Intel’s Q2’15 Earnings Review: New PC Products & Platforms, Data Center, IoT & NAND To Drive Future Growth

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Leading PC chipmaker Intel (NASDAQ:INTC) reported its Q2 2015 earnings on July 15th. As anticipated by the company and highlighted by us in our pre-earnings article, Intel’s Q2 2015 earnings were impacted by the sluggish PC market, but the company continued to see strong growth in its data center, Internet-of-Things (IoT) and the NAND businesses. As a result, Intel managed to beat the Wall Street revenue and EPS consensus estimates (as per Thomas Reuters) of $13.04 billion and 50 cents, respectively.

While Intel expects PC sales to improve in the second half of the year (after the Windows 10 launch and as new Intel Skylake products hit the market), the company admits that PC sales are weaker than it initially expected and has consequently lowered its full year 2015 revenue guidance (mentioned below). Intel believes that stability in its PC business, the completion of Altera’s acquisition (expected in the next 2-3 quarters) and continued strength in the data center, IoT and NAND businesses will help drive its future growth. The company continues to transform and diversify its business. The data center, IoT and NAND segments accounted for almost 40% of its revenue and more than 70% of the overall operating profit in Q2 2015.

Quick Snapshot of the Q2 2015 Earnings

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Intel’s Q2 2015 revenue of $13.2 billion was inline with its guidance, declining 5% year on year and increasing 3% quarter on quarter. The year on year decline was mainly on account of lower desktop and notebook platform volume. The company saw a 10% growth in its data center business, more than 40% growth in NAND revenue, and 4% growth in its IoT segment. Diluted EPS of $0.55 was flat year on year but grew 36% quarter on quarter.

We are in the process of updating our current price estimate of $35 for Intel for the Q2 2015 earnings.

See our complete analysis for Intel

The Windows 10 Launch & New Products By Intel Can Stabilize The Decline In PC Shipments

Intel’s Client Computing group reported revenue of $7.5 billion, a 14% decrease year over year. Both desktop and notebook unit volumes were down as a result of lower demand in the business segment and in emerging markets. Nevertheless, Intel saw record Core desktop mix due to growth in the high-end segment and record Core i7 mix overall for the PC business. The company stated that the global PC inventory levels declined last quarter and that inventory levels are now normal. The company’s inventory declined in units but grew in dollars as it refreshed inventory levels with the 14-nm products.

Intel expects the second half of 2015 to be seasonally up, helped by the upcoming launch of Windows 10. During Q2 2015, the company qualified its sixth generation Core products (code-named Skylake) for production and believes that the new products from its OEM partners can create exciting new opportunities in the PC market. It worked closely with Microsoft to make sure the best Windows 10 PC and tablet experience run on Intel.

In the second half of 2016, Intel plans to introduce a third 14-nm product, code named Kaby Lake, built on the foundations of the Skylake micro-architecture but with key performance enhancements. In the second half of 2017, the company expects to launch its first 10-nm product, code named Cannonlake. Intel believes that these additions to the roadmap will deliver new features and improved performance and pave the way for a smooth transition to 10-nanometer adoption.

The new products and platforms can spur PC demand in the future.

Growth In Data Center To Be Driven By Cloud, Networking & Storage

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. With revenue of $3.9 billion in Q2 2015, the data center business grew 10% year on year driven by very strong results in cloud and networking infrastructure, partially offset by weakness in the enterprise segment. While the enterprise segment is expected to remain weak in the current quarter as well, Intel believes that its data center business remains on track to grow by more than 15% in 2015, driven by growth in cloud, networking and storage.

The growth of consumer services is fueling the build-out of the cloud, and the continuing migration of workloads onto Intel architecture and the rise of network function virtualization is driving strong growth in network infrastructure. The enterprise segment is more macroeconomic driven, and Intel is not expecting a lot of incremental strength there for the next few quarters.

Update On Intel’s Mobile Roadmap

Intel claims to be on track with its annual goal of improving profitability of the mobile sement by $800 million, with about a third of the improvement realized to date. Original Equipment Manufacturers (OEMs) are already ramping Atom x3, x5, and x7 products using Intel’s Cherry Trail SoFIA 3G and SoFIA 3G-R products. The 4G version of the Atom x3 platform, SoFIA LTE, is sampling now for network certification, and is expected to ship in volume in the first half of next year. Intel’s latest LTE modem, the CAT-10 7360, is on track for shipments to customers this year. With these new products Intel hopes to cut down its contra revenue (subsidies it has been paying OEMs to switch to Intel products), eventually getting the segment back to profitability.

Q3 2015 Outlook

– Midpoint of the revenue range at $14.3 billion, up 8% sequentially.

– Midpoint of the gross margin range at 63%, a 0.5 point increase from the second quarter.

2015 Guidance

– Revenue to be down 1%. Intel initially estimated flat revenue as compared to 2014. Though the PC market is expected to be lower than expected, Intel continues to forecast robust growth rates in the Data Center Group, Internet of Things Group, and NAND businesses.

– Midpoint of the capital spending at $7.7 billion, down $1 billion from the previous outlook.

– Midpoint of the gross margin range at 61.5%, up 0.5 point from the previous guidance.

– Midpoint of the R&D and MG&A spending for the year at $19.8 billion, $100 million more than the previous guidance.

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