Intel (INTC) and Microsoft (MSFT) have been classically referred to as Wintel because of their tight relationship in the PC market. This also means that both were handicapped similarly when mobile computing came of age.
Their scrambling to build a position in mobile resulted in Microsoft declaring a mobile-first cloud-first strategy and Intel promising a strong position in the “next wave of computing.”
What this boils down to is an increased focus by both to develop technologies for mobile computing devices while building/optimizing their existing capabilities in the cloud. Microsoft takes care of the software side, which includes the eco-system. It also does hardware, in smaller doses.
Intel is involved in creating the building blocks that could push its technology into mobile devices including tablets, smartphones, wearables and other IoT (Internet of Things) devices.
The technology has been under development for some time and management has now reported that some of its LTE and baseband-integrated SoFIA chips are ramping production. Don’t expect high volumes just yet because management says that will take until year-end. But this is still good news because these cost effective chips won’t require the subsidy Intel has been paying PC makers in order to build market share.
The server side appears to be on fire and we can bank on Intel to maintain its leadership position in the foreseeable future.
Strong gross margins, higher other income, a lower tax rate and lower share count contributed to its 74 cent profit in the last quarter, well ahead of analyst expectations of 66 cents.
Investors shrugged off the strong performance, however, reacting to the outlook instead, which indicates that the PC market is not going to do anything exciting in the near future. Independent market research had indicated earlier that the PC market was turning around with pockets of strength emerging. Shares were down 2.5% in after-hours trading.
Here’s a look at the details-
Revenue
Intel’s reported revenue was $14.72 billion, roughly in line with the guidance range of $14.7 billion (+/-$500 million) and the Zacks Consensus of $14.72 billion. This was up 1.1% sequentialy and 6.4% from the year-ago quarter.
The PC Client Group, which continues to account for the largest chunk of Intel’s business (60%), saw revenues drop 3.5% sequentially while increasing 3.0% year over year.
Overall unit volumes dropped 5% sequentially but were up 6% year over year, with average selling prices (ASPs) increasing 3% sequntially and declining 2% from last year.
Segment units have now grown for five straight quarters. While this was partly helped by Microsoft’s decision to phase out XP, market research from IDC also indicates that the PC market continues to stabilize. Intel’s strategy for the market has been changing with the company now targeting every price point whereas it had earlier stuck to the high end. This allowed it to make the most of Google’s (GOOGL) Chromebooks as well as other lower-end varieties from hardware makers HP, Dell, Lenovo, etc.
Data Center, which generated 28% of quarterly revenue, saw units and ASP up 15% and 10%, respectively from last year, with management attributing the strength to cloud build-outs, data analytics and Intel’s strong product portolio. Intel’s dominance in the data center enables it to generate very strong prices here. Segment revenue was up 10.6% sequentially and 25.4% year over year.
The new segment Internet of Things Group also includes Intel’s embedded business. The segment accounted for 4% of revenue, up 11.5% sequentially and up 9.9% from last year.
The Software & Services Group generated another 4%, flat sequentially and down 5.8% year over year.
The all-important Mobile & Communications Group generated less than 1% of revenue, although Intel shipped into 16 million tablets. This took the total for the year to 46 million, ahead of the targeted 40 million. Management said that Intel was taking share in tablets and was already one of the leading players in the segment. Segment revenue was down substantially from both the previous and year-ago quarters.
Management said that the importance of the LTE technology developed for phones is growing in importance because of its application in tablets. Management estimates that by 2015, baseband attach rates on tablets will double and PC attach rates will be around 15% by then (due to increasing WLAN connectivity). Qualcomm (QCOM) remains the leader here with its 4G LTE solutions having taken the dominant share.
Intel’s LTE solution is ramping now with management looking for bigger volumes in the second half. The qualification process for the 3G SoFIA is also complete, with production expected to accelerate by the second half of the year.
The Other segment, which comprises Intel’s NAND flash memory products generated around 4% of revenue, up 7.3% sequentially and 13.2% year over year.
Margins
The gross margin for the quarter was 65.4%, up 37 basis points (bps) sequentially and up 340 bps year over year, better than the guidance of 64% at the mid-point. The strength in the data center business and the resulatant mix improvement are positives for the gross margin. Within the PC business too, there is relative strength in corporate PCs versus consumer, which again results in a stronger mix for Intel.
Management attributed the margin expansion to Intel’s product portfolio. The contra revenue or subsidy that Intel is giving tablet makers for the higher cost of using Bay Trail remains an offsetting factor, but volumes are helping margins. The growing list of foundry customers will further improve loading, which along with the new mobiity products will help margins.
Operating expenses of $5.11 billion were up 4.4% sequentially and 1.8% from last year. The operating margin was 30.6%, down 70 bps sequentially and 498 bps year over year. R&D costs as a percentage of sales increased substantially (up 78 bps sequentially and 581 bps year over year). MG&A costs also increased 32 bps sequentially, but were down 651 bps from last year.
The operating margins by segment were as follows—PC Client 44.9% (up 2 bps sequentially, 569 bpd year over year), Data Center 54.5% (up 275 bps and 537 bps, respectively), Internet of Things 31.3% (up 243 bps and down 736 bps, respectively) and Software & Services 4.5% (down 71 bps and 59 bps, respectively). The other segments continued to make significant losses.
Net income was $3.72 billion, or 25.3% of sales, compared to $3.34 billion, or 22.9% in the previous quarter and $2.63 billion or 19.0% in the comparable prior-year quarter.
Including restructuring charges of a penny a share, the GAAP EPS was 74 cents in the last quarter, up from 66 cents in the previous quarter and 51 cents in the year-ago quarter.
Balance Sheet
Inventories were up 3.8% sequentially with annualized inventory turns moving from 4.9X to around 4.8X. Days sales outstanding (DSOs) went up from 23 to around 27. The cash, marketable securities and fixed income trading asset balance at quarter-end was $14.05 billion, down $1.54 billion during the quarter.
Intel has $12.11 billion in long-term debt and $1.60 billion in short-term debt, resulting in a net cash balance of $343 million. Cash flow from operations was around $20.4 billion. Important usages of cash in the last quarter included $2.14 billion on capex, $4.4 billion on dividends and $10.80 billion on share repurchases.
Guidance
Intel guided to first-quarter revenue of around $13.7 billion (+/-$500 million), down 6.9% sequentially and 7.3% from the March quarter of 2014 (in line with the consensus estimate of $13.77 billion). The gross margin is expected to be around 60% (+/-2 percentage points). Total operating expenses are expected to come in at around $4.9 billion. Restructuring charges are expected to be around $40 million.
Management also expects to provide for depreciation of around $1.8 billion and intangibles amortization of around $65 million. Other income/expense and equity investments are not expected to have much of an impact on results. Applying the guided annual tax rate of 27%, net income comes to around $2.34 billion or 17.3% of revenue, which would be down 36.1% sequentially but up 22.0% from the year-ago quarter.
For 2015, Intel expects revenue to increase mid-single-digit percentage points, a gross margin of 62% (+/-2 percentage points), opex of $20.0 billion (+/-$400 million), intangibles amortization of $255 million, depreciation of $8.1 billion (+/-$100 million), a tax rate of 27% and capex of $10 billion (+/-$500 million).
Intel shares carry a Zacks Rank #2 (Buy).
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