Microprocessor giant Intel's (NASDAQ: INTC) fastest-growing business segment in 2016 was its Internet of Things group (IoTG). Through this business unit, Intel supplies processors and other technologies into markets such as automotive, manufacturing, retail, and more.
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Intel executive Diane Bryant. Image source: Intel.
Although this business doesn't make up a large portion of the company's sales today (it accounted for just 4.4% of the company's revenue during 2016), it is a segment that Intel has repeatedly cited as one of its key long-term growth drivers.
In this article, I'd like to go over this segment's financial results during 2016 and then look at the longer-term prospects for this business.
Revenue and profit growth for the year
Intel's IoTG saw revenue grow from about $2.3 billion in 2015 to $2.64 billion in 2016, coming just shy of 15% revenue growth year over year. Double-digit revenue growth is a solid result, but what really makes it interesting is that this represents a meaningful acceleration in business performance compared to last year, when Intel's IoTG only grew sales by roughly 7%.
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CEO Brian Krzanich attributed the acceleration in growth to "strength in the video, retail, and industrial segment."
Operating profit in this segment also grew this year, hitting $585 million, up 13.5% from the $515 million in operating profit that it generated last year. Investors might note that revenue grew a touch faster than operating profit during 2016, implying a modest contraction in operating profit (operating margin dropped from 22.4% to 22.2%).
Intel has signaled that it is investing more into IoTG, with Intel CFO Robert Swan citing a "step function increase" in Intel's investments in self-driving cars (Intel's automotive efforts all fall under the IoTG group). The modest operating margin contraction is likely indicative of increased operating expenses within the broader IoTG group rather than any potential gross profit margin/pricing pressure.
Taking a longer-term look
Although Intel has done a good job thus far of capitalizing on the opportunities and market segments that exist today, perhaps the most exciting thing about Intel's IoTG is the opportunity ahead of it in increasingly smart and autonomous vehicles.
It is well understood that it takes a lot of computing power to support cars that can do all the calculations necessary to emulate a human driver. Additionally, tens of millions of new cars are sold each year.
The thinking, then, is that if -- over time -- most, if not all, new cars come with a significant amount of computing power built-in, and if Intel can get a solid amount of market share, then the revenue growth opportunities could be quite significant.
Furthermore, today Intel is likely spending significantly on products and technologies aimed at self-driving cars that won't begin to generate revenue for quite a while yet. At some point, Intel should be able to slow down the rate at which it increases its IoTG investments while revenue from the investments that Intel is making today will finally start coming in.
If that revenue is significant, then over time Intel's IoTG could see operating profit margin expansion from the roughly 22% that it sits at today to, perhaps, 30% or more. In the near term, though, I expect Intel to continue to ratchet up investments, which may keep a lid on IoTG operating margins for a while.
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