On Jan. 26, microprocessor giant Intel (NASDAQ:INTC) announced its financial results for 2016 and issued detailed financial guidance for 2017, including revenue, gross margin, operating income, and earnings-per-share estimates.
This guidance calls for "flat" revenue to the $59.4 billion that the company generated in 2016. Now, while on the surface this might be disappointing, it's not as bad as it looks.
Remove McAfee and you get growth
In its earnings release, Intel explicitly says that if one were to exclude revenues from the Intel Security business, a business that Intel is in the process of spinning out, it would achieve revenue growth "in the low single digits."
In 2016, Intel Security generated $2.16 billion in revenue. Excluding that from the 2016 results yields total revenue of approximately $57.23 billion.
Now, Intel's financial guidance for 2017 of about $59.4 billion doesn't include a full year of Intel security revenue -- just a single quarter. And, in fact, Intel CFO Robert Swan said that if the company ends up closing the spin out during the second quarter of 2017, a quarter later than anticipated, then Intel would go in and revise its full-year financial guidance to account for the additional quarter of revenue.
If Intel generates the same amount of revenue in 2016 and in 2017, and if the 2017 number includes just one quarter of Intel Security revenue while the 2016 number includes four quarters of Intel Security revenue, then the business -- excluding Intel Security -- is set to grow.
Client Computing Group guidance looks cautious
Going into 2016, Intel had told investors to expect revenue from its Client Computing Group to either be flat or to grow by a low-single-digit percentage. This forecast assumed that the personal-computer market would be "slightly down," a forecast that Intel said at the time was more pessimistic than what the third-party market researchers had expected.
However, early in the year, Intel revised its full-year financial guidance downward because of a belief that the personal-computer market would "decline in the high single digits in 2016 versus [Intel's] prior forecast of [a] mid-single-digit decline."
Then, in the third quarter of the year, Intel saw better-than-expected personal computer chip sales, driving it to revise its third-quarter guidance and, shortly thereafter, its full-year 2016 numbers. And, finally, when Intel reported its financial results for the fourth quarter of 2016, it once again saw upside to its guidance because of better-than-expected personal-computer chip sales.
Intel's CCG ultimately saw 2% revenue growth for the year.
For 2017, Intel says its financial guidance assumes that the personal-computer market will decline at a mid-single-digit rate -- a figure the company admits is more pessimistic than third-party forecasts.
It's understandable that the company is being cautious here. Remember that in 2014, Intel saw solid upside in personal-computer sales, which, in hindsight, was due to the end of life of the Windows XP operating system, which drove a substantial corporate personal-computer refresh.
Intel's financial guidance for 2015 with regard to its personal-computer business called for roughly flat unit shipments, with "revenue slightly down." When the rubber hit the road that year, Intel saw notebook platform volumes drop 9% and desktop platform volumes plunge 16% -- wildly missing the company's original forecast.
It's ultimately much better to set the bar relatively cautiously and then surprise investors to the upside later than to set the bar extremely high only to have to lower it later. In this case, I think the bar is low enough that there's a reasonable chance that Intel's CCG performs better than what the current guidance implies.