Guidance
Intel guided fourth-quarter 2017 revenues of around $16.3 billion (+/-$500 million), up 3% year over year excluding McAfee. The projected figure is better than the Zacks Consensus Estimate of $16.12 billion.
The non-GAAP gross margin is expected to be around 63% (+/-2%), flat on a year-over-year basis. R&D and MG&A expenses are anticipated at around $5.1 billion.
Non-GAAP operating income is projected to be approximately $5.2 billion, while earnings are anticipated to be 86 cents (+/- 5 cents) per share, up 15% on a year-over-year basis. The Zacks Consensus Estimate is currently pegged at 83 cents.
For fiscal 2017, management expects revenues of almost $62 billion (+/- $500 million), better than the Zacks Consensus Estimate of $61.37 billion and up $700 million from previous expectation.
Gross margin is anticipated to be 63% (+/-2%), which remains unchanged from the previous expectation.
R&D and MG&A expenses are anticipated at around $20.7 billion, up from previous expectation of $20.5 billion. Intel now expects direct spending to be below 33% (down 200 bps over 2016), approximately 10 bps better than its prior guidance.
Operating income is projected to be approximately $18.8 billion (up from $17.9 billion). Earnings are now anticipated to be $3.25 (+/- 5 cents) per share, up from previous guidance of $3.00 and better than the Zacks Consensus Estimate of $3.01.
For the data-center group, management still expects revenues to grow in the high-single digits and operating margin greater than the lower end of its long-term guidance range of 40-45% in 2017.
Moreover, Intel expects the memory segment to report profits by the end of 2018.
Full-year capex is expected to be $11.5 billion (+/-$500 million).
Intel remains committed to reduce spending to 30% of revenues by 2020 at the latest.
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
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Intel (INTC) Q3 Earnings Top on Robust Data-Centric Growth
Intel Corp. (INTC - Free Report) reported third-quarter 2017 non-GAAP earnings of $1.01 per share, which beat the Zacks Consensus Estimate by 21 cents. The figure surged 26.3% from the year-ago quarter and 40.3% sequentially.
The strong earnings growth was driven by better-than-expected top-line performance and operating margin expansion. Moreover, Intel Channel Alliance Program (ICAP) contributed 13 cents to quarterly earnings.
Revenues totaled$16.15 billion, up 2.4% year over year and 9.4% quarter over quarter. The figure beat the Zacks Consensus Estimate of $15.71 billion. After adjusting for the McAfee (formerly Intel Security Group) transaction, revenues grew 6%.
The top-line growth came on the back of impressive results from the Data Center Group, Internet-of-Things Group, Non-Volatile Memory Solutions and Programmable Solutions Group, which contributed almost 44% of total revenues. These segments form the crux of Intel’s data-centric business model.
Intel revised its 2017 outlook based on double-digit growth expectation from data-centric businesses. Further, anticipated improvement in cost structure and lower spending, primarily due to improving operational efficiency will aid in expansion of margins.
Shares were up more than 2% in after-hours trading. Intel’s stock has returned 14.3% year to date, substantially underperforming the 34.3% rally of the industry.
Segment Revenue Details
Client Computing Group (54.9% of revenues) – Intel 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 remained almost flat on a year-over-year basis but increased 7.9% sequentially to $8.86 billion. The flat year-over-year perpermance reflected declining PC total addressable market (TAM).
The company launched the new 8th Generation Core processor (Coffee Lake), which includes Intel’s first six-core desktop central processing unit (CPU). Management claims Coffee Lake to be its best gaming processor to date, with up to 50% better performance than competitive offerings in the market.
Intel stated that it remains on track to ship first low-volume 10-nanometer (nm) part by the end of this year. Initial ramp is scheduled for the first half of 2018, while both high volume and system are anticipated to be available in the second half of 2018.
During the quarter, Intel shipped its first modem in the auto industry. Modem revenues surged 37% on a year-over-year basis.
On a year-over-year basis, platform volumes decreased 7%, while platform average selling price (ASP) was up 7%. Desktop platform volumes were down 6%, while Notebook platform volumes were up 1%.
Data Center Group (30.2% of revenues) – Revenues increased 7.4% year over year and 11.6% sequentially to $4.88 billion. Platform volumes increased 4%, while platform ASP was up 2% on a year-over-year basis. Sequentially, platform volumes were up 10%.
Per Intel, the cloud service provider revenues advanced 24%. Enterprise & Government was down 6%. Commercial service provider revenues grew 9%. Cloud and Commercial service provider comprise nearly 60% of DCG's revenues.
The company shipped Xeon Scalable (formerly known as Skylake) to more than 200 original equipment manufacturer (OEM) systems in the quarter.
Internet of Things Group (5.3% of revenues) – Revenues jumped 23.2% from the year-ago quarter and 17.9% quarter over quarter to $849 million. The growth was backed by strength in industrial, retail and video applications.
Intel closed the acquisition of Israel-based Mobileye, an autonomous vehicle technology provider, during the quarter. The deal will help the company to penetrate the $70-billion autonomous driving systems, data and services market.
Management noted that in 2017, Mobileye has won 14 Advanced Driver Assistance Systems (ADAS) designs across 14 automakers, much better than the 12 wins the company recorded in full-year 2016.
The company has been a supplier to Alphabet’s Waymo self-driving car unit, which it revealed during the quarter. Intel has also formed Automotive Edge Computing Consortium in the quarter.
Non-Volatile Memory Solutions Group (5.5% of revenues) – Revenues jumped 37.3% year over year and 1.9% sequentially to $891 million. Fab 68, Intel’s Dalian factory, continued to beat both ramp rate and yield goal. The factory accounted for more than half of the company’s supply in the quarter where more than 70% of the total bits were 3D NAND.
During the quarter, Intel shipped the industry's first 64-layer data center SSDs and have a strong pipeline for Optane designs.
Programmable Solutions Group (2.9% of revenues) – The Altera business is now the Programmable Solutions Group, which increased 10.4% from the year-ago quarter and 6.6% sequentially to $469 million. Strength in advanced products, data center, automotive and military drove top-line growth.
Notably, Microsoft Corporation (MSFT - Free Report) is deploying Intel FPGAs to develop the industry's fastest public cloud network and acceleration of deep neural networks. During the quarter, the company announced that it would use Intel’s 14-nm Stratix 10 FPGAs for its accelerated deep-learning platform (Project Brainwave).
Chinese e-commerce giant Alibaba Inc (BABA - Free Report) also selected Intel FPGA’s in its Cloud.
Moreover, Audi is using Intel’s Cyclone V SoC FPGA technology for the Level 3 autonomous driving system in its upcoming A8.
Intel also launched Movidius Myriad X, the world's first vision processing unit with a dedicated neural compute engine to deliver artificial intelligence (AI) capabilities to the edge in a low-power, high-performance package. The company also delivered a 17-qubit superconducting test chip for quantum computing to its research partner, QuTech in the quarter.
Going forward, Intel is set to launch Nervana neural network processor. The company has worked with Facebook Inc to launch this new AI hardware in the market.
Intel also has a residual segment, which now includes results of operations from MobilEye, New Technology Group and other adjustments. The segment reported revenues of $202 million down 65.2% year over year but up 40.3% sequentially. Mobileye generated $82 million in revenues.
Operating Details
The gross margin for the quarter was 63.9%, which contracted 80 basis points (bps) on a year-over-year basis but expanded 100 bps sequentially, better than management’s guidance.
Research & development (R&D) expenses and marketing, general & administrative (MG&A) expenses decreased 2.6% on a year-over-year basis and 5.2% sequentially to $4.78 billion, lower than management’s guided figure of $5.10 billion. As percentage of revenues, R&D and MG&A declined 260 bps on a year-over-year basis and 520 bps sequentially in the quarter.
Intel stated that total spending declined 6% in the reported quarter.
The operating margin was 34.4%, up 180 bps year over year and 610 bps sequentially. Segment margin expanded 340 bps on a year-over-year basis and 580 bps sequentially.
Client Computing Group operating margin was 40.6% as compared with 37.4% in the year-ago quarter. The massive expansion came on the back of lower investments and declining costs (14 nm). On a sequential basis, Client Computing group operating margin expanded 380 bps.
Data Center group operating margin was 46.2%, down 20 bps from the year-ago quarter. Operating margin was affected by increased technology development costs and higher spending on AI and adjacency businesses. Sequentially, segment margin expanded 820 bps.
Internet of Things group operating margin was 17.2% down from 27.7% in the year-ago quarter. Sequentially, segment operating margin contracted 210 bps.
Non-Volatile memory solutions group reported loss of $52 million as compared with a loss of $134 million in the year-ago quarter and $110 million in the previous quarter. The loss was primarily due to costs associated with 3D XPoint and start-up costs for the company’s memory capacity enhancement project.
Programmable Solutions Group reported operating income of $113 million, up almost 45% year over year and 16.5% sequentially.
Mobileye generated operating income of $39 million.
Balance Sheet
Cash, marketable securities and fixed-income trading asset balance at quarter end was almost $17.50 billion.
Intel currently has $20.65 billion in long-term debt as well as $4.63 billion in short-term debt, which has led to a net-debt balance of $8.18 billion.
During the reported quarter, Intel generated approximately $6.3 billion in cash from operations, paid dividends worth $1.3 billion and bought back shares worth $1.1 billion.
Intel also signed long-term NAND supply agreements, which provided more than $2 billion in prepayments through 2018. This significantly helped in free cash flow improvement.
Intel received $924 million cash from the divestiture of its portion in McAfee. In the quarter, McAfee repaid the promissory notes of $2.2 billion and issued a dividend of $735 million.
Guidance
Intel guided fourth-quarter 2017 revenues of around $16.3 billion (+/-$500 million), up 3% year over year excluding McAfee. The projected figure is better than the Zacks Consensus Estimate of $16.12 billion.
The non-GAAP gross margin is expected to be around 63% (+/-2%), flat on a year-over-year basis. R&D and MG&A expenses are anticipated at around $5.1 billion.
Non-GAAP operating income is projected to be approximately $5.2 billion, while earnings are anticipated to be 86 cents (+/- 5 cents) per share, up 15% on a year-over-year basis. The Zacks Consensus Estimate is currently pegged at 83 cents.
For fiscal 2017, management expects revenues of almost $62 billion (+/- $500 million), better than the Zacks Consensus Estimate of $61.37 billion and up $700 million from previous expectation.
Gross margin is anticipated to be 63% (+/-2%), which remains unchanged from the previous expectation.
R&D and MG&A expenses are anticipated at around $20.7 billion, up from previous expectation of $20.5 billion. Intel now expects direct spending to be below 33% (down 200 bps over 2016), approximately 10 bps better than its prior guidance.
Operating income is projected to be approximately $18.8 billion (up from $17.9 billion). Earnings are now anticipated to be $3.25 (+/- 5 cents) per share, up from previous guidance of $3.00 and better than the Zacks Consensus Estimate of $3.01.
For the data-center group, management still expects revenues to grow in the high-single digits and operating margin greater than the lower end of its long-term guidance range of 40-45% in 2017.
Moreover, Intel expects the memory segment to report profits by the end of 2018.
Full-year capex is expected to be $11.5 billion (+/-$500 million).
Intel remains committed to reduce spending to 30% of revenues by 2020 at the latest.
Zacks Rank
Currently, Intel carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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