Krista Macomber, senior analyst at TBR, says Intel diversifies into high-growth markets, but volatility threatens near-term profits.
Intel is diversifying its top line, reducing its reliance on a weakened global PC industry for revenues in favor of faster-growing connected device and next-generation data center opportunities. As a result, Intel achieved 3 percent revenue growth during 2Q16, despite revenues from its core, PC-centric Client Computing Group (CCG) declining 3 percent during the time period. Notably, Intel’s Data Center Group (DCG) revenues rose 5 percent, with revenue from cloud service providers expanding 9 percent and its share in network infrastructure increasing.
$7.3 billion (–3%) from Client Computing
$4 billion (+5%) from Data Center
$572 million (+2%) from Internet of Things
$554 million (–20%) from Non-Volatile Memory Solutions
$537 million (+10%) from Intel Security
$465 million (+30% sequentially) from Programmable Solutions
Intel is expanding its addressable customer base and increasing share of wallet as it refines its DCG performance to accommodate modern workload requirements such as scalability and flexibility. Additionally, the Intel Security Group delivered 10 percent revenue growth in 2Q16, its strongest growth in the past two years and on par with the growth of similar-sized competitors such as Check Point and IBM Security. Intel adjusted its go-to-market and product strategies for the enterprise security market in 2015 to focus on fewer, but faster-growing, segments such as endpoint security and security management.
Intel has bright spots to tout, but volatility in other strategic growth markets coupled with ongoing investment in restructuring portends ongoing financial turbulence moving forward. During 2Q16, Intel’s Internet of Things (IoT) Group revenue growth slowed to 2 percent , from 22 percent in the prior quarter, as its Non-Volatile Memory (NVM) Group revenue shrank 20 percent.
Additionally, corporate operating margin fell from 21.9 percent in 2Q15, to 9.7 percent in 2Q16 – a notable threat as Intel seeks to maintain funding to build out portfolio, go-to-market and manufacturing capabilities in strategic markets. TBR anticipates that Intel’s focus on driving channel, technology and service provider partner engagement in these areas will help the vendor to further hone its R&D initiatives on growing IoT and data center modernization opportunities, while building paths to more consistent demand.
Intel enhances NVM and IoT chip and ecosystem development to maximize its market share
Intel continues to struggle from the loss of revenue and profit from underperforming segments such as mobile and PCs, which are a rising threat to its profitability. Although Intel currently holds the majority of the server chip market, the majority of smartphones are adopting chips using ARM-based architectures. Data center-centric product lines such as server chips and IoT are rising within Intel as a potential remedy for the declines in mobile and PCs.
However, TBR believes while Intel’s intent to gain share in servers and IoT is a strategic move during its restructuring, the smaller scale of those segments compared to PCs will not be enough to offset declines in PCs. To bolster its leadership in server chips, Intel has announced it will increase its R&D to around 30 percent of its revenue.
Intel is transforming its historically PC-based company to focus on emerging segments where it is better positioned for growth such as IoT, memory and field-programmable gate arrays (FPGA). This is driving portfolio development for Intel around technologies in emerging areas that meet customer demand for flexible solutions. TBR believes that by aligning itself among the core growth centers of data center and cloud will help Intel slow revenue declines as customer demand continues to take that direction.
Aligning with the key focus areas included in its restructuring plans such as data center and cloud, Intel has made updates to its non-volatile memory technology, 3D Xpoint. The technology is more cost-effective than conventional memory and faster than NAND memory. This provides Intel more opportunities in the memory industry including within markets such as gaming and medical research, as it allows for greater memory storage.
Shifting focus to alternate devices chipsets has also driven Intel to increase collaboration among other vendors. Intel is currently participating in numerous proof-of-concept designs with customers such as Honeywell, which is using Intel’s hardware for a wearable connected safety solution for its employees, and Levi Strauss, which is using Intel’s IoT Retail Gateway.
Intel’s long-time PC OEM partner Dell has stated it has well over 100 IoT proofs of concepts in the works, many of which incorporate a Dell Gateway device, based on Intel chips. The speed with which Intel’s IoT business accelerates will be determined by the value it brings to developers and developers’ ability to deliver value to their end customers, as well as the length of the cycle from idea to proposal to commitment to execution to deployment.
Intel alters its go-to-market strategy to meet changing customer requirements to cope with alternate data center chipset offerings
Intel’s opportunities in the data center market continue to grow, as customers further increase already large investments in x86-based architectures to support modern workload requirements. However, ARM-based and IBM Power-based alternatives are also benefiting, as tailored innovation to support these workloads with greater efficiencies and performance is on the rise.
For example, IBM has opened up its Power architecture to third-party innovators through its OpenPOWER initiative. Additionally, Fujitsu recently announced that it has chosen ARM-based chips for its new K supercomputer. ARM Holdings and Taiwan Semiconductor Manufacturing Company announced plans to partner to target the growing number of workloads requiring low-power, high-performance processing.
The changing server landscape has also impacted Intel’s strategy, as the traditional differentiators between industry-standard server (ISS) and proprietary servers are becoming less defined as converged data center architectures are increasingly required to serve modern workloads such as cloud and analytics. This has presented new opportunities for Intel, as it benefited from vendors such as Cisco and Dell driving their respective ISS sales by using refreshed Intel server processors to address customer demand for more scalable and service-oriented offerings.
It is of increasing importance for Intel to address these workloads as Intel is faced with amplified challenges in the PC segment as customers’ refresh cycles are not as frequent. To cope with these challenges, Intel is applying increased R&D and acquisition spending to address next-generation IT requirements in areas such as analytics, IoT and cloud. Intel has made strides toward this by acquiring Itseez to enhance its computer vision capabilities as well as through the launch of its Xeon E7 V4 CPU that is optimized for analytics.
Intel is embracing more collaborative development with its partners, as seen with an extended partnership with Tyndall for joint product development of new transistor architectures for high-density chips. Additionally, Intel has increased collaboration around initiatives such as Rack Scale Architecture, which is currently being tested by vendors such as Tencent. TBR believes while Intel has the advantage of holding the large majority of the chipset market, it must continue with vendor collaboration and evolve with changing customer demands during the restructuring to attain growth during 2016.
By Krista Macomber, senior analyst at TBR