Intel’s Q2’16 Earnings Preview: Focus on Data Center, IoT & Memory To Offset Decline In PCs; Restructuring Initiative To Improve Profitability
Intel (NASDAQ:INTC), the world’s largest semiconductor company, is set to release its Q2 2016 earnings on July 20th. Despite the drastic decline in PC sales in the last few years, Intel has manged to hold its ground by continuously focusing on adapting its technology to alternate growth markets.
Just prior to its Q1 2016 earnings release, Intel announced its restructuring initiative to accelerate its evolution from a PC company to one that powers the cloud and billions of smart, connected computing devices. Intel expects the restructuring program to deliver $750 million in savings this year and annual run rate savings of $1.4 billion by mid-2017. A one time charge of approximately $1.2 billion will be recorded for the restructuring in Q2 2016.
Intel plans to intensify its focus on the data center and Internet of Things (IoT) businesses, which it believes are its primary growth engines, with memory and field programmable gate arrays (FPGAs) accelerating these opportunities. While the next wave of computing drives strong growth in each of the above mentioned segments, PC sales are expected to continue declining in the high-single digit this year, Nevertheless, Intel expects 2-in-1s, gaming PCs, and set-top boxes to continue to grow at a strong pace.
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Improving Profitability in Intel’s Client Computing Segment
As the PC industry enters an entirely new era defined by immersive experiences, high-end gaming and content creation, Intel is committed to driving a regular cadence of innovation in PCs, across 2-in-1s, gaming, and entry segments. Intel’s 2-in-1s, gaming PCs and set-top boxes grew at a strong pace in Q1 2016 and the company expects the trend to continue. Recently, Intel announced its Core i7 processor Extreme Edition, its most powerful desktop processor ever, designed for the needs of today’s “mega-tasking” gamers and content creators. In the second half of 2016, the company will launch its 7th Gen Intel Core processors (code named Kaby Lake). In addition to powering a wide spectrum of PCs, Intel is also extending Intel Core to the IoT space for solutions in retail, signage, industrial IoT and medical devices.
Despite a continued decline in PC sales, Intel witnessed a 34% year-on-year increase in its computing operating profit, primarily on account of a richer product mix, lower 14nm unit costs on notebook processors, lower overall total spending and margin improvements in the mobile products. We expect the trend to continue in Q2 2016.
Data Center, IoT & Memory To Fuel Growth
Data center, IoT and memory account for ~40% of Intel’s revenue and 70% of its operating profit. The company considers the three markets to be its strongest growth drivers. Some of the factors that will drive demand in these segments are –
- Strong cloud and communication service provider demand. Growth of consumer services is fueling the build-out of cloud demand.
- Continuing migration of workloads onto Intel architecture and the rise of network function virtualization.
- Ramp-up of Intel’s 14nm server products and the Xeon plus FPGA shipments.
- 3D NAND and 3D Xpoint to expand Intel’s footprint in memory.
- Broadening IoT product portfolio and new partnerships in various IoT domains.
See our complete analysis for Intel
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