Intel’s Q3’14 Earnings Preview: PCs, Tablets & IoT In Focus

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Leading chipmaker Intel (NASDAQ:INTC) reports its Q3 2014 earnings on October 14. The persistent decline in PC shipments, combined with increasing investment in building out its technology, impacted Intel’s revenue growth as well as its bottom line over the last two years. The year 2013 was one of transition for Intel, as it made significant progress in alternative markets with new platforms, product launches and design wins.  These in turn increased its competitiveness in the semiconductor industry. The company has performed well in the first half of 2014, with revenue and net income up 5% and 17% respectively, compared to the same period last year.

Though the PC environment remains challenging, Intel’s expanding reach, from the smallest energy-efficient embedded machines to the most powerful supercomputers, helps the company retain its leading position in the semiconductor industry. Intel reported a strong Q2 2014, with an 8% annual growth in revenue (to $13.8 billion) backed by improving PC sales, strong growth in data center products and increasing Internet-of-Things (IoT) revenue. Intel expects its Q3 2014 revenue to increase by 4% (midpoint of  revenue range) Q2 2014, which is roughly in line with consensus ($14.4 billion).

Intel believes that the macro situation is improving in 2014 as the industry accepts innovative form factors, including ultrabooks, convertibles and detachables.  The company is also benefiting as it expands its presence in new growth markets.

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Our current price of $33 for Intel is slightly below the current market price. We will update our valuation after the Q3 2014 earnings release. 

See our complete analysis for Intel

Stabilizing PC Business; Intel Gained Market Share In 1H 2014

Having grown at a robust rate for many years, PC sales started declining 2011 onward. As per research firm IDC, PC shipments declined 3.7% and 10.3%, in 2012 and 2013 respectively. The rate of decline dropped down to 4.4% in Q1 2014 and remained flat in Q2 2014, as Windows XP migration (to machines running newer operating systems) and commercial spending helped offset the weak consumer PC demand. [1] [2]

According to preliminary results by research firm Gartner, global PC shipments declined 0.5%, reaching 79.4 million units, in Q3 2014 as growth in mature markets was offset by a decline in shipments in emerging markets. However, Gartner claims that positive results in Western Europe and North America can be a sign of gradual recovery for the PC industry as tablet adoption peaks with mainstream consumers. [3]

In Q2 2014, Intel’s PC client group reported its third consecutive quarter of year-over-year unit growth, with volumes increasing 9% annually, backed by the improving economic environment, an ongoing PC refresh, form factor innovation and the end-of-life of Windows XP. Both desktop and notebook platform revenues grew.

Intel is working to reinvent PC computing with new form factor innovation, lower price points, longer battery life and an OS of choice. It believes that the innovative two-in-one devices and lower price points have helped it gain market share so far this year.  The company expects more than 70 2-in-1 designs running on Intel processors for the back-to-school  and holiday selling seasons, which can help spur demand for its processors.

Intel On Track To Ship 40 Million Tablets In 2014

Intel shipped 10 million tablet units in 2013 and targets to ship a total of 40 million tablets this year. The company shipped 15 million tablets in 1H 2014, which it believes keeps it on track to meet its target. Intel presently accounts for 4% – 5% of the global tablet market. If the company meets its target of shipping 40 million tablet chips by the end of 2014, its market share would increase to approximately 15%.

In Q2 2014, Intel announced a strategic agreement with Rockchip, a leading Chinese fabless semiconductor company and mobile-internet system on a chip (SoC) solution provider, to expand its low-cost tablet offerings. The two companies plan to deliver an Intel branded quad-core mobile SoC platform integrated with Intel’s 3G modem technology, targeted primarily at the low-cost Android tablet segment. Intel and Rockchip will sell the quad-core SoFIA 3G into each others existing customer base (OEMs and ODMs). By expanding its reach in sockets that typically sell for $10 – $20, the Rockchip deal will help Intel gain a considerable share in the Chinese market. [4]

Increasing Focus On The Fast Growing IoT Market

Intel is keen to become an early entrant in what is touted to the be next big wave in computing – the Internet of Things (IoT). IoT includes all the other computing devices apart from PCs, tablets and smartphones. Gartner estimates the market will grow almost 30 times, from an installed base of 0.9 billion in 2009 to 26 billion by 2020. It will result in $1.9 trillion in global economic value-add through sales into diverse end markets. [5]

In August 2014, Intel signed a definite agreement to acquire LSI’s Axxia networking business and related assets from Singapore-based Avago, a vendor of analog semiconductor devices, for $650 million in an all-cash deal. The deal can aid Intel’s foray into the IoT market and other emerging technologies. Additionally, Intel has been investing in a wide range of start-ups in the wearables space, and has also tied up with some fashion houses to market wearable gear as a fashion accessory rather than just a device that monitors your health (and more).

In Q2 2014, Intel unveiled the smart bracelet developed in collaboration with Opening Ceremony – MICA (My Intelligent Communication Accessory) – at the Opening Ceremony Spring/Summer 2015 fashion show. It also announced its collaboration with Fossil, which specializes in consumer lifestyle and fashion accessories, to develop innovative wearable technology for the fashion-conscious.

With the expanding growth opportunities in this segment and Intel’s focus on rapidly expanding its footprint in the market, we believe IoT’s contribution to the company’s total revenue can double over our review period.

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Notes:
  1. Windows XP Migration and Commercial Spending Helped Offset Weak Consumer PC Demand in The First Quarter of 2014, IDC Press Release, April 9, 2014 []
  2. Gartner: Global PC shipments post flat growth in Q2, Business Line, July 11, 2014 []
  3. Gartner Says Worldwide PC Shipments in the Third Quarter of 2014 Declined 0.5 Percent, Gartner Press Release, October 8, 2014 []
  4. Intel – Rockchip Deal Could Mean A New Player In x86 And Transform Intel’s Mobile Division, Hot Hardware, May 30, 2014 []
  5. Gartner Says the Internet of Things Installed Base Will Grow to 26 Billion Units By 2020, Gartner Newsroom, December 12, 2013 []