Intel Earnings Hit Hard by PC Buying Trends

Intel Earnings Hit Hard by PC Buying Trends

As PC market slumps, so does Intel

Intel this week revealed that it isn't immune to the current trends sweeping the PC industry: Profits and net income at the world’s largest maker of microprocessors dropped almost 30 percent year over year, as interest in traditional PCs continued to wane in the most recent quarter. Intel’s problem? Its chips are rarely used in the quickly growing market for PC replacements such as smartphones and tablets.

It was an expected but inauspicious start for new Intel CEO Brian Krzanich.

Related: "Gartner: PC Market Decline Continued in Q2 2013"

“Looking ahead, the market will continue buying a wide range of computing products,” Mr. Krzanich said in a prepared statement. “We will leave no computing opportunity untapped. To embrace these opportunities, I've made it Intel’s highest priority to create the best products for the fast-growing ultra-mobile market segment … I am more confident than ever about our opportunity as a company.”

Strong words. But Intel’s strategy doesn’t really appear to have changed at all: Mr. Krzanich also noted that “Intel Atom and Core processors and increased SOC integration will be Intel’s future.” Those products are also notably Intel’s present.

Intel earned a net income of $2 billion on revenues of $12.8 billion, down 29 percent and 28 percent year over year, respectively. Two-thirds of Intel’s revenues come from the sale of microprocessors, and most Intel microprocessors are still used in mainstream PCs—not by the smartphones and tablets that customers are buying in ever-growing numbers.

PC sales, meanwhile, are down dramatically. According to data from both Gartner and IDC, PC sales dropped about 11 percent overall in the most recent quarter, and Gartner noted that it was a record fifth straight quarter in which sales fell year over year. Looking more closely at Intel’s numbers, revenue in Intel’s PC client group was down 7.5 percent year over year, roughly in line with what we’re seeing in the wider industry. So Intel is going to need to step it up in the mobile market, which the firm admits it responded to too slowly.

To that end, Intel sees a bigger emphasis on the next-generation Atom chips, code-named Bay Trail, which it says will offer the performance that PC buyers expect, combined with the battery life that tablet buyers expect. The resulting devices, which will include true tablets, hybrid PCs, and touch-based Ultrabooks, will be quite inexpensive—“down to the $200 to $400 range,” Mr. Krzanich said—and be much more competitive with the market-leading Android devices, and with Apple’s iPad. Some Bay Trail-based tablets will sell for as little as $150, he claimed.

Of course, Intel’s focus on the low end of the market has its own problems, as the industry’s previous emphasis on low-end netbooks proved. Higher-volume, low-cost devices will further erode the value of PCs and devices, and drive consumer cost expectations ever lower. I explained this previously in "Explaining Windows 8 PC Sales Over the Holidays," noting that an emphasis on very-low-cost machines drove Windows sales to artificially high heights. Obviously, the same is true on the hardware side.

Intel should eventually see some success with products that compete directly with PCs, like tablets and hybrid PCs. But smartphones are the biggest market for personal computing devices, and here Intel has seen nothing but defeat. Indeed, in the most recent quarter, Intel’s business unit responsible for smartphone chips posted an operating loss of $608 million. Long term, this is the firm’s biggest vulnerability.

Related: "Microsoft's Vision for the Replaceable PC"

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