Chip giant Intel Corp (INTC, Financial) posted mixed first-quarter 2014 results. Although revenue didn’t live up to Street expectations, earnings per share were better than expected. The dismal quarter was the reflection of Intel’s poor performance in the mobile chip market. Intel shares moved up slightly in the after-hours, showing positive investor sentiment, probably due to a decent second-quarter outlook and signs of PC market stabilization. Let’s dive deeper into the fundamentals and find out some key takeaways. But before that a small recap of numbers is required.
Quarter Recap
Intel’s earnings per share of $0.38 dropped 5% from the year ago quarter but came a penny above the Street’s $0.37. The decline was mainly due to lower-than-expected revenue and higher tax expense.
Revenue grew 1.5% year over year, backed by higher contribution from the Data Center Group, Internet of Things Group (IoT), and Software and Services segments. However, the growth was rationalized by a significant fall in Mobile and Communications Group and a nominal tweak in the PC Client Group. Gross margin grew 350 basis points over a year-ago quarter, while operating margin remained flat.
Total cash balance stood at $19.1 billion. Despite a drop in profitability, Intel returned cash to its shareholders. It paid $1.1 billion in dividends and repurchased shares worth $545 million. Overall, the figures were not very encouraging, but still there are some positives.
Data Center Is the Key Driver
Intel registered a double-digit growth in its Data Center Group, the second largest segment, as both unit volumes and average selling price (ASP) grew year over year. Improved sales of Intel’s new Xeon E5 and E7 server chips were the main drivers. Cloud, networking and storage bolstered the demand for server chips.
Intel plans to expand its reach in the business with Cloudera, which is a big data analytics solutions provider. As demand for its products is growing solid, Intel expects the segment revenue to continue to see double-digit growth.
PC Market Stabilizing
PC Client Group’s revenue dropped 1% year over year as ASP fell 3%. Despite a fall in selling prices, management looked quite contented as unit volume grew for the second consecutive quarter. Demand from the corporate sector was the key driver, although the consumer side continued to lackluster. The chipmaker gained massively after Microsoft (MSFT, Financial) announced that it would stop providing support for Windows XP operating system. This forced several organizations for a product upgrade.
According to research firm Gartner, PC shipment dropped just 1.7% in the first quarter (January through March) of 2014. The statistic shows a stark improvement in PC shipments as the decline in first quarter 2013 was 13.9% and 6.9% in fourth-quarter 2013.
Intel is expecting more than 70 design wins in advanced desktop computing buoyed by increasing preference for Windows 8.1 update and upcoming back-to-school period.
Promising Growth in Mobile & Communications Group
Intel has been a late entrant in the smartphone and tablet market compared to Qualcomm (QCOM, Financial) that has been dominating the mobile device market for long. Naturally, Intel will take time to make its presence felt in this market. Revenue in this segment plummeted 61%, mostly due to shift in preference from 2G/3G to 4G LTE. Intel has just started shipping chips for 4G LTE platform late last year.
But it has made commendable performance in the tablet space by selling 5 million chips during the quarter. Intel’s CEO Brian Krzanich plans to sell around 40 million tablet chips this year (four times from last year) and believes that the company is on track to meet its target.
Currently, Intel is supplying its latest chips to Dell, ASUS, Lenovo and Foxconn for their respective smartphones and tablets. It has also won designs in more than 90 tablet and smartphone models based on both Windows as well Android platforms. This bodes well for Intel and it is expected that this Group could deliver better results going forward.
Internet of Things Group - a Big Opportunity
Although the IoT Group used to be reported under a consolidated segment earlier, Intel is recording its financials separately effective this quarter. The segment reported 32% revenue growth helped by increasing demand from the car infotainment makers and retailers. Unit volume nearly doubled from the year ago quarter.
Market research firms Gartner and IDCĂ‚ are extremely positive about this trillion-dollar market. IDC expects global revenue to surpass $7 trillion by 2017. Sensing this, the chipmaker plans to invest heavily to boost its capabilities and deliver innovative solutions for the IoT market.
To Conclude
The first quarter results might have disappointed investors, but there are enough positives to draw from the period and stay put for the coming quarters. Intel is aligning its resources such that it gets more active in the mobile, tablets, cloud and storage space, while reducing dependency on the uncertain PC market. Investors should keep faith in Intel’s continuous effort to upgrade technologies and increasing exposure in newer growth areas.
