Intel Q1 15A – Data centric

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Data centres rescue the quarter but not the year.

• Intel reported Q1 15A results in line with reduced expectations but guided well thanks to the continued strength of the data centre.
• Q1 15A revenues / EPS were $12.8bn / $0.41 which was exactly in line with consensus given the profit warning given earlier in the quarter.
• As usual, the problem was the PC market but in this instance it was not the consumer but the small and mid-size businesses that bought fewer PCs than expected.
• Last year, the ending of support by Microsoft for Windows XP drove many business to upgrade their PCs to Windows 7.
• This trend drove the PC market to recover slightly in 2014A but the trend has ended more quickly than expected.
• To keep the momentum going a pick-up in the laptop replacement cycle was needed which is something that I think can only be driven by tablet PCs. (see here).
• Without this pick-up in the laptop replacement cycle, the result is a weaker than expected market.
• I expect that this scenario will persist until users begin to understand how much better the use case for a tablet PC is over a laptop and make the switch.
• Unfortunately, these advantages are not obvious and until Intel and Microsoft get their act together and start explaining the proposition, users are unlikely to bite.
• The good news is the data centre where demand has been stronger than expected allowing Intel to guide better than feared.
• Q2 15E revenues will be $12.7bn – $13.7bn ($13.2bn) which is slightly behind consensus of $13.5bn but clearly the market was braced for much worse following the profit warning in Q1 15A.
• Intel also moved to account for weaker expectations overall for the PC market in 2015E by reducing its full year revenue forecast from mid-single digit revenue growth to approximately flat.
• This puts an end to any hopes of revenue growth and moves Intel into line with RFM forecasts which is forecasting a decline of 1.3% to 311.8m units in 2015E.
• Profitability remained strong as the mix shift towards the data centre is helping gross margins remain in the low 60s.
• That being said, Intel is taking a more cautious stance to 2015E and is trimming capex and share buy backs to reflect its expectation that cash flow will be lower than originally budgeted.
• Intel’s mobile business is on track to lose $3.2bn this year which is $800m less than last year but represents a huge investment.
• Intel is effectively paying companies to make devices that use its chips and still none of these have gained any real traction in the market.
• With every quarter that passes, Intel’s challenge to ARM in the mobile market weakens and throwing good money after bad is not helping.
• Consequently, I do not see Intel mounting a credible challenge to ARM in the mobile market but at the same time ARM’s forays into PCs and servers have also not been successful.
• Intel and Microsoft would be my top choices for ways to play a recovery in the PC market but for another year it looks like my hopes will be dashed.
• In the long term, Microsoft and Google remain the best ways to play the digital ecosystem.