On Jan. 14, chipmaker Intel (INTC -1.44%) announced its fourth-quarter financial results and provided a detailed outlook for what it expects from both the first quarter of 2016 as well as the full-year 2016.
The company's fourth-quarter results were, on the whole, quite good. Revenue climbed to $14.9 billion, up 3% from the prior quarter and up a percent year over year. Breaking that down, Intel saw Client Computing Group revenues drop 1% year over year, but its other business segments -- principally its lucrative Data Center Group -- picked up the slack.
Gross profit margin came in at 64.3%, up a solid 2.3% from the guidance it gave for the quarter. This margin beat was driven by improved unit costs (14-nanometer yields may have improved at a better-than-expected rate), a richer mix of products, as well as lower factory start-up and other "non-production" related costs.
An OK-but-not-great outlook for Q1'16
Intel said in its earnings release that it expects to register $14 billion in GAAP revenue in the first quarter, give or take $500 million. At first glance, this would seem to be quite impressive given that the company reported seeing "just" $12.8 billion in the year-ago period. This is growth of nearly 10%, right?
Well, not so fast. Although Intel will technically see this kind of year-over-year growth if it meets guidance, it's important to note that the numbers this year include revenue from recently acquired FPGA maker, Altera. This, according to CFO Stacy Smith, is good for around $400 million in revenue for the quarter.
Stripping out the Altera contribution, we see that Intel is guiding to revenue of $13.6 billion, or about 6.25% year-over-year growth. This is still respectable, but analyst consensus called for $13.86 billion, so this is a miss relative to Wall Street expectations.
Additionally, the company says that it expects its gross profit margin percentage next quarter to clock in at 58% on a generally accepted accounting principles, or GAAP, basis. However, it's worth pointing out that this number is actually artificially low as it includes a 3.5% deduction thanks to acquisition related charges (3% from Altera, 0.5% from "other").
On a non-GAAP basis (which excludes these one-off charges), gross profit margins are expected to come in at a respectable 62%. The decline from the 64.3% seen in the fourth quarter is attributable to higher 10-nanometer factory start-up costs (deduction of 1%), lower volumes (deduction of 1%), "memory business ramp" (deduction of 0.5%), and higher platform write-offs (deduction of 0.5%).
Given that gross profit margin came in at 60.5% a year earlier, this is a respectable result.
How about full-year 2016?
At its November investor meeting, Intel guided to revenue growth of 5%-7% ("mid-single digits") for the full-year 2016. It's worth noting that this guidance didn't include the revenue contribution from Altera (as the acquisition hadn't closed at that time) but did include an extra work week (inflating the year-over-year comparison).
Its gross margin guidance at the time was 62% "plus or minus a couple of points."
In the CFO commentary accompanying the Jan. 14 earnings release, Intel revised its expectations. On a GAAP basis (which includes 2.5 point deductions related to "acquisition-related adjustments"), Intel is now calling for gross profit margin of 61.
The "comparable" number, though, is the non-GAAP gross margin guidance, which excludes those acquisition-related adjustments. This value came in at 63%, so Intel effectively raised its gross profit margin guidance.
However, one factor that's driving this increased margin outlook for the year is that the company has changed its semiconductor equipment depreciation schedules.
In a nutshell, when Intel buys tools to equip its chip manufacturing plants, those tools -- from an accounting perspective -- previously had a "depreciable life" of around four years. This means that the cost of a particular piece of equipment would be depreciated (which shows up as cost of goods sold) over four years.
The company is now extending that to five years, meaning the depreciation impact per year for a given piece of equipment is lower, helping to boost gross profit margins.
Additionally, it is now guiding to revenue growth from the mid- to high-single digits for 2016, including Altera. Given how tough the semiconductor market is shaping up to be for 2016, I'd be pleased to see it merely hit these projections at this point.