Yahoo and Intel Q1 16A – Falls at the first.

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Results season off to a tough start

Intel Q1 16A

• Intel reported a difficult set of results and cut 10% of its workforce as the server business can no longer compensate for the damage being done by the weakness in PCs.
• Q1 16A revenues / EPS were $13.7bn / $0.42 broadly in line with forecasts of $13.8bn / $0.37 but the outlook was weak.
• Q2 16E revenues are expected to be around $13.5bn with gross margins around 61% which compared unfavourably with consensus at $14.2bn / 62%.
• The problem remains the PC market which fell nearly 10% in Q1 16A as content consumers continue to desert the platform.
• I still think that the PC market will stabilise once all these users have left, but it is taking longer than I originally anticipated.
• With the data centre business beginning to slow down, Intel has to look elsewhere to make up the difference.
• Here, it will be mobile, Internet of Things, Wearables, automotive and so on where Intel will be looking but this is easier said than done.
• Intel has been struggling in mobile for 15 years despite vast investments and the ARM processor remains a much better proposition for many of the segments that Intel is hoping to address.
• The job reductions are clearly aimed at realigning Intel to the new reality it faces as well as preserving its superb profitability until the other business lines can be brought up to speed.
• With Intel’s history outside of its core markets, this will be a big ask and with ARM finally having a credible go at the server market, the immediate term outlook remains very difficult.

Yahoo! Q1 16A

• Yahoo reported results that just beat the very low expectations set by management but underneath the veneer, I see declining engagement in mobile.
• Q1 16A revenues-ex TAC / Adj-EPS were $859m / $0.08 compared to forecasts of $847m / $0.08 but guidance for Q2 16E missed again.
• Q2 16E revenues are expected to be $810m-$850m ($830m midpoint) compared to consensus at $860m.
• Yahoo is now struggling with video advertising which is one area where all of its peers are seeing strong growth highlighting again how bad the execution has become at Yahoo.
• Furthermore, I see weakness in mobile.
• Yahoo generated $250m in revenues from mobile devices but benchmarked (see here) on its already dismal performance in mobile in Q4 15A, I was expecting $270m in Q1 16A.
• In Q4 15A, RFM calculated that Yahoo managed to monetise 12% of the opportunity that it has in mobile which fell to 11% in Q1 16A.
• Yahoo refused to be drawn on any aspect of the sale process which I think is likely to end with Yahoo selling its core assets at a very low price.
• This is likely to be positive for the share price as the core value of Alibaba and Yahoo Japan should be unlocked when the assets are separated.
• However, given the increasing problems that Yahoo has in both mobile and video, I see risks to FY 16E guidance of $3.4bn-$3.6bn which will be high in the minds of all potential acquirers of the core business.
• There is huge value in Yahoo shares but it still looks like a value trap as these results indicate that things are getting worse not better.