Intel: Bay Trail And Quark Can Change Its Fortunes

| About: Intel Corporation (INTC)
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On October 15, 2013, Intel (NASDAQ:INTC) reported the results for its third quarter of fiscal year 2013. The following are the results, my analysis of the results and the future of the company.

Results summary:

For the latest quarter, Intel reported the revenue of $13.48 billion, up 0.2% from $13.45 billion a year earlier, and the net profit of $2.95 billion, down 0.67% from $2.97 billion a year earlier. The net profit was fueled by the whopping rise in the "Gain on equity investment" by 750% to $452 million from $53 million during same period last year.

The operating profit declined by about 9% primarily due to rise in the R&D expenses and "restructuring and asset impairment" charges. On per share basis, the earning per share stands at $0.59, unchanged from the same period last year.

The PC revenues continue to see the contraction. Cloud, storage and high performance computing divisions showed excellent performance. Cloud revenue was up 40% year-over-year, storage was up 20%, and high performance computing was up 27%.

Revenue by Segment

PC Client segment generated 62% of Intel's revenue in the last quarter. The segment generated about $8.3 billion of revenue in the last quarter, down 3.5% year over year. Volumes dropped 4% year over year. Pricing was up 1% year over year. Operating income declined by about 2.5% to $3.2 billion from $3.3 billion during the same period last year.

Data Center group delivered the all-time record revenue and generated $2.9 billion of revenue in the last quarter, up 12.2% year over year. Volumes jumped 5% and pricing was up 8% year over year. Operating income jumped by about 15.8% to $1.4 billion from $1.2 billion during the same period last year. Data Center group showed strength across its lines of business such as cloud revenue was up 40% year-over-year, storage was up 20%, and high performance computing was up 27%.

Other Intel Architecture segment generated about $1 billion of revenue in the last quarter, down 9.3% from the last year. Segment loss increased from $235 million to $606 million.

Software and Services segment contributed around $621 million of total revenue, up 5.6% from the same period last year.

Q4 2013 Guidance: (as mentioned by the company)

  • Revenue: $13.7 billion, plus or minus $500 million.
  • Gross margin percentage: 61 percent, plus or minus a couple of percentage points.
  • R&D plus MG&A spending: approximately $4.7 billion.
  • Amortization of acquisition-related intangibles: approximately $70 million.
  • Impact of equity investments and interest and other: approximately zero.
  • Depreciation: approximately $1.7 billion.
  • Restructuring and asset impairment charges: approximately $100 million.
  • Tax rate: approximately 25 percent.
  • Full-year capital spending: $10.8 billion, plus or minus $300 million.


The company is by far the largest player in the PC microprocessors market and is much ahead of its main rival Advanced Micro Devices (NASDAQ:AMD). The global PC market is big but is declining due to the proliferation of the mobile devices like smartphones and tablets.

The company is well aware that its prime business segment, PC client, which contributed about 62% of its revenues, in the latest quarter, is in the declining phase since the last few years. It is focusing more and more on the growth segments (tablet, LTE mobile, cloud, etc.) where it is facing the intense competition from the already establish players.

To establish itself in these growth segments the company over the past couple of months has launched 15 new 22-nanometer Atom SoCs. These products are designed for the markets ranging from consumer tablets to cloud data-centers.

During the quarter the company made its long-term direction very clear, as it intends to get aggressive in the new growth segments by launching the new products and getting aggressive on the pricing front in all the segments.

As mentioned in its earning call transcript:

"From a product perspective, we have an unprecedented line-up of products coming to the market this holiday season."

"During the holiday selling season, you will see Atom SoCs and tablets as low as $99, and in 2-in-1 systems as low as $349."

"At the same time, you will also find Haswell Systems with outstanding performance and 50% better battery life using Windows 8, Mac OS, and Chrome as low as $299. Together, Bay Trail and Haswell are making possible a range of innovative new form factors at breakthrough price points."

Bay Trail:

One of the key achievements during the quarter is the industry response to the company's Bay Trail, its next-generation Atom processor-based SoC for tablets. As said by the management:

"We've seen great adoption. We have over 50 design wins" "The other place Bay Trail is going into is tablets. We think that by Black Friday, you will see 8 to 10 SKUs on shelf"

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).

The initial response to Bay Trail by the industry raises hope about the company's future success in the tablet space, which offers an enormous growth opportunity.


Recently, the company introduced another product named Quark, an ultra-low power and low-cost architecture. Both the basic qualities (ultra-low power and low-cost architecture) of the product are the key requirement for Internet of things as well as the machine to machine communication. Both are the fast evolving technologies and hold a lot of promise for the future. As mentioned by the company:

"we are making to ensure we are in a better position to lead and define technology trends moving forward."

All in all results are within expected lines with no surprises.

Initial success of Bay trail is a great news for the company as well as the investors. Introduction of Quark products shows that this time the company does not want to lag behind its competitors in capturing the growth opportunities in the emerging technologies. Both products can change the fortunes of the company and can put it back on the growth track or at least can mitigate the negative effect of the declining PC segment. The company is progressing well on LTE, but it's still early to take a firm view. Data center segment showed record results and is expected to continue with its performance in the near future.

The investors who are worried about the decline in the PC market and the company's little presence in the tablet and smartphone segments can take the quarter as the beginning of the company's firm entry into the tablet segment with around 20 design wins for Bay Trail tablets on Android many of them will on shelf by Black Friday.

Aggressive pricing and rapid product introduction may lead to lower margins and high R&D expenses, but if the company wants to catch-up with its competitors like Qualcomm (NASDAQ:QCOM) in tablet and mobile markets then the company has to show this aggressiveness. Short-term pains like these can lead to the long-term gains like a better position in tablet, mobile and other new technologies, which can bring the company back on its growth path.

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This article reflects the personal views of the author about the company and one must 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.