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Inside Intel’s Big Growth in the Internet of Things

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Apr. 27 2016, Updated 8:06 a.m. ET

Growth now depends on IoTG and other segments

Previously in this series, we discussed how Intel’s (INTC) key growth market, data center, is facing slow growth, reduced ASP (average selling price), and increasing competition. This puts the pressure on the company’s next growth drivers—IoTG (Internet of Things Group) and PSG (programmable solutions group).

Inside Intel's Big Growth in the Internet of Things

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IoTG

In fiscal 1Q16, Intel’s IoTG revenues rose by a remarkable 22% YoY (year-over-year) to $651 million. Its operating profit rose by 41% YoY to $123 million. The group now contributes ~4.8% toward the company’s total revenues, breaking its two-year mark of 4% revenue contribution. This growth was largely driven by strong growth in the video and retail space.

Meanwhile, the company hired former Qualcomm (QCOM) executive Murthy Renduchintala to be Intel’s President of Client and IoT business in November 2015. Intel Chief Executive Officer Brian Krzanich hopes the outside talent would bring new ideas to boost IoT growth.

The company will also use Altera’s FPGAs (field-programmable gate arrays) to develop IoT chips to cater to different needs of different consumers. FPGAs can be programmed after they are manufactured, allowing them to be used for specific applications. Intel is also leveraging Altera’s revenue derived from selling FPGAs to other semiconductor companies. Hence, it has created a separate division of PSG dedicated purely to Altera.

Programmable Solutions Group

In fiscal 1Q16, PSG reported revenues of $359 million and an operating loss of $200 million. The loss came after the company included acquisition-related charges and inventory and revenue adjustments. The company stated that the non-GAAP (generally accepted accounting principles) operating margin, after excluding acquisition costs, was a low-double-digit percentage.

Altera, through the PSG group, will continue to compete with Xilinx (XLNX) in the FPGA space. Moreover, Altera should enable Intel to supply FPGA-powered server chips preferred by cloud customers. However, IBM (IBM) and Qualcomm will likely give tough competition by using Xilinx FPGAs in their server chips.

Notably, the PowerShares QQQ ETF (QQQ) invests ~2.8% in INTC and ~1.5% in QCOM.

Continue to the next part for a look at the performance of Intel’s other key groups.

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