Near-Term Slowdown in the Global PC Market Hits Intel

 Intel (INTC) reported third-quarter results that were affected by the near-term slowdown in the global PC market. We are maintaining our fair value estimate. For the quarter, revenue was $13.5 billion, roughly flat from the second quarter, but down from sales of $14.2 billion in the year-ago period. Nonetheless, third-quarter revenue came in at the high end of the revised forecast of $12.9 billion-$13.5 billion that the firm provided in early September. Intel typically sees healthy seasonal growth in the third quarter, driven by higher PC manufacturing activity in anticipation of the back-to-school period and the holiday season. However, the slowing macroeconomic environment has caused softness in both the consumer and enterprise PC markets, which in turn put some pressure on processor sales at Intel in the quarter. As a result, the firm's PC processor segment posted revenue of $8.6 billion, down 1% sequentially and a decline of 8% year over year.

Intel's server processor business reported sales of $2.7 billion, down 5% from the record-setting $2.8 billion in revenue achieved during the second quarter, but up 6% year over year. While the firm saw some softness in the corporate server market, management noted that server processor sales for cloud infrastructure build-outs were strong. We are encouraged that the server processor unit as a whole appears to be holding up better than the PC processor segment in light of current macroeconomic conditions. As we've previously written, we expect the server chip business to provide Intel with key growth opportunities in the coming years, as the build-out of the cloud will drive significant demand for server processors. On the profitability front, gross margin came in at 63.3%, down very slightly from 63.4% in the second quarter. Intel achieved an operating profit of $3.8 billion in the third quarter, flat from last quarter. For the fourth quarter, management expects revenue to be between $13.1 billion and $14.1 billion, which would indicate a sequential increase of 1% at the midpoint. This forecast is below seasonal trends and can be attributed to the cautious outlook for both the consumer and enterprise PC markets, as well as for global economic conditions. For the time being, it doesn't appear that the firm expects a significant business pick-up from the upcoming  Microsoft (MSFT) Windows 8 release, but management indicated that it has seen some processor demand related to PC builds by computer manufacturers ahead of the launch. We believe that business conditions at Intel will largely depend on the macroeconomic environment in the coming months. Nonetheless, investors should keep in mind that chip stocks tend to fluctuate with industry cycles, and the current near-term business slowdown may present an attractive buying opportunity for Intel.

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