Intel Corporation (INTC): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

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Summary:
Intel is one of the leading producers of microprocessors in the world. The company's first-quarter earnings exceeded the Zacks Consensus Estimate by a penny. Forward guidance was in line with the consensus estimate. Though Intel's promise of success in the mobile segment is encouraging, this is likely to be mitigated by conservative spending by individuals and corporations, competition from ARM-based devices, and the impact of new product ramp-up costs. The silver lining is its strength in the server and software segments, which along with the stabilization in the PC market and its process lead leads us to upgrade our rating to Outperform.

Overview:

Intel Corporation (INTC), based in Santa Clara, California, is the world's largest manufacturer of semiconductor products. The company supplies the computing and communications industries with microprocessors, motherboards, and system building blocks that are integral to computers, servers, and networking and communications products. Intel generated $52.7 billion in revenue in 2013, down 1.2% from 2012.

Microprocessors are the central processing units within a computing system. The speed and performance of microprocessors are dependent on a number of features that may be incorporated within it. The basic functions of the processor include the processing and storage of information and its retrieval at the desired time. Thus there are several operating steps within the processor that take place all the time, while the processor is in use recording or storage of raw data, retrieval of this data for processing, storing the processed data at another location and retrieving this processed data when required. The efficiency of these operations comes from the basic architecture, or the number of bits of information that it is able to process simultaneously. Design architectures are usually referred to as 64-bit, 32-bit and so on. Most of Intel's products are in the 64-bit category, or are 32-bit devices with 64-bit address extensions. This makes them suitable for both 32-bit and 64-bit software applications. Another factor that enhances processor speed is the clock speed, or the speed at which the internal logic of the unit processes the information. Frequently used data is stored in a specific place within the processor that is referred to as cache memory. Some of the company's processors already incorporate second and third levels of cache, enabling faster and more efficient operation.

With each successive year, Intel and competitor AMD have increased the number of cores within each microprocessor, from dual core right up to 12 cores per processor. The two companies are now working on 16-core processors. The increasing number of cores facilitates multitasking and makes energy consumption more efficient. The transfer of information into and out of the processor to and from the chipset is carried out by buses. Therefore, bus speeds also impact the efficiency of the unit. The final link in the process is the storage capacity of the unit that is defined by the number of gigabytes of available memory capacity to support efficient operation over a period of time.

The microprocessor is placed on a board (the motherboard) that also houses other devices, such as the chipset, memory and all related circuitry. The company's motherboards are designed for desktop, server and workstation platforms, although OEM customers have the option of using a motherboard from any other company as well. Intel also makes chipsets that support its processors and may be used on its motherboards. A chipset is a set of chips manufactured, sold and used as a unit for the purpose of carrying out a particular function. The chipset carries information between the CPU, display, storage and I/O devices. It is therefore responsible for regulating the amount and nature of information flowing through system buses, ensuring that the processes are carried out smoothly and that there are no bottlenecks.

Depending on the end markets served, microprocessors, motherboards and chipsets are categorized into the PC Client and Data Center Groups. The PC Client Group is targeted at notebooks, netbooks and desktop computers. Some wireless connectivity products are also included in this segment. This segment generated 63% of revenue in 2013, down 4.2% from 2012. The Data Center Group is targeted at servers, workstations and other products for data center and cloud computing environments. Additionally, wired connectivity products are included in the segment. This segment generated 21% of 2013 revenue, up 6.9% from 2012.

The Other Intel Architecture segment includes the Embedded and Communications Group (microprocessors for industrial, medical and automotive infotainment markets) the Ultra-Mobility Group (power efficient Atom processors and chipsets for MIDs and handsets) and the Digital Home Group (targeting various consumer electronics gadgets primarily used at home). The segment made up 8% of 2013 revenue, down 6.5% from 2012. Software and Services is now a separate segment following the acquisition of McAfee. The segment, which also includes Wind River accounted for less than 5% (up 5.1%). All Other products, including the NAND flash memory products brought in the remaining 3% of 2013 revenue, grew 17.2% from 2012.

Most of Intel's 2013 revenue came from Asian countries. Specifically, Singapore accounted for 21% (down 12.9% from 2012), China 19% (up 19.2%), Taiwan 17% (down 4.7%), and Japan 7% (down 13.4%). The U.S. and Other countries generated 17% and 19% of 2013 revenue, respectively, with the U.S. growing 8.9% and other regions declining 3.1%.

Intel's major customers include original design manufacturers (ODMs), original equipment manufacturers (OEMs) such as Hewlett Packard Company and Dell Computer, which make computers, cell phones and other types of equipment individuals and business customers, who buy Intel's chips and printed circuit board-level products from distributors and other resellers and manufacturers of various types of industrial and communications equipment. In 2013, the three largest customers were Hewlett Packard, Dell and Lenovo, which accounted for 17%, 15% and 12% of total revenue, respectively.

The company's most significant competitor in the x86 segment is AMD, which has offerings in almost every market that Intel serves. Other competitors include VIA, NVIDIA, Freescale Semiconductor, Qualcomm and Texas Instruments, some of whom sell chips based on rival chip architecture from ARM Holdings.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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