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Intel shares fall despite Q2 beat, guidance raise, bullish outlook

Intel Corp. shares fell in after-market trading July 26 following its second-quarter earnings release, despite beating consensus forecasts, higher full-year guidance and bullish outlook for the year. It is the chipmaker's first earnings report after former CEO Brian Krzanich stepped down over a breach of the company's fraternization policies, leaving the helm to CFO Robert Swan as interim CEO.

Intel's board is making "good progress" on the hunt for a new chief executive, Swan said, but he added that there is no timetable. Shares were off by over 2.4% since June 20, the day before the resignation announcement, and dropped by over 5% in after-hours speculation during the webcast. The company absorbed a string of bearish commentary after the executive shake-up.

On a positive note, Swan said Intel is on track for a "third year in a row of record financial performance." The company raised its full-year revenue outlook to about $69.5 billion, GAAP EPS outlook to around $4.10 and non-GAAP EPS of $4.15; up $2.0 billion, $0.31 and $0.30 from April guidance, respectively.

"We are seeing demand signals in supply feasibility to deliver on our revised expectations. Our biggest challenge in the second half will be meeting additional demand," Swan said.

Much of the company's 15% revenue growth in the quarter was driven by its data-centric business, which saw revenue increase 26%, with its data center group, or DCG, up 27% to $5.5 billion. That compares to just 6% growth in its PC-centric business, or the client computing group, to $8.7 billion in revenue.

"Just 5 years ago, roughly one-third of our revenue was data-centric. Today, nearly half our revenue is data-centric and growing at a double-digit range," Swan said on the webcast.

However, one analyst on the call noted that data center revenue is slowing as the year progresses, and Swan agreed that in the fourth quarter, tougher year-over-year comparisons will weigh on that metric. Another analyst pointed out that the guidance assumes a 59% compression in gross margin.

In response, Swan pointed to growth in operating margin, which is forecasted at about 30.5% — 32% on a non-GAAP basis — for the full year. The "modest gross margin erosion" will be offset by spending leverage and increased income improvement, he said. Also, the company's accelerating memory business is margin intensive, he said.

In general, analysts have raised concerns about the company's long-term growth prospects partly due to competition from other chipmakers like Advanced Micro Devices Inc.

Inside the data-centric business, Swan highlighted the performance of its internet of things products, which saw record revenue of $880 million, up 22% year over year. Another bright spot is the company's memory business, which grew 23% to $1.1 billion.

The company reported topline revenue of $16.97 billion, up from $14.76 billion reported in the 2017 second quarter.

Net income was $5.01 billion, or $1.05 per share, compared to $2.81 billion, or 58 cents per share, posted in the year-ago quarter. On a non-GAAP adjusted basis, net income came to $4.94 billion, or $1.04 for the quarter, up from $3.51 billion, or 72 cents, posted a year prior.

The S&P Capital IQ consensus EPS estimate for the second quarter was 95 cents on GAAP basis and 97 cents on a normalized basis.

The consensus EPS estimates for the third quarter were $1.03 on a GAAP basis and $1.08 on an adjusted basis, according to S&P Capital IQ. For the full year, the consensus EPS estimates were $3.86 and $4.01, respectively.