Pre-Earnings Analysis: Intel Corporation, Advanced Micro Devices and Nvidia Corporation
The earnings season is almost upon us and we wanted to do something different with our financial coverage this time around. We will be conducting a pre-release analysis and will be going through the significant factors that could end up being material to the PC hardware industry. Our unique position as a tech publication with leading expertise in the PC hardware sector allows us to add significant value for investors of companies in the PC Hardware industry. As the senior editor of the hardware section here at WCCFTech, I will be analyzing the three chip giants: Intel, AMD and Nvidia. As a foreword to our readers, you would do well to keep in mind the recent events that have affected the market, including Brexit and the resulting turmoil and currency instability, as well as potential headwinds to China’s continued economic growth.
Intel (NASDAQ: INTC) pre-release earnings analysis
Let’ start off with Intel Corporation (NASDAQ: INTC). The company has, in the past few years, been faced with the prospects of a shrinking PC market and difficulty making headway into shrinking its process nodes. As far as the PC industry is concerned, claims of the market “shrinking” or “dying” border on factual inaccuracy. A more accurate description of the trends of the pc market would be a spectrum shift where growth is slowing. There are multiple reasons for that and the “PC is dying” is not one of them. Intel Corporation has aggressively pushed forward it processor technology at a lightning fast pace (Moore’s Law) even in the absence of a competitor (AMD processors stopped being competitive in terms of performance quite a few years ago – something which could change with Zen).
The effect of this strategy have now become quite clear. As far as the PC gaming industry (and a significant portion of the general consumers) is concerned, Intel (NASDAQ: INTC) processors are years ahead of their time. A Sandy Bridge K-Series CPU, now over 5 years old can easily keep up with even the most demanding gaming titles of today (VR included). As such, the main problem with Intel processors is that, there is no killer app to really push them over the edge and reinvigorate demand.
Adding on to this is the fact that Intel has been battling with the laws of physics. It’s becoming harder and harder to get shrink nodes. 14nm was hard. 10nm will be even harder. Demand is now starting to concentrate on the higher end side of things as the primary market becomes enthusiast in nature with the low end moving towards the mobile side. Things to keep in mind:
- Thankfully this year, Intel finally dropped its aggressive tick tock schema and fell back to a more economically sensible tick-tock-tock strategy. This will allow it to milk a process node one more time with relatively low cost.
- Keep in mind however, that Intel is undergoing restructuring and incurring one-off expenses (recognized under GAAP), so it is possible the company does not beat analyst expectations this time around, breaking a historical trend.
- Kaby Lake (the new iteration of the tick tock tock or shrink-revise-revise schema) will be introduced.
- Intel will begin unification of all its processor brands.
- The internet of things division has been doing very well and the company will be focusing on breaking into the auto industry as well.
- Intel (NASDAQ: INTC) and Mobileye have entered into a Joint Venture to supply BMW with the next generation EyeQ processor (for autonomous driving) and Intel Atom (for dashboard and infotainment) in 2020.
Intel Q2 2016 Outlook:
- Revenue: $13.5 Billion, Plus/minus $500 Million.
- Non-GAAP gross margin percentage of 61%.
- R&D plus M&A spending approximately $5.1 Billion
- Restructuring charges: ~ $1.2 Billion, (Non-GAAP charge: Zero)
- Equity Investments Gain: $150 Million
- Depreciation: $1.5 Billion
- Analysts Expectation: 53 Cents Profit Per Share
Nvidia (NASDAQ: NVDA) pre-release earnings analysis
Nvidia Corporation (NASDAQ: NVDA) is part of the GPU duopoly and a leading supplier of chips for car manufacturers. One of the things it’s desperately trying to break into is the self driving portion of the car segment. Yes, you read that right. One fact, that is often lost in shiny marketing material, Is that for the most part, Nvidia is a supplier of GPUs to car manufacturers that handle the infotainment system while the ‘autonomous’ processing part is actually done on a dedicated chip by a company called Mobileye.
The company has recently introduced the first generation of FinFET GPUs with GeForce branding. This is an upgrade a long time in the making since we have been stuck on 28nm for quite a few years. The performance of these GPUs exceeded expectations and have been met with unprecedented demand in the high end segment. It’s worth pointing out that Wells Fargo has downgraded their expectation to underperform. It is possible that this could be based on outdated information since most of the info about the 1060 has not been publicly revealed yet. Some things to remember:
- Nvidia (NASDAQ: NVDA) introduced the GTX 1080 and GTX 1070 graphics cards which currently have no AMD equivalent cards for competition. The company has also increased the price of its reference cards now called the Founder Editions.
- A GTX 1060 is in the works which could potentially be priced to undercut the RX 480 advantage that AMD has in the mainstream market. Latest rumors indicate that a new GP106 based variant could be priced as low as $149 MSRP. The price of the GTX 1060 i $249 MSRP. The AMD equivalent RX 480 offers slightly better performance at an MSRP of $199 for the 4 GB version and $229 for the 8 GB version.
- The company has also made strides in the mobile segment. The high end market is currently completely Nvidia with no AMD counterparts since the company started introducing desktop level chips for notebooks.
- The auto division remains one of the most bullish sectors of Nvidia Corp with strong footholds with most car manufacturers as far as powering the dashboard and infotainment system is concerned, although this still remains a small piece of the overall revenue pie.
- Nvidia (NASDAQ: NVDA)’s auto division Tegra chips have overtaken Mobileye in terms of MAC/s (the relevant performance metric ) but still haven’t broken into the market yet due to the lack of an established ecosystem.
- There have been rumblings of a supply problem with Pascal GPUs but we have yet to find a credible source to back up the claim.
Nvidia Q2 2016 Outlook (Q2 FY17 )
- Revenue is expected to be $1.35 billion, plus or minus two percent.
- GAAP and non-GAAP gross margins are expected to be 57.7 percent and 58.0 percent, respectively, plus or minus 50 basis points.
- GAAP operating expenses are expected to be approximately $500 million. Non-GAAP operating expenses are expected to be approximately $445 million.
- GAAP and non-GAAP tax rates for the second quarter of fiscal 2017 are both expected to be 20 percent, plus or minus one percent.
- Capital expenditures are expected to be approximately $30 million to $40 million
- Analysts Expectation: 37 Cents Earnings Per Share
Advanced Micro Devices (NASDAQ: AMD) pre-release earnings analysis
AMD (NASDAQ: AMD) has been pretty active in the corporate side of things lately, with the HiAlgo acquisition coming just a few months after their they announced their joint venture with the Chinese company THATIC (Tianjin Haiguang Advanced Technology Investment Co., Ltd.), showing that the company is making several attempts to broaden its portfolio and turn the company around once and for all. AMD licensed high-performance processor and SoC technology to a newly-created Joint Venture it has formed with THATIC (Tianjin Haiguang Advanced Technology Investment Co., Ltd.) to develop SoCs tailored to the Chinese server market that will complement AMD’s own offerings. The $293 million licensing agreement (out of which ~25 Million was forecast to be recognized this quarter) is a meaningful step in AMD’s IP monetization strategy intended to accelerate the Company’s growth and better monetize its valuable assets. One caveat in this is the fact that payments will be dependent on certain milestones being achieved.
“Our new licensing agreement is a great example of leveraging our strong IP portfolio to accelerate the adoption of our technologies more broadly,” said Dr. Su. “The joint venture with THATIC provides AMD with a differentiated approach to help gain share in the fastest growing region of the server market.”
AMD will also be receiving $320 Million (net of tax and other expenses) from the NFME Joint Venture (ATMP) which will be lowering future capital expenditures of the company and increasing cash and other equivalents to $950 Million. This can help profitability in the future but will not affect earnings per share directly.
Things have started to look good for AMD (NASDAQ: AMD) this year and the stock price has reflected this in the past few months. The introduction of Zen will however, be the first test the company must pass. Everything depends on the good reception of Zen, the silicon valley giant has too much invested in it for it not to succeed. Of course, AMD is currently under a mountain of debt (total debt at the end of the quarter was over $2 billion, flat from the prior quarter) with a hefty chunk of that due in 2019 as you can see below so it still has a long way to go before it is out of treacherous waters.
- AMD recently released the RX 480 as well and while that wasn’t able to offer any competition to the high end FinFET products from Nvidia it was supposed to target a new price point for mainstream gaming. This can give AMD an unprecedented edge depending on how Nvidia prices its GTX 1060 GPU.
- Interestingly however, Nividia has decided to push forward their GTX 1060 GPU which will compete directly with the RX 480 in its category – competing for the price point that was supposed to be the jewel in AMD’s crown. Another thorn in an otherwise perfect launch is allegations of the RX 480 failing to meet PCI-E specifications. We will be covering this particular incident in a separate post.
- AMD’s (NASDAQ: AMD) Polaris GPUs are all set to offer mainstream performance at a budget cost.
- The arrival of Zen x86 processors have been causing significant anticipation in the PC market since they are expected to finally offer competitive performance to Intel counterparts (at the given price point)
AMD Q2 2016 Outlook
- Analysts Expectation: 8 Cents Loss Per Share
- Revenue to increase 15% sequentially (plus or minus 3%)
- Gross margin will be 31%
- IP monetization of $25 Million
- Non-GAAP operating expenses to be approx. $335 Million
- Interest expenses and others to be approximately $45 Million
- Cash and equivalent at $950 Million (up from $716 Million last quarter).