PC microprocessor manufacturer Intel (NASDAQ:INTC) is executing well in a tough market environment, posting modest growth in its Q3 2013 earnings. The company reported $13.5 billion in revenues, marking 5% sequential growth. On account of persistent weakness in the PC market, Intel reported a 3.5% decline in revenues from its PC client group. However, the same was more than offset by robust growth in the data center and enterprise business segment. Additionally, company-wide gross margins improved by 4% sequentially due to lower unit costs, declining factory start-up costs, higher platform revenue and lower write-offs.
Though research firm IDC estimates PC shipments to decline for the second consecutive year in 2013, Intel claims that it is seeing early signs of improvements in North America and Western Europe. The company has introduced over 40 new products for various market segments since August this year, from ultra mobile devices to data centers to Internet-of-Things. It anticipates an expanding product lineup to grow its business across a broad range of devices and price points.
Intel generated around $6 billion in cash from operations, paid $1 billion in dividends, purchased almost $3 billion in capital assets and repurchased over $0.5 billion in stock in Q3 2013. While we agree that the slowdown in PCs will impact its short-term growth, we believe that Intel has the capability and technology prowess to re-accelerate growth in the future.
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We are in the process of updating our current price of $29 for Intel.
Record Revenue in Data Center; Intel Remains A Dominant Player In The Server Market
Backed by the launch of Ivy Bridge product for Xeon cloud servers and Atom-based Avoton SoCs for the microserver segment, Intel’s data center group reported record revenues in Q3 2013. At $2.9 billion, the data center group returned to double digit growth on a y-o-y basis on account of renewed demand from the traditional enterprise business. Intel saw growing strength across business lines and geographies.
However, much of the increase can be attributed to Intel’s robust growth in cloud, storage and high performance computing where revenues climbed by 40%, 20% and 27%, respectively. The company expects the y-o-y growth in data center revenue to accelerate in the current quarter.
Intel derives over 20% of its revenues and approximately 28% of its valuation from servers and thus growth in this segment remains important for its valuation. Intel’s server processors are based on the x86 architecture and account for more than 90% of the market. Historically, strong demand for x86 servers have been the predominant factor fueling global server shipments. x86 servers account for over 80% of total server shipments and their revenue contribution increased from 53.6% in 2007 to 68.2% in 2012.
Though the entry of ARM-based players will heat up competition for Intel in the server market, we believe the company will continue to retain its dominance for years to come.
New Products Will Help Spur Future Demand
Intel believes that its upcoming products and platforms can fuel industry demand in the future. In the last few months, Intel launched 15 new 22 nm Atom SoCs which will power products designed for markets ranging from consumer tablets to cloud data centers.
The Bay Trail Platform Can Help Gain Share In Tablets & Low-Cost PCs: Based on one of the biggest chip architecture advances in Intel’s history (Silvermont), Bay Trail is the company’s first quad-core Atom SoC. With Bay Trail, Intel intends to extend its product line across screen sizes and price points in tablets as well as low-cost PCs. Intel promises to offer a wide variety of tablets ranging from $99 to $350 in the near future. Within PCs, it claims to have over 50 design wins with approximately half of those in 2-in-1 devices. ((Intel’s CEO Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, October 15, 2013))
Intel’s earlier Atom SoC based on Clover Trail and Clover Trail+ platforms were present in a relatively small number of tablets. Backed by some recent high profile design wins such as the Samsung Galaxy Tab, the company now accounts for 4%-5% of the global tablet market.  Bay Trail can also help Intel increase its presence in the low-cost PC segment, an area historically dominated by AMD.
Haswell To Spur Demand For Higher End PCs: Intel recently launched its fourth generation core processor family, code-named Haswell. The processor promises to offer improved performance, strong graphics and up to 13 hours of battery life, in turn enabling a broad new range of ultra-sleek designs across multiple form factors like the 2-in-1 convertibles and other touch-enabled devices.
Intel claims that around 70% of today’s Ultrabooks are touch enabled and anticipates the number to reach 100% by this year end. ((Intel announces Bay Trail tablet CPU, part two, TechEYE.net, September 13, 2013)) The 2-in-1 devices can help spur demand for Intel processors as they offer customers the benefits of a PC and convenience of a tablet. Around 60 designs ranging between $299 and $999 are expected to hit the market in the near future.
The extension of product lineup across devices, price points and operating systems positions Intel to expand its business across a broad range of compute devices.
Q4 2013 Outlook
– $13.7 billion is the mid point of Intel’s target revenue range, a 2% sequential growth.
– Gross margins of 61%, a 1% sequential decline, as Intel anticipates higher factory spending on 14 nm.
– Spending to be consistent with Q3 2013 ($4.7 billion)Notes:
- Intel’s Management Presents at Citi 2013 Global Technology Conference (Transcript), Seeking Alpha, September 4, 2013 [↩]