Strength In High End PC Shipments Drove Intel’s Q4’16 Growth, But Growth From PC Processors Seems Unsustainable In Long Run

Intel (NYSE:INTC) reported its Q4 2016 earnings on January 26th. The company registered a 10% growth in its overall revenues in the quarter, which was driven by strong growth across all its segments. In dollar terms, client computing group revenues increased 4.3%, despite a market decline in the PC shipments for the year. This growth was driven by a 7% increase in the unit average selling price due to higher Core i7 units shipments sold and a strength in gaming and high-end shipments. Furthermore, Intel’s operating profit in the client computing segment increased by 30% as a result of richer product mix and improvements in unit costs of 14-nanometer processors.

For Q1’17, Intel has guided a revenue of $14.8 billion at the midpoint, which is a slight decline on a sequential basis and translates to a 7% growth on a year-over-year basis. The sequential decline can be attributed to a decline in ASPs because of an expected decline in high-end gaming and PC shipments in Q2. For the full year 2017, the company expects its revenues to grow in low single digits and operating margins and gross margins to increase one percentage point and remain flat, respectively.

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Little Signs of Revival In PC Shipment Growth; Data Center And IoT To Be Major Growth Drivers For Intel In The Long Run

Though Intel saw a demand pick up in PC shipments and higher ASPs for its PC processors in Q4, this growth seems to be unsustainable in the longer run. This is primarily because of a fundamental change in the PC buying behavior. An increased dependency on smartphones has stretched PC life cycles longer, offsetting the slight growth from the PC enthusiast market. The company expects overall PC market to decline in mid-single digits in this year. Given that Intel still garners more than 50% of its revenues from PC processor sales, its overall revenue growth will also be subdued because of the weak outlook.

However, the company now derives its revenues from a much diversified portfolio, as compared to its revenues a few years ago, which were almost completely tied to PC sales. Intel claims that going ahead, it expects server revenue growth to offset the decline in the PC shipments. The company expects a strong surge in data generated by the smart and connected devices in future. To support this surge, cloud infrastructure has to expand, which, in turn, will drive the growth in Intel’s server processor shipments. Furthermore, the demand for server processors supporting machine learning is also likely to significantly increase going ahead. Given that Intel has a strong product portfolio catering to this market, it is likely to benefit from this growth opportunity as well. Currently, Intel powers more than 90% of the servers which are deployed to support machine learning.

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