Intel Holds Its Ground Despite Dismal PC Sales

Leading PC microprocessor manufacturer Intel (NASDAQ:INTC) announced its Q1 2013 earning on April 16. With 7% sequential and 3% annual declines in quarterly revenues ($12.6 billion), we feel the company fared well in light of the drastic decline in Q1 2013 global PC shipments (13.9% y-o-y). While Intel’s PC client group declined by approximately 7% q-o-q and y-o-y, its data center group showed increased strength with a 7% rise over Q1 2012 sales figure. Intel earns over 60% of its revenue from the PC market and thus is highly sensitive to any adverse development in the industry.

Though the PC industry still remains in the doldrums, Intel looks optimistic about the situation and expects an improvement towards the second half of the year. It anticipates a marginal increase in Q2 2013 revenue on account of seasonal factors and expects the macro environment to improve thereon as the industry accepts innovative form factors in ultrabooks, convertibles and detachables.

Intel’s gross margins declined by two percentage points to 56% in Q1 2013 as it incurred higher than expected excess capacity charges in older generation process technologies. Additionally, the company witnessed high inventory write-offs on account of increased production of its Haswell products prior to the qualification for sale. Nevertheless, it generated $4.3 billion in cash from operations, paid dividends of $1.1 billion and re-purchased $533 million worth of stocks in Q1 2013.

We believe that with an improving macro environment, a gamut of new products and platforms, participation across a range compute devices and its manufacturing leadership can help Intel achieve financial growth in 2013.

See our complete analysis for Intel

PC Sales To Continue Declining Albeit At A Lower Rate

The slowing enterprise market, consumer softness in mature markets (U.S. and Western Europe), slowing demand from emerging markets, a weak reception for Windows 8 OS and cannibalization by tablets and smartphones are the main factors leading to the slump in the PC market. PC sales declined marginally in 2012, and research firm IDC estimates the downward trend to continue this year as well.

Global PC shipments witnessed the sharpest quarterly decline (13.9% y-o-y) in Q1 2013 in almost two decades. Though IDC estimates a revival in demand in the second half of the year, we maintain a conservative estimate for PC shipments in the future. Nevertheless, with improving macro conditions, increasing demand from emerging economies and the introduction of new ultrabooks, convertibles and touch-enabled designs, we forecast the rate of decline in global PC demand to drop in the future.

Source: IDC Press Release & Trefis Estimate

Innovative Form Factors Can Spur Demand For Intel’s Products

In Q1 2013, Intel witnessed 6% sequential and 7% quarterly declines in PC sales by volume. However, the company believes that its upcoming products and platforms can fuel industry demand in the future. In the next few months, Intel plans to introduce more than 140 core-based ultrabooks, 40+ of which will be touch-enabled. As the line between PCs and tablets is blurring, Intel intends to focus on developing over a dozen convertibles and detachable ultrabook designs in the near future.

It is working towards developing its fourth generation core processor family, code-named Haswell, in Q2 2013. The processor promises to offer up to 13 hours of battery life, in turn enabling a broad new range of ultra-sleek designs across multiple form factors. With the Haswell launch, it expects pipeline inventory replenishment by it customers to contribute to a higher than average seasonal increase this quarter.

The high price point for Ultrabooks and touch-enabled notebooks designs has been one of the key reasons for lower that expected demand for these products. While the current prices are still high, Intel mentioned its its Q1 2013 earnings release that prices will decline rapidly in the next few quarters. We can expect to see ultrabook prices to reduce to $599 with some models available for even $499 by this year end. On the other hand, touch-enabled Intel-based thin notebooks will be available for as low as $300 and probably below that in the future. ^[1]

A Broader Product Portfolio To Target New Markets

Apart from working towards reviving the PC market, Intel has been focusing on increasing its footprint in the fast growing mobile computing domain. The company claims to have made significant progress in the mobile device market in Q1 2013, with tablets volumes more than doubling sequentially. Though it expects its tablets volume sales to double this quarter as well, it does not anticipate phones to contribute much towards its revenue in 2013 as it is still in the design wins phase in smartphones. ^[1]

Intel recently launched Clover Trail+ processor, its first dual core chip for smartphones and Android tablets, that delivers double the performance and up to three times the graphics capabilities compared to its predecessor, the Medfield platform. The company is winning additional designs with the new processor and is on track to ship the next generation Merrifield platform by the end of 2013.

The company recently introduced one of the industry’s smallest and lowest-power multimode-multiband LTE solutions (XMM 7160) that supports smartphones, tablets and ultrabooks. It currently ships the single-mode 4G LTE data solution and remains on track ship multimode voice and data LTE baseband solutions by the end of this year. Additionally, Intel will launch its first quad-core Atom SoC (Bay Trail) in the second half of 2013, which will extend its product portfolio across screen sizes and different price points. The new platforms promise to offer significant performance and power improvement over the current platforms.

Technology Prowess To Help Retain Leadership

Within the semiconductor industry, Intel is known to have best-in-class R&D capabilities. It is the only chip maker with its own manufacturing, design and fabrication capabilities which makes it less dependent on other companies. In July 2012, Intel pumped $4.1 billion into ASML Holdings (NASDAQ:ASML) to fund the next generation chip-making technology.

Intel continues to invest in its manufacturing leadership. In 2012, it ramped up its 22-nanometer factories and shipped its 100 millionth 22 nm processor in Q1 2013 using its revolutionary 3D transistor technology, while its competitors work towards shipping their first unit. Intel is in the process of transitioning to the 14 nm technology and will start production in the latter part of 2013. Its manufacturing leadership helps its offer its customers the world’s lowest cost and lowest power transistors.

Future Outlook

– $12.9 billion in revenues this quarter

– Gross margins to increase to 58%; rise to over 60% in the second half of 2013

– 60% gross margin target for the entire year

– Data center group to post double digit growth in 2013

– $12 billion capex target for 2013

We are in the process of updating our $29.20 price estimate for Intel.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Intel’s CEO Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, April 16, 2013 [↩] [↩]