Intel (INTC) To Post Q2 Earnings: Disappointment In Cards?

Intel Corp (NASDAQ:INTC) is set to report second-quarter 2017 results on Jul 27. Notably, the company has a positive record of earnings surprises in the trailing four quarters, with an average surprise of 6.95%.

Last quarter, the company delivered a positive earnings surprise of 1.54%. Non-GAAP earnings of 66 cents per share surged 22% from the year-ago quarter but declined 16.5% sequentially.

Strong year-over-year earnings growth was driven by 7.2% increase in revenues, which totaled $14.80 billion but missed the Zacks Consensus Estimate of $14.81 billion. Revenues decreased 9.6% sequentially.

Intel guided second-quarter 2017 revenues of around $14.4 billion (+/-$500 million), almost flat sequentially and up 6% year over year. Excluding Intel Security Group business, revenues are projected to grow 11% on a year-on-year basis.

The non-GAAP gross margin is expected to be around 63% (+/-2%), flat sequentially. R&D and MG&A expenses are anticipated to amount at around $5.2 billion.

Operating income is projected to be approximately $3.9 billion, while EPS is anticipated to be 68 cents (+/- 5 cents), up 15% on a year-over-year basis.

Despite the positive guidance, Intel’s shares have underperformed the S&P 500 on a year-to-date basis primarily due to rising competition in most of the markets. While the index gained 10.7%, the stock has returned a negative 4.2%.

Let’s see how things are shaping up for this announcement.

Factors at Play

We note that Intel’s growing focus into areas with better growth prospects, such as the artificial intelligence (AI), autonomous car and Internet of Things (IoT) businesses are key catalysts. In this regard, the acquisition of Mobileye (NYSE:MBLY) is a significant development that will boost its presence in the autonomous vehicle market.

However, increasing competition in the data center market is a headwind. Reportedly, Microsoft (NASDAQ:MSFT) is collaborating with ARM chip-makers, Qualcomm (NASDAQ:QCOM) and Cavium, to design ARM-based servers. The server will run a major part of the company cloud services going ahead. Additionally, increasing competition from AMD's recently launched EPYC server chip is also a threat.

Market research firm, Gartner, stated that worldwide server shipments decreased 4.2% year over year to 2.60 million units in the first quarter of 2017. Moreover, worldwide server revenues declined 4.5%. Data from another market research firm, IDC, showed that although server shipments increased 1.4% year over year to 2.21 million units, worldwide server revenues declined 4.6%.

Sluggish high-end server sales affected results. IDC noted that, “server market growth continues to slow down with most hyperscale service providers waiting until the second half of the year for deployment of Intel's new Skylake processors.”

The data center business now comprises a major part of Intel’s overall business (29% of 2016 revenues). Hence, a decline in the server shipment and revenues amid intense competition is a major concern for the company.

Notably, Intel recently launched its Xeon (formerly Skylake) scalable ‘Purley’, a next-generation server processor platform. However, it is unlikely to have much positive impact on top-line growth in the going-to-be-reported quarter.

We also note that the top-PC makers like HP, Lenovo, and Asus are set to launch PCs based on Qualcomm’s ARM-based Snapdragon processor, which intensifies competition for Intel. Moreover, declining PC shipment is a major concern for the company.

Earnings Whispers

Our proven model does not conclusively show that Intel will beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Intel’s Earnings ESP is currently -1.47%. This is because the Most Accurate estimate of 67 cents is lower than the Zacks Consensus Estimate of 68 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Intel carries a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

You could consider the following stocks with a positive Earnings ESP and a favorable Zacks Rank.

Cypress Semiconductor (NASDAQ:CY) has an Earnings ESP of +11.11% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

IPG Photonics Corporation (NASDAQ:IPGP) has an Earnings ESP of +3.07% and boasts a Zacks Rank #1.

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