Intel’s Mobile-Chip Progress Falters as PC Market Stabilizes

Apr 16, 2014 4:05 pm ET

(Updates with closing share price in eighth paragraph.)

April 16 (Bloomberg) -- Intel Corp.’s main personal- computer processor business is showing signs of improvement after a record industry slump, yet the company’s push to get into faster-growing mobile-phone chips has gone backward.

The world’s largest semiconductor maker yesterday reported higher first-quarter sales and forecast revenue that may top analysts’ estimates in the current period, saying the PC market is stabilizing. At the same time, Intel said the phone and tablet chip business posted a quarterly operating loss of more than $900 million as sales plunged 61 percent.

While stemming the decline in its largest business, PC processors, is a positive step, the mobile unit’s losses are a setback for Chief Executive Officer Brian Krzanich, who called success in mobile “critical.” The drag on profit and Intel’s failure to gain traction with phone and tablet customers after years in the market is leading investors to question the company’s future as a mobile-chip designer.

“The raw financial analysis would say: you’ve been trying for a long time, you’ve invested internally, you’ve done acquisitions and you still have not been able to make it work,” said Michael Shinnick, a fund manager at Wasatch Advisors Inc., which owns Intel shares. “It just does appear to be a long-term capital drain. There have to be milestones towards profitability.”

Intel may be better off using its manufacturing to build chips for companies such as San Diego-based rival Qualcomm Inc., the leader in mobile chips, Shinnick said.

Sales Forecast

Mobile is still a small part of Intel’s business. The Santa Clara, California-based company gets more than 80 percent of revenue from PC and server chips, and a recovery in corporate demand helped lift total first-quarter sales by 1.5 percent to $12.8 billion, the company said yesterday in a statement. Consumers and companies are being tempted to buy new PCs to replace aging equipment, Chief Financial Officer Stacy Smith said in an interview.

Revenue this quarter will be $13 billion, plus or minus $500 million, and gross margin, or the percentage of sales left after deducting the cost of production, will be about 63 percent. That compared with the average estimate of analysts for sales of $12.96 billion and gross margin of 59.8 percent, according to data compiled by Bloomberg.

Intel shares rose less than 1 percent to $26.93 at the close in New York. The stock has climbed 3.8 percent this year, compared with a 2.2 percent drop in the Nasdaq Composite Index.

Mobile Questions

Even as improvement in PCs cheered investors, Krzanich and Smith faced questions on their mobile strategy on a conference call after the earnings report. They told analysts that new modems and processors for smartphones and tablets are being designed into devices going on sale this year, and the company will start to gain market share. The executives declined to name the customers.

“In terms of progress in the marketplace, you’re seeing it now,” Smith said in an interview following the call. “It’ll take some while for that to translate into meaningful financials, but this is an important business and we’re patient.”

If the PC market continues to stabilize, and Intel can keep increasing sales of chips for servers, networking equipment and tablets and get its products into new areas such as entertainment devices in cars, the company will be able to return to solid growth, he said.

Flagship Phones

Through its 2011 acquisition of Infineon Technology AG’s wireless business, Intel supplies modems for phones that connect to older, slower networks. Like other chipmakers, this year Intel is starting to field LTE-capable modems, aiming to shake Qualcomm’s grip on the most profitable part of the market.

“Getting into the mobile market is obviously very difficult,” said Brian Fox, a fund manager at Standard Life Investments in Boston, which has $305 billion of assets under management. “It’s highly competitive and the profit pool is fairly concentrated. It comes down to needing to win one of a few flagship phones.”

In tablets, where Intel has also struggled to win chip orders, Krzanich has promised to get his company’s products in 40 million units this year. The chipmaker shipped 5 million tablet processors in the first quarter, Intel said in yesterday’s statement. The company is on track to meet that target, Krzanich said.

Foundry Interest

Krzanich, a former factory manager, is opening up Intel’s plants to manufacture other companies’ products. In a departure from his predecessors, he said he’s willing to build chips that compete with Intel’s own. While interest from potential foundry customers has been strong, the company still has a lot to learn about that business, he said yesterday.

Though the PC market is improving, it’s not expanding yet. The PC market shrank by 9.8 percent to 315 million units last year, according to market-research firm IDC, which projects the market will drop 6.1 percent this year and decline through 2018. Smartphone shipments, meanwhile, surged 39 percent to more than a billion units for the first time last year.

In the first quarter, revenue in Intel’s PC-chip business fell to $7.94 billion, while operating profit in that division rose to $2.8 billion. Server-chip group sales increased to $3.1 billion with operating profit rising to $1.32 billion.

Egypt, Ukraine

Christian Morales, head of Intel’s Europe, Middle East and Africa business, said while the desire to have access to new technology exists, turbulence in Egypt last year and Russia this year is hurting sales.

“This year, obviously the Russian and Ukraine situation is having a negative impact on the business,” Morales said in an interview with Bloomberg TV. “We still see investments in infrastructure there, in cloud, data centers, but on devices there is definitely an impact.”

Intel said first-quarter net income fell 4.8 percent to $1.95 billion, or 38 cents a share, from $2.05 billion, or 40 cents a share, a year earlier. Analysts had predicted earnings of 37 cents a share on revenue of $12.8 billion.

Gross margin in the recent period widened to 59.7 percent from 56.1 percent. For the year, Intel said gross margin will be about 61 percent, 1 percentage point higher than a previous forecast.

ASML Holding NV, Europe’s largest semiconductor-equipment supplier, today predicted sales trailing analysts’ estimates on slowing demand from makers of chips that process functions in devices. The stock fell as much 6.5 as percent in Amsterdam.

--With assistance from Adam Ewing in Stockholm.