Insights from Intel’s earning release.

Intel reported a very strong Q3 result, especially from an income perspective. Net income grew 33.6% from the same quarter last year and an impressive 60.8% from last quarter. We will get more detail when Intel files its quarterly report but a major part of the result will be based on the client computing segment. While the PC segment is in decline, Intel can still generate results by optimising manufacturing faster than customers are given price decreases.

 

 

However, this is only a temporary strategy as there are limits to how much juice you can squeeze out of a declining business. Intel will need to get some more meaningful growth out of the smaller divisions. The problem is that the smaller divisions are a lot smaller. 

 

 

The datacenter Group is the only current division that can add to meaningful growth. Getting close to 5B$/qtr the group is serving two major markets. The enterprise data centre market that is in moderate decline and the cloud data centre market that is in exponential growth.

 

 

The overall growth of 7,4 % is not stellar in a market that has grown 60% in the same period. Although most of the growth in the data centre is driven by increases in memory pricing, Intel's direct competitor Nvidia has grown more than 190% in the same period. Even AMD is starting to get revenue out of the cloud data centre. Intel is still a formidable company but it will need to transform its business faster than it is currently to maintain its ability to be a value creation company.

 

 

On the balance sheet,  inventory kept increasing suggesting that the revenue numbers achieved were lower than the planned expectations. This could also represent a product mix mismatch

Over the last few quarters, Intel has made some deep cuts into the SG&A expenses. It has reduced the cost with over 550m$ since the beginning of 2016. This is most likely representing deep cuts in marketing and sales as the administration costs typically are a function of size. Since the beginning of 2016, Intel has reduced headcount by 10.000 employees. Although there has been acquisitions and divestitures impacting this number, Intel is clearly in consolidation mode as a response to the modest growth rates. 

The MobileEye acquisition was closed in the quarter draining Intel for 14.5B$ of cash. Not surprisingly most of the value of the acquisition (10B$+) does not come from tangible or measurable intangible assets but has hit the goodwill balance. This is not unusual for an IP based acquisition but at the same time, it is a significant investment that impacts Intel's numbers and is certainly not without its risk. 

You can download the free Q3 Intel Factbook here

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