This morning, Intel (INTC +12.93%) issued a revenue warning for the first quarter of 2015, calling for first-quarter revenue to be just $12.8 billion (give or take $300 million), which is a $900 million reduction at the midpoint from prior guidance of $13.7 billion. The company also said in its press release that it's keeping its gross profit margin forecast unchanged at 60%.
There's no beating around the bush here -- this is bad news.
What's going on here?
According to Intel, the reason that it felt the need to issue a revenue/profit warning is due to "weaker than expected demand for business desktop PCs" as well as "lower than expected inventory levels across the PC supply chain."
Elaborating further, the company said in its press release that lower-than expected Windows XP refresh "in small to medium businesses" as well as macroeconomic and currency headwinds were key culprits of this weakened outlook.
On the bright side, Intel did say in its press release that its data center business is "meeting expectations."
Resetting expectations
Until Intel reports its actual first quarter results, and issues its outlook for the rest of the year, there will be quite a lot of uncertainty surrounding the stock. It's hard to call right now what the company will revise full-year guidance to, but after this pretty wide miss, my guess is that management will play it on the conservative side so as to avoid having to guide down again.
But, the question worth asking is, what would be "conservative" at this point?
Well, keep in mind that the company's previous guidance for PCs was "flat units, revenues slightly down." Let's call "slightly" somewhere between 1-3%. If we further assume that the company had expected pretty consistent year-over-year comps on a quarterly basis, then the company might have expected PC-related revenues to be anywhere from $7.66 billion to $7.821 billion (down 1-3% from first quarter 2014 levels).
Since Intel is guiding down to the tune of $900 million, then if the above reasoning/math is correct, this would imply PC-related revenues of $6.76 billion to $6.921 billion, or a year-over-year drop of between 11.5% and 11.7%.
Note that Intel had $34.669 billion in PC-related sales during 2014. Taking 11.6% out of that number would imply 2015 PC chip sales of just $30.65 billion. This would take Intel's full-year revenue guidance down from about $58.67 billion (assuming a 5% increase from 2014 levels) to about $54.65 billion -- a nearly 6.9% decline from initial expectations.
That said, this would likely be too conservative.
Expecting a decline, but not that steep
I don't think Intel will see a double-digit year-over-year decline in PC-related revenue for 2015. However, to think that it will be just a low single-digit decline at this point is probably overly optimistic. I'd feel comfortable guessing that for the full year, PC-related revenues will be down on the order of 5-7% from 2014 levels, and that's what I think Intel's management will guide to.
This wouldn't be great by any stretch of the imagination, and if the PC business continued to decline at that kind of a level in 2016, then that would be a sizable drag on the company's financials (and the bull case for the stock).
At any rate, there will be more to say when Intel releases its full results and hosts its first quarter conference call.
