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Why Does Intel Expect a Slow Start to 2016?

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Jan. 19 2016, Updated 8:06 a.m. ET

Fiscal 2016—a year of transition

World Semiconductor Trade Statistics expects the global semiconductor market to grow 1.4% in 2016 and 3.1% in 2017. This assumes that the macro economy will revive during the period. It’s important to note that 2016 is a year of transition. Most semiconductor companies will invest in upgrading technology and production to prepare for 2017.

Intel (INTC) expects fiscal 2016 to start slow given the weak economic growth in its major market—China (MCHI). However, its move towards data center and IoT (Internet of Things) will likely boost sales in 2016 and also increase expenses.

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Fiscal 1Q16 guidance

For fiscal 1Q16, the company expects to post revenue of $14.1 billion. This includes $400 million in revenue from Altera. Analysts expect the company to post revenue of $13.9 billion in fiscal 1Q16. However, it isn’t clear whether analysts’ estimates include Altera as well.

On the profitability front, Intel expects to post a non-GAAP (generally accepted accounting principles) gross margin of 62% in fiscal 1Q16. This is lower than the 60.5% margin reported in fiscal 1Q15 and 64.3% reported in fiscal 4Q15. The company expects its R&D (research and development) and M&A (merger and acquisition) spending to increase to $5.5 billion from $5.2 billion in fiscal 4Q15.

Intel’s fiscal 2016 guidance

On a non-GAAP basis, the company expects the gross margin to rise to 63% in fiscal 2016 from 62.6% in fiscal 2015 as the transition to 14 nanometer starts showing results. It expects to increase its R&D and M&A expense by 6% YoY (year-over-year) to $21.3 billion. It expects the capex to grow by 30% YoY to $9.5 billion in fiscal 2016.

If we look at the capex-to-operating cash flow ratio, it has been above 50% in four of the past five years including 2015. The revenue growth has been negative in three of the past five years. While the company is increasing its capex, it needs strong revenue growth as well.

Altera effect

For fiscal 2016, Intel raised its previous 2016 revenue outlook of mid-single digit growth, provided in the November 2015 investor conference, to mid-to-high single digits. The revised guidance adds the revenue from Altera. This would be offset by the uncertain macroeconomic environment, especially in China.

There will likely be more integrations in 2016. Avago (AVGO) will incorporate Broadcom (BRCM) into its earnings. NXP Semiconductors (NXPI) will incorporate Freescale.

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