Kirk Skaugen, senior vice president and general manager of Client Computing at Intel (INTC, Financial), recently spoke at the Citi 2015 Global Technology Conference. Skaugen discussed Intel's new Sixth Generation Intel Core processor known as Skylake and how it is revolutionizing the client computing market. Skaugen also spoke in detail about Intel's partnership with Microsoft (MSFT, Financial) and what the Intel processor can do for the client computing market when combined with Microsoft's Windows 10 operating system. Both Intel's new processor and the capabilities it has when combined with Microsoft's Windows 10 operating system are expected to significantly help revenue growth overall in Intel's Client Computing Group.
Client computing
According to Intel's second quarter earnings, the Client Computing Group is Intel's largest business driver. In the second quarter it generated 57% of the firm's revenue at $7.5 billion with earnings of $1.6 billion.
The client computing market has been a tough sub-sector for the technology industry recently. IDC has reported waning growth in the market overall. According to IDC, in 2015 personal computer shipments are expected to decrease by 8.7% and tablet shipments by -8%. Smartphone shipments are also expected to decrease according to IDC which projects device shipments falling to a growth rate of 10.4% from 27.5% in 2014.
The slower growth environment in the client computing market is evidenced in Intel's Client Computing earnings results. In the second quarter, revenue in Client Computing was down 14% from the comparable quarter. Earnings for the segment were also down, falling 38% in comparison to the second quarter of 2014. In the second quarter, operating margins were also lower likely do to the increased expense of manufacturing its new line of processors.
Growth opportunities and the 2-in-1 device
Despite the headwinds in the client computing market, one subset of the sector has shown significant demand and that is the 2-in-1 device. According to IDC the 2-in-1 tablet has growth potential of 86.5% in 2015. While the headwinds will continue to remain in the client computing sector it appears Intel has launched its new generation processor at an opportune time. Skaugen was bullish on Intel and its processor sales in his presentation at the Citi 2015 Global Technology Conference. Given the timely launch the business segment appears poised to capitalize on growing sales of 2-in-1 tablets and the combined benefits of a nearly simultaneous launch with Microsoft's Windows 10.
“We have never had a closer collaboration with Microsoft than we’ve had on Windows 10,” reports Skaugen in his comments on Intel’s relationship with Microsoft.
In Skaugen's presentation comments he discussed the added features that the Skylake processor can provide when combined with Windows 10. Current Windows 10 innovations includes facial recognition, video scanning and increased efficiency with Cortana. In the testing phase, Skaugen reports that Intel is also moving towards options for log-ins through facial recognition which would eliminate the need for passwords. Additionally, Intel is also seeking to make interaction more convenient through the use of gestures and voice. Both of these innovations specifically demonstrate Intel's marketability when paired with Windows 10.
Additionally, in the 2-in-1 market Intel's Skylake processors can provide for all of the same innovations in a 2-in-1 tablet. Thus making the timing of the new Skylake processor even more ideal given the growing market. Skaugen supported IDC's growth projections in the 2-in-1 sub-sector noting that consumers are more likely to refresh 2-in-1 tablets based on market innovation and Intel is seeing an eight to twelve month refresh for 2-in-1 tablets in the current market.
Conclusion
Overall, Skaugen's presentation supports the increased sales growth projections for Intel's Client Computing Group segment. The launch of the Skylake processors should significantly add to revenue growth in the third and fourth quarters. According to Skaugen, strong initial sales of the Skylake processor have the Client Computing Group segment on track to meet its goals of increasing profitably by $800 million in mobile this year.
Given the high end of revenue projections for the Skylake processor, the Client Computing Group overall could see segment sales increase by as much as 8% on a quarterly basis. The improved segment growth is also expected to help total firm revenue which analysts have projected to grow at a rate of 12% for the final quarter of the year. If Intel can boost its Client Computing revenue in the second half of the year it will prove that the bullish outlook on Intel's computing capabilities is realistic, helping the company to further solidify its leading market position in the semiconductor industry.
For investors, the revenue gains translate into substantial increases in shareholder value. Given best case scenario assumptions Intel currently has a discounted cash flow value of $35.23. At $35.23 investors have potential upside of 18%. Analysts' stock price outlook for Intel is consistent with this analysis. Analysts currently have an average target stock price of $34 with a high target price of $40. Overall, Intel's third and fourth quarter results appear to be critical for its future value and market position in 2016.
