2014 turned out to be a rebound year for Intel (INTC 2.11%). The company released its fourth-quarter earnings on Jan. 15, and results for the quarterly period and the recently ended fiscal year were better than anticipated on many fronts. Earnings per share for the quarter came in at $0.74, soundly beating the average analyst estimate of $0.66 per share, and operating income rose 25% year over year. Looking at the annual fiscal term, Intel recorded record revenue of $55.9 billion, up 6% from the year prior.
Performance for the company's PC Client Group, which accounted for roughly 62% of the company's annual sales, was one of the big drivers for the better-than-expected results. Following a tough year for the broader PC market in 2013, Intel projected that sales in its largest segment would fall by a low single-digit percentage; however, the company delivered 4.2% growth in the segment, and operating profit was up 25% annually. The PC rebound is encouraging, as the segment will likely continue to be Intel's bread and butter revenue-wise, but it's also worth looking at some of the opportunities and challenges that the company is facing in other areas of its business. Here are two things Intel investors should consider.
Intel's mobile margins should improve substantially
Intel has been spending big in hopes of making up for lost time in mobile. The broader personal computer market saw sales fall roughly 10% in 2013, and projections that the PC is on the decline amplified the company's apparent need to establish a place in smartphone and tablet chips. This prompted Intel to offer heavy subsidies on its mobile chips. In 2013, the company's mobile losses reached $3 billion on sales of $1.375 billion. 2014 saw Intel incur $4.2 billion in mobile losses on $202 million in sales.
Regarding tablets, Intel's loss-leading strategy has delivered big market share gains. The company set a goal of getting its chips in 40 million tablets in 2014, and it managed to exceed that target and ship in 46 million devices. Progress has been slower on the smartphone front, but Intel's most important mobile phone chips are still in the rollout phase, and CEO Brian Krzanich has said that the company is aiming to avoid the same degree of subsidization it exercised with tablets.
Intel is now focused on mobile profitability and has the opportunity to improve margins as production scaling increases, as Krzanich noted about the company's SoFIA systems on a chip during the recent earnings call. The company's increased push into chips with cellular baseband functionality also looks to benefit its Internet of Things business, which grew revenue 19% over 2013. An increasing number of devices will have a cellular modem built in, which has the potential to lessen costs and enable the benefits of Intel's shared R&D structure to be realized.
Data centers are booming, but competition is heating up
Along with the PC rebound, Intel's growing data center business was a big part of its 2014 success story. The segment generated $14.4 billion in the last fiscal year, an 18% increase over revenue in 2013, and healthy growth should continue as companies build up their cloud infrastructure. Interestingly, the company's gains in its PC Client group reportedly had a lot to do with wrestling market share away from competitor Advanced Micro Devices, but AMD is now looking to have a bigger presence in data centers. Qualcomm is also looking to lessen Intel's server dominance, and both of these competitors are building alternatives to Intel's x86 architecture based on designs from ARM Holdings.
International Business Machines' (IBM 2.20%) push to make its POWER architecture a viable alternative to Intel's server offerings likely represents an even greater threat. 2013 saw the OpenPOWER foundation founded with this end in mind, and the group has companies like Google, Samsung, NVIDIA, Micron Technology, and Altera joining IBM to create more choice in the server industry.
The dominance of x86 and resultant need for customization with other architecture present obstacles to ARM-based and OpenPOWER-based alternatives gaining market share, but the emergence of credible alternatives could put significant downward pressure on Intel's pricing and cut into the great margins it currently enjoys. Intel is still growing its average selling price for server chips, 2014 saw average prices increase 10% over 2013's prices, but that growth could slow or reverse if IBM's POWER8 gets a foothold. The Data Center segment accounted for roughly 47% of Intel's operating income in 2014, so eroding margins could have a big impact on the company's earnings and stock.
