The results of the latest in a long line of efforts to re-energize and retool Intel Corp. in a tumultuous and continuously changing electronics industry took so long to take hold that company executives appear to have been caught by surprise when it finally did. Two days before Intel announced second quarter results, it hastily updated revenue guidance numbers, handily beating analysts’ revenue and profit estimates.
Could this be the sign everyone has been waiting for that the company has finally put together a viable plan for entering and dominating new markets – communications, data and the cloud, tablet PCs and Internet of Things? A definitive answer to this question may still be years away but investors liked the news of stronger sales and profits reported by Intel and were especially pleased with the third quarter and 2014 sales and profit guidance as well as the strong gross profit margins. The company’s stock price rose to $34.74, a 52-week high, soon after the announcement of the second quarter results.
Analysts were similarly impressed with many of them raising their revenue forecasts for the company and jacking up the 52-week share price forecast. Vijay Rakesh, an analyst with Sterne Agee, increased his stock price target for the company on the basis of what he described as a “solid June quarter [and], guiding to a stronger-than-consensus September quarter.”
The world’s biggest semiconductor company by revenue widened the gap with competitors in the second quarter by posting surprisingly strong record shipment of PC microprocessors and showed traction in newer product segments such Internet of Things (IoT). Sales in its data center division climbed 14 percent and rose in the IoT and other “all other operating segments” 24 percent and 16 percent, respectively, according to CFO Stacy Smith. These are all areas the company had faced some skepticism about its ability to penetrate the market and take on established rivals, including semiconductor intellectual property supplier Arm PLC.
"Our second-quarter results showed the strength of our strategy to extend the reach of Intel technology from the data center to PCs to the Internet of Things," said Intel CEO Brian Krzanich, in a statement. "With the ramp of our Baytrail SoC family, we have expanded into new segments such as Chrome-based systems, and we are on track to meet our 40 million unit tablet goal. In addition, we hit an important qualification milestone for our upcoming 14nm Broadwell product, and expect the first systems to be on shelves during the holidays."
It’s taken years of preparation, billions of dollars in capital expenditure and R&D investments, acquisitions – some of which seemed to be paying off only now amidst others of suspect returns – and hard work to get Intel to where it is today. Analysts and other observers have panned the company for pouring money into the communications IC segment, seemingly without making a dent on the opposition, and there were doubts expressed about its ability to extend its reach beyond the supposedly troubled PC market.
Think again. “Intel Inside,” the company’s once fabulously successful slogan is making a quiet comeback. Intel wants to be inside any electronic products used by consumers and enterprises, whether for manufacturing or services, according to CEO Krzanich. If it clanks, heaves, pumps or squeals and generates data of any value to enterprises and consumers, Intel wants to provide the connectivity solutions, he said.
“This is a strategic area for us. All our products have become more personal, more mobile, more connected and we’re seeing modems work their way into PCs, for example, especially two-in-one devices,” Krzanich said during a conference call to discuss the latest quarterly results. “It’s going to probably start with Chrome Books but you can go from a PC down through tablets, phones and into the Internet of Things in the industrial space where you’re looking at a pump that’s out in the middle of the desert someplace or wherever. It’s going to want a 2G or 3G connection probably to get that data back into the system.”
Smith echoed the sentiment in his comments during the conference call saying:
The strategy that we put in place for this year are playing out nicely to extend the reach of Intel technologies across the spectrum of the smallest embedded devices to the most powerful supercomputers. We’re enabling innovative two-in-one devices and lower price points and we are growing our market segment share. We have brought new products into the data center which drive a strong return on investment for our customers to upgrade their infrastructure and we are benefitting from both our product line up and the build out of the cloud.
The Internet of Things business is growing fast as we bring intelligence to more and more devices and we are making investments in communications and tablets that benefit the breadth of our businesses.
Intel started slow in the fast-growing and now cluttered tablet PC market ruled by semiconductor intellectual property vendor Arm PLC but now expects to ship 40 million devices this year. It shipped 10 million Intel-denominated tablets in the second quarter on top of about 5 million in the first quarter and expects to hit the 40 million target by selling another 25 million devices in the second half of this year.
If any company in the high-tech industry exemplifies the belief that enterprises must continually reinvent themselves and devote overwhelming resources – whatever it takes – to enter new markets and avoid being overtaken or left behind by the competition, it is Intel. Although it has for years enjoyed a near-monopoly in its core microprocessor business, Intel’s management constantly talk about the company’s operations as if they are under siege, a mentally infused in them by former executives like Andy Grove whose book “Only the Paranoid Survive: How to Identify and Exploit the Crisis Points that Challenge Every Business” remains a compelling read almost 20 years after it was first published in 1996.
Current executives appear to still believe Intel must reinvent its business and have reorganized the business units in the last year, adding Internet of Things as a standalone operating division. That unit reported sales of $539 million in the second quarter, up 24 percent, from $434 million in the prior year quarter, and 12 percent on a sequential basis. It has also continued to press for market share in other product areas and has made significant inroads into the tablet PC although it continues to struggle in the feature phones and smartphone markets.
The strength Intel experienced in the second quarter is expected to stretch into the rest of the year. Enterprises are finally taking steps to replace ageing PCs and pouring money into servers and cloud-related equipment. A full recovery in the consumer PC market hasn’t quite taken off yet, Intel executives said but “What we’re seeing from our customers is more optimism on the back half than we’ve seen in the last couple of years for the consumer segment, but we won’t see the sell through data on that for a while yet,” said CFO Smith.
So, even as Intel’s executives enjoyed the congratulatory comments from analysts during their conference call they remained cautious as usual. The company’s manufacturing resources and process technology remain at the core of its competitiveness, they said, and as such, Intel will remain an integrated device manufacturer, spending annually upward of $10 billion on capital expenditure to stay ahead of rivals, according to Krzanich.
“One of the real advantages of Intel is an integrated device manufacturer, an IDM, and we believe that the integration of the process technology and the design and our leadership in Moore's Law just gives us a real advantage when you look at the whole ecosystem,” he said.
Such optimism about the future is tempered by concerns over areas where the company hasn’t quite gained the kind of solid footings they would like and fears persist about how unfolding events in the consumer PC market would impact the company on a longer-term basis. Additionally, success in the communications market cannot be taken for granted and the company will do whatever it must to break through, Smith said.
“If we don’t have the ability to integrate in communications, I think three or, four years from now we’ll locked out of large segments of the market,” he said. “So, it’s a critical capability.”
Paranoia may be considered a problem to be treated in the health world but at Intel, it isn’t a foe but rather a constant reminder of what it takes to stay on top of the market.