22 Apr

Why Intel’s 1Q16 Earnings Suggest All Is Not Well

WRITTEN BY Puja Tayal

Intel’s fiscal 1Q16 earnings

The semiconductor behemoth Intel (INTC) has released its fiscal 1Q16 earnings, and all is not well. Although Intel reported revenue growth across all major business segments, it missed the analyst revenue estimate by $30 million. It topped the analyst estimate for EPS (earnings per share), however.

In the earnings call, Intel Chief Financial Officer Stacy Smith stated that the company witnessed “weaker than expected PC market,” and this is only going to aggravate with high single digit declines in PC sales expected in 2016.

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For the company’s key growth driver, the data center group, growth slowed from double digits to single digits for the second quarter in a row, raising concerns about its future growth potential. With IBM (IBM) and Qualcomm (QCOM) moving fast in the data center space, competition is not far away.

Weak guidance for fiscal 2Q16

Given the current market condition, Intel has posted a weaker guidance for fiscal 2Q16 and has lowered its fiscal 2016 guidance from mid-to-high-single-digit growth to mid-single-digit growth. Recently, Gartner revised down its 2016 forecast for the global semiconductor industry revenue from the earlier 1.9% YoY (year-over-year) growth to a 0.6% YoY decline.

Share price

Despite the stronger EPS, the company’s shares fell by over 2%, trading at $30.86 in the after-hours trading session on April 19, 2016, due to the weaker guidance. But the shares rose by 3.7% and closed at $32 on April 20, 2016, as investors reacted positively to the company’s restructuring announcement.

Notably, you can gain exposure to Intel through the iShares Russell 1000 ETF (IWB), which invests in large-cap stocks across various industries. IWB has 0.72% exposure to INTC, 0.64% to IBM, and 0.38% to QCOM.

Intel’s restructuring priority

Like peers Advanced Micro Devices (AMD) and Qualcomm, Intel has resorted to restructuring amid declining revenues and has announced 12,000 job cuts in the next two months. But the silver lining in the dark cloud of PC weakness is Intel’s increasing exposure to other markets, such as programmable chips, memory chips, embedded, and security solutions. In the 1Q16 earnings call, Stacy Smith said, “We’re moving from a company that was at the center of the PC market to being a company at the center of cloud computing.”

In this series, we’ll explore the growth drivers, growth deterrents, and Intel’s strategy to tackle deterrents with its new organizational structure.

Now let’s look at Intel’s margins and revenue growth in 1Q16.

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