What Intel’s earnings tell us about the wider marketplace

Intel’s latest quarter was quite positive, with revenues and profits up 9 percent year over year and earnings per share up 8 percent. This was above many prognosticators’ expectations and shows that perhaps things are not as gloomy for Intel and the semiconductor market as some have speculated. Indeed, looking deeper into the numbers, we can learn a lot about where the marketplace is right now.

The PC isn’t quite dead yet

Despite many calling the PC market dead, it’s clearly not. Intel’s Client Computing Group revenues were up 5 percent year over year. This is a reflection of PC vendors increasing their component buying in anticipation of a renewed interest in PC purchases. Clearly, the PC market is not what it once was, but it does seem to be back to a modest growth phase, driven by new business and enterprise PC purchases, along with specialized (particularly high end gaming) machines. Ten years ago, Intel generated the bulk of its revenues from PC sales. They new comprise closer to 50 percent of its revenues. But given the company’s overall revenue growth coupled with reduced cost of operations, it is generating high profit margins in this segment, which it can use to fund other growth market prospects. Of course, this rise should also float rival AMD’s prospects for increased sales in the PC space, but perhaps not as much as Intel’s, as AMD tends to be focused less on enterprise devices and more on the consumer market, where gains have been less forthcoming except in graphics-heavy segments like gaming.

Cloud is eating the enterprise

Intel’s Data Center Group had revenues increase 10 percent year over year. The company showed very strong growth in its cloud oriented business, which was up about 30 percent. This was offset by the overall enterprise data center business being down about 3 percent. The result clearly shows a shift underway in how businesses deploy apps. Enterprises aren’t really spending less, they are just shifting where they spend.

While not all apps are being moved immediately to the cloud, it’s pretty clear that most of the new investment in infrastructure is in the cloud, at the expense of on-premises solutions. Couple this with the massive investment in new “software-defined everything,” especially in networking for SDN and NFV, and the market forces are pretty clear. But Intel will win either way: On-premises solutions and cloud based solutions both require processers that Intel can provide. Even though the ARM camp has put a big bullseye on the cloud server and SDN segments, it has yet to put much of a dent in Intel’s dominance.

The “things” are coming, the “things” are coming

Intel’s Internet of Things group revenue was up 19 percent year over year. Although still a relatively small portion of the overall business ($649 million vs. $15.8 billion), it nevertheless shows a major opportunity is emerging in this often over-hyped space. This is one of the growth areas Intel has targeted for replacing much of its dwindling traditional PC sales. Indeed, its investments in 3D vision, drones, autonomous cars, Edison and Quark processors, etc., is beginning to pay off. It also shows that there is indeed a strong market emerging for IoT, and more particularly what I term the “Enterprise of Things” – tech that will power business needs and is now starting to generate significant revenues. This is also a market where Intel sees the most competitive pressure, as the presence of ARM-based chips powering “things” is currently much larger than Intel’s presence with its own x86 architecture. While the market will grow substantially, it’s still unclear how well Intel can compete with the likes of Qualcomm, MediaTek, and other ARM-based powerhouses.

Increasing insecurity over security

Intel’s expensive buy of McAfee several years ago never really paid off. The strategy behind the acquisition was sound, but the implementation never materialized. The relatively small amount of revenue the Intel Security group generates (even less than the IoT group), and the relatively flat revenue growth, shows this is not a key future growth market for Intel. It’s why it is spinning out the group and selling off controlling interest, as I predicted it would. While clearly security built into Intel chips will continue to be a strong focus, and indeed a requirement, to advance its markets, Intel’s ownership of a software and services security company is not in its long-term strategic interest. And traditional competitors (like Symantec) are also feeling the pinch of markets less interested in traditional security like anti-virus apps, and more interested in advanced hardware-embedded and data-driven approaches.

Can you hear, see, and remember me now

Intel continues to invest in important areas around communications (e.g., 4G/5G modems) where it’s now picking up some steam after several missteps. It is also investing in connectivity (high speed photonics), machine learning with high end CPU and GPU efforts, FPLAs as solution-specific accelerators, and high speed non-volatile Cross Point memory. All of these areas are potential high growth product areas for the future, and all are components necessary for Intel to be a “full service provider” of future system needs.

So what’s the bottom line?

Intel with its best-in-class profit margins (63 percent) has wisely chosen to invest heavily into many new high growth areas that will become much more important over the next 3-5 years as these emerging markets mature. Other companies are also doing so, but the amount of investment that many of these technologies require will be extremely high. It’s not at all clear that early entries can make it alone, and it’s also why Intel and others have been acquiring many smaller players with interesting technologies. But Intel’s recent quarter makes one thing abundantly clear: The market is shifting away from commodity personal computing to much more diverse environments, and only the visionaries (with deep pockets) will thrive.

Jack Gold is the founder and principal analyst at J.Gold Associates, LLC., a technology analyst firm based in Northborough, MA., covering the many aspects of business and consumer computing and emerging technologies. Follow him on Twitter @jckgld or LinkedIn at https://www.linkedin.com/in/jckgld.