Intel’s Q4’15 Earnings Preview: Growth To Be Driven By Data Center, IoT & Memory

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Weakness in the macroeconomic environment and the continued slowdown in PC sales restricted Intel’s (NASDAQ:INTC) topline growth in 2015. Nevertheless, despite deriving over 60% of its revenue from the PC market, Intel has done a good job of weathering the impact of sluggish PC sales, as the company continues to transform and diversify its business. The data center, IoT and NAND segments now account for almost 40% of Intel’s revenue and more than 70% of its overall operating profit. Continuous growth in these segments will help Intel weather the impact of a soft PC market.

Intel will release its Q4 2015 earning on January 14th. The company expects its 2015 revenue to be down approximately 1% compared to 2014. However, Intel is confident of a better 2016, and expects its top line to grow in the mid-single digits this year. The data center, IoT and NAND business segments are expected to be the key growth drivers for Intel in 2016.

We will update our current price estimate of $34 for Intel after the Q4 2015 earnings release.

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See our complete analysis for Intel

PC Market To Stabilize Towards The End of 2016

While PC sales are expected to remain weak in early 2016, research firm IDC estimates shipments to stabilize by the end of 2016 and grow slightly toward the end of the forecast as commercial replacements rise.

In its Q3 2015 earnings update, Intel announced seeing signs of the PC market stabilizing. The company believes that the worldwide PC supply chain is healthy as it ramps its sixth generation core microprocessor, Skylake. The 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 in 2016. 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 a 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 is expected to have more than tripled that number at the end of 2015. Increasing segmentation of the PC product line and the launch of exciting new devices will hopefully improve volume sales going forward.

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

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. For 2015, Intel expects its data center business  to grow in the low double digits. 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.

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 new generation low-power microprocessors for connected IoT devices. 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.

In Q3 2015, Intel registered a 10% growth in its IoT 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.

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

In 2015, 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. A few months back, 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. 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.

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.

Fiscal 2016 Outlook

– Revenue growth in the mid-single digits.

– Gross margin of 62%, +/- a few points.

– R&D and M,G&A expenses as a % of revenue to be down half a point.

– Capex of $10 billion, +/- $500 million.

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