Intel Slumps After Beating Estimates and Pulling Full-Year Guidance: 5 Key Takeaways

Strong notebook and server CPU sales helped Intel easily top Q1 estimates. But the chip giant cautioned that macro pressures are set to weigh on some businesses.
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Intel  (INTC) - Get Report delivered the kind of strong Q1 numbers that many investors were counting on. But its Q2 guidance and full-year commentary were more mixed.

On Thursday afternoon, the chip giant reported Q1 revenue of $19.83 billion (up 23% annually), GAAP EPS of $1.31 and non-GAAP EPS of $1.45. Those numbers respectively topped consensus analyst estimates of $18.67 billion, $1.23 and $1.28.

For Q2, Intel is guiding for revenue of $18.5 billion (up 12%), GAAP EPS of $1.04 and non-GAAP EPS of $1.10. The revenue guidance is above a $17.79 billion consensus, but the EPS guidance is respectively below consensus estimates of $1.12 and $1.20.

And like many other firms, Intel is withdrawing the full-year guidance that it shared three months ago, citing the “significant economic uncertainty” caused by the COVID-19 pandemic.

Intel’s stock fell 6% in after-hours trading to $55.50. Shares were up 35% from their March low going into earnings, aided by widespread signs of a pickup in notebook and cloud server demand amid COVID-19 lockdowns.

CPU archrival AMD  (AMD) - Get Report, which reports on Tuesday, fell 3.3% after-hours. GPU giant Nvidia fell 1.6% and memory giant Micron  (MU) - Get Report fell 1.5%.

Here are some notable takeaways from Intel’s earnings report and call.

1. Notebook and Server CPU Sales Grew Very Strongly in Q1

Intel’s Client Computing Group (CCG), which covers PC and mobile chip sales, saw revenue grow 14% annually in Q1 to $9.78 billion, easily beating a $9.34 billion consensus. While CCG’s desktop processor shipments fell 4% annually, this was more than offset by a 22% increase in notebook processor shipments. Inventory-building by PC OEMs provided a lift, but so did strong notebook demand.

The Data Center Group (DCG), which covers sales of server CPUs and certain other data center products, saw revenue grow 43% to $6.99 billion, blowing past a $6.32 billion consensus. CPU shipments rose 27%, CPU average selling price (ASP) rose 13% and sales of “adjacencies” rose 35% thanks to strong networking chip demand.

As expected, DCG’s sales to cloud service providers shot higher, rising 53%. But it also saw its sales to telecom service providers grow 33%, and (following a 7% Q4 decline) its sales related to systems meant for enterprise and government clients grow 34%.

2. Intel’s Near-Term Demand Outlook Is a Mixed Bag

Intel expects cloud server CPU demand to remain strong in Q2, and is optimistic that this strength will continue into Q3. Notebook demand is also expected to remain strong this quarter, but Intel cautions that it expects macro weakness to weigh on second-half PC sales (AMD’s ongoing share gains could also have an impact).

Likewise, Intel expects DCG’s sales related to enterprise and government end-markets to weaken in the back half of the year. And its Internet of Things Group (IoTG), whose processors go into systems that are installed in places such as factories and retail stores, is also expected to see macro headwinds. Also, not surprisingly, auto plant shutdowns will impact sales for Intel’s Mobileye ADAS vision processor unit.

One bright spot: Intel says demand for its Snow Ridge (Atom P5900) system-on-chip (SoC) for 5G base stations is stronger than expected. In February, Intel said that it expects to be the world’s top supplier of base station processors by 2021, a year earlier than previously expected.

Intel's commentary about expected 2020 headwinds and tailwinds. Source: Intel.

Intel's commentary about expected 2020 headwinds and tailwinds. Source: Intel.

3. Product Ramps Will Weigh on Q2 Margins

The reason that Intel’s Q2 EPS guidance is below consensus even though its revenue guidance is above consensus: Its gross margin (GM) is expected to drop by about 6 percentage points sequentially to 56%.

Intel attributes its GM guidance to three factors: Lower revenue relative to Q1, the building of pre-qualification inventory reserves for its next-gen notebook processor line (codenamed Tiger Lake) and a sales mix shift towards products made using its newer 10-nanometer (10nm) manufacturing process node, driven by Tiger Lake and Snow Ridge.

Intel added that its Tiger Lake reserves aren’t expected to impact its full-year GM, since the company expects to sell the reserves in the second half of the year.

4. Intel Plans to Be ‘Disciplined’ With its Near-Term Capital Spending

Among the full-year forecasts that Intel pulled today: Guidance for 2020 capital spending of roughly $17 billion, up from 2019 capex of $16 billion and 2018 capex of $15.2 billion.

When asked about where Intel’s capex plans now stand, CEO Bob Swan said that Intel still plans to make capital investments needed to “support the growth that we anticipate over the medium-to-long-term horizon.” However, he added that his company will be “very disciplined” this year on capex that isn’t related to capacity expansion needs and/or technology development.

Also, CFO George Davis suggested Intel expects 6-to-8 weeks worth of capital spending being pushed out into 2021, due to disruptions caused by COVID-19 lockdowns.

Some chip equipment makers -- a group of companies that have generally reported seeing strong near-term demand -- fell a bit after-hours. Applied Materials  (AMAT) - Get Report fell 1.9% and Lam Research  (LRCX) - Get Report fell 1.1%.

5. Intel Says its 2020 Product Roadmap Is ‘Largely on Track’

“While product development in a work-from-home environment is extremely challenging, we are largely on track for our 2020 product deliverables,” said Swan.

Tiger Lake processors are expected to roll out in mid-2020, and Intel promises that more than 50 Tiger Lake-based notebooks will be available during the holiday season. And though it isn’t known yet how large these shipments will be, “initial production shipments” for Intel’s first 10nm server CPU line (codenamed Ice Lake) are still set for Q4.