Chipmaker changes focus to the data center, cloud, and IoT businesses
Chipmaker Intel Corp. (NASDAQ: INTC) is considering selling its cyber security business, which operates under the name Intel Security and was previously known as McAfee, as reported by the Financial Times on June 26th, 2016. Intel acquired McAfee in February 2011 for $7.7 billion in cash to protect its chips and improve their threat detection power with McAfee’s security functionality. Further, Intel announced in January 2014 that all products under McAfee’s computer security software suite will be rebranded under the Intel Security name.
However, even after six years of its acquisition by Intel, the Intel Security unit has not been able to make any significant contribution to the Company’s revenue or profitability. What’s more, Intel’s original plan to embed McAfee’s cyber security technology in chips is yet to take off.
In the meantime, the cyber security space has become highly competitive with nimble startups quickly making inroads into the market through venture backups or being acquired by bigger players. Given this scenario, the Intel Security unit is faced with competition in a number of areas such as network, risk management, end point, and data security. It now appears that Intel’s McAfee acquisition is not really a good fit to its overall business since its core chip business is struggling due to a steady decline of its PC business.
Intel Security valuations may be lower
Private equity buyers are evincing interest in cyber security companies, with large organizations becoming increasingly worried about protecting their business from cyber attacks. The Intel Security unit may attract interest from a group of PE firms if it is sold for the same price or higher than the $7.7 billion that Intel originally paid for it. That being said, valuations could go downwards for Intel’s cyber security unit given the dearth of funds in the cyber security industry, which is currently in a consolidation mode.
Intel’s change in focus
Intel announced on April 20th, 2016, that it plans to lay off 11% of its total workforce, or 12,000 employees, as it shifts focus to the more lucrative data center, cloud, memory, and Internet of Things (IoT) businesses. The Data Center, Memory, and IoT segments accounted for 40% of Intel’s revenue and more than 60% of its operating profit in 2015. Additionally, these three segments together generated revenues of $2.2 billion in 2015. The Company has made it clear that the restructuring is aimed at redirecting its resources into areas with better growth prospects, and thereby move away from manufacturing chips for PCs, which still account for 60% of Intel’s sales and 40% of profits.
In FY16, Intel will also invest in its memory and connectivity products, 2-and-1s, gaming, and home gateways. The Company expects to launch its Xeon E7 v3 processors power AWS’ X1 instance, a high-performance cloud for memory-intensive workloads, later in 2016. In a significant boost for the Company’s mobile chip business, Intel won a major mobile chip deal from Apple Inc. (NASDAQ: AAPL) on June 13th, 2016, as reported by Bloomberg. Apple will use Intel’s modem chips for its iPhone shipments to AT&T Inc. (NYSE: T) as well as the overseas markets.
Venture capital unit on the block
Intel’s cyber security division is not the only business that the Company is considering putting on the block. In May 2016, Intel’s sale of its venture capital portfolio has attracted investment firms including Coller Capital, HarbourVest Partners and Lexington Partners, which are interested in assets worth around $1 billion, as reported by Bloomberg. Intel has roped in UBS Group AG (NYSE: UBS) to sell part of the portfolio, which is made up of small- and mid-cap companies.
Q1 FY16 financial results
Intel reported Q1 FY16 earnings of $0.54 per share excluding items, on $13.8 billion in adjusted sales. GAAP revenues came in at $13.7 billion for the quarter. As part of its restructuring plan to lay off 11% of its workforce, the Company will incur a one-time charge of approximately $1.2 billion in Q2 FY16. However, Intel expects to generate $750 million in savings in FY16 and annual run rate savings of $1.4 billion by mid-2017.
Intel’s stock stood at $31.93, up 2.37%, at the close on Wednesday, June 29th, 2016, having vacillated between an intraday high of $31.98 and a low of $31.31 during the session. The stock’s trading volume was at 22,730,242 for the day. The Company’s market cap was at $150.77 billion as of Wednesday’s close.
While Intel has chosen to focus on cloud and IoT for its future success, it remains to be seen whether it would be able to garner a fair valuation for its units that are on the block.