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Eight Takeaways from Intel’s Q4 Results

{complink 2657|Intel Corp.} exceeded analysts' average revenue and profit estimates in the fourth quarter. Its forecasts for the first quarter of 2011 and the entire year pleasantly surprised many industry observers, but the company still faces huge challenges outside its core PC and server markets.

Here are eight factors that affected Intel in 2010 and which I believe will influence future strategic investment decisions at the company.

1. Intel remains a cash gusher: This company knows how to spin off cash. Remember that $1.5 billion it agreed to pay {complink 3926|Nvidia Corp.} to end a dispute over graphics IC patent infringement? (See: Intel Buys Peace of Mind, Again.) Well, Intel could write a check today and not feel any pains. At the end of the fourth quarter it had $16.8 billion in cash and short-term securities, plus $5.1 billion in what Intel coyly described as “trading assets,” for a total of $22 billion. Look further down on its balance sheet and there is $1 billion in marketable equity securities, other long-term investments of $3 billion, and $5.1 billion in “other current assets.”

Now, I am not fully sure how to classify the extra investments (are they liquid, semi-liquid, or what exactly?) but years of financial reporting tell me the extra numbers add up to almost $10 billion Intel could tap for leverage should it need to spend more on a major acquisition or any other strategically significant transactions. In other words, if you want to take on Intel, try the technology route and not the dollar-for-dollar strategy.

2. PC market growth is moderating: Intel's results were strong but not muscular enough to hide a slight, but still noticeable, softness in the PC market. Sales for Intel's PC client group rose 8 percent in the fourth quarter, compared to a 27 percent jump for the datacenter group. This is further confirmation that the PC sector is not as robust as it was in the earlier part of the year. “One of the notable standout performers in the fourth quarter was our datacenter group,” said Paul Otellini, Intel's president and CEO, during a conference call with analysts. “The world of PC, plus new emerging computing devices, is increasing the demand for servers of all types.”

3. New devices can both hurt and boost Intel's sales: Company executives see both opportunities and challenges in the advance of new market segments, including smartphones and tablet devices, which analysts have warned could erode PC sales. {complink 3426|Microsoft Corp.}'s announcement, for instance, that its operating system would start supporting {complink 444|ARM Ltd.} touched a raw nerve at Intel, but the company believes this development can also create opportunities for its products. Here's how Otellini describes the situation:

    I can see positives and negatives for Intel in this announcement. Microsoft has only supported ARM in their phone OS and in their consumer electronics OS. The plus for Intel is that, as they unify their operating systems, we now have the ability for the first time to have — designed from scratch — touch-enabled operating systems for tablets that run on Intel that we don't have today. Secondly, we have the ability to put our lowest-power Intel processors running Windows 8 or next-generation Windows into phones, because of the same OS stack. On the downside there is a potential — given that Office runs on these products — for some creep-up coming into the PC space.

4. Internet traffic continues to surge: Intel estimated total traffic over the Internet in 2010 was 245 exabytes, “greater than all the previous years combined,” according to Otellini. The addition of new wireless devices able to access the Web on the go will only accelerate the growth and jack up demand for the servers dishing up the data. Many of these servers run on Intel products, and this should result in even higher sales for the company's data center business.

5. Smartphones, tablet computers, and other embedded design products are critical to Intel's future: Don't be fooled by the company's huge PC sales — its future lies more in sales to OEMs serving newer markets like smartphones, tablet devices, automotive, Internet-enabled TVs, and other embedded applications. This makes servers even more critical to the company. Intel has already established itself as the dominant player in the PC market and only needs to keep the engine finely tuned in this sector. But for future growth — five years and more — the company needs new revenue streams from a wider set of OEMs than it currently serves. The opportunities here are tremendous, but the challenges and rivalry at this early stage are similarly enormous.

6. High-performance, lower-power, and lower-cost products needed: Intel's strategy for the competition against ARM-licensed technology is to lure customers with products that offer a combination of high performance, low power, and low cost. In the small form-factor market, low power consumption is essential, but so also is lower cost at optimal performance levels. In order to gain these advantages, Intel is pouring more money into R&D and capital expenditure.

The company forecasts “an increase of over $700 million in research and development investments as we look to extend our leadership in PCs and servers and design further generations of products to increase our offerings in adjacent market segments like smartphones and tablets,” says Stacy Smith, Intel's CFO. Intel expects total R&D spending in 2011 will be $7.3 billion and forecasts $9 billion in capital expenditure.

7. Mature markets are slowing; emerging markets are surging: This is a trend for the foreseeable future. Sales to mature Western economies have been slowing while technology adoption is rising in emerging countries, driven by comparatively lower prices for electronic products. “The price of technology has come down to the point that billions more people can afford it,” Smith says. “That has been the big driver of our business the last few years [and] it's likely to be over the next several years.”

8. You'll be dumb to bet against Intel: I already expanded on this in an earlier blog, but this is a company that has thrived by never resting on its oars. “Only the paranoid survive” is the catch-phrase Intel executives live by, and its rivals would be smart to emulate them. Additionally, Intel is peaking in its core PC and server processor segments on a market-share basis and is eager to broaden operations into new areas. That hunger, combined with a fat piggybank, makes Intel a tough rival to underestimate or ignore. (See: It’s Dumb to Bet Against Intel.)

5 comments on “Eight Takeaways from Intel’s Q4 Results

  1. AnalyzeThis
    January 14, 2011

    Great article(s) Bolaji… just had a comment about ARM, though: I can't believe all the hype surrounding ARM and people talking like somehow they're going to completely dominate mobile, then put a significant dent in Intel's more traditional markets.

    I do think it's possible that ARM will be a power player in the mobile space for many years to come, but I just don't see them directly competing with Intel elsewhere. And I think it would be a mistake for ARM to try to “reach” too far anyhow, as they really should just focus on mobile, embedded, etc. because as you mention… Intel is going to be pouring quite a bit of money into R&D.

    It remains to be seen if Intel will ever beat ARM at their own game, but I believe they have the best chance to do so. Yes, it's true that Intel has stumbled a bit at times (specifically with the Atom), but Intel has made bigger mistakes in the past (like the debacle with the first Pentiums), learned valuable lessons, and delivered higher-quality, more competitive products.

    Like you say, you'd have to be pretty dumb to bet against Intel!

  2. bolaji ojo
    January 16, 2011

    DennisQ, There's a lot of hype surrounding ARM — many people forget, for instance, that this is a company with less than $1 billion in annual sales, compared with more than $40 billion for Intel. I agree that ARM is not the great competition that many imagine for Intel.

    However, we should not underestimate ARM. This is because the company's sales do not reflect its actual impact on the market. ARM provides chip IP to OEMs and semiconductor companies, which multiplies its impact exponentially. ARM is a danger to Intel because the IP it provides enables other semiconductor companies to enter the market and compete against Intel. In other words, ARM provides the ammunition other companies need to enter areas Intel wants to play in. This is reflected in ARM's market capitalization.

  3. Anand
    January 17, 2011

    @Bolaji,

    Rumours are that intel is planning to drop its legacy x86 architecture what do think it willa adopt next ?

     I think one thing that will work in favour of Intel is its process advantage. With intel moving to 22nm as againts planned 32nm for ARM, this will give intel that extra mile interms of low power and area.

     

  4. bolaji ojo
    January 17, 2011

    Anandvy, One of the points emphasized by Intel was the process advantage you mentioned. The company is moving to 22 nanometer production and this will both give it leading-edge as well as highly cost-competitive products. ARM, of course, is not a semiconductor company in the traditional sense. It does not make chips and owns no fabs but its IP-licensees will have to move to leading-edge production too, most likely at foundries, to be as competitive. This is extremely important in small form factor production. The market is getting more and more fascinating to watch.

  5. elctrnx_lyf
    January 17, 2011

    Bolaji, I accept that the way things going around is getting really interesting. The simple fact will be something like if atleast 50 percent of the total population in the world have an independent device and imagine every one connected to the internet. The products like tablet, smart phones powered with a latest mobile communication technologies will boost the internet usage to unimaginable heights in the future. There is lot already and there is many more to come.

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