On November 21, 2013, during an investor-meet Intel (NASDAQ:INTC) provided some information about its future strategy and near-term outlook. Following is my analysis of the company's strategy and its long-term potential (segment-wise).
The company primarily has four major operating segments: PC Client Group (PCCG), Other Intel architecture (IA), Data Center Group (DCG) and Software and services ("SSG").
(click to enlarge) (source: Annual report 2012)Click to enlarge
PC client group:
PCCG is the largest segment of the company. It contributed over 60% of the company's revenue during the last few years.
The company forecasted that in FY 2013 the segment's revenue is expected to decline by 5% to touch 32.7 billion. The operating profit is expected to decline by about 11.5% to touch 11.6 billion from 13.1 billion in FY 2012. The operating margin is expected to decline by 300 bps to touch 35%.
Despite the expected decline in the segment's revenue, the company predicted a flat profit for FY 2014, which is a good news as this means that the company is expecting a margin improvement. The company intends to reduce the platform cost significantly from 2014 onwards due to the growing contribution from low cost platforms like Bay Trail Celeron in 2014 and Broxton Celeron in 2015 (see the table below). Expected stabilization (moderation in the slowdown) in PC market will further benefit the company as the company is the largest player in the market.
Other Intel Arch.:
The segment's operating units include: Intelligent Systems Group, Intel Mobile Communications, the Phone Group, the Tablet Group, the Service Provider Group, etc.
The company forecasted that in FY 2013 the segment's revenue is expected to decline by 8% to touch $4 billion from $4.4 billion in FY 2012. The operating loss is expected to increase further to touch $2.5 billion from $1.4 billion in FY 2012.
The company predicted a flat revenue growth and wider operating loss for the segment in FY 2014. The reasons behind all this is the lack of scale, and heavy investments in research & development activities.
This segment serves some huge and fast growing markets like tablet and smartphone markets. The company is a late entrant in these markets and is finding it difficult to gather a reasonable market share or scale. The company is making significant R&D efforts to develop cost-effective products that fit the needs of these markets.
Though till now, the company is a small player in the tablet market, but it is moving ahead in the right direction to gain market share in the years to come. The company's tablet strategy is focused on the various price points with different products. Beyond FY 2014 the company intends to introduce the products for low-end tablet market (see the chart below).
To get a better share of the tablet and mobile markets, the company is making some excellent strategic moves like: multiple product offerings to address all price points, technological advancements and Intelligent Systems offerings such as complete SoC solutions for tablet and mobile markets. All these efforts points towards a better future.
Data Center Group:
The company forecasted that for FY 2013 the segment's revenue is expected to improve by 9% to touch $11.5 billion from $10.7 billion in FY 2012. The operating profit is expected to increase further to touch $5.3 billion from $5.1 billion in FY 2012. The operating margin is expected to remain around 47% in FY 2013. The prime reason behind the growth is the better product mix.
The company predicted a very healthy revenue and margin growth for the segment in FY 2014. The segment serves the global data center industry. The global data center industry is showing a healthy growth due to the rising popularity of cloud computing. The company with its high-performance and cost-effective offerings is all set to make good of this opportunity in the future, as the segment is expected to show a long-term CAGR of 15%.
Software and Services Group:
The company forecasted that for FY 2013 the segment's revenue is expected to improve by 4% to touch $2.5 billion from $2.4 billion in FY 2012.
The company predicted a healthy revenue and margin growth for the segment in FY 2014. Its key product, McAfee, is winning share and performing well in a down PC market, which is a good news.
Slowdown in the PC market and the company's very little presence in the growth markets (tablet and smartphones) are the key worries for the company. The company is trying to address both these problems with some aggressive R&D efforts, which are focused towards the introduction of high-performance, cost-effective products. If the things goes well then FY 2014 may well become the year of transformation for the company.
- Tablet market:
According to IDC, the worldwide tablet market is expected to grow by 78% during 2013-2017, representing a CAGR of 15.66% (see the table below).
Tablet market is one of the fastest growing markets, and the company has a little presence in the market till now. From FY 2014 onwards, the company is all set to become a much more serious player in the market with numerous offerings (discussed above).
- PC market:
In PC market, the company should be a more dominant player due to the expected improvement in the margins. This also means that the decline in the segment's revenue will not affect the margins negatively.
- Data center market:
All-round growth in the data center market is a very positive for the future of the company as this is the high-growth and high-margin business.
- Software and Services Group
The expected positive contribution from the segment (revenues as well as profits) will be another positive for the company in the future.
- Capital expenditure:
The company has been making significant capital investments since the last few years (see the table below).
A significant part of the capital investments goes towards the capacity build-up and technological upgrades. This huge spending makes it sure that the company is all set to deliver the products based on the most advanced and cost-effective manufacturing technologies.
All in all, it looks like that the company is heading back towards a growth oriented future. The company is focusing more on the growing markets, and the margin enhancement of all the segments. It has been making some good strategic moves that should lead the company towards a better future.
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This article reflects the personal views of the author about the company and one must read offer prospectus and consult its financial adviser before making any decision.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.