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Intel's Report Leaves A Slightly Sour Taste
Jan. 15, 2015 11:25 PM ET | 39 comments | About: Intel Corporation (INTC)
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
Q4 revenues beat slightly.
Q4 EPS beat mostly due to low tax rate.
Q1 guidance a little soft.
Cash balance a slight worry for capital return fans.
After the bell on Thursday, chip giant Intel (NASDAQ:INTC) reported its fourth quarter and full year 2014 results. Overall, results were a little mixed. The company was slightly ahead of revenues estimates for Q4 but blew out the EPS number thanks to a low tax rate. Guidance for Q1 was a little light, and shares edged down in the after-hours session. Today, I'll analyze the company's results.
Fourth quarter results:
As I detailed in my Intel earnings preview, the company gave the following guidance for Q4:
Revenue: $14.7 billion, plus or minus $500 million.
Gross margin: 64%, plus or minus a couple of percentage points.
R&D plus MG&A spending: approximately $4.9 billion.
Restructuring charges: approximately $45 million.
Amortization of acquisition-related intangibles: approximately $65 million.
Impact of equity investments and interest and other: approximately $175 million net gain.
Depreciation: approximately $1.9 billion.
Tax rate: approximately 28%.
Full-year capital spending: $11.0 billion, plus or minus $500 million.
For the quarter, Intel announced revenues of $14.721 billion, slightly ahead of the consensus estimate for $14.7 billion. Gross margins came in at 65.36%, nicely ahead of Intel's forecast for 64%. This beat was mainly driven by higher platform average selling prices for the PC Client Group and Data Center Group microprocessors and chipsets. You can see the full gross margin analysis in the CFO commentary letter.
R&D plus MG&A spending came in at $5.039 billion versus the company's $4.9 billion forecast. These extra operating expenses were mostly due to profit dependent spending. Restructuring and amortization expenses were also a bit higher than the company's forecast. Overall, Intel had operating income of $4.453 billion, nicely ahead of the roughly $4.4 billion if you use guidance midpoints.
Further down the income statement is where things really took off. Intel had "other items" that totaled a $206 million gain, ahead of guidance for $175 million. Additionally, the company's effective tax rate came in at 21.42% versus guidance of 28%, thanks to the reenactment of the US R&D tax credit.
On the bottom line, Intel came in at $0.74 per diluted share, well ahead of the $0.66 that analysts were looking for. That's a tremendous beat, but a large share of that was due to the tax rate difference. If you put Intel's Q4 tax rate at the 28% that was guided to, EPS would have been roughly $0.68, two cents ahead of estimates.
Overall, this report was decent, although the headline numbers probably make things appear a little better than they actually were. While the gross margin number was strong, a lot of those gains were wiped out in operating expenses. Additionally, the other income items and much lower tax rate really helped the bottom line.
Other important Q4 items:
In the quarterly report, Intel detailed the following numbers regarding its business segments. Dollar values are in millions.
Q4 revenue growth was driven mostly by 25% plus growth in the Data Center Group. It is also important to note that the Mobile and Communications group racked up another $1.1 billion plus in operating losses. Getting this segment closer to profitability in 2015 is a key goal for Intel, although we probably will see some steep losses there. Intel's goal for 2014 was to ship 40 million tablets. On the conference call, management stated that 46 million were shipped, so the company blew past its goal.
Q1 guidance:
Intel provided the following details for the first quarter of 2015:
Revenue: $13.7 billion, plus or minus $500 million.
Gross margin percentage: 60 percent, plus or minus a couple of percentage points.
R&D plus MG&A spending: approximately $4.9 billion.
Restructuring charges: approximately $40 million.
Amortization of acquisition-related intangibles: approximately $65 million.
Impact of equity investments and interest and other: approximately zero.
Depreciation: approximately $1.8 billion.
Analysts were looking for $13.77 billion in revenues, so the top line forecast was a little light. The gross margin number is a big disappointment, especially when you look at things sequentially. If you use the midpoints of the given guidance, along with the full-year tax rate that I'll discuss later, you get an EPS number of 47.5 cents per share. This is using the Q4 diluted share count, and the Q1 number probably will be a little lower thanks to the company's buyback. Analysts were looking for $0.51 in EPS from Intel, so overall, this forecast is a bit light.
Gross margins seem to be the main culprit for this weak guidance, and that's mainly due to higher factory start up and platform unit costs related to Intel's new 14nm products. The 14nm node is the next generation of chips for Intel, and will help to power all sorts of devices. Intel has already started shipping devices based on the new platform, and the company recently announced a number of new 14nm products at the Consumer Electronics Show.
In the second half of 2014, Intel's gross margin guidance proved to be very conservative, so I'll be very interested to see how things shake out by the time the April report comes around. Basically, for every full percentage point (100 basis points) Intel deviates from its gross margin forecast, we should see a 2 cent impact on the bottom line (per quarter). If Intel can come in at 61% in gross margins for Q1, I think we can easily see an EPS print of $0.50 or above. If analyst estimates come down on this guidance, we'd see another beat in April.
2015 guidance:
We had a mini preview of what this year might look like when Intel held its investor meeting back in November, as the company provided the following initial details for 2015.
Revenue: Growth in the mid-single digits.
Gross margin: 62%, plus or minus two points.
R&D plus MG&A spending: Spending as a percent of revenue is expected to be down with spending of approximately $20 billion, plus or minus $400 million.
Capital spending: Approximately $10.5 billion, plus or minus $500 million.
At that time, the revenue forecast was quite decent. However, the gross margin forecast was a bit worse than expected, and the operating expense forecast seemed a little high. The capital spending number would have been a $500 million decrease over the 2014 projection at that time. Included in Intel's report was the following guidance for 2015:
Revenue: growth in the mid-single digit percentage points.
Gross margin percentage: 62 percent, plus or minus a couple of percentage points.
R&D plus MG&A spending: approximately $20.0 billion, plus or minus $400 million.
Amortization of acquisition-related intangibles: approximately $255 million.
Depreciation: approximately $8.1 billion, plus or minus $100 million.
Tax rate: approximately 27 percent.
Full-year capital spending: $10.0 billion, plus or minus $500 million.
The revenue, gross margin, and R&D plus MG&A spending numbers are all the same, although the wording changed slightly on the gross margin range. The company did also provide some extra details, although Intel did not provide a full year number for restructuring charges. Going into this report, analysts were looking for 4.2% revenue growth and $2.37 in EPS. The one interesting item to note is that the capex forecast was reduced by $500 million. Intel only used $10.1 billion on capital spending in 2014, a bit below the company's forecast for $11 billion.
One key takeaway is that the gross margin forecast for the year is a bit higher than the Q1 forecast. As I detailed above, the 14nm costs will impact the company early in 2015. Those costs should subside a bit as the year continues, improving gross margins later in the year. Intel's dividend raise also makes a lot of sense now, given the reduction in capital expenditures late in 2014 and into 2015. With the company not spending as much on capex, free cash flow improves, and thus the dividend was hiked by 6 cents.
Back in November, I outlined a plan for how Intel shares could get to $40 this year. As part of that, I determined that the company needed to get to $2.50 in EPS, and my above article gave some potential numbers on that. Unfortunately, using Intel's yearly guidance, and using 5% for revenue growth, I only get $2.39 at the moment. I was hoping for 63.5% in gross margins, so the 62% forecast obviously was a disappointment in my opinion. If Intel's gross margins for the year were to come in at 63%, holding all else equal, EPS would probably jump to around $2.47. I also used $100 million in restructuring expenses, and did not add any "other income" items in my forecast. Should Intel improve in either of those two areas, the company probably could get another penny or two in the bottom line. Intel analysts were looking for $2.37 in EPS, so the $2.39 number above is not weak, but I'm not sure it gets Intel shares to $40 unless the market has another big year in 2015.
Capital return update:
Intel spent $4 billion in the fourth quarter to repurchase stock, which I am sure pleased investors. The company also raised its dividend for 2015 payments, something investors have been waiting a few years for. One important item to note is that the company finished Q4 with just $2.1 billion listed in its US cash pile. The company spent $10.8 billion to repurchase stock in 2014, but investors probably should not expect the company to come anywhere near that in 2015 unless more debt is taken out or funds are repatriated. Free cash flow minus the expected dividend payments will not be enough to satisfy another nearly $11 billion in repurchases, not with the current US cash balance.
Final thoughts:
Overall, this report leaves you with a slightly sour taste. Revenues were barely above the analyst average, while the huge bottom line beat was mostly due to a tax rate issue. Guidance for Q1 also seemed to be a bit light, and investors probably shouldn't expect as much of a buyback in 2015. Intel shares declined in the after-hours session on this news, and that makes sense given the huge run over the last year. I would recommend Intel investors stay the course over the next couple of days, and I'll be back in another week or two after things settle down a bit.
