Earnings Preview: Intel To Close 2014 On A Strong Note

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Leading chipmaker, Intel (NASDAQ:INTC) is set to report its Q4 2014 and full year 2014 earnings on January 15. The company 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.

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.

For Q4 2014, Intel projects revenues of around $14.7 million, up 1% sequentially and 6% annually. For fiscal 2015, the company 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 is well ahead of competitors in achieving the 14-nanometer process node and plans to do the same with 10-nanometer technology as well.

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Our price estimate of $34 for Intel is slightly below the current market price. We will update our model after the Q4 2014 earnings release.

See our complete analysis for Intel

Stabilizing PC Market; Intel Gained Market Share Over AMD In 2014

Having grown at a robust rate for many years, PC sales started declining from 2011 onward. According to the research firm IDC, PC shipments declined 3.7% and 10.3%, in 2012 and 2013 respectively. The PC market stabilized in 2014 as Windows XP migration (to machines running newer operating systems) and commercial spending helped offset the weak consumer PC demand. The rate of decline in PC shipments dropped down to 4.4% in Q1 2014, remained flat in Q2 2014, and declined 1.7% and 2.4% in Q3 2014 and Q4 2014 respectively. [1] [2] [3]

Intel believes that global PC demand is stabilizing, and claims to be seeing clear signs of a refresh in the enterprise segment, as well as in small and medium businesses. The company took away some market share from AMD (NYSE:AMD) in 2014. In Q2 2014, Intel accounted for 94.7% of the revenue in the PC processor market while AMD accounted for just 5.2%, according to research firm IDC. Intel’s chips powered 84% of desktop units shipped and 88% of laptops in the quarter. AMD lost market share to Intel in Q3 2014, since the latter reported strong growth in PCs despite a relatively flat PC market. In comparison, AMD witnessed a 15.6% year-on-year decline in its computing and graphics revenue.

At the 2015 Consumer Electronics Show (CES), Intel launched the full lineup of its 14 nm fifth generation core line of Broadwell processors, which is the most energy-efficient Core processor in Intel’s history. Broadwell offers up to a 22% improvement in 3D graphics performance, and video conversion runs 50% faster. Intel claims a system with a Broadwell chip can run up to 1.5 hours longer on battery than one powered by the Haswell chip. [4] Apple (NASDAQ:AAPL) has been widely rumored to be waiting for Intel to ship Broadwell in order to begin production of a new, redesigned MacBook Air. [5]

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 the growing number of devices that compute and connect to the Internet. In 2013, 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 CPU is seeing strong uptake and is already 10% of Intel’s DP (i.e., Dual Processor) or two-socket volume. [6]

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. [7]

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%. As of the third-quarter conference call, Intel expected to see double digit growth in data center products for the rest of 2014.

Accelerating Footprint In Internet-of-Things

Having missed out on the mobile revolution, Intel seems determined to be an early entrant in the IoT space, which is considered to be the next big wave in computing. 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. [8]

In the past year, Intel has launched a number products and initiatives with different fashion, fitness and lifestyle brands, to accelerate its presence in wearables. These include the acquisition of Basis Science, the partnership with renowned rapper 50 Cent to create fitness-tracking headphones, the collaboration with Opening Ceremony to launch a fashion accessory MICA, as well as the partnerships with Fossil and Luxottica. Intel showcased new wearable technology at CES this month, the highlight being a new button-sized computing system designed for smart clothes and other wearables, called Curie. (Read: Intel Showcases New Wearable Technology At CES 2015)

Intel currently derives less than 10% of its valuation and approximately 5% of its revenue from the Internet-of-Things segment. We believe that accelerating its entry in IoT augurs well for Intel’s long term growth potential, and estimate the segment to account for approximately 10% of Intel’s total revenue by the end of our forecast 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. Global PC Shipments Exceed Forecast with Mild Improvement in Consumer Demand, While Apple Moves to #5 Spot, IDC Press Release, October 2014 []
  4. Intel touts tardy Broadwell Core CPUs for laptops, PCs, The Register, January 5, 2015 []
  5. Intel officially unveils full Broadwell-based Intel Core CPU lineup, appleinsider, January 5, 2015 []
  6. Intel’s (INTC) CEO Brian Krzanish on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 14, 2014 []
  7. Intel talks server demand and mobile profits on CC; AMD and MU higher, Seeking Alpha, October 14, 2014 []
  8. Gartner Says the Internet of Things Installed Base Will Grow to 26 Billion Units By 2020, Gartner Newsroom, December 12, 2013 []