One market that microprocessor giant Intel (NASDAQ:INTC) is aggressively pursuing is the Internet of Things -- a fancy renaming of what the company had previously referred to as its embedded business.
In the chip giant's most recent quarter, its Internet of Things business brought in $651 million in revenue ($571 million coming from "Platform" sales with the remaining $80 million coming from "Other"). Operating income was $123 million, or nearly 19% of revenue.
These figures represented significant growth from the results seen in the same period a year prior of $533 million and $87 million, respectively.
Let's take a closer look at what drove this strength and what Intel management expects from the segment for the rest of the year -- and beyond.
Taking the long view
As analyst Ambrish Srivastava pointed out on the call, Intel's original long-term growth target for its Internet of Things business was apparently a 20% compounded annual growth rate. This was then revised down to a "mid-teens" compounded annual growth rate.
Srivastava went on to note that in 2015, Intel actually missed that growth target, achieving just 7% year-over-year growth.
This led to Srivastava asking Krzanich about what kind of growth rate investors should expect to see in this business going forward.
"I would tell you that I'd reiterate what I said, which is it's a mid-teen type of growth rate," Krzanich said. "And you got to take a look at this over the long haul."
Krzanich went on to explain that the design cycles in this business tend to be slower than they are in other parts of the company's business.
"Autonomous driving vehicles are a good example," he began. "If you're out winning designs today, you're winning 2018/2019 card designs. Those are what are being won today."
Although Krzanich is calling for really nice growth rates here, he also believes that this segment can offer "PC-like" margins. As noted above, operating income for this segment last quarter came in at around 19% of revenue. It's key to note that although revenue growth came in at 22% year-over-year (a very strong result), operating income was up an impressive 40%.
This segment had actually started to see operating margin compression as it started ramping up research and development (and likely marketing) spending to support future products/business opportunities. However, it would seem that operating margins are back on the rise as revenue growth reaccelerates and more than offsets any year-over-year spending increases.
This is a business to watch
Although Intel's Internet of Things business isn't even close to the size of its Data Center or PC businesses, as a stand-alone entity this business would actually be a sizable chip/platform company. That being said, this business tends to leverage a lot of the core technology development done in support of other businesses so as a stand-alone entity it would likely not be as profitable as it is today.
At any rate, it's looking as though Intel's Internet of Things business is quite successful and, over time, could start contributing revenue/profits that actually move the needle for the chipmaker.
Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.