Intel Earnings Preview: The Clock Is Ticking

Intel (INTC - Analyst Report) is expected to report second-quarter results on July 15 after the bell.

The Zacks Rank #3 company has an earnings expected surprise prediction (ESP) of -3.92%, which, being negative, makes surprise prediction difficult irrespective of the Zacks Rank. That said, Intel has topped estimates in each of the last four quarters and it has revised its guidance in the past when there were chances of its results coming up short.

Investor expectations are already rock bottom, what with Gartner and IDC producing depressing estimates about PC market performance in the second quarter and continued sluggishness through the year. Gartner also expects tablets (that Intel clubbed under the same group recently) will stumble.

The research firm only expects the smartphone market to grow this year and we all know that Intel isn’t much of a factor there.

Expected Drivers

Client Computing Pressures: The PC market is shrinking and yes, Intel will suffer. Microsoft (MSFT - Analyst Report) giving away Windows 10 won’t help either. But Intel does have a plan B: look how close it’s getting to Chinese players, not to mention its increased targeting of lower-end devices. Margins are likely to remain under pressure both on account of product mix/pricing and tablet subsidies.

Data Center Strengthens: There should be no reason for a slowdown in Intel’s second largest business segment. Last quarter the segment did better than the targeted 15%. Cloud demand remains as strong as ever and Intel’s offerings and position remain supreme. If there aren’t mishaps, this segment could surprise positively yet again. Adding Altera (ALTR - Analyst Report) will mean greater synergies in the future.

IoT: The segment is likely to see decent growth as the market continues to expand and Intel gets into more devices. The Recon acquisition could also help.

NAND: This is still a small percentage of revenue and likely to remain so this quarter. But growth rates remain solid and may be expected to accelerate through the year.

What Else Is Important

Intel’s process lead is what enabled the company to maintain a competitive advantage thus far and this is where it could be seeing major challenges at the moment.

Intel will launch 14nm Skylake processors this year, which is the tock in its tick-tock cadence of producing chips. Intel refers to a design improvement as “tock” and shrinks it down to a lower process node in the following year, which is then referred to as “tick.”

So everyone thought that 10nm was going to be tricky and Intel agrees. Skylake’s successor Cannonlake (i.e. Skylake shrunk down to 10nm) should have been released in 2016, but doesn’t have a launch date and a weaker 14nm Kaby Lake will substitute it instead.

It’s 4G LTE SoFIA chip for mobile also looks delayed.

What all this boils down to is a possible shrinking in its process lead, which can affect its competitive position.

Summing Up

So far Intel maintains very strong growth expectations for the second half despite the pessimism related to the PC market, so its full-year expectations could be at risk.

Other technology stocks reporting this week are Advance Micro (AMD - Analyst Report), eBay (EBAY - Analyst Report) and Google (GOOGL - Analyst Report).