Intel’s Q3’15 Review: Higher ASPs, Data Center, IoT & NAND Drive Growth

Despite ongoing weakness in the macroeconomic environment and the PC market, Intel (NASDAQ:INTC) managed to report a strong Q3 2015, beating Wall Street consensus estimates.  Results were driven by strong growth in the data center, memory, and Internet-of-Things (IoT) businesses. The three businesses accounted for 40% of Intel’s overall revenue in the quarter, and the company expects these divisions to exhibit strong growth in the current quarter as well. As expected, the ‘Client Computing Group’ saw a significant decline in its revenue base, as PC sales continued to decrease in Q3 2015. However, the steep decline in platform volumes was offset to a degree by an increase in average selling prices (ASPs), on account of a richer product mix in the quarter. Intel admits to seeing signs of stability in the PC market, helped by the launch of Windows 10 and the Intel Skylake platform. However, growth in the next few quarters is expected to be driven by Intel’s non-PC business, as the full benefits of the new PC platforms have yet to be realized.

Quick Snapshot of Q3’15 Earnings

At $14.5 billion, Intel’s Q3 2015 revenue was just marginally lower than Q3 2014 but 9.6% higher than Q2 2015. The data center, memory, and IoT businesses grew year-on-year by 12%, 20% and 10%, respectively. The ‘Client Computing Group’ revenue declined 8% year-on-year, as the 15% increase in ASPs was offset by a 19% decline in unit volumes. Intel’s Q3 2015 net income of $3.1 billion increased 15% quarter-on-quarter but declined 6% year-on-year. Diluted earnings per share (EPS) for the quarter stood at $0.64.

Our current price estimate of $35 for Intel is slightly above the current market price. We are in the process of updating our model for the Q3 2015 earnings release.

See our complete analysis for Intel

Signs of Stabilizing PC Market

Despite ongoing macroeconomic headwinds, Intel claims to be seeing signs that the PC market is beginning to stabilize. The company believes that the worldwide PC supply chain is healthy as it ramps its sixth generation core microprocessor, Skylake. Q3 2015 saw the launch of the Windows 10 operating system and the Skylake platform, which most industry experts believe will help re-accelerate PC demand. However, the fact that Windows 10 offers a free upgrade option, which means that one need not necessarily buy a new PC specifically to run Windows 10, is impacting new PC sales. Once the free Windows 10 licenses end, PC sales will most likely pick up in 2017.

Intel claims that its partners are using the combination of Windows 10 and Skylake to drive unprecedented innovation in PCs, creating new generation of high performance enthusiast desktops and thinner, lighter and more versatile two-in-ones. There are more than 50 sixth generation core systems in the market, available and shipping now, and Intel expect to more than triple that number by the end of 2015. Increasing segmentation of the PC product line and the launch of exciting new devices will hopefully improve volume sales and help Intel sustain the increase in ASPs in the current quarter.

Cloud & Network Infrastructure To Drive Growth In The Data Center Business

Intel’s strong growth in data center was driven by continuous strength in the cloud and improvement in the enterprise business. The company now expects its data center business  to grow in the low double digits, as compared to its prior forecast of approximately 15% growth. Although Intel is seeing strong growth in cloud and networking infrastructure, its enterprise segment remains weak. The enterprise segment is more macroeconomic driven, and Intel is not expecting a lot of incremental strength there for the next few quarters. 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.

3D NAND & 3D XPoint To Drive Strong Growth In Memory

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 Q4 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.

Recently, Intel and Micron also launched the 3D XPoint technology, the industry’s first new memory category in more than two decades. 3D XPoint is up to 1,000 times faster than NAND and up to 10 times denser than conventional memories, like DRAMs. The companies will start shipping limited engineering samples by the end of this year. In addition to transforming the space, Intel claims that the technology will benefit many other products, as the value of memory, storage, and performance start to play out in a variety of applications for the  data center, IoT, and mobile devices as well.

Q4 2015 Outlook

– Midpoint of the revenue range at $14.8 billion, up 2% quarter-on-quarter.

– Midpoint of the gross margin range to be 62%, a one point decrease quarter-on-quarter.

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