After the close last Thursday, INTC reported results for 4Q15 and the full year. For the final three months of last year, INTC posted revenue of $14.9 billion, operating income of $4.3 billion, net of $3.6 billion and eps of $.74–all better than the Wall Street analyst consensus. The company also announced an 8% increase in the dividend, to a yearly total of $1.04.
Nevertheless, in Friday trading the stock was down by 9.1%.
What’s going on?
There are lots of moving parts, but in a nutshell INTC appears to be forecasting another flattish eps year for 2016–vs. market (and my) expectations of a return to earnings growth.
The main reason is softness in demand that INTC is already experiencing in its important Asian markets, particularly in China. My back of the envelope calculation is that pre-tax income for INTC will still be up by about 15% this year, despite a China slowdown. But I think the shift of business growth from Asia to the US + the EU is the main reason the company is projecting a rise in its income tax rate from 19.6% in 2015 to around 25% this year. That’s enough to wipe out virtually all the pre-tax improvement in the business. So the bottom line remains basically unchanged.
Another worry: during 4Q15 revenue from INTC’s important server business decelerated from a 10%+ growth rate to just over 5%. Operating income fell by about 4% yoy, as high margin cloud sales cooled while low margin networking sales boomed. INTC points out that 4Q14 was a record quarter, so simple yoy comparisons may be misleading. It also says that the fourth quarter has become important enough for online sales that cloud customers don’t want to fool with their websites by installing new equipment. So for its most important class of customers, 4Q is no longer the seasonal peak for orders, as it has been in prior years.
–for reporting to shareholders (financial accounting) INTC is changing the way it expenses the chip manufacturing equipment it uses. It previously wrote their cost off in equal installments over four years. It’s now going to use five.
Nothing changes in the way the business is being run or in the way the equipment is written off for income tax purposes. But annual depreciation cost on the income statement will be about $1.5 billion less than under the old method. In broad terms, this is enough to offset the rise in the tax rate for 2016. It’s also the largest factor involved in my thinking pre-tax income will rise significantly in 2016.
It’s hard to know whether Wall Street will regard this accounting change as a good thing of a sign of weakness. I presume algorithmic traders won’t care.
–for the past couple of years, INTC has tried to buy its way into the tablet business by essentially paying customers to use its chips (the company calls this support contra revenue). The company appears to have pared back the subsidies significantly during 4Q15. Tablet units decreased from 12 million in 4Q14 to 9 million in 4Q15, as a result. But overall tablet revenues increased.–and operating losses in the segment appear to have shrunk.
My bottom line:
For the moment, I’m content to hold the stock. There’s enough evidence from other hardware companies to suggest that the Asian slowdown is an industry phenomenon, not an INTC specific one.
We’ll also know in a quarter or so whether the cloud business bounces back or not. Given the significant shift in retail from bricks and mortar to online this holiday season, I’d expect to see strength in cloud orders during 1Q16.
Finally, I’m a bit troubled about the change in depreciation policy. The effect is to make earnings look better than they would otherwise be. Is that the purpose, though? Was INTC forced to do so by its auditors, or is this simply optics (which would be a very bad thing, in my view)? I’m not sure.