Leading semiconductor manufacturer Intel (NASDAQ:INTC) will announce its Q2 2014 earnings on July 15. The persistent decline in PC shipments, combined with increasing investment in building out its technology, has impacted Intel’s revenue growth as well as its bottom line over the last two years. Q1 2014 marked a strong start for Intel as it saw a 1.5% year-over-year increase in revenue and reported fully-diluted earnings per share of $0.38. 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.
Driven by stronger-than-expected PC demand, Intel raised its Q2 2014 earnings expectations last month. The company now expects Q2 2014 revenue to be around $13.7 billion (+/- $300 million) as compared to its previous range of $13 billion (+/- $500 million). Intel has increased the mid-point of its gross margin range by 1% (from 63% to 64%), driven mostly by higher PC unit sales.
2013 was a year of transition for Intel. It made significant progress in alternative markets with new platforms, product launches and design wins, which increased its competitiveness in the semiconductor industry. Intel 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.
Our current price of $27 for Intel is at an approximate 15% discount to the current market price. We will update our valuation after the Q2 2014 earnings release.
Stabilizing PC Business; Intel Gained Market Share In Q1’14
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.
Intel’s PC Client Group revenue declined by 1% year over year in Q1 2014, as compared to 4.4% in total PC shipments, which implies that the company ended up gaining additional market share in the quarter. Its PC Client Group platform unit volume increased 1%, up for the second consecutive quarter. 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.
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 claims that it is seeing strengthening consumer demand from emerging markets even though the consumer demand in the rest of the world remains weak. With the higher than anticipated business PC demand in Q2 2014, we expect the company to report another quarter of improving PC sales.
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. 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.
Earlier this year, Intel completed its acquisition of Basis Science, which specializes in wearable device technologies for health and wellness applications. This 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.
Agreement With Rockchip Will Expand Intel’s Presence In The Tablet Market
Last month, Intel announced a strategic agreement with Rockchip, a leading Chinese fabless semiconductor company and mobile-internet system on a chip (SoC) solution provider, to expand its low-cost tablet offerings. The two companies plan to deliver an Intel branded quad-core mobile SoC platform integrated with Intel’s 3G modem technology, targeted primarily at the low-cost Android tablet segment. The agreement accelerates Intel’s growth in the tablet market and expands Rockchip’s product portfolio with the addition of the performance and flexibility of the Intel architecture and leading communications solutions. Intel and Rockchip will sell the quad-core SoFIA 3G into each others existing customer base (OEMs and ODMs).
Intel shipped 5 million tablets in Q1 2014 and targets to ship a total of 40 million tablets this year, compared to 10 million in 2013. An increased focus on the low-cost Android tablet space is a step ahead in meeting its goal, we believe. By expanding its reach in sockets that typically sell for $10-$20, the Rockchip deal will help Intel gain a considerable share in the Chinese market.
Intel presently accounts for 4%–5% of the global tablet market, and we believe that expanding its presence in China can help the company increase its share in the global tablet market. If Intel meets its target of shipping 40 million tablet chips by the end of 2014, its market share would increase to approximately 15%.
Disclosure: No positions.