Intel Corp (NASDAQ: INTC) is set to announce fourth-quarter results after the closing bell on Jan 15. Intel beat the Zacks Consensus Estimate in each of the preceding three quarters, but the surprise percentage has varied (2.70% in March, followed by 5.77% in June and 1.54% in the September quarter of 2015.
Shares soared nearly 43% over the past year as new products, collaborations a focused approach on new markets and opportunities, and surprisingly resilient margins encouraged investors. In the third quarter, results benefited from stronger volumes, good cost control and a lower share count that were however offset by a weaker-than-expected gross margin.
There could be a stronger beat in the December quarter given that the $700 million increase in the revenue outlook did not really move estimates much. But the Zacks Rank #2 and Zacks Earnings ESP of 0.00% allotted to the shares indicate that the surprise if any, will not be significant. Stocks with Zacks Ranks of #1, #2 or #3 that also have a positive ESP generally indicate a positive earnings surprise.
At any rate, it makes sense to go over the trends impacting the company and make note of the changes affecting its performance in the December quarter and the year ahead.
Revenue: The variables here are PC/mobile mix, emerging market/developed market mix, Microsoft’s (NASDAQ:MSFT) Windows transitions and new products from Intel. Not much has changed on the PC market front as the most recent numbers from IDC and Gartner continue to show that the market is stabilizing with cannibalization by tablets tapering off in developed markets while remaining a factor in emerging ones and chromebooks pitching in to push sales. The enterprise side remains the driver with consumer remaining relatively weak. The PC/mobile mix is roughly 40%/60%.
The server business continues to gain from the move to cloud computing as well as growing volumes of custom silicon that Intel is selling to companies like Facebook (NASDAQ:FB), Microsoft and eBay (NASDAQ:EBAY).
Intel’s own strategy remains on track with its 14-nanometer Broadwell-U Core processors launching just ahead of CES 2015. Higher-end versions including integrated graphics are expected to ship in a few months.
These Gen 5 systems for mainstream desktops and notebooks are expected to reduce the form factor and speed up the computer while adding 1.5 hours of battery life (for notebooks) over the Gen 4 Haswell processors. Other attractive features include new SmartSound technology to wake up a PC through voice command and new WiDi wireless display technology including 4K resolution, gaming support and more.
An upgraded NUC (next unit of computing) and the Intel Compute Stick were other attractions.
CES also saw Intel launch a button-sized module called Curie that is based on its Quark microcontroller to target slimmer and more powerful wearables/IoT devices.
Intel likely picked up share in the tablet market last year and will continue to do so this year. The positive here is that subsidies will start coming down.
Microsoft’s XP end of life helped sales in 2014 although there was likely less of an impact in quarter four. Win 10 will launch this year, which is a potential tailwind for the business.
Intel’s guidance doesn’t include additional color on segment contribution, but the company’s total revenue projections are usually bang on.
Gross Margin: The variables here are product mix and startup costs related to the 14nm transition. Intel will continue to sell a larger number of lower-end Atom chips that will impact pricing and thereby the mix. The fourth quarter will likely show increased costs due to processes ramping 14nm. Related benefits are expected to be realized gradually through 2015.
A lesser factor is contra revenue (the amount paid out by Intel to tablet makers as an inducement to use its more-expensive chips). Intel’s fully-integrated SoFIA family is launching in phases (a 3G version that is ready-to-ship and an LTE version that will launch this year). SoFIA is a cost competitive product that will eventually drive down contra revenue. Intel has arrangements with Rockchip and Spreadtrum that will facilitate adoption in important markets including China.
Share Buyback/Dividend: Buybacks may be expected to continue since the goal is to get net cash close to zero. Management increased the buyback authorization by $20 billion last year. The company raised the dividend from 90 to 96 cents on annualized basis during the fourth quarter, the most significant increase in recent years.
Capex: Projections for 2015 of $10.5 billion are just slightly lower than $11 billion expected for 2014.