With An Expanded Product Portfolio Intel Better Positioned For 2014

Jan.22.14 | About: Intel Corporation (INTC)

Intel (NASDAQ:INTC) closed its fiscal 2013 with $52.7 billion in revenue, a 1% decline over 2012, which was in line with its expectation. Though PC shipments continued to decline, the company claims that the market stabilized in the back half of 2013 and strong growth in the desktop segment helped it report better than expected performance in its PC client group. Despite lower than expected growth, Intel's data center business remains strong and witnessed a 7% growth in 2012. Higher start-up cost for the 14-nm factory reduced Intel's 2013 gross margin by 2%, to a still robust 62%.

2013 was a year of transition for Intel as the company spent the year building a foundation in growth segments of computing. It made significant progress in alternate markets with new platforms, product launches and design wins, which increased the company's competitiveness. Though it expects seasonal variation to lower its revenue growth in the current quarter, Intel believes that the macro situation will improve in 2014 as the industry accepts innovative form factors in ultrabooks, convertibles and detachables and it expands its presence in the mobile market.

Our current price of $29 for Intel is at a 10% premium to the current market price. (We are in the process of updating our valuation.) While we agree that the slowdown in PCs will impact Intel's short-term growth, we believe that the company has the capability and technology prowess to re-accelerate growth in the future. To lower its dependence on the traditional PC market, Intel is shifting investments toward the data center, tablets and low-power SoCs.

Stability In The PC Segment

PC sales declined marginally in 2012, and research firm IDC estimated shipments to decline by 10.1% year to year in 2013, slightly above its initial forecast of a 9.7% decline. [1] Despite its growing focus on alternate growth markets, Intel continues to derive approximately 70% of its revenue from the PC market, and thus is highly sensitive to any adverse development in the industry.

In line with industry trends, Intel witnessed a 4% decline in its PC client group revenue in 2013. However, achieving all-time records of i5 and i7 unit shipments, its PC business stabilized and even recorded an annual growth of 2% in Q4 2013. Registering an 11% annual growth, Intel's desktop business was particularly strong.

Since August this year, Intel has introduced over 40 new products for various market segments, ranging from ultra mobile devices to data centers to the Internet-of-Things. The company expects an expanding product lineup to grow its business across a broad range of devices and price points. It plans to launch around 70 unique 2-in-1 designs with outstanding battery life and performance across a range of price points before it enters the back to school selling season. [2]

Data Center Group To Remain Strong

Intel's data center business grew by 7% in 2012, backed by a 35%, 24% and 18% growth in cloud, storage and high performance computing, respectively. The enterprise segment fell short of the company's expectation for Q4 2014 as it overestimated the rate of recovery among corporate buyers, in the wake of third quarter strength.

Backed by the launch of Ivy Bridge products for Xeon cloud servers and Atom-based Avoton SoCs for the microserver segment, Intel's data center group returned to double-digit growth on a year-over-year basis in Q3 2013. However, a tapering off in order patterns across certain segments towards the end of the year, driven by the government shutdown and the uncertainty around the debt level, impacted the data center growth rate in Q4 2012.

Nevertheless, Intel expects its data center business to grow in the 10% range in 2014. In 2013, the company extended its leadership at the high end as well as at the low end of the market with the launch of the Ivy Bridge-based Xeon product line and Avoton (which targets the micro-server market), respectively. Intel plans to launch Ivy Bridge-EX, which will bring the largest generation-to-generation improvement in MT Server performance, later in Q1 2014.

Intel claims that its data center business continues to see robust growth as a result of the build out of the cloud and the exposure of devices that compute and connect to the internet.

Milestone Year For Tablets

While Intel has been the world's dominant PC Microprocessor maker for over two decades, it has had difficulty penetrating newer processor markets for tablets and smartphones, in which Qualcomm (NASDAQ:QCOM) and Samsung (OTC:SSNLF) are dominant. However, Intel remains focused on expanding its presence in the mobile computing space and is no longer dependent solely on PCs.

Intel plans to significantly increase its investment in chips for the fast-growing mobile market and lower investment in its core PC processor business. With considerable investment and effort, it has built on this and its Atom-based SOCs now power around 12 smartphones and 15 tablets at present. In 2013, Intel's tablet volumes climbed to 10 million units and the company aims to grow the same to more than 40 million units this year. It saw significant growth in the tablet market in the back half of 2013 and its Bay Trail platform can further increase its share this year.

Q1 2014 Outlook

- Mid point of the revenue range at $12.8 billion and gross margin range at 59%.

2014 Outlook

- Revenue to be approximately flat. Data center group revenue to be up in the low-double digits and PC client group revenue to be down in the mid-single digits.

- Gross margins to remain flat at around 60%, compared to 2013.

- Capex of $11 billion.

Disclosure: No positions.