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What’s Driving Growth in Intel’s Computing Segment?

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CCG posts strong growth in sales

In the last part of the series, we saw that Intel (INTC) surprised analysts and investors by reporting strong figures in the CCG (client computing group) and slow growth in the DCG (data center group). Let’s look a little deeper into the CCG’s results and identify the cause of growth. Is the growth sustainable?

Intel has been shifting its focus away from PCs towards the high-growth data center and IoT (Internet of Things) markets. However, the CCG still commands a dominant share of 60% towards the revenue. Its contribution towards the operating income is only 40%.

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The CCG’s revenue fell by 1% YoY (year-over-year) to $8.8 billion in fiscal 4Q15. Its operating loss fell to $2.7 billion from $2.8 billion in fiscal 4Q14. Although the unit volumes fell by 16% YoY, the average selling price rose by 17% YoY during the quarter. This trend shows that the company witnessed increased sales in powerful processors that are more expensive.

Product mix

Fiscal 4Q15 witnessed record volume sales of high-end Core i7 microprocessors and K SKUs for gaming. The company produced more than 50% of its CCG volume on the 14nm (nanometer) node as of November 2015.

In fiscal 3Q15, the CCG reported strong sequential growth of 13%. However, it reported a 7% YoY decline. The growth was driven by the enterprise refresh cycle. It doesn’t indicate sustainable growth.

The growth seen in the CCG over the second half of fiscal 2015 is seasonal. Gartner forecasts global PC shipments to fall 8.3% in 4Q15. The IDC (International Data Corporation) forecasts an even steeper fall of 10.6% during the same quarter.

Intel’s strategy

To boost growth in the slowing PC market, Intel adopted a segmentation strategy to cater to customers’ specific needs like gaming and all-in-one. PC vendors like Hewlett-Packard (HPQ) and Dell are innovating their products to ignite the PC refresh cycle. Adopting virtual reality would result in many gamers upgrading their PCs. This would bring growth opportunities for NVIDIA (NVDA), Intel, and Advanced Micro Devices (AMD).

The PowerShares QQQ ETF (QQQ) has more than 8.00% exposure in the semiconductor market. It has a 3.2% holding in Intel and 0.34% in NVIDIA.

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