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Earnings Outlook: Intel earnings: New CEO is not getting a honeymoon period

Intel Corp.’s new permanent chief executive should arrive to his first earnings report with a full deck of updates for investors after what is expected to be a slow start to 2019. Read More...

Intel Corp.’s new permanent chief executive should arrive to his first earnings report with a full deck of updates for investors after what is expected to be a slow start to 2019.

Right after its last earnings report, Intel INTC, +0.56%  made interim CEO Bob Swan the company’s chief executive on a permanent basis, and brought on Qualcomm Inc.’s  George Davis earlier this month to fill Swan’s role as chief financial officer. With earnings scheduled for Thursday after the close of markets, investors will be looking for further details of Intel’s recent decision to drop out of the 5G smartphone modem market following a settlement between Apple Inc. AAPL, +0.33%  and Qualcomm QCOM, +2.60%  .

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Instinet analyst David Wong, who has a buy on Intel, said he sees Intel’s exit decision as evidence that the company management is sticking to the strategy of focusing on high-growth, high-profitability products.

“We estimate that smartphone modem sales accounted for a little more than $2bn in revenues in 2018,” Wong said. “Intel cited lack of a clear path to profitability as a reason for exiting the modem business. This implies that manufacturing, R&D, and other costs associated with the modem business were comparable to or higher than revenues from modem sales last year.”

Swan will also have to address continuing reports of CPU shortages — which may be benefiting rival Advanced Micro Devices Inc. AMD, +1.81%  — along with a slowdown in cloud spending and continuing production concerns.

What to watch for

Earnings: Intel is expected to post adjusted earnings of 87 cents a share, according to a FactSet average of analyst predictions, in line with Intel’s forecast. That’s down from the $1.01 a share expected at the beginning of the fourth quarter. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of 91 cents a share.

Revenue: Wall Street on average expects revenue of $16.03 billion from Intel, according to 29 analysts polled by FactSet, compared with $16.07 billion in the year-ago period. The current estimate is down from $18.39 billion expected at the beginning of the quarter. Intel predicted revenue of about $16 billion. Estimize expects revenue of $16.21 billion.

Data-center group, or DGC, revenue is expected to decline 2.5% to $5.1 billion, according to FactSet data, while Intel’s largest segment, client-computing or traditional PC, is expected to rise 1.9% to $8.38 billion from the year-ago period. Nonvolatile memory solutions revenue is expected to decline 9.4% to $942.1 billion, compared with the year-ago period. “Internet of Things,” or IoT, revenue is expected to decline 6% to $789.5 million.

Stock movement: Intel shares are up 18% since the chip maker’s last earnings report, compared with a 3.4% rise on the Dow Jones Industrial Average DJIA, -0.18% a 10% rise on the S&P 500 index SPX, +0.10% a 13% advance on the tech-heavy Nasdaq Composite Index COMP, +0.22% and a 24% surge on the PHLX Semiconductor Index SOX, +0.01%  .  

What analysts are saying

Jefferies analyst Mark Lipacis, who has an underperform rating and a $40 price target on Intel, said shortages of central processing units, or CPUs, are expected to last into the third quarter of this year, and that’s handing market share to AMD. Lipacis estimates AMD’s share of the CPU market at just shy of 10%, compared with 3% to 5% share in the first half of 2018. 

“Intel’s misexecution on 10nm appears to have created a need in the supply chain to diversify CPU supply by giving AMD higher market share,” Lipacis said.

See also: Intel CPU shortages helped AMD, hurt PC shipments in first quarter, analyses contend

Intel has struggled in rolling out its new generation of chips made with a 10-nanometer manufacturing process as AMD rolls out its own 7nm process. In chip parlance, the number of nanometers refers to how small a chip maker can make the transistors that go on a computer chip, with the general rule being that smaller transistors are faster and more efficient in using power.

Cowen analyst Matthew Ramsay, who has a market perform rating on Intel and a $50 price target, said capital spending on cloud is expected in the second half of the year following a soft start to 2019. Ramsay expects a “lively debate” about spending, data-center growth and progress on the 10nm front as well as competition from AMD.

“While Intel may be stretched to hit overall 2019 revenue consensus given PC chip shortages and less than certain of 10nm Ice Lake timing in client, we believe [the data-center group] should post markedly better results during 2H19 and upside to overall gross margins for Intel despite AMD share gains for Rome during 2H19,” Ramsay said.

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Macquarie Research analyst Srini Pajjuri, who has an outperform rating and a $62 price target, said that server share concerns were “overblown.”

“We model [data-center group] revenue to decline 3% YoY in 1H19 due to ongoing inventory digestion & capex slowdown at hyperscale customers,” Pajjuri said. “That said, underlying demand remains strong, and Intel should benefit from intensifying competition among cloud vendors and new streaming services.”

Of the 38 analysts who cover Intel, 16 have buy or overweight ratings, 15 have hold ratings and seven have sell or underweight ratings, with an average price target of $54.72.

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