Intel Corporation Earnings Preview: What You Need to Know

Intel (NASDAQ: INTC  ) is the world's largest semiconductor company by revenue. The company dominates the market for chips found in notebook and desktop computers, as well as the market for processors that go into many compute-focused portions of the data center. The company reports earnings on Tuesday, which should provide long-term investors with a number of key data points.

More details on the PC market needed
Intel investors got a mighty fine treat on June 12 when the company pre-announced that unexpectedly strong corporate PC sales drove significant upside to the company's prior guidance. Back in April, the company had guided to $13 billion in sales for Q2 (give or take $500 million), but following the upward revision in June, the company is now expecting sales to fall in the range of $13.7 billion give or take $300 million.

Even though business-oriented PCs led the sharply higher guidance, Intel likely saw nice growth in the low-end of the consumer PC market for a couple of reasons:

  1. Tablet slowdown. With tablet growth slowing significantly, consumer wallet share may be shifting back to the PC.
  2. More compelling PC offerings. Thanks to the roll-out of the low cost Bay Trail-M and Bay Trail-D chips, which have enabled fanless, low-cost PCs, Intel may have gained back share in the low end of the Windows PC market (Intel has lost significant share here to rival Advanced Micro Devices in recent years). Further, Intel's broad-based collaboration with Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) on Intel-powered Chrome systems is likely further helping Intel win low end PC share (as well as wallet-share back from tablets).

The key thing to watch here will be how management guides PC growth for the rest of the year. It wouldn't be surprising to see management guide cautiously so that it has a high chance of meeting/exceeding estimates for the remainder of the year. Keep in mind, though, that management likely understands that the recent run-up in the stock price likely bakes in some optimism surrounding the guidance.

An interesting balancing act will be required, for sure, between setting expectations low enough to be easily beaten and high enough to keep investors optimistic about the long-term outlook for the company.

Server growth should be nice
Roughly half of Intel's data-center group is dependent on shipments into traditional enterprise servers. The other half is a mix of other segments, including high performance computing, networking, storage, cloud, and others.

Source: Intel

The nonenterprise portion of the market has generally been growing quite nicely, while -- as you can see in the Investor Day slide above -- the enterprise portion has been disappointing. But last quarter Intel actually saw the enterprise segment of the data-center group return to growth. If that segment can just grow slowly, then the rest of the segments should help to continue driving Intel's data-center group toward the low double-digit growth that management promised for the year.

Mobile should get better where it counts
Financially speaking, Intel's Mobile and Communications group is probably going to remain pressured on a year over year basis, but should improve sequentially. This improvement should be driven principally by the ramp of the company's first multimode LTE solution known as the XMM 7160 into a number of designs, such as the Samsung Galaxy S5 mini and Galaxy K Zoom.

Source: Intel

What won't be a tailwind to the financials -- but will be important to investors -- is how the company is tracking toward its 40 million tablet chip goal. In fact, since Intel is offering contra-revenue offsets for its lead tablet platform known as Bay Trail, and since this offset is done on a per unit basis, the worse that the financials are for tablets, the better it is in the long-run.

Why? Once Intel has the share, it can replace the Bay Trail chips with platform bill of materials reduced platforms that will no longer require contra-revenue support. Further, Intel's chips need a high presence on Google's Android in order to grab Android developers' attention, meaning that gaining scale this year -- even at the cost of profitability -- is critical.The worse that the financials are this year, the better things will look in 2015 when Intel is presumably driving even higher volumes but each of those chips is additive to earnings.

Foolish bottom line
The long-term picture for Intel is driven by three principal factors: PC sales, data-center group sales, and mobile progress (in that order). If the PC market shows signs of longer-term robustness, the data-center group shows double-digit year over year growth, and if mobile shows signs of long-term progress, the stock should continue to do well. 

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