Intel largely met analyst estimates when it announced earnings last Wednesday, posting revenue of $12.8 billion and net income of $2 billion for an EPS of $0.39. What caused concern was the company’s revised guidance for the full year, reducing an expected singe-digit percentage revenue increase to flat revenue year-over-year. Along with this revision Intel Corporation (NASDAQ:INTC) cut its capital spending budget for the second time this year, reducing it by $1 billion to $11 billion for the full year.
The market reacted poorly, sending Intel shares lower on the news. Intel is now down a little over 5% from before the announcement, adding to losses incurred when the stock was recently downgraded. Is the market right to be pessimistic? Or is it ignoring the big picture?
A company in transition
Intel Corporation (NASDAQ:INTC) split itself into five different groups in its earnings report:
- PC Client Group – The bulk of Intel’s business, this group is responsible for notebook and desktop platforms, as well as connectivity products.
- Data Center Group – Delivers platforms for server, workstation, and storage computing market segments. This is the second biggest division.
- Other Intel Architecture Group – This vaguely named division is responsible for platforms for tablets, phones, and netbooks, as well as other mobile phone components.
- Software and Services Group – Software which supports the Intel platform as well as subsidiaries like McAfee.
- All Other – Anything that doesn’t fit into the above categories, including NAND flash memory products.
Of the $12.8 billion of revenue for the quarter, 63% comes from the PC client group and 21% comes from the data center group, leaving only about 16% for all of the other divisions. Clearly Intel Corporation (NASDAQ:INTC) is still seriously dependent on the PC and server markets. The other three groups reported an operating loss for the quarter totaling $1.2 billion, while the PC client and data center group posted a cumulative operating income of $3.9 billion.
Intel’s core businesses are still making plenty of money, although the PC business is in decline as the market weakens. If you exclude the unprofitable groups Intel’s net income would have been about $2.9 billion instead of just $2 billion.
Intel Corporation (NASDAQ:INTC) is spending heavily, developing products that will be competitive in the mobile market, but the company was far enough behind that this transition will take time. How did this happen? Well, Intel has been fighting a different war for years.
More power!
Before smartphones and tablets Intel staked out its dominance in the PC market by battling Advanced Micro Devices, Inc. (NYSE:AMD). For a long time desktops were the main form factor, and Intel Corporation (NASDAQ:INTC) focused on making their processors as powerful as possible. There was no focus on energy efficiency at all, as both companies tried to outdo one another and create the most powerful processor. Laptops didn’t change this dynamic too much, as Intel continued to focus on speed.
When mobile devices like smartphones and tablets started to become popular Intel Corporation (NASDAQ:INTC) didn’t have any products that were energy efficient enough to run them for an acceptable length of time on a battery. A powerful tablet that only lasts an hour on battery isn’t much use to anyone. Because of this, mobile devices used processors based on the ARM architecture instead of Intel’s x86 architecture.
Now, there’s nothing inherently more energy efficient about ARM compared to x86, it’s simply a matter of Intel not trying to make its chips energy efficient. That was never the focus. So when smartphone and tablet sales exploded Intel Corporation (NASDAQ:INTC) had nothing to offer. The company had to go back to the drawing board, and during this time sales of ARM-based chips went through the roof.
Advanced Micro Devices, Inc. (NYSE:AMD), I think, is in serious trouble. The company is number two in a declining market and doesn’t have anywhere near the resources of Intel to push its way into the mobile market. After battling Intel for years and losing, the company is in poor position to capitalize on the shift to mobile. AMD reported its earnings last week, posting a revenue decline of 18% year-over-year and a net loss of $74 million. Shares took a dive, falling by 13% the following day. Last year Advanced Micro Devices, Inc. (NYSE:AMD) posted a net loss in excess of $1 billion.
A big step
When Intel Corporation (NASDAQ:INTC) released the newest iteration of its Core line of processors in June, dubbed Haswell, the focus was for the first time energy efficiency. Intel claimed that the mobile versions of the chips, aimed mainly at ultrabooks and hybrid devices, would increase battery life by up to 50% over previous generations while offering better graphics to boot.
