While Intel ( INTC ) has been the world's dominant PC Microprocessor maker for over two decades, it has had difficulty penetrating newer processor markets for tablets and smartphones, in which Qualcomm ( QCOM ) and Samsung (OTC:SSNLF, including Apple) are dominant. As a result Intel's growth has slowed significantly in the last two years, in line with the declining PC shipments.
Intel has lowered its dependence on PCs - it derived 62% of its revenue from the PC market in Q1 2014 as compared to 65% in 2012. For a long time, Intel has had a very strong position in the server microprocessor market and its Atom Microprocessors have had considerable traction in the markets for Embedded Systems. However, the company's effort to enter the handset advanced logic market with its Atom processor have failed to make a significant mark in the industry. Intel plans to increase its investment in chips for the fast-growing mobile market. It continues to focus on producing more energy efficient chips and adding features for connectivity and security to increase its share in the mobile computing space.
The Mobile & Communications segment accounts for less than 3% of Intel's overall revenue and thus does not have a significant impact on its valuation, in our view. Moreover, the company continues to earn negative operating profit from the division and we believe will continue to do so in the near future as well. Nevertheless, Intel's investment and presence in the smartphone and tablet market is important for the company to retain its relevance and dominance in computing.
Our current price of $27 for Intel is in line with the current market price. We are in the process of restructuring our model to incorporate the new reporting structure.
Rising Smartphone & Tablet Shipments
While PC shipments have declined drastically in the last few years, mobile shipments (particularly smartphones and tablets) have grown at a robust rate (see table below). Though growth rate has slowed as developed markets near saturation, mobile shipments continue to expand at a fast pace. Smartphones accounted for 55.1% of total mobile phone shipments in 2013, up from 41.7% in 2012.
IDC expects total tablet shipments to reach 271 million units in 2014 and reach 386 million units by 2017, surpassing PC shipments by the end of 2015. Global smartphone shipments, which crossed 1 billion units in 2013, is estimated to reach 1.5 billion units by 2017.
Source: IDC Press Releases
Intel's New Chips To Spur Future Demand
Intel marked its thrust in the mobile market with the acquisition of Infineon's Wireless Solutions Business in 2011. This gave it a near top ranking in the market for cellular baseband processors, even as Qualcomm and Samsung attained their dominance through Apple and Android. With considerable investment and effort Intel has built on this, and presently accounts for 4% - 5% of the global tablet market. Its share in smartphones is less than 1%.
Intel's mobile and communications revenue declined from $1.8 billion in 2012 to $1.4 billion in 2013. In Q1 2014, the figure stood at $156 million, 61% lower compared to Q1 2013. The main reason for the drastic decline in revenue is Intel's diminishing feature phone and 2G/3G business, as the company is in the midst of a transition to integrated LTE solutions. Additionally, the ramp up in its tablet volumes is being offset by an increase in contra revenue dollars.(Here's and interesting article explaining why Intel's contra revenue is a good long-term move for the company)
Intel introduced a series of new products/updates at the Mobile World Congress in February 2014. Its first LTE solution, the 7160, is now available in the Samsung Galaxy Note 3 Neo and the Asus Fonepad 7, in addition to the previously announced Samsung Galaxy Tab 3. The Cat 6 LTE solution, the 7260, will start shipping this quarter. The company showcased its next-gen Atom SoC products - the Atom Z34 family of SoCs (Merrifield), the Atom Z35 line (Moorefield), as well as Cherry Trail and SoFIA. Merrifield will start shipping in smartphones in the current quarter. Moorefield will hit production in the second half of 2014, and Cherry Trail and SoFIA towards the end of the year.
The company recently announced multi-year, multi-device agreements with Lenovo, Asus, Dell and Foxconn to expand availability of out-of-base smartphones and tablets.
Offering Subsidies Will Help Intel Ship 40 million Tablet Chips In 2014
In its Q1 2014 earnings call, Intel announced that it shipped 5 million tablet chips in the first quarter and is on track to reach a goal of shipping 40 million tablet chips in 2014. In 2013, the company shipped a total of 10 million tablet chips. It has offered to heavily subsidize manufacturers' costs to include its components in their future tablets, a move that impacts Intel's bottom line but could help it sell more chips. Intel is paying tablet makers to cover the additional component costs of using its Bay Trail chips instead of ARM-based processors, and is also helping its customers cover the engineering costs of designing an Intel tablet.
With contra revenue, Intel is paying tablet makers to cover the additional bill of materials ( BOM ) costs. However, the company believes that it will no longer have to pay the subsidies when its new products hit the market towards the end of 2014. The bill of materials cost for a Broxton tablet will be $20 less than for Bay Trail, and SoFIA, with its greater integration and smaller die size, is expected to cost even less.
While Bay Trail was designed for the high end of the tablet market, Intel's new platforms target systems below $250. The low cost tablet is what's driving growth in the global tablet market. If Intel meets its target of shipping 40 million tablet chips by the end of 2014, its market share would increase to approximately 15%.
LTE Capability To Expand Footprint In The Smartphone Market
Intel's multimode, multiband 4G LTE solution (XMM 7160) started shipping commercially in September 2013. Prior to that, the company was only shipping the single-mode 4G LTE data solution. At the Mobile World Congress in February this year, Intel introduced its next-generation LTE cellular modem and Atom chipsets for mobile devices - XMM 7260. The XMM 7260 will show up in smartphones and tablets "in every major LTE market" in the current quarter.
The XMM 7260 will be sold to mobile device makers as a standalone part and the company will rollout an integrated design approach (LTE integrated with application processors) towards the end of 2014, with the launch of its SoFIA chip.
4G/LTE is the future of wireless connectivity for mobile devices, especially smartphones, and a dominance in the production of LTE chips has enabled Qualcomm to lead the smartphone market so far. Of the various technologies that are driving the market currently, LTE is seeing the strongest growth as carriers around the world increasingly shift to the new standard for wireless communication. Nvidia estimates the LTE market to more than double by 2016.
Despite stiff competition in the mobile computing space, we believe that LTE integration will enable Intel to make a deeper foray in the smartphone market.
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