Intel Revenue Soars on Strength of Data Center, IoT Groups

Chipmaker’s revenue jumped 9% Y-o-Y to $15.8 billion during Q3 FY16

i1Chipmaker Intel Corp. (NASDAQ: INTC), which makes chips that run more than 90% of the world’s servers, announced its Q3 FY16 financial results on October 18th, 2016.

Headquartered in Santa Clara, California, the Company designs, manufactures, and sells integrated digital technology platforms worldwide. Intel operates under six groups: The Client Computing Group, which houses PCs, tablets, phones, and wired and wireless communication; Data Center Group, which focuses on enterprise and the cloud; Internet of Things (IoT), which houses retail, transportation, industrial, and home use electronics; Non-Volatile Memory Solutions, which includes Intel’s SSD efforts; Intel Security Group, which comprises security software (McAfee), and the newly added Programmable Solutions Group, formed after the acquisition of Altera in 2015, and features field-programmable gate arrays and related products. Read more about Intel’s financial results below.

Q3 FY16 financial highlights

During Q3 FY16, Intel’s GAAP revenue jumped 9% Y-o-Y to $15.8 billion versus $14.5 billion in the year-ago period, propelled by record revenue in the Data Center Group (DCG) and Internet of Things (IoT) Group. Intel achieved margins of 63.3%, up 0.3% Y-o-Y, while operating income grew 6% to $4.5 billion during the reporting quarter. Net income jumped 9% Y-o-Y to $3.4 billion versus $3.1 billion in the year-ago period. Intel’s Q3 FY16 EPS came in at $0.69.

Source: Company's Data
Source: Company’s Data

On a non-GAAP basis, Intel reported operating income of $5.1 billion during the reporting quarter. The Company also delivered 21% Y-o-Y growth in non-GAAP net income of $3.9 billion, driven by strong execution and demand for its products net income, while EPS came in at $0.80 during the reporting quarter.

Intel, which announced plans to lay off 11% of its total workforce, or 12,000 employees, aims to emerge a nimbler organization with a focus on the data center, cloud, memory, and IoT businesses. The Company is looking to move away from manufacturing chips for PCs, which still account for 60% of Intel’s sales and 40% of profits. Intel expects to launch its Xeon E7 v3 processors power AWS’ X1 instance, a high-performance cloud for memory-intensive workloads, later in 2016. In FY16, Intel will also invest in its memory and connectivity products, 2-and-1s, gaming, and home gateways.

Segmental highlights

During Q3 FY16, Intel’s Client Computing Group reported revenue of $8.9 billion, up 21% sequentially and up 5% Y-o-Y.

The company’s Data Center Group reported revenue of $4.5 billion, up 13% sequentially and up 10% Y-o-Y.

The company’s IoT Group clocked revenue of $689 million, up 20% sequentially and up 19% Y-o-Y.

Intel’s Non-Volatile Memory Solutions Group’s revenue was at $649 million, up 17% sequentially and down 1% Y-o-Y.

Intel Security Group reported revenue of $537 million flat sequentially and up 6% Y-o-Y during the reporting quarter.

Lastly, Programmable Solutions Group revenue came in at $425 million, down 9% sequentially.

Other highlights

Cash flow: Intel generated approximately $5.8 billion in cash from operations during the reporting quarter.

Dividends and share buyback: Intel paid dividends of $1.2 billion and used $457 million to repurchase 13 million shares of its common stock during the quarter under review.

i3Acquisition of Nervana Systems: Intel is seeking to become future-ready by tuning its chips and systems with artificial intelligence (AI) functionalities. As part of these plans, Intel announced on Tuesday, August 8th, 2016, that it has signed a definitive agreement to acquire startup Nervana Systems, a leader in deep learning and machine learning. The San Diego, California-based Nervana Systems will boost the deep learning performance of Intel Xeon and Intel Xeon Phi processors, as per Intel’s blog post. Nervana Systems will collaborate with Intel’s Data Center Group (DCG), which needs products with built-in AI services such as voice and picture recognition. Such AI functions are expected to become a bigger portion of the functions carried out by servers powered by Intel’s chips. Intel’s DCG is the Company’s most-profitable and fastest-growing business, growing 18% to generate $16 billion in revenues in FY15.

Intel latest acquisition is aimed at gaining expertise from Nervana Systems’ software, a cloud service, and future hardware to attune its products for AI functions. While Intel’s Xeon processors dominate in data centers, they currently do not have the capability to handle artificial intelligence calculations. Adding Nervana Systems’ products and expertise will help it gain a foothold in a rapidly growing market and fend off rivals such as Nvidia Inc. (NASDAQ: NVDA), if it can swiftly turn its acquisition into products. With the PC market shrinking, Intel is largely counting on its DCG to drive its future growth.

Stratix chips update: Intel has begun sampling its Stratix 10 programmable chips, which the company expects to use as accelerators in data center environments running compute- and data-intensive applications. Intel was able to combine Altera’s 14-nanometer tri-gate manufacturing process with its HyperFlex fabric architecture to develop a field-programmable gate array (FPGA) that will address the growing demands from end users for more performance and power efficiency as they try to manage the proliferation of smart, connected devices and the huge amounts of data they’re producing. Intel is aiming the Stratix 10 FGPAs at such workloads as data center applications, cloud computing, radar and imaging systems, and network infrastructure. Intel expects FPGAs to be used in 30% of all data center servers by 2020.

Source: Company's Data
Source: Company’s Data

Deal with Apple: 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 chips for its iPhone shipments to AT&T Inc. (NYSE: T) as well as the overseas markets.

Divesture of Intel Security Group: Intel announced on September 8th, 2016, that it would sell a 51% stake in its Intel Security Group for $4.2 billion, and establish an independent software security company with private equity firm TPG, an asset manager that oversees $70 billion. Intel will have a 49% stake in the spin-out. The new company will be led by Chief Executive Officer Chris Young, currently a senior vice president at Intel and general manager of its security unit. Intel is offloading the anti-virus software unit as part of a strategy to focus on its more profitable data-center business. The chipmaker acquired McAfee in 2011 for $7.7 billion to build security features directly into its silicon products.

Appointment of new CFO: Intel announced that it has appointed Bob Swan as its new CFO to succeed Stacy Smith, who was promoted to the chief operating officer role in April 2016. Mr. Swan will assume his role at Intel effective October 10th, 2016. Swan was previously a partner at General Atlantic and eBay. Smith is now overseeing the company’s sales, manufacturing and operations.

Appointment of new CIO: Intel appointed Paula Tolliver as corporate vice president and chief information officer (CIO), replacing Kim Stevenson who will take on a new role at the company, on August 1st, 2016. Tolliver joins Intel from Dow Chemical where she served as corporate vice president of business services and CIO.

Outlook for Q4 FY16 and full year FY16

For Q4 FY16, Intel expects revenue to be $15.7 billion, plus or minus $500 million, roughly flat to Q3 FY16. GAAP gross margin in Q4 FY16 is expected to be 61%, plus or minus a couple of points, down 2.3 points from Q3 FY16. Non-GAAP gross margin in Q4 FY16 is expected to be 63%, plus or minus a couple of points, down 1.8 points from Q3 FY16. Spending for R&D and MG&A in Q4 FY16 is expected to be approximately $5.2 billion.

As a result of restructuring and other charges associated with the transaction of the Intel Security Group, and increased severance costs associated with the restructuring program, Intel increased the restructuring and other charges forecast by $700 million to $2.3 billion. Approximately $1.8 billion has been realized to-date, with $250 million expected in Q4 FY16. The majority of the remaining restructuring and other charges will be realized between Q4 FY16 and the middle of 2017.

Stock Performance

i5Intel’s stock stood at $35.10, slipping 0.45%, at the close on Tuesday, October 25th, 2016, having vacillated between an intraday high of $35.25 and a low of $35.01 during the session. The stock’s trading volume was at 17,842,393 for the day. The Company’s market cap was at $167.38 billion as of Tuesday’s close.

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