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Intel executives are beginning to see some positive results from their efforts to expand into growth areas and reduce dependence on the contracting global PC market. But the continued decline in system sales and macroeconomic issues in regions like China are conspiring to get the company off to what CEO Brian Krzanich is calling a “soft start” to 2016.
The chip vendor on Jan. 14 reported that revenue in the fourth quarter 2015 came in at $14.9 billion, a 1 percent increase over the same period the year before. Net income dropped 1 percent to $3.6 billion. For the year, revenue fell 1 percent, to $55.4 billion, and net income dropped 2 percent, to $11.4 billion.
In a conference call with analysts and journalists, Krzanich noted that Intel’s financial numbers were able to remain essentially flat even as the global PC market continued its years-long decline. Earlier in the week, Gartner analysts reported that in 2015, PC shipments fell 8 percent, to 288.7 million units. IDC analysts said 2015 marked the first time since 2008 that shipments fell below 300 million for the year. PC sales have fallen since late 2011, when shipments of mobile devices like smartphones and tablets began taking off.
The decline has hurt PC and component makers, and Intel is no exception. It’s Client Computing Group, which accounts for 60 percent of its revenues, fell 1 percent for the quarter and 8 percent for the year. Krzanich and industry analysts expect that 2016 will be another slow year for the market, though it could pick up in the second half as more consumers and businesses users, many of whom are working on PCs that are three to five years old, begin to buy new ones that run Microsoft’s new Windows 10 operating system and are powered by Intel’s new “Skylake” processors, offering better performance, power efficiency and security.
“We saw about a year without desktop enterprise upgrades,” Krzanich said, adding that the company is “hearing very good response in terms of people’s interest in new form factors.”
Despite the struggling PC market, the 2015 financial numbers reflect Intel’s effort to aggressively push its products into emerging markets like the Internet of things (IoT), growing spaces like memory and pursuing new opportunities in the data center, company executives said. The three growth areas now account for 40 percent of Intel’s revenue, and executives expect that percentage to continue growing.
For the year, the Data Center Group—Intel’s second-largest business unit and the key driver of the company’s growth in recent quarters—saw revenue grow 11 percent, while revenue for the IoT Group jumped 7 percent. The Non-Volatile Memory Solution Group’s revenue rose 21 percent over 2014.
“We are incredibly confident in our strategy,” Krzanich said.
That strategy was on full display at the 2016 Consumer Electronics Show (CES) earlier this year. During his keynote address, Krzanich showed drones, wearable devices, robots, and other connected devices, all running on Intel chips.
On the data center side, the company is pushing to expand beyond servers and into networking and storage equipment. Krzanich noted that Intel currently has a 10 percent share of the networking chip market, giving the company room to grow. Intel has been benefiting from the growth of cloud-scale data center environments and demand from communications service providers, segments that both saw 20 percent revenue increases during the year. For the cloud, 40 percent of the volume was through custom processors, he said.
Intel Sees Gains From Transformation, but Challenges Continue
In addition, the recent acquisition of Altera will help accelerate the company’s capabilities in the data center, the CEO said. Intel last month closed its $16.7 billion acquisition of Altera, which makes field-programmable gate arrays (FPGAs).These are chips that can be reprogrammed for different workloads, some that will benefit both data center systems and IoT devices, Krzanich said. The first Xeon server chips with Altera FPGAs will start sampling with select customers later this quarter. The chips will feature server CPUs and FPGAs as separate modules, though the eventual goal is to house both on the same piece of silicon.
Christa Macomber, an analyst with Technology Business Research, wrote in a research note that Intel’s increasing focus on the high-performance computing (HPC) space is indicative of the company’s agile data center efforts.
“Intel continues to refine its [Data Center Group] strategy to align with customers’ evolving data center needs,” Macomber wrote. “This is critical to growth for Intel, as DCG is the vendor’s second-largest business, and revenues from its largest business, the client computing group, [are in] decline. As markets such as cloud and virtualization mature, Intel is focusing on smaller but fast-growing markets, recently concentrating on HPC. HPC is now a widespread computing phenomenon, as customers seek to process and analyze growing data pools for their businesses advantage.”
Intel is addressing that demand with such solutions like Scalable System Framework (SSF) and Omni-Path Architecture “to bring HPC capabilities to a greater array of industries and workloads, including big data analytics,” she wrote.
However, despite the success Intel has had in growing in new areas, the chip maker is still facing challenges that go beyond the PC market. Krzanich pointed to macroeconomic issues in places like China that are volatile and unpredictable and will impact Intel’s business. In addition, financial analysts were concerned about the data center business, which in previous quarters had seen double-digit revenue growth, but in the fourth quarter the revenue increased only 5 percent.
There also were concerns about Intel’s projections, which called for revenue in the current quarter to be about $14 billion and for revenue growth for all of 2016 to grow by mid- to high single percentages.