Eight Takeaways from Intel's Q4 Result
Bolaji Ojo, Editor in Chief
Login to RateIntel Corp. (Nasdaq: INTC) 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 Nvidia Corp. (Nasdaq: NVDA) 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. Microsoft Corp. (Nasdaq: MSFT)'s announcement, for instance, that its operating system would start supporting ARM Ltd. (Nasdaq: ARMHY; London: ARM) 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.)