Analysis: Intel ends a revenue decline of two straight quarters and slows a drop in operating income with a 2015-ending quarter that shows some investments are paying off, writes Technology Business research Krista Macomber. What bets are delivering? WTW Insiders find out.

HAMPTON, N.H. – Intel (Nasdaq: INTC) closed out 2015 by capitalizing on high-end client processor demand and increasing revenue in strategic segments such as non-volatile memory (NVM), the Internet of Things (IoT), and next-generation data center architectures.

Intel’s revenue grew 1.3% year-to-year to $14.9 billion in 4Q15 after two quarters of decline, and operating income declines slowed, dipping 3.5% to $4.3 billion. Unit shipments of Intel’s core business, PC processors, declined during the year due to shrinking customer demand and extended device lifecycles.

The company’s shift to higher-end processors in its Client Computing Group (CCG), which contributes nearly 60% of its quarterly revenue and operating income, increasingly influences its corporate performance, as well as its ability to invest in its ongoing expansion into growing, adjacent markets such as IoT and data center.

Intel’s CCG revenue slipped just 1% year-to-year in C4Q15 after falling approximately 10% year-to-year in the first nine months of the year. Average platform selling prices rose 17% year-to-year, as Intel monetized its new Skylake processors during the holiday period. Increased selling prices and stabilizing revenue helped to slow CCG operating income declines, a trend that is critical to Intel’s ability to continue investing in its targeted growth markets during 2016.

Intel is also exhibiting success in its identified growth markets. The chip giant’s Data Center Group (DCG) revenues rose 11% year-to-year to $16 billion in 2015, driven by increasing traction in cloud providers’ data centers, and Intel’s continued alignment with customers’ emerging, increasingly software-defined requirements.

TBR believes this traction coupled with Intel’s growing investment in areas such as high-performance computing (HPC) position DCG to sustain double-digit growth in 2016. IoT revenues rose 7% year-to-year to $2.3 billion in 2015, as Intel built use cases with marquee customers that will set the stage for broader adoption and accelerated growth in 2016.

Intel focuses on high performance computing as a revenue driver for its DCG in 2016

Intel continues to refine its DCG strategy to align with customers’ evolving data center needs. This is critical to growth for Intel, as DCG is the vendor’s second-largest business, and revenues from its largest business, the client computing group, decline.

As markets such as cloud and virtualization mature, Intel is focusing on smaller but fast-growing markets, recently concentrating on HPC. HPC is now a widespread computing phenomenon, as customers seek to process and analyze growing data pools for their businesses advantage. Intel is responding to the rise in customer demand by Intel Scalable System Framework (SSF) and Omni-Path Architecture to bring HPC capabilities to a greater array of industries and workloads, including big data analytics.

Intel is leveraging acquisitions, including QLogic and Cray, and internal development to enhance its HPC capabilities in areas such as clustering for a wider range of users. From an architecture standpoint, Intel works to differentiate around cost and performance efficiency, as well as lower latency and higher messaging rates, against competitors such as InfiniBand.

In addition to investing in its technological differentiation, Intel is increasing support for customers seeking to adapt their applications for HPC implementations by launching five new Parallel Computing Centers. Furthermore, Intel is engaging with organizations more specific to certain geographical regions and industries, such as Alan Turing Institute in the U.K., and the Barcelona Supercomputing Center in Spain, to increase its penetration in the HPC market.

Intel Capital invests to tap growing mobile communications demand in China

Intel leverages its venture capital strengths to hone in on specific opportunistic markets as it kicks off 2016. Intel Capital invested nearly $500 million in technology startups in 2015, surpassing the $359 million it invested in 2014, with a focus on growing technology markets such as mobile communications, data center, IoT and NAND.

Combined, these segments make up more than 35% of Intel’s quarterly revenue and more than 40% of its quarterly operating profit. As a result, they are crucial to helping Intel weather weakening PC demand. As part of this investment, TBR notes Intel positioning to tap growing demand for the memory chips used for data storage in mobile devices, especially in China.

Intel expects China to consume nearly a third of the NAND chip market in 2016, and as a result is working to play a key role in helping China to build out this industry. In 4Q15, Intel Capital announced its plan to invest $5.5 billion in its Dalian facility in China, expanding its manufacturing capacity for non-volatile memory.

The Dalian facility will house the initial production of the 3D NAND technology, slated for release in 2H16. The 3D NAND technology, developed jointly by Intel and Micron Technology Inc., will bring cost savings, lower power usage and high performance for a range of mobile consumers, marking an important investment area for Intel to increase market share.

These investment plans follow Intel’s purchase in 2014 of a 20% stake in Tsinghua Holdings Co. Ltd. to increase competition against APAC-based peers such as South Korea’s Samsung Electronics Co. Ltd. and SK Hynix Inc., and Japan’s Toshiba Corp.

(C) TBR