Intel’s Growth In Q3’14 Fueled By Stabilizing PC Demand, Higher PC Market Share & Strong Data Center Performance

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Leading chipmaker, Intel (NASDAQ:INTC) set new records for revenue and earnings per share (EPS) in Q3 2014, driven by strong performance from the PC and the Data Center groups. At $14.6 billion, revenue grew 8% year to year and was well within company guidance and ahead of analysts estimates. Though gross margin was a percentage point below Intel’s guidance, it was 0.5 points higher than Q2 2014.  This was primarily due to lower platform unit costs on 22-nanometer and higher platform volume, mostly offset by higher production costs on 14-nanometer products.

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. Intel has performed well so far in 2014 backed by a stabilizing PC market and the company’s widening reach in new growth markets. In Q3 2014, Intel shipped over 100 million units for the first time its history in a widening range of devices, including  PCs, servers, Internet-of-Things (IoT) products, phones and tablets.

Intel plans on building on its success in the PC and Data Center segments to successfully pursue adjacent opportunities, across the breadth of emerging and established devices. It was well ahead of competitors in achieving the 14-nanometer process node and plans to do the same with 10-nanometer technology. Despite incurring significant losses in the mobile business (which reported operating loss of $1 billion in Q3 2014), Intel’s business continues to generate significant cash with over $5.7 billion of cash from operations in Q3.

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Our current price of $33 for Intel is almost in line with the current market price. We are in the process of updating our valuation for the company. 

See our complete analysis for Intel

Stabilizing PC Market; Intel Continued To Gain Market Share in Q2’14

Intel claims that the trend it observed in the PC market in Q3 2014 was similar to that seen in Q2 2014 — i.e., stability in mature markets offset by ongoing declines in emerging markets. Intel’s PC Client group revenue was up 9% year on year, with unit volumes growing 15%. According to preliminary results by research firm Gartner, global PC shipments declined 0.5%, reaching 79.4 million units, in Q3 2014. Intel believes that it continued to gain market share in Q3 2014 as well, though it will wait to see all the third party results come in to know for sure.

Innovation and lower price points have enabled Intel to witness robust growth in its PC segment. The company’s notebook platform units grew over 20% year over year on account of innovative two-in-one devices and increasing market segment share with its leading Bay Trail at lower price points.

Intel launched its Core M CPUs in Q3 2014. Cortex M is the first CPU line to leverage Intel’s 14nm Broadwell architecture. Intel claims that Core M is the first of a new product family designed to deliver the promise of one of the world’s thinnest laptops and highest performance tablets in a single 2-in-1 device. The company announced in its earnings call, that the first of these systems will be available by the end of this month. The processors will power new devices from a variety of manufacturers — Acer, ASUS, Dell, HP Lenovo and Toshiba.

Intel claims that the worldwide PC supply chain appears to be healthy with inventory levels appropriate in anticipation of the fourth quarter retail cycle. New designs and lower price points will help spur demand for Intel processors in the future.

Intel’s Data Center Business Remains Strong

Intel’s data center business continues to see robust growth as a result of the build-out of the cloud and growing number of devices that compute and connect to the Internet. In Q3 2014, the Data Center Group revenue grew 16% from a year ago with platform volumes up 6% and platform average selling prices up 9%. Intel saw growth across all segments: enterprise grew 11%; networking grew 16%; and HPC and cloud service providers grew 22% and 34%, respectively.

Last year, Intel extended its leadership at the high end as well as at the leading edge of the market with the launch of the Ivy Bridge-based Xeon product line and Avoton (which targets the micro-server market), respectively. Almost a month back, it launched the new Xeon E5 processors, formerly known as Grantley, which provides leadership, features and performance for compute, storage and network workloads, respectively. The Grantley Xeon CPUs is seeing strong uptake and is already 10% of Intel’s DP (i.e., Dual Processor) or two-socket volume. [1]

Intel’s data center team is customizing its Xeon products for specific customers and workloads. Over the last year volume from custom SKUs has grown at three times the rate of Intel’s off-the-shelf products. Facebook, eBay, Microsoft, and other Web giants have been avid buyers of custom Intel server CPUs. [2]

Intel expects to see double digit growth in data center products for the rest of 2014.

 

Intel’s IoT and Mobile & Communications Show Promise to Plan

Intel’s remaining segments performed well.  The Internet of Things posted revenue of $530 million, up 5% sequentially and 14% year to year. It seems set to leverage the growth of this emerging sector.  The performance of the Mobile and Communications Group is showing considerable momentum, with a notable caveat.  Unit growth was very strong as Tablet SoCs sold totaled 15 million in Q3 2014. With the 15 million sold in the first half of the year, the company is well within reach of attaining its target of 40 million SoCs for the year. Still, the company has been subsidizing sales of current technology products in advance lower priced SoCs due this quarter, generating negligible revenues and sizable losses. It is testimony to the profitability of Intel’s core businesses that they can fund the investment required to secure a sizable position of the Tablet SoC market. It is expected that, with appropriately priced SoCs, they will now be able to generate profits from this business. We will provide a more thorough analysis soon.

Q4 2014 Outlook

– Midpoint of the revenue range at $14.7 billion, up 1% sequentially.

– Midpoint of the gross margin range at 64%, 1% sequential decline on account of higher platform unit costs, higher factory start-up costs, primarily offset by lower production costs on 14-nanometer.

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Notes:
  1. Intel’s (INTC) CEO Brian Krzanish on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 14, 2014 []
  2. Intel talks server demand and mobile profits on CC; AMD and MU higher, Seeking Alpha, October 14, 2014 []