Intel’s Q4’15 Earnings Review: Growth To Re-Accelerate in 2016

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Leading PC processor manufacturer, Intel (NASDAQ:INTC) reported its Q4 2015 and full year 2015 earnings on January 19th. Earnings were consistent with company expectations, as the significant decline in PCs was offset by strong growth in Data Center, Internet-of-Things (IoT) and Memory. Despite beating Wall Street estimate, Intel’s stock price was down marginally in after hours trading, mainly due to the company’s tepid Q1 2016 guidance and the fact that some had expected even stronger data center growth. The mid point of Intel’s Q1 2016 revenue guidance is at the low-end of the average seasonal range, as the company remain cautious on the level of economic growth, particularly in China. Despite the relatively weak guidance for the current quarter, Intel expects solid growth in fiscal 2016 (mentioned below).

In the last few quarters, Intel has evolved its business by lowering its dependence on PCs and increasing its focus on three key areas: Data center, IoT and Memory. This strategy has enabled the company to successfully weather the impact of declining PC sales. According to research firm IDC, PC sales declined by 10.4% in 2015. In comparison Intel’s 2015 revenue was down just 1% compared to 2014 (Intel derives approximately 60% of its revenue from the PC market). The company claims that its future will increasingly be a product of the virtuous cycle of opportunities in the Data center, Memory and IoT market segments. In 2015, the three segments accounted for 40% of Intel’s revenue and more than 60% of its operating profit. Additionally, these three adjacent markets delivered $2.2 billion in profitable revenue growth in 2015 alone.

Intel completed its acquisition of Altera at the onset of Q1 2016. With Altera on board, Intel expects to broaden its product portfolio in the data center and IoT and enable even more innovation going forward .

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Quick Snapshot of Fiscal 2015 Earnings

At $55.4 billion, Intel’s 2015 revenue declined 1% compared to 2014. While the Client Computing revenue ($32.2 billion) was down 8%, the Data Center ($16 billion), IoT ($2.3 billion), and Non-Volatile Memory (>$2.5 billion) revenue were up 11%, 7%, and 22%, respectively.  Gross margin for 2015 was approximately 63%, down about a point from 2014. The higher unit costs, due to the ramp of 14 nm production, was offset by an increase in ASPs, driven by strong results in the data center business and a richer mix in the Client Computing business. Intel’s 2015 net income and diluted EPS stood at $11.4 billion and $2.33, compared to $11.7 billion and $2.31, respectively, in 2014.

We are in the process of updating our current price estimate of $34 for Intel.

See our complete analysis for Intel

PC Supply Chain Remains Healthy & Demand Could Stabilize in 2016

Though the Client Computing revenue declined by 8% in 2015, Intel managed to grow the business sequentially in the last three quarters of the year. The company continues to believe that the worldwide PC supply chain remains healthy with appropriate levels of inventory. 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.

Intel launched its sixth generation core microprocessor, Skylake, in Q3 2015. 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. As of November 2015, 14 nm products made up more than 50% of Intel’s Client Computing volume. The high-end Core i7 microprocessors and K SKUs for gaming, both set all-time volume records for 2015.

In the mobile segment, Intel exceeded it goal and achieved almost $1 billion in mobile profitability improvements over the course of 2015. The company expects to lower its mobile losses by another $800 million in 2016.

Data Center, IoT & NAND Will Continue To Fuel Demand In 2016

– Enterprise segment stabilized a bit in the second half of 2015; Data Center growth driven by cloud and network infrastructure: As expected by Intel, the macro weakness weighed on enterprise demand and resulted in slower growth in the data center group, compared to what the company expected at the start of 2015. The enterprise segment was weaker in the first half of 2015 and stabilized a bit in the second half. The cloud and communication service provider segment remained strong, growing more than 20% for the year. Within the cloud segment, 40% of Intel’s volume was custom SKUs, demonstrating the ongoing value of working directly with the customers to tailor solutions to their needs. 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 3D XPoint technology will help retain growth momentum in Memory – Towards the latter part of 2015, Intel introduced a revolutionary new class of memory called 3D XPoint, the industry’s first new memory technology 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 Q4 2015, Intel announced upgrading its Dalian, China fab to manufacture both 3D NAND and 3D XPoint, with production scheduled to begin later this year. In addition to transforming the space, Intel claims that the 3D XPoint 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.

– IoT to offer strong growth opportunities: At $2.3 billion, Intel’s IoT Group revenues reached an all-time record as the retail transportation and video segments saw strong double-digit year-over-year growth. 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.  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.

Q1 2016 Outlook

– Mid-point of the revenue range at $14.1 billion.

– Gross margin of approximately 62%. Spending of approximately $5.5 billion.

Fiscal 2016 Outlook

– Revenue growth in the mid- to high single digits.

– Gross margin of 63%. Spending of $21.3 billion.

– Capex of $9.5 billion.

– Depreciation expense of $6.5 billion.

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