Intel Beats Again, Outlook Strong

Intel Corp reported first quarter revenues of 57 cents per share, which beat the Zacks Consensus Estimate by 6 cents. The surprise was driven by higher revenue and a lower tax rate.

Intel reported revenue of $13.0 billion, which was within management's guidance of $12.8 billion. Revenue for the quarter increased 1.4% sequentially and 21.1% year over year. Revenue growth was driven by the data center and embedded businesses, as then as McAfee. PC client business was soft as expected, mainly on account of the consumer, partially offset by enterprise refresh and emerging markets.

The PC Client segment generated 64% of revenue in the last quarter, down 3.5% sequentially and up 6.1% year over year. Sandy Bridge was a major driver of growth in the last quarter, with the ramp rate 20% higher than the previous generation product. Overall, enterprise remained the driver of growth, during consumer remained soft in developed markets.

The main positive here

The main positive here was the strength in emerging markets. Low penetration and a growing per capita income are making computing devices more popular in these regions. Intel expects PCs to grow 8-10% this year, with enterprise growth resulting in a richer mix. This will clearly be somewhat offset by the strength in emerging markets, where Intel's consumer business continues to do so then.

DataCenter was the second largest group with a 19% revenue share. Segment revenue was down 1.1% sequentially, nevertheless up 15.2% year over year. This segment has witnessed very strong double-digit year-over-year growth in each of the last seven quarters and, even though the growth rate dropped off in the last quarter, there is every reason to believe that it will grow into one of the most important drivers of Intel's business. The secular growth drivers here are increasing Internet usage by consumers all over the world, and the ongoing move towards virtualization and cloud computing.

The last quarter

Cloud applications were up 50% in the last quarter. Equipment upgrades and the growing demand for online data storage and networking infrastructure are nearly-term drivers. To illustrate, Intel reported that second-quarter microprocessor shipments for storage applications grew 38% year over year, during networking grew 40%.

The Other Intel Architecture segment generated around 11% of Intel's revenue in the last quarter, growing 20.9% sequentially and 233.1% from last year. The embedded business did in the extreme well in the last quarter, with over one million units of Atom processors being sold, up 76% from a year ago. Medical imaging was up 50%, Prit imaging up 48%, communications up 40% and industrial applications up 20%.

Management started breaking out Software and Services revenue separately, which went from $65 million in the year-ago quarter to $511 million in the last quarter, mainly due to the addition of McAfee in corporate results. McAfee had a record second quarter and Intel stated that the number of large deal wins doubled from the first quarter. An integrated Intel-McAfee solution is expected to launch later this year.

The Asia/Pacific market

The Asia/Pacific market was the largest in the last quarter with a 57% contribution. Revenue growth was strong, particularly in China, leading to increases of 1.8% and 19.9%, respectively, from the previous and year-ago quarters. The Americas was the second largest region, with a 22% contribution, representing sequential and year-over-year increases of 7.1% and 33.9%, respectively. Europe came in third with a 12% revenue share, having declined 4.9% sequentially and increased 20.9% from last year. Japan stayed at number four, with a 9% contribution, representing a decline of 4.7% from the previous quarter and an increase of 3.2% from last year.

The pro forma gross margin for the quarter was 61.7%, down 75 basis points sequentially and 553 bps year over year, better than guided. This was the fourth straight quarter of sequential decline in gross margin and the third quarter of year-over-year decline. The reason for the decline in the last quarter was largely on account of 22 nm ramp up costs that peaked in the last quarter. Utilization was as well lower, as additional 32nm capacity came online. Clearly, a stronger mix of enterprise business remained a positive factor, though this will continue to be offset by strength in emerging markets.

Intel guided revenue of around $14.0 billion in the third quarter, up 7.4% sequentially and 26.1% from the September quarter of 2010. Gross margin on a GAAP basis is expected to be around 64%, during on a non-GAAP basis, it is expected to be 65%. Total operating expenses are expected to come in at around $4.3 billion.

Management as well expects to provide for depreciation of around $1.3 billion and intangibles amortization of around $75 million. Other income/expense is expected to net a gain of around $100 million. Applying the guided tax rate of 28%, net income comes to around $3.5 billion or 25.2% of revenue, which would be up sequentially, however down year over year.

We reiterate that the low-power devices currently selling like hot cakes are more dependent than ever on strong server chips. Additionally, data centers are upgrading and Intel's powerful devices are the obvious choice. With its tick-tock strategy, we believe that Intel is way ahead of the competition in terms of research. So its supremacy in servers is likely to be sustained.

Additionally, Intel mentioned some encouraging numbers for other data center applications, just as storage, which is very encouraging. We think the move toward cloud computing will particularly benefit the company

The then and there segment to consider is corporate buyers that are steadily replacing PC fleets. Given Microsoft Corp's Windows 7 and Intel's new processor families, the Wintel domination here would change very by degree. Note that Intel's newer chips are as well more energy efficient. We just don't see any ARM Holdings-based devices taking notable share of core corporate computing spend but.

The sore point for Intel remains the consumer segment

The sore point for Intel remains the consumer segment, where it appears to be losing ground to ARM-based devices from Apple Inc.. Intel appears to be very much behind in the race, without any compelling product for the fast-growing tablet market. Additionally, the company's promise of progress in the smartphone segment as well appears to be some way off.

Gross margin expectations were as well better than expected, we think because the bulk of the 22nm ramp up charges were taken in the second quarter as then as the new growth opportunities in embedded and a strong software business.