Popularity Of Mobile Devices Challenge For Intel

Intel (NASDAQ:INTC), which has an 80% share in PC chips and a 90% share in the server market, reported strong results last week that beat estimates and provided a strong outlook for 2011 driven by the growth in servers. The growing number of connected devices like smartphones, tablets, smart TVs, and embedded devices is leading to a surge in Internet traffic and data usage. This dynamic in turn leads to a demand for high-performing servers and networking infrastructure. Intel says it is well positioned to benefit from the growth of its Data Center division and the build out of cloud computing. But it needs to look out for challenges from ARM, not just in smartphones and tablets but in servers as well.

Intel’s Financials
In its fourth quarter, Intel reported revenue of $11.46 billion, up 8.4% y-o-y. Net income was $3.39 billion or $0.59 per share, up from $2.28 billion or $0.40 per share last year. Gross margin was 67.5% versus 66% last quarter and 64.7% last year. Analysts were expecting gross margin of 66.7% and earnings of $0.53 on revenue of $11.37 billion. Intel ended the quarter with $21.5 billion in cash and investments after repurchasing stock for about $1.5 billion during the quarter. Intel increased the dividend by 12.5% and resumed stock repurchases in the fourth quarter. The company had stopped stock repurchases for more than a year due to the uncertainty about the severity of the recession.

Intel reported weak consumer demand during the fourth quarter but said the weakness was offset by strong enterprise demand, particularly in servers. PC Client revenue was flat over the third quarter, Data Center revenue was up 15 % q-o-q, Atom microprocessor and chipset revenue of $391 million was flat sequentially, and other Intel architecture group was flat over the last quarter.

For the full fiscal year 2010, Intel reported revenue of $43.6 billion, up 24%, and profit of $11.7 billion or $2.05 per share, up $7.3 billion or $1.28 per share or 167% y-o-y.

Intel expects first quarter revenue to be $11.5 billion, plus or minus $400 million, and gross margin of 64% driven by its new multi-function chip, Sandy Bridge, which integrates graphics and video processing. Analysts expect first quarter revenue of $11.73 billion and gross margin of 63.5%. For 2011, the company expects revenue growth of 10% over 2010 and gross margin of 65% as the economy is expected to improve. Further, Intel expects its proposed acquisitions of Infineon and McAfee to close this quarter, and the 2011 revenue estimate doesn’t include their contribution.

The stock is trading around $21 with market cap of about $118 billion. It hit a 52-week high of $23.69 on April 14 and a 52-week low of $17.60 on August 31.

The Challenges Ahead
Intel has a lot of challenges ahead. It has yet to prove its mettle in the mobile computing sector, a market that has become vital for any company that wants to grow. ARM is the leader in the smartphone and tablet industry with design wins in Apple’s iPhone and iPad, Samsung, and Dell. Smartphones with Intel chips are expected this year, and as the tablet market heats up, Intel-powered tablets are also expected to surface in 2011.

While Intel is looking to push into ARM’s domain, ARM is looking to challenge Intel chips in data centers in 2014. Early this month, NVIDIA announced that it will be building ARM-based CPUs, and Microsoft said that the next version of Windows will work on both x86 and ARM. ARM is increasingly gaining ground. Its strong point has been its low power consumption architecture, while Intel’s has been high-performance processors.

Will ARM be able to challenge Intel? It will be interesting to see the story unfold over the next decade.