Intel: Spectacular PC, Some Progress in Mobile

Intel announced their quarterly results today. They beat consensus by a cent. Not surprisingly their business is driven heavily by the microprocessor businesses, what Intel calls PC and Datacenter. Revenue and earnings both set new records in both groups.

As Brian Krzanich, the CEO, said:In the Data Center, we saw double-digit revenue growth across all four major market segments. Enterprise grew 11%; networking grew 16%; and HPC; and cloud service providers grew 22% and 34%, respectively. We also launched the new Xeon E5 processor, formerly known as Grantley. This product family provides leadership, features and performance for compute; storage and network workloads. Formally launched just five weeks ago, E5 is already 10% of our DP or two-socket volume.

Intel is clearly still having problems getting 14nm to yield. They didn’t give an actual number but did say that while yields improved substantially during the quarter they are behind where they expect to be. In what has to count as a huge understatement, Brian said that “these challenges highlight just how difficult it has become to ramp advanced process technology.” Stacey, the CFO, gave a bit more color later in the call. It looks as if 14nm is pulling overall margin down by at least a few percentage points:Moving to gross margin, third quarter gross margin of 65% was up 0.5 point from the second quarter and down 1 point from our guidance. The increase from the second quarter was primarily due to lower platform unit costs on 22-nanometer and higher platform volume, mostly offset by higher production costs on 14-nanometer products.

As always, the interesting thing about Intel is not how well its main microprocessor business is doing, that is almost a given, but how it is doing in other areas, in particular mobile. In mobile Intel lost $1B this quarter, which is actually an improvement of $81M from last quarter. They reckon they are now the second biggest supplier of chips into the tablet market, and the first merchant supplier (obviously Apple is #1 but they don’t sell their chips to anyone else). They are on track to ship 40 million parts into the tablet market by the end of the year. But remember they are shipping money with each part too (what they call contra revenue dollars). In the Q&A they admitted that they will continue to lose money in this sector through next year (probably).

They did have a couple of design wins that may turn out to be significant. Samsung selected their Cat6 LTE modem for the Galaxy Alpha and Galaxy Note 4 products. What may be especially important for them are the predictions that increasingly PCs will also have LTE capability. By 2018 they expect 15% of PCs to have cellular baseband, and the percentage of tablets that do will double. But reading between the lines they are still losing money (contra revenue) in this part of the market too.

And Intel foundry? Didn’t get mentioned.

Transcript of call here. Intel’s investor meeting is on November 20th.

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