Intel: PC Demand Pulls Out Of Nosedive, But Data Center Disappoints

Intel: PC Demand Pulls Out Of Nosedive, But Data Center Disappoints
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MKM Partners analysts Israel Hernandez and Tyler Radke rate Intel Corporation (NASDAQ:INTC) as Neutral, as the tech giant announces in-line earnings but disappoints on guidance.

Intel reports In line 4Q, disappoints on guidance

Intel Corporation (NASDAQ:INTC), reported generally in line 4QFY13 revenue and EPS of $13.83 billion and $0.51 vs. consensus of $13.72 billion and $0.52. The quarter was buoyed by expected upside in PC Client ($8.56 billion vs $8.28 billion consensus) offset by disappointing Data Center revenue ($3.0 billion vs. $3.25 billion consensus) on weaker than expected corporate spending. Intel’s FY14 revenue outlook remained unchanged with expectations for flat y/y revenue growth (1Q guidance was in line with seasonality but disappointing relative to expectations), with guidance implying low single declines in PCs units and Data Center growth now tracking to the lower end of its prior 10%-15% growth outlook. In the aggregate, the 2014 guidance was disappointing relative to elevated investor expectations who were beginning to price in an improved PC outlook.

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PC units tracked better in 4Q

PCs were better than expected with platform volumes increasing 3% y/y and q/q. The strength in the quarter was driven by improving enterprise desktop shipments which can be attributed to an upgrade cycle in from of the end-of-life of Windows XP in April 2014. We believe this enterprise upgrade cycle will fade once we move past the March 2014 quarter. Intel Corporation (NASDAQ:INTC) noted that its internal unit forecasts for 2014 are in line with third party forecasts calling for a low to mid single digit decline in PC shipments, though it does believe that PC demand appears to be finally stabilizing.

Data Center disappoints on weak corporate demand

While indicating that cloud, high performance computing, storage and networking met expectations, Intel Corporation (NASDAQ:INTC) indicated that corporate data center spending was weaker than expected in certain verticals at the end of the quarter ‘driven by government shutdown and uncertainty around the debt ceiling.’ On hindsight, it also appears the server inventory levels were higher entering the fourth quarter than previously believed. As a result of the unanticipated deceleration in corporate data center spending in now expect Data Center growth at the lower end of its prior 10-15% growth outlook for 2014. In Q&A, management made reference to notion that enterprise spending is less than it was three years ago, essentially saying that growth associated with the virtualization curve has played out (i.e. server upgrade cycle has peaked with server virtualization market having achieved maturity).

Implications for enterprise software

Intel Corporation (NASDAQ:INTC) commentary on weaker than expected corporate demand is puzzling given the strength of our fourth quarter checks and evidence of a fourth quarter flush supported by our checks and a number of technology pre announcements. We also believe the government shutdown impact in 4Q was manageable for most vendors as the issue was resolved early in 4Q. We continue to look for solid results across enterprise software in 4Q and view any short-term correction into earnings as healthy for the group.

Implications on Microsoft

Better PC Numbers Positive for Windows Though Likely Priced In Improving PC unit shipments were largely expected by the Street and priced into shares of both Intel Corporation (NASDAQ:INTC) and Microsoft Corporation (NASDAQ:MSFT). The good enterprise unit shipments suggest a solid Windows licensing quarter for Microsoft with an upside bias given a more favorable pricing mix. This trend should last for another quarter, than reverse itself in the June quarter once we move past Windows XP end-of-life. We remain cautious on a broadbased recovery in PCs which continue to lose share to tablets and smart phones, especially in growth markets in emerging markets. Weaker than expected corporate server shipments, on the other hand, represent a potential negative drag on Commercial licensing (previously Server & Tools), though the impact we believe would likely be modest to numbers.

Implications on VMware

Shares Likely to Soften on Cautious Virtualization/Corporate Data Center Comments Shares of VMware, Inc. (NYSE:VMW) are likely to weaken on Intel Corporation (NASDAQ:INTC)’s 4Q data center miss, cautious commentary on corporate data center spending for 2014, and view that the server virtualization market has essentially matured. Our fourth quarter checks actually point to a solid 4Q and we remain comfortable with our $1.473 billion and $0.99 revenue and EPS estimates, though we note the increasing presence of Microsoft Hyper-V in our checks. Given the recent ebullient move in the stock over the past two weeks, we believe some correction should be expected off the Intel data center outlook. Similarly Red Hat Inc (NYSE:RHT) could see some short-lived weakness though the company is coming off a very solid November quarter in which billings increased 19% in complete contrast to Intel.

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