Intel Preview: Growth To Accelerate In The Second Half Of 2013

Leading PC and server microprocessor manufacturer Intel (NASDAQ:INTC) will declare its Q2 2013 earnings on July 17. Despite a 7% sequential and 3% annual declines in quarterly revenues in Q1 2013, we feel Intel fared well in light of the drastic decline in global PC shipments in the quarter. Though it saw a marginal decline in its gross profits, it generated $4.3 billion in cash from operations, paid dividends of $1.1 billion and re-purchased $533 million worth of stocks in Q1 2013.

We believe that with an improving macro environment, a gamut of new products and platforms, participation across a range of compute devices and its manufacturing leadership can help Intel achieve financial growth in 2013. Though the PC industry still remains in the doldrums, Intel looks optimistic about the situation and expects an improvement towards the second half of the year. It anticipates a marginal increase in Q2 2013 revenue, on account of seasonal factors and expects the macro environment to improve thereon as the industry accepts innovative form factors in ultrabooks, convertibles and detachables.

See our complete analysis for Intel

PC Sales Continue To Decline; New Products To Spur Sales

The cannibalization by tablets and smartphones combined with a weak reception for Windows 8 OS, the slowing enterprise market, consumer softness in mature markets (the U.S. and Western Europe) and the slowing demand from emerging markets are the main factors leading to the slump in the PC market. PC sales declined marginally in 2012, and research firm IDC estimates the downward trend to continue this year as well.

Global PC shipments witnessed the sharpest quarterly decline (13.9% y-o-y) in Q1 2013, in almost two decades. IDC predicts the worldwide PC shipment to have declined by 11.7% in Q2 2013, but forecast the PC demand to improve in the second half of 2013, with the rate of decline in PC shipments slowing to 4.7% in Q3 2013 and 1.6% in Q4 2012. ^[1]

We maintain a conservative estimate for PC shipments in the future. Nevertheless, with improving macro conditions, increasing demand from emerging economies and the introduction of new ultrabooks, convertibles and touch-enabled designs, we forecast the rate of decline in global PC demand to drop in the future.

Source: IDC Press Release & Trefis Estimate

Intel derives over 60% of its revenue from the PC market and thus is highly sensitive to any adverse development in the industry. The company believes that its upcoming products and platforms can fuel industry demand in the future. In the next few months, Intel plans to introduce more than 140 core-based ultrabooks, 40+ of which will be touch-enabled.

With the Haswell launch, it expects pipeline inventory replenishment by its customers to contribute to a higher than average seasonal increase this quarter. Additionally, we can expect to see ultrabook prices to reduce to $599 with some models available for even $499 by this year end. On the other hand, touch-enabled Intel-based thin notebooks will be available for as low as $300 and probably below that in the future. ^[2] The high price point for Ultrabooks and touch-enabled notebooks designs has been one of the key reasons for lower that expected demand for these products.

Stronger Mobile Push With The Overhaul Of Atom Processors

The declining global PC shipments combined with Intel’s late entry in the mobile computing space has significantly slowed its growth in the last few quarters. Being more responsive to customer demands in the mobile computing segment is one of Intel’s key growth strategies.

As Intel’s processor in general consumed more power, they were not considered suitable for use in mobile devices. However, it has worked towards developing more energy efficient chips and its processors now compete with ARM designs on performance, and have equal or better power and battery life. Intel continues to focus on producing more energy efficient chips and adding features for connectivity and security.

In May this year, Intel introduced its new Silvermont chip which promises to offer three times more performance, or a similar level of performance using five times less power compared to the Atom chips. Intel believes that Silvermont is one of the biggest chip architecture advances in its history. Its first quad-core Atom SoC (Bay Trail) for tablets and the Merrifield platform for smartphones will be based on the new architecture. Both platforms will start shipping in the second half of 2013. Additionally, the company currently ships the single-mode 4G LTE data solution, and remains on track to ship multimode voice and data LTE baseband solutions by the end of this year.

Intel currently powers only 12 smartphones and 15 tablets for manufacturers including Samsung (PINK:SSNLF), Lenovo and Asustek among others. By the end of the year it will start producing its Atom processors based on the 22 nm process node. While Intel’s presence in the mobile computing space is not significant enough to compensate for the declining PC sales, we believe staying in line with changing consumer trends will augur well for its long term valuation.

Intel Will Continue Dominating The Server Market

In Q2 2013, Intel’s data center group showed increased strength with a 7% rise over Q1 2012 sales figure. In addition to the PC microprocessor market, Intel is also the leading player in the server microprocessor space. Its server processors are based on the x86 architecture which is the predominant platform in the global server market. x86 servers account for over 80% of total server shipments and their revenue contribution increased from 53.6% in 2007 to 68.2% in 2012.

Cloud computing, server virtualization, the rapid rise in the number of connected devices and strong growth in the HPC market are key trends driving global server demand. We estimate global server shipments to increase from 9.6 million units in 2012 to over 15 million units by the end of our review period. While Intel could lose some market share with ARM-technology based processors entering the server processor market, we believe that Intel will continue to account for a majority share in the server market for years to come. (Read: Intel’s x86 Servers Will Dominate But ARM’s Entry Will Take Share)

We will update our $27.58 price estimate for Intel after the Q2 2013 earnings release.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. May PC Shipments Reflect Slow Second Quarter, According to IDC, IDC Press Release, June 28, 2013 [↩]
2. Intel’s CEO Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, April 16, 2013 [↩]