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Quick Take

  • Intel posted a healthy Q2 2013 despite persistent weakness in the PC market. It believes that the macro situation will improve in the second half of 2013 as the industry accepts innovative form factors in ultrabooks, convertibles and detachables.
  • The launch of Haswell has made Intel’s product portfolio more competitive with a lower price point. The high price point for Ultrabooks and touch-enabled notebook designs has been one of the key reasons for lower that expected demand for these products.
  • With the ongoing shift away from traditional PCs towards smartphones and tablets, Intel plans to drive a greater focus on Atom-based products by bringing the full weight of its process and architectural leadership to the Atom family.
  • Intel’s first quad-core Atom SoC (Bay Trail) for tablets and the Merrifield platform for smartphones will be based on its new Silvermont architecture, which offers better performance and consumes less power compared to its predecessor.
  • With Bay Trail, Intel intends to extend its product line across screen sizes and price points in both tablets and PCs.
  • Intel’s technology prowess will help it retain its leadership in the semiconductor industry.

Despite persistent weakness in the global PC market, leading PC microprocessor manufacturer Intel (NASDAQ:INTC) posted healthy Q2 2013 earnings. The 1.4% and 6.1% sequential growth in its PC client and data center group, respectively, led to a marginal increase (2%) in its total revenues. Additionally, Intel’s gross margins improved by 2% q-o-q.

With a new CEO at its helm, Intel has taken significant steps to reorganize in the last few months, which the company claims has improved decision making and contributed to greater accountability. Additionally, in an effort to stay in line with the changing technology landscape, Intel has made several strategy and priority changes. It plans to drive a greater focus on Atom-based products by bringing the full weight of its process and architectural leadership to the Atom family. With the ongoing shift away from traditional PCs and towards smartphones and tablets, we think Intel’s increasing focus on ultra-mobile products is a good long term move.

Intel believes that the macro situation will improve in the second half of 2013, as the industry accepts innovative form factors in ultrabooks, convertibles and detachables. We believe that with an improving macro environment, a gamut of new products and platforms, participation across a range of compute devices and its manufacturing leadership can help Intel achieve financial growth in the year. Generating approximately $4.7 billion in cash from operations and paying dividends of $1.1 billion in Q2 2013, Intel continues to earn record cash flows.

Intel To Hit A Significant Milestone In Mobility With New Products

Intel marked its entry in the mobile market at the start of 2012, and its Atom processors currently power approximately 12 smartphones and 15 tablets. [1] As Intel’s processor in general consumed more power, they were not considered suitable for use in mobile devices. However, it has worked towards developing more energy efficient chips and its processors now compete with ARM (market leader in the mobile space) designs on performance, and have equal or better power and battery life. Intel continues to focus on producing more energy efficient chips and adding features for connectivity and security.

In Q2 2013, Intel introduced its new Silvermont chip which promises to offer three times more performance or similar level of performance using five times less power compared to the Atom chips. Supporting both the Windows as well as the Atom platforms, Intel believes that Silvermont is one of the biggest chip architecture advances in its history. Intel’s first quad-core Atom SoC (Bay Trail) for tablets and the Merrifield platform for smartphones will be based on the new architecture. Both platforms are on track to start shipping in the second half of 2013.

With Bay Trail, Intel intends to extend its product line across screen sizes and price points in both tablets and PCs. Intel powered tablets could be available for as low as $199 and below in the future. In its earnings call transcript Intel stated that it is gaining market share in tablets and aims to quadruple it tablet volumes in Q3 2013, compared to Q1 2013. [1]

Last month, Intel scored a significant win in the mobile space when Samsung (OTC:SSNLF) chose Intel over ARM-based processor and its own Exynos chip family for the Samsung Galaxy Tab 3. The Galaxy Tab 3 uses an Atom SoC and its LTE solution. Intel currently ships the single-mode 4G LTE data solution, and remains on track to ship multimode voice and data LTE baseband solutions by the end of this year.

A More Competitive Product Portfolio To Spur Future Demand

Intel recently launched its fourth generation core processor family, code-named Haswell. The processor promises to offer improved performance and up to 13 hours of battery life (the biggest improvement in battery life in Intel’s history), in turn enabling a broad new range of ultra-sleek designs across multiple form factors like the 2-in-1 convertibles, tablets and other touch-enabled devices. With the Haswell launch, Intel claims that the inventory levels across the worldwide PC supply chain grew slightly as customers began building Haswell based PCs.

Going forward, we can expect to see ultrabook prices reduced to $599 with some models available for even $499 by this year end. On the other hand, touch-enabled Intel-based thin notebooks will be available for as low as $300 and probably below that in the future. [2] The high price point for Ultrabooks and touch-enabled notebooks designs has been one of the key reasons for lower that expected demand for these products.

IDC estimates the worldwide PC shipment to have declined by 13.9% and 11.7% y-o-y in Q1 2013 and Q2 2013, respectively. It forecast the PC demand to improve in the second half of 2013, with the rate of decline in PC shipments slowing to 4.7% in Q3 2013 and 1.6% in Q4 2012. [3] We believe the Intel’s new products can help revive demand for its processors going forward.

In the data center space, Intel has new microserver and Xeon products coming to market in the second half of 2013.

Intel Maintains Its Leadership In Process Technology and Architecture

Within the semiconductor industry, Intel is known to have best-in-class R&D capabilities. It is the only chip maker with its own manufacturing, design and fabrication capabilities, which makes it less dependent on other companies. In July 2012, Intel pumped $4.1 billion into ASML Holdings (NASDAQ:ASML) to fund the next generation chip-making technology. Its manufacturing lead gives it the world’s highest performing, lowest cost and lowest power transistors. (Intel’s CEO Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, July 17, 2013)

Intel continues to invest in its manufacturing leadership. In 2012, it ramped up its 22-nanometer factories and shipped its 100 millionth 22 nm processor in Q1 2013, using its revolutionary 3D transistor technology, while its competitors work towards shipping their first unit. Intel is in the process of transitioning to the 14 nm technology and will start production in the latter part of 2013.

We are in the process of updating our $27.58 price estimate for Intel.

Notes:

  1. Intel’s Krzanich pledges stronger mobile push in his first speech as CEO, Computer World, May 16, 2013
  2. Intel’s CEO Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, April 16, 2013
  3. May PC Shipments Reflect Slow Second Quarter, According to IDC, IDC Press Release, June 28, 2013

Disclosure: No positions

Source: Intel Shows Steady Results But Guides To A Stronger Recovery Ahead