Editor’s note: Intel announced its first quarter earnings on Monday, and Technology Business Research analyst Stephen Belanger breaks down the results.

HAMPTON, N.H. – Intel is working to augment its core Data Center Group (DCG) and Client Computing Group (CCG) revenue with increased mobile and Internet of Things (IoT) revenue streams. Intel uses its DCG business segment to drive corporate profitability during its ongoing corporate realignment.

After falling behind in the mobile devices space, Intel is investing heavily to develop a viable portfolio that’s competitive with ARM-based rivals such as Qualcomm.

Additionally, Intel is investing in IoT product development to avoid falling behind as the market evolves and to capture long-term growth opportunities.

Despite Intel’s portfolio investments and efforts to realign its business, TBR believes the vendor will have difficulty gaining traction in the mobile devices market due to the technological advantages of competitors such as Qualcomm. Further, the vendor will face rising competitive pressures from vendors such as Samsung in the IoT space.

In 1Q15, Intel’s corporate financial performance was dragged down by weakness in the global PC market. The vendor’s corporate revenue was approximately flat, increasingly 0.1% year-to-year to $12.8 billion. Intel’s operating margin was 20.5% in 1Q15, up from 19.7% in 1Q14, which TBR attributes to continued strong performance from Intel’s DCG. CCG revenue was down 8.4% year-to-year, caused primarily by a decline in desktop platform volumes of 16% year-to-year and a decrease in notebook platform ASPs of 3% year-to-year.

Contrarily, Intel’s data center group (DCG) revenue increased 19.2% year-to-year, on the back of unit and ASP gains of 15% and 5%, respectively. Going forward, TBR believes Intel’s financial performance will be driven largely by DCG, while CCG declines will continue to pressure corporate revenue and profitability.

Intel bolsters its smartphone and tablet offerings to better compete with ARM rivals

Intel continues to take a long term view in the global mobile devices market. The vendor is fine-tuning its PC portfolio while DCG funds R&D spending for Intel’s mobile business. TBR believes it is unlikely that Intel will be able to dominate the mobile and IoT markets as it has in the PC market. However, the vendor’s core data center and PC businesses give Intel flexibility to take its time and carefully develop technology that aligns with customer demand.

TBR believes Intel will incrementally enhance its mobile and IoT offerings and become a viable alternative to ARM-based processors that are dominant in the mobile device market. In the IoT market, TBR believes Intel will be among a handful of leaders, with the largest competitive threat coming from Samsung.

In March, Intel closed the technological gap between itself and Qualcomm in the smartphone and tablet processor markets. The vendor unveiled its “SoFIA” Atom x3 systems-on-a-chip (SoC) for entry-level Android smartphones, and its “Cherry Trail” Atom x5 and x7 processors for Windows tablets and smaller-sized 2-in-1 PCs.

While Intel’s Atom processor technology still lags behind Qualcomm’s offerings, Intel’s Atom x3 chip is the first to integrate a 3G radio and an embedded processor, making it an attractive component for entry-level smartphone manufacturers. Furthermore, Intel plans to expand the roadmap of the Atom x3 processor line to include commercial IoT hardware, which will complement the company’s Quark CPU with a more robust processor.

Intel strengthens its leadership in the global data center processor market

Intel’s DCG segment provides consistently strong revenue and profit performance, and in 1Q15 DCG revenue and operating income increased 19.2% and 27.3% year-to-year, respectively. TBR believes Intel is capitalizing on growth in the x86 server market, as enterprise, midmarket and SMB customers increasingly adopt x86 solutions for a growing variety of use cases.

While these customers will remain a critical revenue stream for Intel’s DCG, the vendor is enhancing its data center portfolio to better accommodate cloud, telecommunication service providers and web hosting companies.
In March, Intel announced the Xeon processor D product family for microservers, storage, network and IoT devices, the vendor’s first Xeon SoC product line. By extending the Xeon processor into a 64-bit SoC, Intel will offer a dense, low-power processor. Intel is already gaining traction among several large-scale customers.

For example, Facebook is one of the first users of the SoC on an Open Compute Project (OCP)-based server design. TBR believes the product line launch will complement Intel’s strong footprint and brand recognition in the global data center market, and will help the vendor drive DCG revenue as cloud and telecommunication service provider customers scale their infrastructure.

(C) TBR