Intel Earnings Q3 2015: Tops Estimates On Strong Data Center Performance

  • Intel has delivered good third quarter results that topped both top and bottom line consensus estimates.
  • The results got a nice boost from Intel's Data Center Group which recorded double-digit growth.
  • Intel's worst days seem to be behind it.  Its recent groundbreaking innovations in PC processors and NAND flash could drive growth in the future.
  • Intel shares are good investments for the long haul.

Semiconductor chip giant Intel (NASDAQ:INTC) has reported impressive third quarter earnings that managed to beat on both top and bottom line consensus estimates. Intel earnings stood at $0.64 on revenue of $14.47 billion against consensus estimates of $0.59 on revenue of $14.22 billion. Granted the revenue was merely flat Y/Y while profits dropped 6% but viewed against the backdrop of a terrible quarter for the entire semiconductor chip industry, Intel’s performance was commendable. And Intel had its Data Center division to thank for that performance.

Meanwhile, Intel’s gross margin fell 200 basis points to 63% probably due to pricing pressure in the company’s Client Computing segment. GM was, however, up 50 basis Q/Q due to higher ASPs and higher platform unit costs.

INTC-1

Source: Intel

Intel shares were down marginally after the announcement as the investing world tried to digest the results.

Data Center & Cloud Shines as Client Computing Falters

As expected, Intel’s Client Computing Group, a division that includes PC chips, was down 13% sequentially and 7% Y/Y to $8.5 billion. That hardly came as a surprise given that Gartner recently reported that worldwide PC shipments during the quarter had recorded a 7.7% Y/Y slump. The situation is not expected to ease up any time soon as IDC sees PC shipments falling 8.7% in 2015 while the industry is not expected to fully stabilize until 2017. This is being caused partly due to the growing popularity of smartphones and tablets and partly due to the strong U.S. dollar that is depressing international sales. The segment’s operating profits declined 20% Y/Y to $2.4 billion.

Intel’s rapidly growing Data Center, however, came through for the company once again. This division is made up of chips used in data servers and the cloud computing industry. The segment’s revenue was up 8% sequentially and a healthy 12% Y/Y to $4.1 billion while operating income climbed 9% to $2.1 billion. Intel owns a virtual monopoly of the server chip industry with IDC estimating the company’s market share at 99.3%.

The rapid growth in Intel’s server division is welcome news not only because it is helping to offset PC chip weakness, but also because of its much higher margins. The server division sports an operating margin of 51.2% compared to 28.2% for the PC group. The Data Center Group now accounts for 50% of Intel’s profits despite representing just 28% of revenue. As the server division continues to grow, Intel should see a gradual uptick in operating margins and profits.

Skylake and 3D XPoint to Drive Growth

Intel introduced two important breakthrough technologies during the last quarter: 6th Gen Intel Core processor, aka Skylake, and 3D XPoint technology, the industry’s first new memory category that the company developed jointly with Micron (NASDAQ:MU).

Skylake is a high-performance PC chip processor capable of groundbreaking speeds, 4K Ultra-HD graphics capabilities, and long battery life. Skylake works best with Microsoft (NASDAQ:MSFT) Windows 10 OS. Intel is betting on Skylake to drive future PC sales, and this appears to be achievable given that PC gaming is still going strong even in the middle of the PC industry slump.

3D XPoint technology is being hailed as a once in a decade innovation that could prove to be truly disruptive in the NAND flash industry. The new technology is 1,000 times faster than conventional NAND and 10 times more dense than conventional memory. Truly disruptive technologies such as 3D XPoint technology take a couple of years to truly mature, and the new technology might take some years before it can move the needle for both Intel and Micron.

Takeaway

Intel’s transition from a core PC company to a company that manufactures the chips that power the cloud seems to be working just fine. Although the company’s heavy exposure to the highly cyclical PC industry will continue hurting the company’s growth in the near-term, Intel’s worst moments seem to be behind it now. I suspect all the bad news has already been baked into the shares which limits their downside. Intel shares are good long-term investments.

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