Intel (NASDAQ: INTC) Q1 2017 Quarterly Results Are Out: 66 Cents EPS On $14.8 Billion Revenue – Beats Earnings Expectation But Misses On Revenue

This is not investment advice. The author has no position in any of the stocks mentioned. WCCF TECH INC has a disclosure and ethics policy.

Intel (NASDAQ:INTC)'s quarterly results for the first quarter of 2017 are out and saw the company beat analyst expectations as far as EPS go, but missed the mark on revenue. Analysts consensus for the (non-GAAP) EPS was 65 cents and the company posted an EPS of 61 cents on a GAAP basis and 66 cents on a non-GAAP basis respectively. Revenue for the quarter was $14.80 Billion, which was just shy of the $14.81 Billion expectation of the consensus.

Before we break down the performance of the company, lets go over the financial summary:

  • Delivered year-over-year revenue growth, up 8 percent on a GAAP basis and 7 percent on a non-GAAP basis, and record first-quarter revenue
  • Growth businesses collectively grew double digits year-over-year; the memory business had record quarterly revenue and shipped first Intel® Optane™ products
  • Operating income was up 40 percent year-over-year on a GAAP basis and 20 percent on a non-GAAP basis and EPS was up 45 percent year-over-year on a GAAP basis and 22 percent on a non-GAAP basis, driven by higher platform average selling prices and lower platform unit cost
  • Full-year outlook for revenue was raised $500 million and EPS was raised by 5 cents to $2.85

Our Take On Intel (NASDAQ:INTC) - Is no one going to talk about the Ryzen elephant in the room?

Disclaimer: I own no stock in Intel and/or competing companies and have no plans to do so for the foreseeable future. The analysis and forecasts given here are provided "as is".

The star of Intel's earnings is its accelerating, Non-Volatile Memory Group which saw an impressive growth of 55% year over year. On a quarterly basis, Intel saw the majority of its segments go down as seasonality and cyclicality kicked in with the backdrop of a red-shifting PC market. With the acquisitions the company has made last year, it is clear that the company wants to diversify away from the PC market and head on to hitherto unexplored avenues - like the blossoming autonomous vehicle industry.

“The first quarter was another record quarter, coming off a record 2016. We continued to grow our company, shipped our disruptive new Optane memory technology, and positioned Intel to lead in new areas like artificial intelligence and autonomous driving,” said Brian Krzanich, Intel CEO. “The ASP strength we saw across nearly every segment of the business demonstrates continued demand for high-performance computing, which will only increase with the explosion of data.”

It has been a more or less reasonable quarter for Intel (NASDAQ:INTC) all things considered, and the company expects things to stay on track well into this year. Here is a summary breakdown of all the major trends for Intel this past few months:

The company also entered its first revenue quarter for Optane memory. Intel has previously revealed (in their quarterly earnings webcast) that they were shipping 3D NAND from our Fab 68 and had qualified the first 3D XPoint base Optane SSDs, which were expected to ship for revenue in the first quarter. The DX P4800X is the realization of this statement and means that indeed, Intel has entered the first revenue quarter for this platform. Intel has also previously stated that they expect less than 10% of their Non-Volatile Memory Solutions Group to be driven by 3D XPoint products. In the same earnings call they had also mentioned that their 3D XPoint memory DIMM will be shipped as sample to data center customers at the same time, so we assume that that is something that has already happened as well. As far as disruption goes, yes it is a disruptive technology but the very high cost associated with it means it wont be adopted in volume any time soon.

Intel also made the decision to diversify away from its core business to a very significant extent with the acquisition of Mobileye for $15.3 Billion. Mobileye currently accounts for 70 percent of the global market for driver-assistance and anti-collision systems. It employs 660 people and had adjusted net income of $173.3 million last year.On paper, the deal looks good, the market for autonomous vehicles is clearly a race Intel wants to get into and analysts have commented that this might be a fair price for something that is "key technology" to break into this sector. So the question then becomes, is Mobileye worth $15.3 Billion?

The answer to that question is multi faceted and I would suggest reading our detailed analysis of the Mobileye acquisition. One thing is very clear however: Mobileye in its current state and function does not appear to be wholly capable of matching Nvidia (the major Self Driving technology competitor) in either capability or performance and will quickly be far outstripped by the fast paced chip-maker if it does not change its current fixed function philosophy. That said, Mobileye would have been a very good buy just for the IP it offers at a significantly lower premium. At the current pricing, it is priced more like the on-paper specs of the company (70% market share) without accounting for the severe risks it faces going forwards from new but powerful entrants like Nvidia Corporation. To justify its purchase, Intel must seek to broaden the vision of Mobileye and offer a truly integrative approach that matches the one provided by Nvidia.

Here is the catch though: There is one major variable that has now changed, which no one seems to be talking about. Most of the analysts are focused on Intel's acquisitions and the shrinking PC market, but all of that is secondary compared to the Ryzen threat that Intel faces right now. Intel has enjoyed a completely free run of the x86 market for quite a few years now. And this year, AMD is back in the game, with its Ryzen processors, chasing that delicious price point advantage that it has always exploited - and it looks like its succeeding.

Anecdotal evidence based on our in-house polls in which thousands of readers took part showed that more than 60% of consumers aiming to upgrade their systems this year were going for a Ryzen processor. This is in sharp contrast to just a few year ago, where the vast majority of users would have no option but to opt for an Intel processor. And the most alarming part of this is that Intel does not appear to be responding in any rational fashion. There were no major price cuts, to make their lineup more competitive against Ryzen, and it seems to still be going for its standard policy to ignore AMD. Something, which will no longer work.

So while Intel (NASDAQ:INTC)'s fundamentals remain as strong as ever (it still easily maintains its process leads of a couple of years over other foundries) it is turning an absolute blind eye to the first real competition in many years - something that could cost it a significant portion of its PC segment revenue if it is not careful.

Intel Q1 2017 Quarterly Result, GAAP

 WccftechQ1 2017Q1 2016vs. Q1 2016
Revenue$14.8 billion$13.7 billionup 8%
Gross Margin61.8%59.3%up 2.5 points
R&D and MG&A$5.4 billion$5.5 billiondown 1%
Operating Income$3.6 billion$2.6 billionup 40%
Tax Rate22.3%18.4%up 3.9 points
Net Income$3.0 billion$2.0 billionup 45%
Earnings Per Share61 cents42 centsup 45%

Intel Q1 2017 Quarterly Result, Non-GAAP

WccftechQ1 2017Q1 2016vs. Q1 2016
Revenue$14.8 billion ^$13.8 billionup 7%
Gross Margin63.2%62.7%up 0.5 points
R&D and MG&A$5.4 billion ^$5.4 billionup 1%
Operating Income$3.9 billion$3.3 billionup 20%
Net Income$3.2 billion$2.6 billionup 22%
Earnings Per Share66 cents54 centsup 22%

Intel Year Over Year Segment Comparison for Q1 2017 Results

Revenue of $14.8B was up 8% on a year-on-year basis.

  • Client Computing Group had revenue of $8.0B, up 6% with platform volumes down 4% and platform average selling prices up 7%. Desktop platform volumes were down 7% and desktop platform average selling prices were up 2%. Notebook platform volumes were up 1% and notebook platform average selling prices were up 7%.
  • Data Center Group had revenue of $4.2B, up 6% with platform volumes down 1% and platform average selling prices up 6%.
  • Internet of Things Group had revenue of $721M, up 11%.
  • Non-Volatile Memory Solutions Group had revenue of $866M, up 55%.
  • Intel Security Group had revenue of $534M, down 1%.
  • Programmable Solutions Group had revenue of $425M, up 18%. PSG revenue would have been down 7% after adjusting for a $99M deferred revenue write-down in the first quarter 2016.

Intel Quarter-on-Quarter Segment Comparison for Q1 2017 Results

  • Client Computing Group revenue was down 13% with platform volumes down 13% and platform average selling prices up 2%.
  • Data Center Group revenue was down 9% with platform volumes down 7% and platform average selling prices down 3%.
  • Internet of Things Group revenue was down 1%.
  • Non-Volatile Memory Solutions Group revenue was up 6%.
  • Intel Security Group revenue was down 3%.
  • Programmable Solutions Group revenue was up 1%.

Intel (NASDAQ:INTC) Q2 2017 Guidance

The divestiture of Intel Security Group includes a gain of roughly $375 million and tax related impact on a GAAP basis. The tax basis in the net assets transferred in the McAfee Security transaction was lower than our GAAP basis, resulting in a larger tax liability than our GAAP gain. We excluded these impact on a non-GAAP basis.

Revenue is expected to be $14.4B, plus or minus $500 million in the second quarter. Excluding Intel Security Group, this is up 11% on a year-on-year basis. GAAP gross margin in the second quarter is expected to be 62%, plus or minus a couple of points, flat to the first quarter. GAAP EPS is expected to be $0.53 plus or minus 5 cents. Non-GAAP EPS is expected to be $0.68 plus or minus 5 cents. This is up 15% on a year-on-year basis

Non-GAAP gross margin in the second quarter is expected to be 63%, plus or minus a couple of points, flat to the first quarter. GAAP and non-GAAP gross margin are primarily driven by lower platform* unit cost and offset by higher factory start-up costs. Spending for R&D and MG&A in the second quarter is expected to be approximately $5.2B.