Intel’s Q1’15 Earnings To Be Impacted By Weak PC Sales, Focus On Emerging Segments To Drive Growth

Leading PC chipmaker  Intel (NASDAQ:INTC) will announce its Q1 2015 earnings on April 14th. Last month, the company lowered its Q1 2015 outlook as a result of weaker than expected demand for business desktop PCs and lower than expected inventory levels across the PC supply chain. The company has lowered the midpoint of its Q1 2015 revenue guidance from $13.7 billion, plus or minus $500 million, to $12.8 billion, plus or minus $300 million. The gross margin guidance remains intact at 60%, plus or minus a couple of points. Additionally, Intel has withdrawn its 2015 guidance and will update the yearly outlook along with its Q1 2015 earnings release.

Intel closed 2014 on a strong note, reporting revenue, operating income and earnings per share of $55.9 billion (up 6%), $15.3 billion (up 25%) and $2.31 (up 22%), respectively. The company claims to be in a very different place today than it was a year back, as it is participating in a broader range of devices and emerging segments. It intends to remain focused on building on the trend in 2015 as well.

Intel has announced that it is changing its reporting structure with the first quarter earnings report, combining the PC Client and Mobile and Communications Groups into a single Client Computing Group.  It will also detail plans to improve the profitability of it mobile business by $800 million this year.  ((Read “Intel to Change Financial Reporting Structure.”))

Our current price of $34 for Intel is approximately 10% higher than the the current market price. We will update our valuation after the Q1 2015 earnings release.

See our complete analysis for Intel

PC Demand Could Pickup In The Second Half Of The Year

For 2014, Intel expected its PC revenue to be down by a low single digit percentage and for operating profit to be roughly flat year over year. However, the company’s focus on re-inventing the computing experience, and on serving the low-end to the high-end of the market, helped it exceed its PC target for the year. It closed 2014 with a 4% increase in PC revenue and a 25% increase in operating profit. In comparison, the global PC shipments declined marginally in 2014. At its Q4 2014 earnings call in January, Intel announced that the PC supply chain appears to be healthy with appropriate inventory levels, as it entered the first quarter. However, the company now indicates that it is seeing lower than expected Windows XP refresh in small and medium business and increasingly challenging macroeconomic and currency conditions, particularly in Europe.

Re-affirming the weakening PC demand, research firm IDC recently lowered its PC outlook for 2015. The firm now expects global PC shipments to decline by 4.9% this year as compared to its initial estimate of 3.3%.“Although portions of the market saw genuine improvements in demand during the second half of 2014, part of the 4Q14 volume was inflated by an inventory build-up of “Windows 8.1 + Bing” systems in anticipation of Microsoft scaling back subsidies in early 2015.”  ((IDC Lowers PC Outlook for 2015, While the Long-Term Outlook Improves Slightly, IDC Press Release, March 12, 2015)) IDC expects the short term impact to hit consumer channels as they work to clear stock. Additionally, the firm believes that while recent processor updates have generated positive reception, more significant product refreshes from Intel and Microsoft will be released later in the year, shifting OEM product updates and consumer interest toward the latter part of the year. Accordingly, IDC has lowered the rate of decline in PC shipments for 2016 and 2017, and now forecast PC unit sales to decline to 291 million by 2019.

Intel is expected to launch its Skylake platform, Broadwell’s successor, in the second half of 2015. Skylake is said to be based on a completely new 14nm core and will feature several architectural enhancements and will be supported by a new chipset. New platforms and designs can help spur PC demand in the long-run.

Increasing Focus On Mobile & IoT To Drive Future Growth

Although Intel’s Mobile and Communications Group revenue declined drastically in 2014, the company in fact gained market share in the segment. Intel had set a target to ship 40 million tablets in 2014 but ended up shipping 46 million tablets, becoming one of the industries largest merchant silicon providers in tablets. The company continues to report low mobile revenue because of the impact of contra revenue charges that result from heavy discounting at the present node. This is expected to abate in the coming year with a move to the next less costly node, boosting results considerably. Intel targets to drive $800 million out of its mobile business in 2015.

Intel’s Internet-of-Things (IoT) Group grew 19% through 2014, passing the $2 billion mark for the first time. Intel is keen to become an early entrant in this segment, not wanting to repeat the mistake it made in being late to realize the mobile revolution. 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. ^[1]

In August 2014, Intel signed a definitivee 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).

Strong Growth In Data Center Driven By The Cloud Build-Up & Data Analytics

At the start of 2014, Intel aimed to capitalize on the growth of the cloud and big data by diversifying customer segments and product leadership. In 2014, the company’s server revenue and operating profit expanded by 18% and 31% respectively.

Intel’s data center business continues to see robust growth as a result of the build-out of the cloud, data analytics and a strong product portfolio. Towards the end of last year, Intel launched the new Xeon E5 processors (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. ^[2] 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. ^[3]

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Gartner Says the Internet of Things Installed Base Will Grow to 26 Billion Units By 2020, Gartner Newsroom, December 12, 2013 [↩]
2. Intel’s (INTC) CEO Brian Krzanish on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 14, 2014 [↩]
3. Intel talks server demand and mobile profits on CC; AMD and MU higher, Seeking Alpha, October 14, 2014 [↩]