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Leading chipmaker Intel (NASDAQ:INTC) believes that its recently reported Q1 2014 earnings mark a strong start to its fiscal 2014. At $12.76 billion, the company saw a 1.5% year-over-year increase in its revenue and reported earnings per share (diluted) of $0.38, which was a penny over market consensus. A stabilizing PC market, strong growth in data centers and an expanding footprint in the Internet-of-Things market were Intel’s key growth drivers in Q1 2014, offset partially by lower mobile group revenue.

2013 was a year of transition for Intel as it made significant progress in alternative markets with new platforms, product launches and design wins, which increased its competitiveness in the semiconductor industry. Despite a marginal decline in its 2013 revenue, Intel managed to retain its No. 1 spot in the semiconductor industry, with a 15.4% market share. [1]

The company believes that the macro situation will improve in 2014 as the industry accepts innovative form factors in ultrabooks, convertibles and detachables, and as the company expands its presence in new growth markets. At the recently concluded Beijing IDF, Intel showcased a broad range of new products that it is bringing to the market in 2014 and beyond, ranging from servers in the Data Center to innovative PC form factors like detachables and all-in ones, tablets, phones and wearables. Additionally, the company began production on its 14-nanometer process technology and remains on track to launch Broadwell in the second half of the year.

Our current price of $27 for Intel is almost in line with the current market price. We are in the process of restructuring our model to incorporate the new reporting structure.

Stabilizing PC Business; Intel Gains Market Share

Having grown at a robust rate for many years, PC sales started declining 2011 onward. As per research firm IDC, PC shipments declined 3.7% and 10.3% in 2012 and 2013 respectively. The rate of decline dropped down to 4.4% in Q1 2014 as Windows XP migration (to machines running newer operating systems) and commercial spending helped offset the weak consumer PC demand. [2] Intel claims that it is seeing strengthening consumer demand from emerging markets even though the consumer demand in the rest of the world remains weak.

Intel’s PC Client Group revenue declined by 1% year over year (much lower than the 4.4% decline in total PC shipments) which implies that the company ended up gaining additional market share in Q1 2014. Its PC Client Group platform unit volume increased 1% (up for the second consecutive quarter) and inclusive of tablets the company marked a high single-digit unit growth. Mobile unit volume was up year over year for the first time since Q2 2012, while desktop units were flat year over year, with all-time record core volume and mix. PC platform average selling prices declined 3% compared to Q1 2013.

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. The company is working to reinvent PC computing with new form factor innovation, lower price points, longer battery life and an OS of choice. Its 2-in-1 volume increased by over 20% sequentially in Q1 2014, which is typically a seasonally down quarter. Intel expects more than 70 2-in-1 designs running on Intel processors for the back-to-school selling season.

Intel’s Data Center Group Remains Strong

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

The data center business grew by 7% in 2013, backed by a 35%, 24% and 18% growth in cloud, storage and high performance computing, respectively. The positive momentum continued in Q1 2014, with data center growing by 11% year over year backed by a 3% and 11% increase in platform volumes and average selling prices respectively, compared to Q1 2013. Growth in Cloud, networking and storage was in excess of 20% in the quarter.

Last year, Intel extended its leadership at the high end as well as at the leading edge of the market with the launch of the Ivy Bridge-based Xeon product line and Avoton (which targets the micro-server market), respectively. It introduced the Ivy Bridge-EX, which brings the largest generation-to-generation improvement in MT Server performance, this year. The company claims that its new E7 line, which features the largest memory footprint in the industry, saw particularly strong reception from enterprise as a result of its high speed, real-time data analytic capabilities.

Intel derives over 20% of its revenues and approximately 28% of its valuation from servers and thus growth in this segment remains important for its valuation. Intel expects its data center business to grow in the 10% range in 2014.

Intel Eyes Growth In the Internet-of-Things Market

Intel changed its reporting structure in Q1 2014 and now has the Internet-of-Things as a separate product segment. The new business segment, which includes small low-power chips that are used in wearable devices and a range of consumer and industrial products, reported a 32% year-over-year increase in its revenue ($482 million) in Q1 2014 driven by strong demand in in-vehicle infotainment systems and retail.

Intel was a late entrant in the mobile computing space and for this reason does not (yet) have a very large presence in the market. However, the computing giant is keen not to miss the next big wave in computing – Internet-of-things. The wearable gadgets market is still at a nascent stage and is predicted to more than double (from $4 billion in 2013) by 2018. [3] Intel is driving significant innovation in this area as its invests, both to extend its architecture into the very low power space and to acquire IP and capabilities.

Last month, Intel completed its acquisition of Basis Science which specializes in wearable device technologies for health and wellness applications, which gives Intel an immediate entry into the wearable devices market. The company intends to build upon this foundation to deliver new products that offer greater utility and value to its customers.

Intel shipped its first Quark SoCs for the Internet of Things in Q1 2014 and announced an upgrade of Edison to the Silvermont Atom architecture. Edison is on track to ship this summer.

Q2 2014 Outlook

- Midpoint of the revenue range at $13 billion, up 2% sequentially.

- Midpoint of the gross margin range at 63%, with the increase primarily driven by lower factory start-up costs.

Full Year 2014 Outlook

- Revenues to be approximately flat. PC Client Group revenue to decline in the mid-single-digits and the Data Center Group revenue to grow in the low double-digits.

- Midpoint of the gross margin range at 61%.

- Capex to be flat compared to 2013.

Notes:

  1. Worldwide Semiconductor Revenue Grew 5 Percent in 2013, According to Final Results By Gartner, Gartner Press Release, April 3, 2014
  2. Windows XP Migration and Commercial Spending Helped Offset Weak Consumer PC Demand in The First Quarter of 2014, IDC Press Release, April 9, 2014
  3. Intel buys wearable technology firm Basis Science, BBC, March 26, 2014

Disclosure: No positions

Source: Intel's Q1 '14 Earnings: Expanding Footprint In New Markets, Strong Data Center Performance And Higher PC Market Share Drive Growth