Intel (INTC) reported an inline quarter on revenue with a slight beat on net income with earnings per share of $0.58 for the quarter. Guidance was at the low end of expectations with Q4 revenue at $13.7 billion plus or minus $500 million. The breakout of segment earnings was revealing nonetheless. PC Client Group was pleasantly ahead of many expectations with operating income of $3.3 billion, essentially unchanged from 2012 despite many dire predictions of the death of the personal computer (PC), and Data Centre Group continued its steady growth with operating income of $1.4 billion up from $1.2 billion last year.
The surprise was in the "Other Intel Architecture" segment, which includes the smartphone and tablet segment. Sales of $1.1 billion were down from $1.2 billion in 2012, and the net loss ballooned to $0.6 billion from $0.2 million despite all the effort to promote Bay Trail and Silvermont for smart devices. Progress in these areas is halting at best.
Notwithstanding, in the conference call that followed there was evidence of progress in mobile. The following exchange between David Wong of Wells Fargo and CEO Brian Krzanich tells a more positive tale, at least in the tablet market.
Krzanich's statement that there are 50 Bay Trail designs in the works and the majority of them are Android devices is worth noting. Best Buy lists 569 tablets on its web site although many of these are simply differentiating 16GB, 32GB and 64GB versions of the same tablets. In any event, there are a lot of tablets. The same site lists 82 of those tablets having "Intel Inside" including 45 with an Atom chip. Not all tablets are created equal but a dirty way to estimate Intel's share of tablets would be to divide 82 by 569 giving you a share of models of about 14%. If you narrow the field to just Android tablets, only one of the 349 listed is Intel powered.
This leads to two conclusions. First, 81 of tablets listed on Best Buy are Windows tablets with Intel processors with only 45 of these using Atom chips. Second, and more importantly, the 20 to 30 Android based tablets CEO Brian Krzanich was talking about are not yet on store shelves. If they were, Intel processors would be in about 8% of the Android tablets offered.
According to IDC the tablet market is about 227 million units a year, of which about one-third are iPads, 63% are Android and 4% are Windows (non RT).
The Q2 breakdown by supplier in the second quarter showed Apple and Samsung were the big players but the field of "also ran" suppliers still amounted to some 18 million units.
Assuming these market shares hold where they are, and if we are to believe Intel's CEO's comments, Intel processors would be found in about 8% of the Android portion and about 80% of the Windows (non RT) portion. By my math, that amounts to almost 20 million tablets. At $40 Intel content per tablet (my best guess, not that scientific) tablets should be something like an $800 million market for Intel. IDC and Gartner forecast growth in tablets over 30% suggesting that processors for tablets might be a $1 billion item for Intel in 2014.
Those figures exclude any growth in market share. But market share growth is likely. The Surface Pro, for example, is a Haswell device, which now has long battery life and no storage issues. While expensive, it will find customers (like me) who can afford it and value its power and versatility. Similarly, there are a number of iCore hybrids on the market with excellent features, long battery lives and creative designs. These will also be popular.
Intel progress in smartphones still seems a long way off owing to the absence of a compelling LTE solution. Intel has LTE plans and whether these will pay off and produce a product competitive with Qualcomm is an open question. To my mind, any progress there is upside. Intel losses on "Other Intel Architecture" reflect its spending on R&D for this area but lack of revenue. If Intel can get this segment to break even it will add $0.40 per share to operating income.
I am long Intel.
Additional disclosure: I hold calls on 260,000 INTC