Intel Hits the Reset Button

NEW YORK ( TheStreet) -- For Intel ( INTC), the second half of 2013 is all about resetting market expectations. No matter what it does to the share price.

Intel's second-quarter earnings report was largely in line, as the world's largest chipmaker reported earnings of 39 cents a share on $12.81 billion in revenue. Gross margins came in at 58%, up 2% sequentially, but down 5% year-over-year. Analysts surveyed by Thomson Reuters expected Intel to earn 39 cents a share on $12.896 billion in revenue.

However, for the third-quarter, new CEO Brian Krzanich reset market expectations. Intel said it expects revenue of $13.5 billion, plus or minus $500 million. Gross margins will be approximately 61%, plus or minus a couple of percentage points.

Deutsche Bank analyst Ross Seymore notes that Intel's new leadership team is resetting the company's growth trajectory, but also is also showing spending restraint, something Wall Street may like down the line. The company also lowered its full-year capital spending plan. It now expects to spend $11 billion, plus or minus $500 million, down from a previous view of $12 billion.

"While this revenue guide is mildly disappointing, we believe the company has now set the bar realistically and importantly shown continued signs of cost control by trimming capex/opex (- $1b/-$200m)," Seymore wrote in the note. "Consequently, we believe the company's transition into faster growing mkts (ultra-mobile, foundry etc.) will require patience, but expect the shares to slowly rise as signs of success emerge in 2H13 (tablets, convertibles etc.) and become more meaningful in 2014 (LTE handsets)." He rates Intel shares "buy" with a $26 price target.

Krzanich and CFO Stacy Smith made it a point in both the earnings release and on the conference call to talk about how Intel is adapting to new markets, particularly mobile and the foundry business. Krzanich said the foundry business, where Intel builds chips for other companies, is "moving from crawl space to walk space." For shareholders, this transition requires patience, with a 12 to 18-month lag between when a customer is signed and revenue flowing from the foundry.

The mobile business is another story. Intel is working hard to get its Atom chipsets into tablets, and smartphones, segments that have traditionally been dominated by ARM Holdings ( ARMH)-designed chipsets. CFO Smith said that Intel's working hard to get Atom in the $500 and below market, an area that has plagued the company in the past. Intel even mentioned getting into tablets in the $150 and below price point range. The firm's chipsets have traditionally been more expensive than ones based on ARM's intellectual property, like those from Qualcomm ( QCOM), Broadcom ( BRCM) and others, so this is a marked change.

Intel's aggression around the mobile business, however, could cannibalize revenue in its PC Client Group, which is still the company's largest segment. Citi analyst Glen Yeung, who rates Intel "neutral" with a $24 price target, believes Intel's mix in the second half of 2013 is worthy of attention, depending on how it positions Atom in low-end PC's and tablets.

Though Intel revised full-year revenue guidance lower, expecting revenue growth to be "approximately flat year-on-year, down from prior expectations of low single digit percentage increase," the company was unusually bullish on the second-half of 2013 from a macro perspective. Intel expects to see 15% growth in its data center business, with half of that growth coming from macro improvement. It doesn't seem like the world's economies are going to get that much stronger in the next six months, so Intel's bullishness may be a little overly optimistic.

"We believe the 2H guide could be aggressive, given lower PC supply chain expectations and more challenges with pricing and new tablet form-factors," wrote Sterne Agee analyst Vijay Rakesh who lowered his estimates following the report. He cut his third-quarter estimates to 50 cents a share and full year to $1.83 a share, down from $1.88 per share in earnings.

Intel tried its best to rest market expectations for the full year, hinting on the call that the guidance could be conservative. With shares down sharply following the reset, it's up to Krzanich and his team to deliver on the new areas of growth, notably foundry and mobile.

Otherwise, Intel may not be "inside" as many portfolios as it once was.

-- Written by Chris Ciaccia in New York

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