Intel’s Q3’15 Earnings Preview: Growth To Be Driven By Data Center, IoT & NAND

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Leading PC microprocessor manufacturer, Intel (NASDAQ:INTC) will announce its Q3 2015 earnings on October 13th. We expect growth in the quarter to be driven by continued strength in the data center, Internet-of-Things (IoT) and NAND businesses. Despite deriving over 60% of its revenue from the PC market, Intel has done a good job weathering the impact of sluggish PC sales, as the company continues to transform and diversify its business. The data center, IoT and NAND segments accounted for almost 40% of Intel’s revenue and more than 70% of the overall operating profit in Q2 2015.

On account of weaker than expected PC shipments in the first half of 2015, the company lowered its full year 2015 revenue guidance last quarter. Intel now expects its 2015 revenue to be down 1%, as compared to its initial forecast of flat revenue. According to research firm IDC, global PC shipments fell 10.8% year-on-year in Q3 2015. Many industry experts believe that the launch of Windows 10 and Intel’s Skylake platform will help stabilize and re-accelerate PC demand in coming quarters.

Our current price estimate of $35 for Intel is slightly above the current market price. We will update our valuation after the Q3 2015 earnings release.

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See our complete analysis for Intel

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. Although the company saw strong growth in cloud and networking infrastructure in Q2 2015, the enterprise segment remained weak. Intel expects the enterprise segment to remain weak in Q3 2015 as well, but it 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.

Intel Is At The Forefront Of The IoT Revolution

Learning from its short-shortsightedness in the smartphone market (where it lost out due to its late entry), Intel is determined to be one of the early entrants in IoT and has been aggressively investing to gain a wide footprint in the space. Intel is at the forefront of developing a new generation low-power microprocessors for connected IoT devices. The research firm IoT Analytics has recently placed Intel at the head of the top 20  IoT companies. In addition to introducing new platforms, the company has launched a number of products and initiatives in the past year with different fashion, fitness and lifestyle brands, to accelerate its presence in wearables. Intel also has a reference platform which makes it easier for customers to implement their own IoT solutions and deliver innovations to market faster. Additionally, being the market leader in the server microprocessor market, Intel is at an advantage to gain from the explosion of data that IoT will bring about.

Last year, Intel changed its reporting structure and made IoT a stand-alone segment, underlining its growing focus on the business. The company currently derives less than 10% of its valuation and approximately 5% of its revenue from the IoT segment. We believe that accelerating its entry in IoT augurs well for Intel’s long term growth potential, and estimate the segment will account for approximately 10% of Intel’s total revenue by the end of our forecast period. (Read: Intel’s Aggressive Push In IoT Positions It Well To Leverage Growth In The Market)

Intel Is On Track With Its Goal To Improve Mobile Profitability

Intel claims to be on track with its annual goal of improving profitability of the mobile segment by $800 million, with about a third of the improvement realized by the end of Q2 2015. 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.

Early Acceptance Of 3D NAND Can Increase Intel’s NAND Market Share

Earlier this year, Intel and Micron (as part of their joint venture) announced the availability of their 3D NAND technology, the world’s highest density flash technology used in laptops, data centers, tablets and mobile phones. With more storage in a smaller form factor, the 3D NAND technology offers significant cost savings, low power usage and high performance for a range of mobile consumer devices as well as the most demanding enterprise applications. The fab production line has already begun initial runs and the device will be in full production by the fourth quarter of calendar year 2015.

Though Intel currently account for only 7% of the NAND Flash market, the early adoption of the 3D NAND technology could help increase the company’s market share in the future. Intel does not report revenues earned from memory solutions separately in its annual filings, but our estimate is that NAND accounts for less than 8% of the company’s total revenue. The company witnessed more than 40% growth in NAND revenue in Q2 2015.

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