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Intel Eying Growth Amid PC Revival And Growing New Segments

One of the world’s leading chip makers Intel (INTC) has recently released its quarterly results that were better than analysts’ estimates. The company has shown improvements in its PC business, from where Intel drives more than half of its revenues. Moreover, recent data from the leading research firms has shown that the PC market is bottoming-out, with less than anticipated fall in PC shipments.

Moreover, there is increasing optimism related to Intel’s Internet of Things and Mobile segments. Although the company’s revenues from mobile devices dropped by more than 60% in the quarter, it is in the midst of an aggressive expansion plan in which it is rolling out new mobile chips and reporting contra-revenues. The company is confident about meeting its target to ship 40 million tablet chips during 2014.

The tech giant’s shares have risen by 13.5% in the last 12 months, currently around $26.50. Analyst at Citigroup and Deutsche Bank are optimistic about the company’s future. The two have a buy rating on the stock with a price target of $30.

Quarterly Results

Earlier this month, Intel reported its first quarter results in which its revenues climbed 1.5% from last year to $12.76 billion while its net income dropped 4.8% to $1.95 billion. Meanwhile, the company’s closely watched gross profit margin improved from 56.17% in the same quarter last year to 59.75%.

The PC Business

Intel has been working hard to revive its PC segment, from where it gets nearly 60% of its revenues. During the quarter, the revenues from the PC client group, or PCCG segment, dropped by 1.4% to $7.94 billion, despite the 1% increase in platform unit volumes. The PC platform average selling prices were down 3% from the same quarter last year. However, the unit’s operating income was up 12.6% from last year to $2.8 billion.

In the mid-90s, Intel and AMD (AMD) were the two big boys of this industry. But Intel was slow to react to the rise of mobile devices, a market which is now dominated by Qualcomm (QCOM) at the high end and MediaTek at the low end.

The management is optimistic about the future. During the conference call, the company’s CEO Brian Krzanich said, “In PCCG, where we're working to reinvent computing with new form factor innovation, longer battery life and OS of choice, we saw 2 in 1 volume increase more than 20% sequentially in a seasonally down quarter.

We're now expecting more than 70 two-in-one designs for the back-to-school selling season and many will be offered at $699 or less. These trends, in combination with renewed interest in Windows 8 from our customers, are encouraging.

The global PC shipments have fallen for the eighth consecutive quarter, but the situation is getting better. In the first quarter of 2014, as per IDC, PC shipments dropped by 4.4%, which was better than the anticipated decline of 5.3% and last year’s fall of 10.1%. Moreover, IDC’s rival Gartner believes that PC shipments have fallen by just 1.7%. Gartner believes that this improvement was due to Microsoft’s (MSFT) decision to discontinue the support for Windows XP, which led to an increase in PC replacement.

Clearly, without any growth, the PC market is still weak but with the slowdown in decline, it is showing signs of improvements.

This could be good news for Intel which has struggled amid the shift in consumer’s spending from desktop and laptops to tablets and smartphones.

Promising Segments

The company’s new segment, Internet of Things, looks promising. This segment includes a variety of household, automotive, industrial, retail and other products that are linked together to create an ecosystem of interconnected devices.

In the previous quarter, Internet of Things witnessed an impressive 32.1% growth to $482 million while its operating income rose 83.6% to $123 million. Intel has recently completed the acquisition of Basis Science, a wearable tech company, for around $100 million in order to fuel its growth in the wearable devices and internet of things. Moreover, the company is eying growth in the point of sale terminals and car entertainment systems

On the other hand, revenues from mobile and communications segment, which underpins the company’s growth in mobile devices, plummeted 61.4% from last year to $156 million. Its operating loss increased to $929 million from $703 million in the same quarter last year.

On a positive note, Intel sold just 5 million tablet chips in the previous quarter but has reiterated its goal of selling 40 million tablet chips in 2014.The company’s chips are currently used in [url="]nearly[/url] 90 different kinds of tablets.

Although the 40 million target looks ambitious, Intel can report better numbers in mobile. Earlier in February, during the backdrop of the Mobile World Congress held in Barcelona, company announced that is has signed multiyear deals with Asus, Dell (DELL), Apple’s (AAPL) supplier Foxconn and the Chinese PC maker, that has moved aggressively in the smartphone market, Lenovo (LNVGY), for supplying mobile and tablet chips.

Intel has also launched 64-bit Atom processors (Merrifield and Moorefield) that are designed for smartphones and tablets. Moreover, following success of its LTE-Advanced platform chip XMM 7160, the company has launched XMM-7260 in an effort to gain market share.

The company is also recording contra revenues, which is what Intel pays to original equipment manufacturers to integrate its chip (bay trail). Intel has said that contra revenues will have an adverse impact on its margins, but it is willing to forego its profitability for a better market share.

Moreover, this is a short term strategy as in the coming years, Intel will introduce new platforms (SoFIA and Broxton), which would not require contra revenues. The company is already looking for ways to reduce its contra-revenues by around 50% by the end of the year.

About the author:

Sarfaraz A. Khan
Sarfaraz A. Khan is a capital market analyst and finance writer. His specialty lies in energy stocks. He also covers consumer goods, services sector, technology stocks, emerging markets and ETFs. His work appears on TheStreet, Seeking Alpha, Motley Fool and GuruFocus.

Visit Sarfaraz A. Khan's Website


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