Intel Corp. Earnings: Soft Guidance Overshadows Solid Results

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Intel (INTC -2.40%) reported third-quarter results on Tuesday night. Following up on a rosy mid-quarter guidance update, the semiconductor giant delivered solid growth on both the top and bottom lines. However, investor expectations may have been a bit too high; Intel shares fell 5% in after-hours trading.

Let's have a closer look at that market-moving report.

Intel's third-quarter results: The raw numbers

Data source: Intel. YOY = year over year.

What happened with Intel this quarter?

The quarter didn't work out exactly as outlined in the mid-September guidance update. In fact, most of the final results were better than the September forecast.

• The revenue till clicked $200 million above the updated forecast, led by strong sales in the Internet of Things division and the enterprise-oriented data center group. Both of those segments saw sales rising by double-digit percentages, compared with the same quarter of 2015.
• Costs associated with research and development plus mergers and acquisitions came in at $5.1 billion, in line with the original guidance target and $100 million below the September update. The ongoing restructuring program is running slightly ahead of schedule.
• Both gross margins and income tax rates came in just a hair stronger than previously expected.

As usual, Intel provided a detailed slate of financial projections for the next reporting period. The fourth quarter should work out something like this:

• Sales should rise approximately 5% year over year, landing at $15.7 billion.
• GAAP gross margins are headed toward 61%, down from 64.3% in the year-ago quarter.
• Running the numbers on Intel's line-by-line forecast, GAAP earnings should stop near $0.68 per diluted share in the fourth quarter. That would be roughly 8% below the $0.74 per share seen in the fourth quarter of 2015.

What management had to say

In the earnings release, Intel CEO Brian Krzanich underlined the third quarter's solid results.

"It was an outstanding quarter, and we set a number of new records across the business," Krzanich said. "We're executing well, and these results show Intel's continuing transformation to a company that powers the cloud and billions of smart, connected devices."

Looking ahead

The fourth-quarter revenue forecast was set slightly below the normal seasonal trends. Furthermore, the gross margin picture is under pressure from factory start-up costs as Intel moves onto a next-generation manufacturing technology at the 10-nanometer node. The resulting mix of soft sales and flattish profits weighed on Intel's share prices, largely erasing the gains that were built on that September guidance update.

The market can be a tricky beast. Strong results in the rearview mirror are often ignored when the road ahead shows a speed bump or two. What lies beyond those near-term challenges might not matter at all. That's the story behind Intel's falling share price this time.