10 Revelations For Partners During Intel's Q3 Earnings Call

Intel's Strengths In Q3 – And Challenges Ahead

Intel posted solid third-quarter earnings on Tuesday evening, buoyed by stronger-than-expected PC demand, and growth in cloud, networking and the Internet of Things segments.

The company posted earnings of 69 cents a share on sales of $15.78 billion, about 9 percent higher than the same quarter a year ago. That revenue figure edges above the outlook of analysts polled by Thompson Reuters, which estimated 73 cents per share on sales of $15.58 billion.

However, the Santa Clara, Calif.-based company faces challenges ahead – In the fourth quarter, Intel said it expects $15.7 billion in sales, plus or minus $500 million – slightly below analyst expectations of $15.86 billion. This forecast is roughly flat compared to the third quarter and lower than the average seasonal increase for the fourth quarter, according to Intel.

Following are important takeaways about Intel's Data Center group, the Internet of Things segment, and the PC market for Intel's channel.

Restructuring Efforts Continue

Intel has been restructuring to pivot its focus from the PC market to the lucrative data center and Internet of Things markets and these areas of growth were apparent in the company's third quarter. Sales for the company's Data Center group grew 10 percent year-over-year, while sales for its Internet of Things group increased 19 percent year-over-year.

"We're on track to the original restructuring and focusing our business on core strategic areas. This is allowing incremental investments in critical areas like the Data Center, Internet of Things and memory," said CFO Stacy Smith (pictured). "10 years ago, virtually the entirety of our business was tied to the PC market. Today, we have a diversified portfolio of growing businesses, with roughly half of our profits coming from the Data Center and Internet-of-Things businesses."

Intel CEO Defends The Data Center

Intel alarmed investors on Tuesday when it lowered its Data Center group forecast for the year to be in the "high single digits" growth range – down from its previous forecast of double-digit growth.

But CEO Brian Krzanich (pictured) assured investors on the earnings call that he remains bullish on areas of growth within the Data Center Group, including cloud, networking and storage.

"What you have to really take a look here is, the growth areas that we said we were going to continue to grow and the cloud service provider, the Telco, networking and storage, networking specifically was the more our fastest growing areas of the data center," he said. "In the adjacencies which are all new emerging markets for us around things like Silicon Photonics and Omni-path fabric… all of those are growing at or above what we had forecasted and doing quite well."

Enterprise Server Sales Are Weakening

Krzanich said that Intel is looking for ways to address the weak enterprise segment – which includes large businesses running their own servers, and makes up part of the Data Center Group.

"We anticipate the enterprise will go from that low-single-digit decline to roughly flat and it just hasn't, enterprise market hasn't showed up there yet," he said. "We're working on tactics to show that up over the next couple of quarters and we're still very convinced on the long-term path of those growth areas that we described are going to be what drives the data center."

IoT, Cloud Forecasts Remain Strong

Krzanich said that, while the year's Data Center forecast may have slipped, he remains bullish on cloud growth and "the IoT network in general."

"We're quite happy and I think our thesis of what continues to drive their growth is holding," he said. "When we go out and talk to our partners and customers about what's driving cloud growth, what's going to drive the networking and storage requirements, out in time we start to look at devices like autonomous cars and the IoT network in general. All of those things are driving large requirements into those data centers in those growth segments. And so that's what gives us the comfort that yes this will continue. And our forecasts are holding in those spaces."

Krzanich: Intel Will 'Absolutely' Sustain Double Digit IoT Growth

Krzanich said that strong vertical markets like video analytics, industrial and autonomous vehicles would help Intel continue to sustain double-digit IoT growth.

"Can we sustain the double-digit growth [for IoT]? We absolutely believe that we can and we've tested that with our deals that we see on plate going forward, but we've kind of forward tested that," he said.

"We believe the video analytics segment will continue to go well, [and] there are other segments of the industrial segment that we believe will continue to grow on machine automation, machine factory automation think of this as factory automation," he said. "The retail segment will continue to be an area where it continues to grow. And then automotive."

Intel On Track To Improve Mobile Losses In 2016

On the heels of a rumor that Intel is supplying communications chips for Apple's iPhone 7, an analyst asked how Intel hopes to improve its mobile losses next year.

CFO Smith evaded questions about Intel's relationship with Apple, but said that the company is on track to achieve its $800 million improvement in mobile in 2016.

"We said everything we know of what's going on with counter revenue and investments and margin improvements and all of that … that we'd expect something on the order of an $800 million improvement in 2016," he said. "Everything I know from there would say we're on-track or exceeding that just because we know this has gone through our restructuring, we've made some further disinvestments, as you just heard earlier, our volumes were little lower, our counter revenue is looking a little lower, the product margins all look good."

Stronger PC Segment In The Third Quarter

Intel is traditionally a desktop company, and Client Compute sales still make up the bulk of its revenue. Even as the PC market continues to struggle – Market research firm IDC projects that PC shipments will be down 7.5 percent this year – Intel saw better-than-expected PC demand in the third quarter.

Sales for Intel's Client Compute group were also strong in the third quarter, increasing 5 percent year over year. As part of this segment, Smith said on the call, "what has been strong in the past has driven increased growth for this quarter" – including notebooks and the gaming segment.

Shifting PC Markets And The Enterprise Bouyed PC Market

Smith stressed that regions like China and the enterprise market were particularly strong in the third quarter for the PC market.

"We're not going to raise the flag and say everything is good again," he said. "But if you take a look at this quarter, what we saw was kind of an increased strength in the areas that have been strong in the past. So, definitely the mature markets were a bit stronger. The one that was probably a little bit of a shift is China, was a little bit better than we had forecasted as well."

"Enterprise was again strong, consumer was better but it's still not back to where we consider it where we would like to see the consumer side," he added. "And it was a good mix between desktop and mobile products, laptops and devices like that. So, it's kind of an increase in what's been strong in the past as really what drove the growth for this quarter."

The Future Of The PC Market In 2016

In the fourth quarter, Smith said Intel expects the worldwide PC supply-chain to reduce the inventory, which means that its forecast seasonal revenue will be lower than average.

"I'd say from in-market standpoint [the PC market's inventory] is pretty seasonal. And then from our business it's the impact that Brian and I both talked about which is, we saw some strengthening of demand in the third quarter, we saw some refilling of the pipeline which was kind of lean coming in," he said. "And then in Q4, we're expecting kind of seasonal in-demand but some depletion of inventory pipeline. And it doesn't take much, if you think about the size of the PC market, you're down to changes in inventory levels across the worldwide PC supply chain it was measured in days or certainly less than a week of inventory that kind of shifts around."

Memory Revenue Flat As Intel Continues To Work For 3D XPoint Production

Revenue in Intel's memory business was approximately flat year-over-year, the company reported. Smith said 3D NAND production at the Dalian factory is ramping ahead of schedule with yields matching those of Intel's other production facilities.

"We continue to see industry enthusiasm building for our groundbreaking new memory technology 3D XPoint and we're making steady progress towards bringing it into production," he said.

"On the memory costs, what you're seeing is really two impacts," said Smith. "One is the start up cost associated with Dalian China factory for memory and then some of the first wafers coming out for 3D NAND and 3D XPoint. And I'd expect that that starts to get better into next year, it's hard to pick the quarter but it should become a tailwind as we get kind of into 2017."