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Intel Corporation (INTC): Q1 Earnings Preview

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Intel Corporation (NASDAQ:INTC) reports its first quarter results after the bell on April 16. Let’s take a look at what to expect from the company’s upcoming report including four positive developments to look forward to and three risks to be watch out for.

4 positives to watch for:

For this quarter:

(1) Declining inventories

According to a March report from iSuppli, the industry reduced inventories faster than expected. Intel Corporation (NASDAQ:INTC) aggressively cleared out its warehouses, slashing inventories 11% or nearly $600 million. Tighter supplies could provide some margin support in upcoming quarters.

Intel Corporation (INTC)(2) Strong data center business

One of the few bright spots in Intel’s recent reports has been its data center business. Last year, this segment posted 6% revenue growth driven by investment in cloud infrastructure.  Data centers can’t drive Intel’s entire business as this segment only accounted for 20% of the company’s revenue last year. However, strong results reflect on the company’s strong position in this space.

Long-term trends

(3) New products

At CES 2013, Intel Corporation (NASDAQ:INTC) introduced several products which highlight its transition from PCs to mobile. The company announced the quad core ‘Bay Trail’ processor, Intel’s first chip designed for tablets. Intel also announced a brand new platform for mobile devices known as ‘Lexington,’ which positions the company for explosive smartphone growth in emerging markets. Investors should look for further management commentary on these offerings.

(4) Expanding margins

Intel faces a lot of CAPEX and cost pressure this year. But looking out into 2014, this investment could substantially cut costs, position the company outside of PCs, and boost mobile market share.

3 negatives to watch for:

For this quarter:

(1) Growing CAPEX

Last quarter, Intel Corporation (NASDAQ:INTC) announced a $13 billion full-year CAPEX spending plan. Analysts fear higher investment will lead to a chip-glut and some suspect Intel will cut their CAPEX guidance this  quarter.  However, a recent note from Nomura dismissed that idea saying Intel’s investment is independent of sagging PC sales. The company’s transition to mobile will require heavy investment and investors should expect management to reiterate their CAPEX guidance.

Long-term trends

(2) Poorly positioned

Last month, IDC projected personal computer shipments would fall 7.7% year-over-year, worse than a prior 5.7% drop the firm had been predicting. This is alarming because Intel’s core PC business accounts for over 60% of revenue.

In addition the company has missed the boom in tablets and smartphones after being outflanked by competitors.

Qualcomm Inc. (NASDAQ:QCOM) has dominated the smartphone space. The company has benefited from strong iPhone and iPad sales as the exclusive supplier of basebands for Apple Inc. (NASDAQ:AAPL) devices. As a result, Qualcomm Inc. (NASDAQ:QCOM) has posted nearly 20% annual earnings growth over the past five years.

NVIDIA Corporation (NASDAQ:NVDA) is also well positioned in the explosive tablet market. According to arecent report from Gartner, tablet shipments are projected to grow 70% in 2013 to 197 million units driven. Notably, the number of Android devices are expected to grow 73% in 2013. This is favorable for NVIDA, which is the preferred processor of Android tablets and used in Google Inc (NASDAQ:GOOG)’ sNexus 7.

While Intel is slowly improving mobile offerings, it’s still unclear if growth from smartphones and tablets can offset the decline in PCs.

(3) Dividend

Intel Corporation (NASDAQ:INTC) has increased its dividend 100% over the past five years from $0.11/share in 2007 to $0.22/share today. With the stock yielding over 4%, it’s attracted legions of yield starved income investors. But don’t expect another hike anytime soon. Weaker revenue growth and higher CAPEX will likely eat into Intel’s free cash flow during upcoming quarters.

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