Why Intel Earnings Matter (Update 1)

Updated from 8:10 a.m. to include additional analysis in the twelfth paragraph.

NEW YORK (TheStreet) -- Intel (INTC) is set to report fourth-quarter earnings after Thursday's closing bell, and all eyes will be on CEO Brian Krzanich's PC business, which is still the chip giant's bread and butter.

Research firm Gartner noted 82.6 million PC units were shipped in the fourth quarter, a bit better than expected, and may show that the PC market, while still exceptionally weak, is starting to bottom out. This could last a couple of quarters, as Windows XP becomes obsolete forcing companies to upgrade their computers.

Intel shares were lower on Thursday, falling 0.8% to trade at $26.44.

RBC Capital Markets analyst Doug Freedman noted that while there might be some improvement in the PC business this quarter, it might be "a short term phenomena," as enterprise IT spend picked u, largely due to XP becoming obsolete. "We believe that revenues could be at mid-pt and potentially better given the modest pick-up in Q4 PC demand and on-going data center strength," Freedman wrote in a note. He rates shares "sector perform" with a $26 price target.

Analysts surveyed by Thomson Reuters expect Intel to earn 52 cents a share on $13.71 billion in revenue for the fourth quarter.

Wedbush Securities Betsy Van Hees analyst said she believes sentiment is positive surrounding the stock, but expectations are fairly low. "While we remain very impressed with management's new initiatives, we believe for INTC to outperform the market from here that we will need to seemeaningful revenue contributions from these new initiatives and DCG to outpace declines in PCCG returning INTC back to strong Y/Y earnings and revenue growth," Van Hees wrote in a note.

Van Hees rates Intel shares "neutral" with a $27 price target.


JMP Securities analyst Alex Gauna noted that aside from the moderating declines in the PC business, Intel's data center business could be strengthening. Gauna expects data center revenue to be up 12% year over year, with $2.9 billion in quarterly revenue. "While higher Data Center mix could help Intel beat this figure, the erosion during what should be seasonal strength highlights the challenges facing the company," Gauna wrote in a note.

Outside of traditional earnings and revenue numbers and the health of the PC business, the most important number to watch is gross margins. CEO Krzanich previously has said  Intel's industry leading gross margins are safe, and analysts will be looking to see whether this is true, particularly as Intel goes up against chips from ARM Holdings (ARMH) in mobile and in the data center.

When Intel reported third-quarter earnings in October, fourth-quarter gross margin guidance was between 59% and 63%, about in line with what analysts were expecting. Fourth-quarter revenue guidance was between $13.2 billion and $14.2 billion.

Freedman noted that hype surrounding ARM's entry into the server market was high, but due to the shutdown of Calxeda, an ARM-based server provider, the growth for ARM in the server market could be weaker than many think. That could alleviate perhaps as much as 200 to 300 basis points threat of x86 dollar share.

Analysts will also be looking to hear whether Krzanich has an update on Intel's mobile initiatives, including those launched at the Consumer Electronics Show earlier this month. Intel unveiled several new products at CES, including Edison, an SD card designed to make any device "smart," new earbuds, and a wireless charging bowl.

--Written by Chris Ciaccia in New York

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