Monday, January 27, 2014

Intel's CEO has big plans for foundry business- 12/03/2013


  1. Company overview:
    2013 3Q-10Q
    Net revenue:
    Total 13.5B, PC client group 8.4B, Data center group 2.9B, Other Intel architecture (Phones, Tablet groups, etc.,) 1.1B , software and services and others 1.1B
    Total 3.5B, PC 3.3B, Data 1.4B, All others -1.1B
    GM% Q3 2013 62.4%, Q3 2012 63.3%, -.9%
    NI% Q3 2013 21.9%, Q3 2012 22.1%, -.2%
    Trends: Same period comparison 2012 3Q with 2013 3Q,
    PC segment: Net revenue decreased 4% due to lower notebook and desktop platform unit sales. OI decreased by 3% because of lower gross margin. –( higher factory start-up costs for next generation 14nm process technology and lower platform revenue).
    Data center: Net revenue increased 12%, OI increased by 6%. Intel benefited from DCG platform average selling prices and unit sales. Significant growth in the internet cloud computing and high performance computing market segments.
    Other Intel architecture: Net revenue 1.1B, OI -606M, due to R&D investments in the smartphone and tablet products as well as higher cost of sales.

    - Opening up foundry business to competitors: leading technology in PCs, current low market share in mobile and tablet markets. Substantial revenue and earnings gain if implemented properly. Intel started to manufacture chips for other companies recently, due to deteriorating market power.
    - Shift from PC market to Mobile and Tablet market: PC markets is bottoming, decreases steadily in the future by 3-5% according to Wall street analyst consensus.
    - PC declines will be offset by servers gains and tablet and phone gains—too optimistic, PC is the single most important segment, accounts for 62% revenue and 86% of OI.

    Haohan XuTop 5 Tablet vendors by market shares in 3Q 2013: Apple 14.1M, 29.6%; Samsung 9.7M, 20.4%, Asus 3.5M, 7.4%; Lenovo 2.3M, 4.8%; Acer 1.2M, 2.5%; Others 16.8M, 35.3%.
    Strong competitors: Apple designed its A7 processors and manufactured by Samsung, Samsung is a technology conglomerate. Apple 3 year contract to produce A8 with Taiwan Semiconductor starting in 2014, contract to produce A9Samsung stating in 2015.
    X86 processors are more powerful, but are more expensive and consumes higher power.
    ARM less powerful, but cheaper and consumes less energy. X86 only excels in Windows system, which puts itself at a disadvantage in all other operating systems, such as IOS, Android. (95% of tablets and 99% of cell phones use non-windows, according to JPM analyst Chris Danely).
    Conclusion: Neutral
    High dependence on the PC segment makes Intel’s financial performance volatile given the declining macro trends. Server gains may not be able to offset sales losses. In addition, tablet and mobile markets are hard to penetrate. Current price $23.74, NTM P/E 12.4X, mean 17.4X, 30% discount.

  2. Revenue from 2012:
    Total sale: $53,341 million
    PC Client Group: $34,274 (64.25%)
    Data Center Group: $10,741 (20.14%)
    Other Intel Architecture Operating System: $4,378 (8.2%)
    Software and Services operating segments: $2,381 (4.5%)
    All other: 2.91%

    Financial Performance Until September 30, 2013:
    Intel 11.32%
    Texas Instrument 9.68%
    Qualcomm 15.04%
    Oracle 13.72%

    Intel 18.13%
    Texas Instrument 17.27%
    Qualcomm 19.02%
    Oracle 25.44%

    - Extend like crazy. Kinda like Google Inc. Concerns: will they acquire patents without fully testing them? They will face tons of contingencies from legal problem.
    - Products are changing quickly and under the full protection
    - Long-term contract with NVIDIA: first quarter of 2011 to March 2017.

    New Market:
    Ultrabook, Tablet, Notebook. 2-in-1: a new category of computing
    Greater than 10 inches screen size; full PC OS (Window8); Integrated Keyboard Design; Touch, Responsive, Amazing Battery Life.

    Intel Atom Chip vs. ARM-based Chips:
    - ARM is attempting to move upstream while Intel tries to extend its presence downstream with its Atom chips that are aimed at mobile devices.
    - However, this competition has been overblown.
    - “Silvermont” version of Atom will substantially narrow the gap with ARM.

    Server Processor Business:
    - Benefiting from the extended usage of mobile devices and tablets, Intel's server processor business will be its key growth driver in coming years

    Moore’s law has been true over decades!

  3. 2012 annual report by revenue:
    5 business segments
    • PCGG: PC client group 64%
    • DCG: Data Center Group 20%
    • Other Inter Architechture: 8%
    • SSG: Software and Services:5%
    • Other: 3%

    Compared to 2011, 2012 has almost same revenue but there is 1.9billion net income lesion than 2011.
    Reason: R&D in 2012 is almost 1.8 billion more than that in the 2011

    Strength: R&D

    1. a new microarchitecture for notebook, Ultrabook system, and intel Xeon processors and develop the next generation of silicon process technology (tick-tock technology)
    3. accelerated the Intel Atom processor-based SoC roadmap for smartphones, tablets, and other devices, from 32nm through 22nm to 14nm
    4. Make significant investment in wireless technologies, graphics and HPC.

    1. Declining profitability
    2. Decreased Efficiency Ratios (asset turnover 0.63 vs 0.76 previous year)
    3. Dependence on few customers (43%2012 vs 43% 2011 46%2012, Hewless-packard company 18%, Dell 14%, Lenovo 11%)

  4. Net revenue: 53,341 in 2012, declined 1.3% compared to 2011
    Operating income: 14,638 in 2012, declined 16% compared to 2011

    PC Client Group: 64% of net revenue, declined 3% compared to 2011; 89% of operating income
    Data Center Group: 20% of net revenue, increased by 9% compared to 2011; 35% of operating income
    Other Intel architecture operating segments: 8% of net revenue
    Software and services operating segments: 5%. Over 100% increase rate from 2010
    All other: 3%
    Last three segments: loss 20% of total operating income. Loss for consecutive 3 years.

    Geographic revenue in 2012:
    Singapore: 24%
    Taiwan: 17%
    US: 16%
    China (including HK): 16%
    Japan: 8%
    Others: 19%

    2012 Revenues come from:
    HP: 18% of net revenue, 19% in 2011 and 21% in 2010
    DELL: 14%, 15%, 17%
    Lenovo: 11%, 9%, 8%
    The majority of the revenue come from selling of Platform.

    Profit margin declined from 26% in 2010, 24% in 2011 to 10% in 2012.
    Cash from operating: declined 10% compared to 2011

    Expand contract manufacturing business
    Growth of tablet market

  5. Intel Corporation


    • PC Client Group 64%; operating margin 38%
    • Data Center Group 20%; operating margin 47%
    • Other Intel architecture operating segments 8%; operating margin -31%
    • Software and services operating segments 4%; -0.5%
    • All Other 3%; -134%

    Revenue geography
    • Revenue from outside the U.S. 84% in 2012

    Revenue generated from a few of customers

    • HP 18% of net revenue (19% in 2011 and 21% in 2010)
    • Dell 14% of net revenue (15% in 2011 and 17% in 2010)
    • Lenovo 11% of net revenue (9% in 2011 and 8% in 2010)

    R&D focus
    • For the fiscal year ended December 2012, the company's R&D expenditures were $10.1 billion as compared to $8.4 billion in 2011 and $6.6 billion in 2010
    • Net cash from operating activity: 18.8 billion in 2012; 21 billion in 2011; 16 billion in 2010
    • Percentage 53.7% in 2012; 40% in 2011; 41% in 2010

    Favorable cases
    • Strong Operational Capability; wide product portfolio; efficiencies from its manufacturing capabilities
    • Strategic Growth Initiatives. Shifting to tablet and smartphone market; In-vehicle info and communication system

    Unfavorable cases
    • Dependence on a few of customers.
    • Strong competition in smartphone and tablet market. Qualcomm (QCOM) and ARM Holdings (ARMH) dominate the mobile/tablet market.
    o Major drawbacks of Intel’s two processors Bay Field (tablet) and x86 (smartphone)
    o A 6% share in tablet and 1% share in smartphone processor markets
    • Declining revenue and profitability. Revenue increase in mobile/tablet market may be offset by decease in desktop and notebook sales
    • Decreased efficiency ratios. Decreasing asset turnover ratio and capital employed turnover

  6. Intel has 5 operating segments, PC Client Group generates 65% of the revenue, Data Center Group 20%, Other Intel Architecture 8%, Software and Services 4%, and all other 3%. Effectively, semiconductor business has 93%.
    The PC Client Group offers processors for notebook and desktop; the Data Center Group offers products for server, workstation, and storage platforms; Other Intel Architecture includes products designed to be used in mobile communications, embedded, netbook, tablet, and smartphone market segments; software creates applications that adds value to Intel-based platforms, including McAfee; all other gets revenue primarily from Memory Solutions Group.
    Based on the Reuters article, Intel seeks to expand its small contract manufacturing business. The strategic move corresponds to the decline in the PC market. Despite CEO’s optimism towards a bottoming out PC industry, independent research by Bloomberg Industries and IDC shows that PC market declined by 6.5% in the 3Q, while is projected to declined 7% in the 4Q. On the other hand, tablet market is projected to expand at a 22% growth rate in the next five years, and may exceeds PC market in 2015.
    Intel is doing very well in the PC market, employing a regular two-year upgrade cycle—introducing a new microarchitecture approximately every two years and ramping the next generation of silicon process technology in the intervening years. The strategy effectively gives Intel a dominant position in the PC market. But just as the article mentioned, Intel at this point is a relative small player in the wireless communication processor market, which includes smartphone and tablet. Qualcomm and Samsung dominates with each 17% of the market share in 2012, while Intel has only 4.2%.
    Even with smaller market share, Intel has its inherent advantage in the tablet market. Both Qualcomm and Samsung manufactures mobile processors based on ARM-architecture. While popular with Android system, they are not compatible with standard version of Microsoft Windows, and as a result, many business applications won’t run on tables powered by Qualcomm or Samsung processors. Intel’s processors, on the other hand, are based on x86-architecture, which supports both Windows and Android. This will offer tablet manufacturers the flexibility to cater to the diverse needs of consumers and business users. I think extending its foundry capabilities to high-volume clients may be a short-term measure to increase revenue.

  7. Business Overview:
    - Net Revenue 53 billion in 2012
    - Net Income 22 billion in 2012
    - Revenue decline 1% from 2011 due to negative shock of PC demand
    - Major customers include ODMs and OEMS such as HP and Dell

    Business Segment:
    - PC Client Group (PCG): 64% of 2012 sales
    - Data Centre Group (DCG): 20%
    - Other Intel Architecture (Other IA): 8%
    - Software & services: 5%
    - Others: 3%

    Financial Analysis:
    1. Dividend pay out $4.4 billion and repurchased $4.8 billion common stock
    2. Intel’s revenues are cyclical but less variable than the broader industry’s because of its competitive position,
    3. Annual gross margins have been around 55% to 65% in past five years.
    4. Intel’s PCG revenue is being dragged down by decline in PC sales this year, where it dominates and accounts for 64% of revenue.
    5. Intel is seeing around 25% growth in tis DCG segment driven by cloud computing

    Investment Summary
    1. Intel continues to expand its chip offering at lower price points to gain share in mobile devices.
    2. The launch of new Core chips - Haswell and Aton system (SoC) improve its competitiveness in the mobile device market.
    3. In the Other IA group, Intel will subsidize tablet maker who use its Bay Trail architecture.
    4. Intel has entered into an agreement with Google for the launch of Intel-powered Android devices.
    1. Slowing growth in emerging markets
    2. Weakness in the PC market
    3. Faster price erosion due to product mix

    The success in mobile device market is key.
    - Intel's first 22 nm processor for smartphones 2014
    - Intel’s x86 architecture (Silvermont) made for low power mobile devices.
    - Qualcomm dominates the high end mobile processor with its high performing Snapdragons
    - Mediatek is dominant in the low and middle segments.
    - Apple and Samsung also use proprietary custom made processors for their mobile devices

  8. Business Segments:
    - PC Client Group: 64% of revenue in 2012
    - Data Center Group operating segment: 20% of revenue in 2012. Revenue grew 6% in 2012
    - Other Intel architecture operating segments: 8% of revenue in 2012.
    - Software and services operating segments: 5% of revenue in 2012.
    - Other: 3% of revenue in 2012
    Total Revenue in 2012 was 53b, 63% from PCCG platform revenue, 18% from DCG platform revenue, and 19% from other revenue.

    - Q3: 5% YOY revenue growth, PC Clients declined by 3.5%, Data Center 12.2% increase from the previous Q3
    - Net income grew to 3b compared to 2b from Q2
    - ROIC(TTM) 18.8%, Texas Instruments 17.7%, far higher than other listed companies
    - Increasing Free cash flow in the last three years. Intel generated $5.7 billion of free cash flow in 2012, and it has over $23 billion of excess cash

    - Increasing demand in cloud, storage and high performance computing, leading to a promising server side of business and increasing revenue in data center segment
    - Intel has a large R&D budget to support its mobile and tablet businesses. Intel has designed more efficient and faster processors called x86 Atom quad core Bay Trail for tablets and are designing chips for laptop/tablet hybrids to catch the trend in mobile and tablet computing.
    - PC sales are nearing a bottom and believed to be stabilizing.
    - Expand its contract manufacturing business and open up its foundries to outside semiconductor businesses may bring Intel new revenue. A potential big deal is to make chips for Apple. Apple was making moves to dump Samsung as a manufacturer, in favor of striking deals with either Taiwan Semiconductor, or Intel

    - Growing competitive threat in the server, storage and networking markets
    - Weak PC market