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Is Intel Corp.'s Revised Guidance Conservative Enough?

By Ashraf Eassa - Feb 5, 2016 at 10:15AM

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A look at whether Intel's newly revised guidance is conservative enough to avoid further downward guidance revisions.

On Intel's (INTC -2.20%) most recent earnings call, management admitted that its expectations for its core business (i.e., segments excluding the recently acquired Altera) had come down some from its original expectations set forth at its investor meeting back in November.

Interestingly, analysts with Citi recently took down their industrywide PC shipment forecasts. They're now looking for a year-over-year drop in units of around 6%, compared to prior estimates of units down 2%, during calendar 2016.

The question that Intel investors should be asking themselves at this point is the following: Is Intel's newly revised full-year guidance conservative enough, or will the company need to further revise its full-year forecasts?

Intel's old guide versus its new guide
Intel's prior guidance, before the inclusion of the Altera business, called for revenue growth in the "mid-single digits" percentage range overall, with PCs "slightly down" compared to third-party forecasts of "[roughly] flat."

Indeed, I wouldn't be surprised if the prior guidance baked in a PC unit decline of about 3% (at the high end of low-single digits).

With this PC unit guidance in mind, Intel called for "flat to low single-digit growth" in revenues for its Client Computing Group, which primarily sells PC-related platforms (though it does also sell tablet/phone related components, as well as cable gateway components).

Intel's new guidance now calls for total revenue up by anywhere from 5% to 9% from the prior year (this is likely the best way to interpret its guidance of revenue up by mid-to-high single digits), implying a revenue rage of $58.17 billion to $60.386 (midpoint of $59.278 billion). However, this number includes an approximately $1.6 billion contribution from Altera.

Strip out the Altera contribution from the ends of those ranges and we get a new range of $56.56 billion to $58.89 billion (midpoint of $57.73 billion).

Now, management didn't explicitly say that this weakness is concentrated in just the Client Computing Group operating segment, but let's assume for a moment that it is. In 2015, Intel's Client Computing Group brought in $30.654 billion in revenue in 2015.

If we assume that the ~$1.55 billion that Intel took its guidance down by at the midpoints of the respective ranges is all PC related, then that's a roughly 5% decline. In this case, Intel's guidance is already likely within spitting distance of what the Citi analyst's new projections for the overall PC market are.

The good news and the bad news
The good news is that as long as the weakness that led Intel to take its guidance down by a bit is mostly isolated to the PC group, Intel's guidance seems to bake in enough conservatism to allow the company to hit its numbers during the year.

However, if this weakness that Intel reported seeing is more broad-based -- in other words, if it impacts the company's highly lucrative data center business -- then Intel may be faced with the prospect of having to take down its full-year revenue (and ultimately earnings) guidance.

I believe that investors will be able to get a better read on the situation in April, when the company is expected to publish its earnings results for the first quarter of the year.

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