Intel earnings: Layoffs and margin pressure could overshadow Mobileye IPO

Intel Corp. must contend this week with an earnings report that notably lacked a formal pre-announcement, a bleaker-than-expected PC market and rumored layoffs, which will likely overshadow the initial public offering of its Mobileye unit.

Intel INTC,
+0.78%
is scheduled to report third-quarter earnings after the closing bell Thursday, after reports that the company was planning a large round of layoffs close to its earnings announcement. Most recently, that inched closer to being confirmed in a report that Chief Executive Pat Gelsinger addressed workers via video that “targeted” layoffs were on the way. The last time Santa Clara, Calif.–based Intel announced a big round of layoffs was in 2016, when the company cut 12,000 jobs, or 11% of its workforce, on the same day it reported quarterly earnings.

Gelsinger reportedly told workers that “costs are too high and our margins are too low,” which will once again put investor focus on Intel’s now chronic margin issues. Already, the CEO has had to walk back last year’s promise that margins would remain “comfortably above 50%” as margins in the previous quarter had fallen to 44.8%, third-quarter margins were forecast at 46.5%, and the annual margin forecast for the year fell to 49%. And against this backdrop, margins for rival Advanced Micro Devices Inc. AMD,
-0.20%
surpassed 50% for the first time, and are expected to climb.

Amid all this downward pressure on several fronts, Susquehanna Financial analyst Christopher Rolland brought up a question many have posed: Why hasn’t Intel pre-announced?

Profit warnings due to the downturn in the consumer PC market have been rolling in for more than a quarter, as worldwide PC shipments are expected to experience their steepest drop since records have been kept, causing chip makers like AMD, Nvidia Corp. NVDA,
+1.07%,
Micron Technology Inc. MU,
+0.34%,
and Applied Materials Inc. AMAT,
+3.06%
to slash their outlooks not only because of weak PC sales but also from widened US restrictions on advanced tech to China.

Read: PC market in ‘steepest’ fall since data started being collected in mid-1990s, analysts agree

Intel has not pre-announced, just as it did not last quarter before announcing a large miss from its own forecast and analysts’ expectations. Rolland, who has a negative rating on Intel, expects revenue to come in at the low end of expectations given that “CEO Gelsinger has already publicly telegraphed weakness.”

“However, we believe 4Q remains at significant risk as our mid-quarter checks have worsened of late,” Rolland said, who now forecasts a 17% year-over-year drop in PC shipments for 2022. “Given the dependence on revenue and utilizations, we are also reducing our GM estimates for the full year below their estimated 49%.”

Read: Chip stocks crushed to two-year low as more tech, AI ban to China add to woes

No matter what, investors are going to want to know if Chief Financial Officer David Zinsner’s forecast of the third quarter being a “financial bottom” for the company holds up.

What to look for

Earnings: Of the 29 analysts surveyed by FactSet, Intel on average is expected to post adjusted earnings of 34 cents a share, compared with Intel’s forecast of 35 cents a share, well below the 90 cents a share expected by the Street when the quarter began, and the $1.71 a share reported in the year-ago period. Estimate, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for adjusted earnings of 46 cents a share.

Income: Wall Street expects revenue of $15.35 billion from Intel, according to 29 analysts polled by FactSet, based on Intel’s forecast of about $15 billion to $16 billion. That’s down from the $18.95 billion the Street expected at the beginning of the quarter, and the $18.09 billion reported last year, and will likely mark the ninth consecutive quarter of year-over-year revenue declines. Estimate expects revenue of $15.43 billion.

Breaking down divisions, analysts surveyed by FactSet expect revenue from client computing to come in at $7.58 billion; data center and AI group revenue of $4.67 billion; “network and edge” revenue of $2.4 billion; and Mobileye revenue of $472.2 million.

Stock movement: Speaking of a possible ninth straight quarter of revenue declines, even if Intel beats expectations — as it generally does — shares have fallen following the company’s past nine quarterly earnings reports.

Over the September-ending quarter, Intel’s stock price dropped 31%, while the Dow Jones Industrial Average DJIA,
+1.34%
— which counts Intel as a component — has fallen 7%, the S&P 500 index SPX,
+1.19%
declined 5%, the tech-heavy Nasdaq Composite Index COMP,
+0.86%
shed 4%, and the PHLX Semiconductor Index SOX,
+0.64%
fell nearly 10%.

What analysts are saying

Bernstein analyst Stacy Rasgon remarked that he sees two reasons, “neither very encouraging from Intel’s point of view,” on why the company is going ahead with its lower-than-expected valuation for Mobileye MBLY.

Last week, Mobileye estimated shares of its IPO would price between $18 and $20, giving the self-driving car tech company a valuation of up to $15.9 billion, coincidentally, roughly the same amount Intel paid to acquire Mobileye in 2017 for $15.3 billion in cash . Mobileye filed for the IPO at the end of September, reportedly seeking a $30 billion valuation, well below earlier estimates of $50 billion valuation for the company.

“As we all know high-growth tech stocks have been decimated by a combination of weaker macro and higher rates, and the IPO market itself has stagnated in recent months,” Rasgon said. “But going ahead with the IPO now, at (what sounds like) any price they can get, suggests Intel still believes doing it now is better than waiting.”

“And secondly, Intel will be receiving some cash from the deal (~$3.5B dividend from Mobileye, and ~$900M from selling them their Moovit asset), and they likely need the money given the way their own business is currently trending,” Rasgon said.

Read: Nvidia, Intel gaming cards go on sale while AMD teases Nov. 3 announcement

Wedbush analyst Matt Bryson, who has an underperform rating on Intel, asked in a note if he lowered his numbers enough for the fourth quarter and 2023, given that Intel’s most recent guidance “assumed a far less bleak PC backdrop (down roughly 10% Y /Y)) than appears to have materialized.”

Looking at Intel’s data center business, Bryson said he sees further risk to his assumptions of a slight uptick in enterprise revenues into the fourth quarter “particularly with AMD share gains [that] also pressure Intel sales.”

“And looking into next year, we have the same question given macro headwinds and our belief that AMD might even see share shift accelerated in light of Intel’s struggles with Sapphire Rapids,” Bryson said.

Of the 36 analysts who cover Intel, seven have a buy rating on the stock, 20 have a hold rating, and nine have a sell rating, along with an average target price of $33.58, which has dropped from a quarter-ago $47.26, according to FactSet data.

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