Intel Marks A Strong Start To Fiscal 2017 Driven By Higher ASPs Across Businesses: Q1'17 Earnings Review
Having exited 2016 on a solid note, and with record revenue, PC processor manufacturer Intel ( INTC ) marked a strong start to fiscal 2017. The company is making significant progress in its transformation from a PC-centered company to one that powers the cloud and billions of smart and connected devices. Strong double digit collective growth in the non-PC segments is fueling the company's growth, as it continues to invest in these high growth markets by expanding its total addressable market from $45 billion to $220 billion, as reported by the company.
Intel witnessed increasing ASPs across all segments - PC, data center and IoT - which helped the company report an increase in its profitability year-on-year. The company expects to lower its spending as a percent of revenue by 2 points from 2015 to 2017, and aims to continue to drive efficiencies in how it operates the business. It targets to reach a spending range of 30% of revenue no later than 2020, which combined with strong revenue growth from new markets can help the company improve its long-term profitability.
Key Priorities For Intel In 2017 -
- Grow the data center business and adjacent markets.
- Improving profitability and health of the PC business.
- Growing IoT devices.
- Strong execution to drive the memory and FPGA business.
PC ASP Growth May Lose Momentum
Product innovation, combined with a thoughtful segmentation strategy, continues to produce a strong PC product mix, which has contributed to higher ASPs and hence improving profitability for Intel's PC business. The client computing group was the only business that registered an increase in operating margin, with operating profit growing over 60% y-o-y, as Intel continues to execute and benefit from continued improvements in 14 nm unit cost, richer product mix, and lower spending. Intel has been lowering its share of technology development and SG&A allocations for the PC business, and increasing its allocation of the same for other growing markets - data center, IoT, memory.
PC ASPs improved more than company expectations in the last few months, but Intel is taking a cautious outlook for the rest of the year, and has forecast a slight decline in ASPs through the year. While the company claims that the global PC supply chain is operating at healthy levels, it is sticking to its estimate of a mid-single digit decline in global PC sales.
Data Center Growth To Accelerate In The Second Half Driven By Skylake
Intel's data center business witnessed a 6% year-on-year growth in Q1 2017 despite the base year having one extra week, mostly driven by higher ASPs across product lines. The company expects ASPs to continue increasing throughout the year, which along with improving product costs (driven by transition from 22 to 14 nm) will help improve profitability in the latter part of the year.
Intel is on track to launch its next-generation Skylake microprocessor, which delivers significant performance gains across a wide range of workloads, this summer. Skylake is expected to ramp in volume to customers in the latter half of the year, which is what makes Intel confident on delivering the expected high single-digit growth in this business.
Mobileye To Strengthen Intel's IoT Portfolio
Intel reported a 11% y-o-y increase in its IoT revenue in Q1 2017, driven by strength in the industrial, video, and automotive segments. This is a promising sector for the company as it benefits from the rise of billions of smart and connected devices.
In March of this year, Intel entered into a definitive agreement to acquire Mobileye, which offers leading computer vision expertise to create automated driving solutions from the cloud through the network to the car, for nearly $15 billion. The acquisition is expected to position Intel as a leading technology provider in the fast-growing market for highly and fully autonomous vehicles. Automotive is one of the fastest and most promising sub-segments of IoT. Intel estimates the vehicle systems, data, and services market opportunity to be up to $70 billion by 2030.
Memory Business To Turn Profitable In 2018
Q1 2017 saw a solid growth for Intel's memory business, which grew 55% year-over-year benefiting from a tight supply and high demand environment. Intel's Dalian factory continues to ramp 3D NAND production and is delivering significant product yields. In the past, Intel has made significant investment in the memory business, and it continues to be loss making. However, the company expects the business to break even in the second half of 2017 and turn profitable towards the end of 2018.