Much like Cisco Systems (CSCO) , Intel (INTC) has few illusions about the long-term pressures facing some of its largest and most profitable businesses, and is using a mixture of M&A, re-structurings and internal investments to position itself better in the years to come. Also like Cisco, Intel's transformation efforts have a financial price attached to them, and involve making trade-offs that can create openings for rivals.
During Thursday's Investor Day, Intel spelled out its ambitious plans to offset the long-term declines expected in the PC and enterprise server CPU markets by targeting opportunities in cloud servers, non-CPU data center products, solid-state drives (SSDs), and IoT and autonomous driving platforms. It also provided a set of short-term and long-term targets for its main reporting segments.
In line with the outlook shared during its fourth-quarter earnings call two weeks ago, Intel predicted its Client Computing Group (CCG), which supplies PC CPUs and mobile chips, will see revenue decline at a mid-single digit clip in 2017 due to PC weakness. It also forecast CCG will decline at a low-single digit annual rate over the next three years, while adding that its margins will be boosted by spending cuts.
Relative to 2015 levels, PC CPU R&D spend is expected to be down about 5% in 2017, and mobile R&D spend (had previously contributed to giant mobile division losses) about 55%. Some of these spending cuts have already been made, courtesy of Intel's 2016 job cuts. CCG was responsible for 54% of Intel's 2016 sales.
Intel's Data Center Group (DCG), which towers over the server CPU market, is still expected to grow at a high-single digit clip this year. But Intel still expects low-double digit growth in subsequent years, as enterprise server weakness is offset by strong orders from cloud giants and carriers, as well as by the growth of non-CPU products such as Ethernet chips, the Omni-Path interconnect fabric, deep learning ASICs and silicon photonics transceivers.
But this growth is going to come at a price. DCG's R&D spending is expected to grow by 25% from 2015 to 2017. That, along with manufacturing process investments, will result in a 2017 margin hit. And thanks to both its investments and the fact that some non-CPU parts carry lower margins, Intel is now aiming for a long-term DCG margin in the low-40% range from a prior target range of 45% to 50%.
That's a big deal, given DCG and CCG currently produce nearly all of Intel's profits between them. The former had a $7.5 billion operating profit last year on revenue of $17.2 billion; the latter had a $10.6 billion operating profit on revenue of $32.9 billion.