On chip giant Intel's (INTC -3.67%) most recent earnings call, CFO and interim CEO Bob Swan went over some of what he referred to as the "headwinds" and "tailwinds" that the company's business is set to face next year. I went over the headwinds Swan discussed in a previous column (in short, he cited tougher year-over-year comparisons due to the strength of Intel's financial performance in 2018, fiercer competition, and "global trade"), and here I'd like to go over the two tailwinds Swan talked about.
Image source: Intel.
An expanded TAM
In recent years, Intel has tried to tell investors that it's now going after a much larger total addressable market (TAM) than it has in the past, and that share gains within that bigger TAM should fuel the company's growth over the long term.
At the company's 2017 investor meeting, CFO Bob Swan -- who is also serving as the company's interim CEO following the resignation of Brian Krzanich back in June -- said the company's TAM would be around $220 billion by 2021. The company raised that figure to $260 billion at its annual stockholder meeting back in May, and as of the company's Oct. 25 earnings call, it was bumped up to $300 billion.
With that background in mind, Swan said that one of the tailwinds in 2019 is the company's expanded TAM.
"That larger TAM and the momentum we're building across all of our products is a pretty good tailwind as we look at just demand for data, whether it's with consumers or with businesses going into the new year," Swan explained.
New products
Next, Swan referred to some of the comments that Intel chief engineering officer Murthy Renduchintala made about how the company intends to start shipping its next data center processor architecture known as Cascade Lake by the end of 2018, and Cooper Lake "toward the end of next year." (Swan said later in the call that Cooper Lake would arrive in "the middle of next year," and when I reached Intel for comment, I was simply told that "Cooper Lake is targeted for 2019 shipments.")
"Those products we believe will deliver more and more performance for our clients, which I'd characterize as a tailwind," Swan explained.
Different business mix
Here's what Swan said about the third tailwind:
And then third, in somewhat of a perverse way, as you know, when PC was 70% of the business and when enterprise was 50-plus percent of the Data Center business and those were declining, it was a headwind for the company's growth. But those more recently have been stable.
This is a densely packed statement, so let's unpack it.
First, Swan is referencing the fact that the PC market -- which had been in decline for several years before returning to growth in 2018 -- has become a smaller part of the company's overall revenue. When the declining/slower-growing part of the business becomes a smaller part of the total, it's easier for growth in the faster-growing portions of the business to shine through.
Putting some numbers to that, 54% of the company's sales in 2017 came from its client computing group (CCG), but that number was an eye-popping 66% in 2015.
That's not all, though. Within Intel's data center group (DCG) -- the most important of the company's so-called "data-centric" businesses -- the segment's revenue from the slow-growth, or even declining, enterprise server business has become a smaller part of the total, while revenue from the faster-growing cloud server and communications infrastructure segments have become larger parts of the business.
For some perspective, Intel reported last quarter that revenue from cloud service providers grew 50% year over year, and sales to communications service providers surged 30%. Revenue in its enterprise and government segment was up just 1%.
The point, though, is that the same dynamic that's been playing out for Intel's overall revenue is also happening within DCG.
