Intel’s Q2’15 Earnings Preview: Non-PC Markets To Drive Growth As PC Sales Remain Sluggish

Leading PC chipmaker  Intel (NASDAQ:INTC) will announce its Q2 2015 earnings on July 15th. While the company closed 2014 on a strong note, 2015 has been a bit slow for Intel as it suffers from the weaker than expected demand for business desktop PCs and lower than expected inventory levels across the PC supply chain. In addition to lower PC shipments, the challenging macroeconomic conditions and an appreciating U.S. dollar weighed on Intel’s business and important geographic markets in Q1 2015. PC sales remained sluggish in Q2 2015 as well, declining by 11.8% year on year according to research firm IDC, and thus we do not expect to see significant growth for Intel in the quarter. Having said that, the company witnessed double-digit growth in its data center, Internet-of-Things (IoT) and the NAND businesses, in Q1 2015, and we expect the growth momentum to continue in Q2 2015.

Intel 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. Innovating in its client business, improving mobile profitability, and investing in and growing profitable adjacent markets remain key focus areas for the company going forward.

Our current price estimate of $35 for Intel is just marginally above the current market price.

See our complete analysis for Intel

PC Sales To Remain Weak In Q2’15, Demand Expected To Pick Up In the Second Half Of The Year 

Having stabilized in the second half of 2014, the PC market is seeing signs of weakness this year, due largely to lower than expected Windows XP refreshment activity  in small and medium business and increasingly challenging macroeconomic and currency conditions, particularly in Europe. According to research firm IDC, “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))

Intel believes that there was an inventory burn across the worldwide PC supply-chain in the first quarter and expected to see a further reduction in inventory supply-chain levels in Q2 2015 in anticipation of the Windows 10 launch this summer. The company expects the PC market to remain challenging this year, leading to a mid single-digit decline in PC shipments, which is line with IDC’s estimate of a 6.2% decline in PC shipments in 2015. IDC believes that significant product refreshes from Intel and Microsoft will shift OEM product updates and consumer interest toward the latter part of the year. The firm recently lowered the rate of decline in PC shipments for 2016 and 2017, and now forecasts PC unit sales to decline to 294 million by 2019. ^[1]

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. It also will be supported by a new chipset. The company claims that the percentage mix of the 14 nm processors is ahead of its expectations. New platforms and designs can help spur PC demand in the long-run.

Strong Growth In Data Center Driven By The Cloud Build-Out and Data Analytics

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 features and performance that are optimized for compute, storage and network workloads. The Grantley Xeon CPU is seeing strong uptake and is already 50% of Intel’s two-socket volume. Approximately 50% of the 19% growth in Intel’s data center business in Q1 2015 was driven by Grantley.

New products like Grantley and Intel’s increased support of custom versions of the product are helping to drive growth in cloud revenue. 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]

In April of this year, Intel announced its acquisition of Altera, a leading fabless vendor of Field Programmable Gate Arrays (FPGAs), for $16.7 billion. By acquiring Altera, Intel will be able to integrate its processing devices with Altera’s programmable chips, which are used, among other things, to speed up web searches. The integration of Altera’s chips with Intel’s will create a new class of products giving customers a significant improvement in performance, lower costs and a lot more flexibility, according to Intel. Altera’s programmable devices will allow Intel to increase the computational capability of its Xeon server chips. (Read: Acquiring Altera Can Help Intel Retain Its Leadership In The High-Margin Data Center Business)

IoT Is An Important Segment For Future Growth

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. Research firm Gartner expects the installed base of the IoT units to increase from 3 billion in 2013 to 25 billion by 2020. Gartner estimates that IoT will support total services spending of $69.5 billion in 2015 and $263 billion by 2020. ^[3]

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).

View Interactive Institutional Research (Powered by Trefis):

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

1. PC Shipments Will Continue to Decline in 2015 as Windows 10 Launch Approaches and Competing Devices Continue To Pressure PC Demand, IDC Press Release, May 28, 2015 [↩]
2. Intel talks server demand and mobile profits on CC; AMD and MU higher, Seeking Alpha, October 14, 2014 [↩]
3. Gartner Says 4.9 Billion Connected Things Will be in Use in 2015, Gartner Newsroom, November 11, 2014 [↩]