Intel Analyst Day

Intel’s analyst day was mostly about the growing importance of the data center business as a driver of both revenue growth and margin pressure. Within data center, the enterprise and government segment is expected to be the weakest due to delays related to the transition from on-premises to public cloud-based deployment, which is why it will grow a mere 2%.

But this will be strongly supplemented with 15%+ growth in cloud service provider (helped by TAM expansion and higher prices) and 10%+ growth in communications service provider revenues. The much larger CPU portion will post a 6% CAGR dropping from 87% of revenue in 2017 to 75% in 2021. Non CPU parts of the data center business will record a 30% CAGR during the same time period.

Intel put out some rather convincing charts showing the artificial intelligence opportunity and Intel’s position within it along with its significance for total server revenue. Accordingly, in 2016, AI was just 7% of revenue, of which 60% was classic machine learning with the remainder being deep learning.

In 2010, when NVIDIA (NVDA Quick QuoteNVDA - Free Report) entered the market, Intel HPC accounted for 93% of the market with NVIDIA making up the rest. NVIDIA grew strongly for the next two years but Xeon Phi has started taking back share again. As a result, in 2016, Intel’s combined technologies gained back some market to end at 84%.

Because of the huge opportunity, Intel will be devoting more R&D dollars to strengthen this business and its new chips starting from the last iteration of 10nm will be first available to its data center customers. Increasing costs will therefore have a negative impact on this business over the next few years.

In 2017, management expects revenue growth in the low single digit range, a gross margin of around 63% and EPS of around $2.80. DCG will be up high single digits, CCG will be down mid single-digits, NSG up 20%+, IoTG up 10%+ and PSG up mid-single-digits.

Intel expects to spend $12 billion (+/- $500 million) on capex this year, of which $2.5 billion will be on memory. But capacity additions will account for most of the rest.

Management also pointed to future opportunities: memory ($100 billion TAM), autonomous vehicles in 2025 ($10 billion TAM) and 5G connected devices (more than $50 billion TAM).

Intel’s U.S. Factory Endears It to Trump

Intel CEO Brian Krzanich met with Trump and promised to invest an additional $7 billion in an Arizona factory it originally started building back in 2011. The plant will employ 3K high-tech high-wage employees and it is estimated that indirect jobs relating to it will take employment up by about 10K.

Intel has struggled to take the x86 architecture below 10nm, which could be partially responsible for construction being put on hold. Intel is one of the few technology companies that stuck with its U.S. fabs as a matter of policy even when many of its peers moved offshore. Intel owns leading edge IP that it wouldn’t want to outsource to places where IP laws are suspect.

The CEO made no bones about the fact that conducive tax and regulatory measures had prompted the company’s decision to complete the investment now, so he may have eked out some concessions from Trump. 

Apple Sells More Smartphones Than Samsung

According to IDC data published Feb 1, Apple shipped slightly more smartphones in the holiday quarter than Samsung, despite the fact that iPhone shipments were down for the first time in 2016. This is the first time in five years that the company gained the top spot.

Apple’s success was attributed to the iPhone 7 and Samsung’s Galaxy Note 7 fiasco. Samsung said the exploding phones cost it $3 billion in sales. Overall smartphones grew just 2.3% in 2016 compared to 10.4% the previous year. Apple’s 4.7% growth rate was better than the industry. Samsung shipments declined 5.2%.

IDC expects the market to rebound this year, in part because of expectations of a landmark phone from Apple and renewed demand in the Middle East and Latin America, which didn’t have a good 2016. Separately, Canaccord Genuity has said that while Apple accounted for just 18% of the smartphone market last quarter, it took 92% of the profits.

Google Selling Its Satellite Company

Google has agreed to sell its high-resolution satellite imaging business, Terra Bella, to imaging startup Planet Labs for somewhere between $300 and $500 million. Planet Labs has a number of medium resolution satellites that will complement the ones it has acquired, according to Planet.

Google is not quitting the mapping business and a long-term agreement to license the technology back from Planet is reportedly a part of the deal. This may not be a hugely profitable deal for Google given that it originally acquired Terra Bella for $500 million in 2014 when the company was called Skybox. But it may be a part of the realignment of its business units and goals under CFO Ruth Porat.

Other stories you might have missed-

Corporate

Apple Submits on Aussie Bank Boycott: Apple has submitted a statement to the Australian Competition & Consumer Commission (ACCC) charging the top four banks (Commonwealth Bank of Australia, National Australia Bank Ltd., Westpac Banking Corp. and Bendigo & Adelaide Bank Ltd) in Australia of delaying the expansion of Apple Pay, which could prove detrimental to smaller card issuers while reducing options for consumers.

The banks, which are in the process of developing their own mobile technology, are seeking to bargain collectively with Apple to have their apps included in Apple Pay. Apple would rather have card issuers add their cards to its wallet and have the banks pay for inclusion. Apple said it won’t give the banks a “free ride” while the banks responded saying Apple’s assertion was “incorrect and unsupported.” In its draft ruling, the ACCC denied the banks’ request. The final ruling is expected in March.   

Apple Hires Away Amazon Executive: Timothy D. Twerdahl, who formerly headed Amazon’s Fire TV unit as its general manager and director, has now joined Apple as its VP in charge of marketing Apple TV. Pete Distad who previously played that role will now help Apple negotiate content deals. Twerdahl has vast experience in streaming: before his four-year stint at Amazon he was VP of consumer devices at Roku and before that, he was an executive at Netflix. The executive changes seem to indicate that Apple is finally going to make some bold moves in this business, which hasn’t really done that well versus competitors.

Facebook VR Demo Stations Shutting Down: Facebook is closing down around 200 of its 500 VR demo stations at Best Buy stores. It appears that the Oculus wasn’t as much of a success as anticipated because few people came in for a demo at all and store attendants said that frequent software issues with the headsets made them unsellable. But the headsets aren’t going out of circulation. The stores will continue to sell them and Facebook has promised that there will be pop up and other stores that will continue with the demos. The program started with 50 stores that were later expanded to 500 in August last year.

Facebook Hires MTV Executive: Facebook is very serious about content, video content in particular. On the earnings call, Zuckerberg mentioned how video was the next big thing just like mobile. So it has done everything possible to help share videos of every description and host Facebook Live streams. But in order to increase differentiation and the price of ads running adjacent to these videos,

Facebook needs a little bit more. And now it’s apparent that that is original content. The company has snapped up Mina Lefevre, who was in charge of scripted programming at MTV to head up its content development efforts. She will report to Ricky Van Veen, co-founder of CollegeHumor.

Legal/Regulatory

Microsoft Battles with Govt Spying: The court hasn’t allowed the government’s request to throw out a Microsoft (MSFT Quick QuoteMSFT - Free Report) lawsuit, in which it contended that the Electronic Communications Privacy Act violates the first amendment. The act allows the government to issue gag orders when asking for data housed on third-party servers like those owned by Microsoft.

The Justice Department had asked the government to dismiss the lawsuit saying that it needed to keep investigations confidential so as not to alarm possible wrong-doers and that they did eventually get to know when charges were filed. Microsoft succeeded in convincing the judge that this affected its ability to do business. But the court held that Microsoft couldn’t assert constitutional rights for someone else, so it couldn’t talk on behalf of its customers.   

Google Wants Warrants for Govt Snooping: Google’s head of information security Richard Salgado visited senators to speed up the passage of a bill that has previously been endorsed by the House of Representatives. The bill seeks to do away with one clause of the current law that allows the government to obtain access emails that are more than 180 days old without a warrant. Google would like the law to be applicable for all emails irrespective of age. The bill was in the hands of Senator Jeff Sessions prior to the elections, when he was elevated to the position of Attorney General by President Trump. 

New Technology/Products

Cisco Announces First SIG: Cisco (CSCO Quick QuoteCSCO - Free Report) has created a new Secure Internet Gateway (SIG) in the cloud that will allow on-field or mobile enterprise users to connect securely to the Internet even when they aren’t connected through VPN. Cisco’s solution is called Umbrella. Umbrella can identify which SaaS apps are being used and enforce policies to block risky or inappropriate apps; analyze over 100 billion internet requests every day, correlating with over 11 billion historical events to identify patterns, detect anomalies, and create models to automatically uncover attacker infrastructure being staged for the next threat; and other security checks through machine learning, Cisco Talos threat intelligence, and Cisco Advanced Malware Protection (AMP).

Microsoft Extends Support to Cloud Customers: Boston Consulting Group says that while IP lawsuits have increased 22% over the last five years, patent trolls - companies that don’t have a business but acquire patents to benefit from litigation - increased patent acquisitions by 35%. It is perhaps these trends that prompted Microsoft to expand its patent protection coverage to all users of its Azure infrastructure. Microsoft will give customers one of its own patents to help them deal with the litigation. Microsoft also expanded its indemnification program under which it provides funds or legal counsel to help customers defend themselves.

M&A and Collaborations

NES and Google Have a Deal: Nashville Electric Service has withdrawn its lawsuit against the Metro Council and telecom companies filed last October, after Google promised to indemnify it against liabilities that may arise out of Metro’s One Touch Make Ready policy. The current law requires that when a new provider’s line is added to a utility pole, each existing provider is required to move its line, resulting in needless delay and disruption on the sidewalk.

The new policy allows one person to move the poles, thus making the process more efficient. Existing providers like AT&T and Comcast object to the law on the grounds that Metro is not authorized to make the law, which is a matter for the Federal Communications Commission (FCC). The deal is significant because NES owns 80% of the utility poles in Nashville and Google is likely to succeed because the action promotes competition in the market and can force incumbents to match Google Fiber’s high-speed services.

Some Numbers

Microsoft Azure Price Cuts: Microsoft has taken the lead in announcing price cuts for its Azure Virtual Machines. The company said that compute-optimized F Series instances would cost its customers up to 24% less, while A1 Basic instances would drop by up to 61%. Azure Hot Block Blob Storage and Cool Block Blob Storage costs are also down. Suntrust analyst Kunal Madhukar expects Amazon to follow soon, as price cuts are “business as usual” for cloud infrastructure service providers.

Amazon Payments: Amazon’s payments service called Pay With Amazon, which allows people to check out quickly using the details saved on Amazon says that the service now has 33 million users, 32% of which access it with mobile devices. Pay With Amazon had 23 million users last April. Amazon’s alliances with companies like PrestaShop, Shopify and Future Shop have brought more users over the past few months.

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